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Accounting for Management 12MBA14
Department of MBA/SJBIT Page 1
Module I
Introduction to Accounting: Need and Types of Accounting, Users
of Accounting, concepts and conventions of Accounting,
Accounting Equations
Module II
Preparation of Books of Accounts: Journals, Subsidiary books,
three column cash book, ledgers and trial balance
Module III
Preparation of Financial Statement: Preparation of final accounts
of sole traders and companies (excluding partnership) in horizontal
format (students are to be introduced to vertical formats also)
Module IV
Analysis of Financial Statements: Comparative, common size and
trend analysis, Ratio Analysis, Preparation of financial statements
using ratios, Cash flow Statement.
Module V
Accounting Standards and IFRS: IFRS and proposed changes in
Indian Accounting Standards
Module VI Audit Report:
Audit Report, Directors’ Report and basics of MAOCARO 1998
(Amended 2003)
Module VII
Corporate Governance, Human Resource Accounting, Forensic
Accounting Window Dressing
Module VIII
Income Tax: Income Tax – Heads of Income, Salary, Profit in lieu
of salary, Perquisites, deductions u/s 80C, Income Tax Rates (Only
Theory)
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 2
Index
Module-1 Page No. 3-10
Module-2 Page No. 11-21
Module-3 Page No. 21-29
Module-4 Page No. 30-48
Module-5 Page No. 48-50
Module-6 Page No. 51-57
Module-7 Page No. 58-62
Module-8 Page No. 62-78
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 3
MODULE I
Accounting Meaning • Accounting, as an information system is the process of identifying, measuring and
communicating the economic information of an organization to its users who need
the information for decision-making.
• Accounting provides information that is useful in making business and
Economic decisions for making reasoned choices among alternative uses of scarce
resources in the conduct of business and economic activities.
Objectives of Accounting
• To maintain Accounting records
• To calculate the results of operations
• To ascertain the financial position
• To communicate the information to others
• To maintain Accounting records
Written records can be used by different persons for different
Decision-making purposes and serve as evidence of transactions. Accounting is done
to keep a systematic record of (i) financial transactions, (ii) assets and (iii) liabilities.
• To calculate the results of operations
To measure the financial performance of an enterprise, the results of operations are
ascertained by preparing income statement i.e. Profit & Loss A/c. and shows the
matching of current costs with current revenues during a particular accounting period.
• To ascertain the financial position To evaluate the financial strength & weakness of an enterprise, the financial position is ascertained by preparing a ‗Position Statement‘i.e. also called as Balance Sheet which shows resources (assets) owned by an enterprise and the sources of financing those resources.
• To communicate the information to others
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 4
Accounting communicates information to internal users and external users.
Internal users: Top level Mgt. Information for planning, Middle level mgt. requires information for controlling the operations
External users: Creditors, Banks and Investors need the information relating to final
results of operation and financial position of a firm.
Importance or Uses of Accounting 1 Facilitate to replace memory
Accounting facilitates replace human memory by maintaining complete record of financial transactions.
2 Facilitates to comply with legal requirements Accounting facilitates to comply with legal requirements which require an Enterprise to maintain books of accounts. For e.g. Sec 209 of the Companies Act 1956, requires a company to maintain proper books of accounts on accrual
basis.
3 Facilitate to ascertain net results of operations Accounting facilitates to ascertain net result of operations by preparing Income Statement or P&L A/c.
4. Facilitates to ascertain financial position Accounting facilitates to ascertain financial position by preparing Balance Sheet.
5. Facilitates the users to take decisions Accounting facilitates the users to take decisions by communicating accounting information to them.
6. Facilitates to comparative study Accounting facilitates a comparative study in the following four ways:
(i) Comparison of actual figures with standard or budgeted figures for the same period
and the same firm.
(ii) Comparison of actual figures of one period with those of another period for the
same firm
(iii) Comparison of actual figures of one firm with those of another standard firm
belonging to the same industry.
(iv) Comparison of actual figures of one firm with those of industry to industry to
whom the firm belong.
7. Assists the management
Accounting assists the management in planning and controlling business activities and in taking decision.
8. Facilitates control over assets Accounting facilitates control over assets by providing information regarding
Cash balance, Bank balance, Debtors, Fixed Assets, Stock etc.
9. Facilitates the settlement of tax liability
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 5
Accounting facilitates the settlement of tax liability with the authorities by
maintaining proper books of accounts in systematic manner.
10. Acts as a legal evidence Proper books of accounts maintained in systematic manner act as a legal evidence
in case of disputes.
Scope of Accounting Accounting covers the following activities:
• Identifying the transactions and events
Accounting identifies transactions and events of a specific firm. A
transaction is an exchange in which each participant receives or gives
value. An event is a happening of consequence to a firm. E.g. use of raw materials for production.
• Measuring the identified transactions and events
Accounting measures the transaction and events in terms of a common
measurement unit, that is the ruling currency of a country.
3. Recording
It is concerned with the recording of identified and measured financial transactions in an orderly manner.
4. Classifying It is concerned with the classification of the recorded transactions so as to group
the transactions of similar type at one place.
E.g. maintaining ledger for each type of Account.
5. Summarizing It is concerned with the summarization of the classified transactions in a manner
useful to the users.
E.g. Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements.
• Analyzing
It is concerned with the establishment of relationship between the various items or group of items taken from P&L A/c & B/S or both.
7. Interpreting It is concerned with the explaining the meaning and significance of the
relationship so established by the analysis. The accountants should interpret the
statements in a manner useful to the users, so as to enable the users to make
reasoned decisions out of alternative course of action.
8. Communicating It is concerned with the transmission of summarized, analyzed and interpreted
information to the users to enable them to make reasoned decisions.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 6
Accounting Conventions & Concepts • Accounting Entity Concept
According to this assumption, a business is treated as a separate entity that is
distinct from its owner(s), and all other economic proprietors. This concept requires
that for accounting purposes a distinction should be made between (i) personal
transactions and business transactions, and (ii) transactions of one business entity
and those of another business entity.
2. Money measurement Concept According to this concept, only those transactions which are capable of being
expressed in term of money are included in the accounting records. Non-monetary
transactions should be ignored. E.g. Guarantee given by bank, Strikes, Lockouts, Layoff etc.
3. Accounting Period Concept According to this concept, the economic life of an enterprise is
artificially split into periodic intervals which are known as accounting
periods at the end of which an income statement and position statement
are prepared to show the performance and financial position.
4. Going Concern Concept According to this concept, the enterprise is normally viewed as a
going concern, that is, continuing in operation for the foreseeable future.
Generally Accepted Accounting Principles (GAAPs) GAAPs my be defined as those rules of action or conduct which are derived from
experience and practice and when they prove useful, they become accepted as
principles of accounting.
Criteria for acceptance of the Accounting Principles: • Relevance: A principle is relevant to the extent it results in information that is
meaningful and useful to the user of the accounting information.
• Objectivity: Objectivity connotes reliability and trustworthiness. A principle is
objective to the extent the accounting information is not influenced by personal bias
or judgment of those who provide it.
• Feasibility: A principle is feasible to the extent it can be implemented without much
complexity or costs.
Basic Principles of Accounting • Duality Principle
• Revenue Recognition Principle
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 7
• Historical Cost Principle
• Matching Principle
• Full Disclosure Principle
• Objectivity Principle
• Consistency Principle
• Duality Principle
The duality aspects of transaction is the basis of double entry records. The entry made for each transaction is composed of two parts-one for debit and another for
credit. Every debit has equal amount of credit.
2. Revenue Recognition Principle This principle is mainly concerned with the revenue being recognized in the
Income Statement (P&L A/c) of an enterprise. Revenue is the gross inflow of cash.
It includes receivable from sale of goods, rendering of services and use of enterprise
resources, interests, royalties and dividends. Revenue is recognized in the period in
which it is earned irrespective of the fact whether it is received or not during that
period.
3. Historical Cost Principle
According to this principle, an asset is ordinarily
recorded in the accounting records at the price paid to
acquire it at the time of its acquisition and the cost becomes the basis for the accounts
during the period of acquisition and subsequent accounting periods. The cost of an
asset is systematically reduced from year to year by charging depreciation and the
asset is shown in the balance sheet at book value.
4. Matching Principle According to this principle, the expenses incurred in an accounting period should
be matched with the revenues recognized on all goods sold during a period, cost of
those goods sold should also be charged to that period. In Trial balance all debits
should be matched with all credits. In B/S, assets side should be matched with
liabilities side.
5. Full Disclosure Principle
According to this principle, the financial statements should act as means of conveying and not concealing.
The financial statements must disclosure all the relevant and reliable information. It
should be full, fair and adequate so that the users can take correct assessment about the
financial performance and position of the enterprise.
6. Objectivity Principle According to this principle, the accounting data should be definite, verifiable and
free from bias of the accountant. This principle requires that each recorded transaction
in the books of accounts should have an adequate evidence to support it. (E.g.
vouchers, receipts, invoices etc.)
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 8
7. Consistency Principle
According to this principle, whatever accounting practices are selected for a
given category of transactions, they should be followed continuously from one
accounting year to another.
Meaning
Accounting Standard
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 9
An accounting standard is a selected set of accounting policies or broad
guidelines regarding the principles and methods to be chosen out of several
alternatives. Standards conform to applicable laws, customs, usage and
business environment.
Objective The main objective of accounting standards is to harmonize the
diverse accounting polices and practices at present in use in India.
Importance or Advantages of setting Accounting standards • Reduction in variations:
Standards reduce to a reasonable extent or eliminate altogether confusing
variances in the accounting treatment used to prepare financial statements.
2. Disclosure beyond that required by law; There are certain areas where important information is not statutorily required to
be disclosed. Standards may call for disclosure beyond that required by law.
3. Facilitates comparison: The application of accounting standards would to a limited extent, facilitate
comparison of financial statements of companies situated in different parts of the
world and also of different companies situated in the same industry.
Accounting Equation • The accounting equation shows the relationship between the
economic resources belonging to a business and the claims against those resources.
• Economic resources are termed as assets. Claims are termed as
liabilities and owners‘ claims or owners‘ equity.
Assets = Liabilities + Owners’ equity
Users of Accounting Information • Investors
Investors are the owners of the firm. So, they need information to decide which investments to buy, retain or sell as well as the timing of the purchases or sales of
those investments. They also need information to assess mgt. performance and the
ability of the firm to pay dividends.
2. Lenders Lenders, such as banks and debenture-holders, need to know about the financial
stability of a business who approach them for funds. They are interested in information that enables them to determine whether their loans, and the related interest, will be paid when due.
3. Security Analysis and Advisers Investors and creditors seek the assistance of information specialists in assessing prospective returns. Equity and bond analysts, stock holders and credit rating agencies offer a wide array of information services. Information specialists serve the need of investors by providing them with skilled analyses and interpretation of financial reports.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 10
4. Management Mgt.needs information for planning and controlling operations, for making
special decisions, and for formulating major plans and policies.
5. Employees and Trade Unions Employees are interested in information about the enterprise as well as its general
operations, stability and profitability. Employees have an interest in the financial
affairs of ; the enterprise since it is the main source of their income. Trade unions
are required for wage negotiations.
6. Suppliers and Other Trade Creditors They are keen to obtain information that enables them to determine whether
amounts owed to them will be paid when due.
7. Customer They are interested in the financial affairs of an enterprise to decide how much
business to do with it, and to assess its ability to service the product or to honor
warranty agreements.
8. Govt. & Regulatory Agencies They also require information in order to regulate the business practices of
enterprises, determine taxation policies and provide a basis for national income.
A number of regulatory agencies like SEBI, Insurance Regulatory Authority and
Stock Exchanges have a legitimate interest in financial reports of publicly held
enterprises to ensure efficient operation of capital markets.
9. General Public
Financial statements assist the public by providing information about
the trends and recent developments in the prosperity of an enterprise and the range of
its activities.
Module II
• Preparation of books of original records
• Meaning & Classification of Accounts
Meaning
It is a statement of the various dealings which occur between a customer
and the firm. It can also be expressed as a clear and concise record of the transactions
relating to a person or a firm or a property (asset) or a liability or an expense or an
income.
Classification of Accounts
1. Personal Accounts
2. Impersonal Accounts
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Department of MBA/SJBIT Page 11
a. Real Accounts
b. Nominal Accounts
1. Personal Accounts
Accounts related to an individual person, firm, company and bank is
called personal accounts. The proprietor being an individual his Capital A/c and his
Drawing A/c are also known as ‗Personal Accounts‘.
2. Real Accounts
Assets or properties or trading goods related to a firm is called Real
Accounts.
E.g. Furniture A/c, Purchase A/c, Sales A/c. etc.,
3. Nominal Accounts Any expenses incurred or incomes received other than real accounts is
called Nominal Accounts.
E.g. Salary for the staff, Rent paid, Commission received etc.
Debit & Credit Aspects One aspect will be either the ‗Receiving Aspect‘ or ‗Incoming Aspect‘. This is
termed as Debit Aspect. Another aspect will be ‗Giving Aspect‘ or Outgoing Aspect‘ or
‗Income Aspect‘. This is termed as Credit Aspect.
Golden Rules of Accounts:
1. Personal A/c – Debit the Receiver
-- Credit the Giver
2. Real A/c -- Debit what Comes in
-- Credit what Goes out
3. Nominal A/c -- Debit all expenses & losses
Journal
-- Credit all incomes & gains
recorded.
Format
Narration
Journal is the book of original entry wherein transactions are first
Below each journal entry a brief explanation of the transaction is given
within the brackets is called narration
• Procedures to enter Journal Entries
1. First find out, which two accounts belongs to a particular transaction.
2. Then find these two accounts belonging to which category i.e.Personal or Real or
Nominal A/cs.
3. Then see rules of the category and match with accounts.
4. Write the journal entry with date, amount in both sides and narration.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 12
1. 1-11-2006
90,000.
Ravi commenced his business with a
2.
2-11-2006
He bought goods for cash Rs. 4,000
3.
3-11-2006
He deposited in IOB Bank Rs. 3,000
4.
4-11-2006
He gave a loan to Mr.Kumar Rs.2,000
5.
5-11-2006
Paid for Stationary Rs.1,000.
Example:1 Journalize the following transactions:
capital of Rs.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 13
Example: 2 Journalize the following transactions:
3.02.06 Goods purchased for Rs.14,500.
7.02.06 Goods sold to Lakshmi Rs.5,000
9.02.06 Received Commission Rs.300
10.02.06 Goods sold for cash Rs.29,000
12.02.06 Goods purchased from Meenakshi for Rs.6,000
15.02.06 5 Chairs purchased from Saravana Stores Rs.300
each
20.02.06 Paid to Saravana Stores 28.02.06 Salary paid Rs.1000
Rent paid Rs.500
Example:3 (Jan 2005)
Journalize the following transactions:
Jan 2004, 2 Started business with Rs.1,00,000
Paid into bank Rs.50,000
4 Bought furniture for cash Rs.6,000
5 Bought furniture for resale Rs.4,000
6 Sold goods to Mr.X Rs.6,000
7 Sold goods Rs.5,000
8 Purchased from Y for Rs.5,000
9 Charged depreciation on Machinery Rs.1,000
10 Withdrew form bank Rs.3,000 for private use.
14 Deposited a cheque into bank for Rs.6,000
20 Cheque deposited on 14th
Jan was dishonored
25 Paid rent, salaries, postage Rs.5,000, Rs.6,000 and Rs.150 respectively.
Prob:4 (Jan 2006) Journalise the following transactions in the books of Vishwanath.
i. Vishwanath started his business with the following:
Cash in hand 1500
Cash at bank 3500
Goods in hand 3000
Furniture 2000
Buildings 10,000
ii. Gave charity Rs.20.
iii. Loan taken from the bank Rs.5,000 iv. Purchased a motor car in exchange for goods Rs.2,000 and cheque Rs.3,000
v. Paid proprietor‘s life insurance premium Rs.100
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 14
vi. Bought goods from Laskshman on account Rs.2,000
vii. Furniture costing Rs.300 was destroyed by fire.
Prob:5(June 2004) Journalise the following transactions in the books Raju and
Company.
2002
Jan 2 Started the business with Rs.80,000
Jan 3 Bought furniture for Rs.12,000
Jan 6 Bought stationary for Rs.500
Feb1 Purchased goods for cash @ Rs.20,000
Feb5 Sold goods for cash worth Rs.4,000
Feb7 Sold to Mohan goods worth Rs.2,000
Feb14 Bought goods from Tilak @ Rs.8,000
Feb18 Paid office cleaning charges of Rs.200
Feb20 Bought goods from Kamalesh worth Rs.4,000
Feb21 Sold to Vishnu & Co goods worth Rs.3,000
Feb 22 Received form Mohan Rs.2,000
Feb 25 Paid to Kamalesh Rs.2,000
• Ledger
Ledger is a secondary book of entry. The journal entries are posted to the
ledger at the end of each period. Ledger is a book containing various account. In this
book, separate account is opened for each and every transactions of different nature.
Format Dr xxx A/c Cr
• Procedures to post entries from Journal book to Ledger book
1. List out the no. of accounts in the journal book.
2. Open separate ledger account for each account.
3. Debit side of the entry in the journal book will come under credit side of the
ledger and vice-versa
4. In debit side of the ledger book while entering the entry, add ‗To‘. In credit side,
add ‗By‘.
5. Balance the amount in both the sides. Prob:1
1995 Mar1 Kannan commenced business with Rs.25,000 3 Purchased goods for Rs.15,000
5 Paid salary Rs.500
8 Received interest Rs.50
10 Cash Sales Rs.2,000
12 Purchased goods for cash Rs.3,000
15 Goods sold to Kumar Rs.1,000
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 15
Capital 16,800 Drawings 5,000
Stock 21,000 Purchases 36,000 Sales 72,000 Purchase Ret. 2,000
Sales Ret. 3,000 Debtors 4,500
Creditors 2,500 Furniture 900
Bills receivable 2,300 Bills payable 4,200 Wages 1,200 Advertisement 600
18 Purchased a cycle for Rs.680
• Trial Balance
Trial Balance is a statement of ledger balances. In this statement four
columns are provided for recording the serial number, name of accounts, debit balances
and a credit balances. The total of such balances must be equal.
Rules Debit : All assets, expenses & losses
Credit : All liabilities, incomes & gains
Format
Prob:1 From the following transactions pass necessary journal entries, prepare ledger accounts and trial balance:
2003 Apl1 Started business with a capital of Rs.10,000
2 Purchased goods from Mr.Gopal for Rs.1,500
3 Paid to Mr.Gopal in full in cash Rs.1,450
4 Sold to goods Mr. Kannan for Rs.500
5 Received cash from Kannan in full settlement Rs.450
6 Paid salary Rs.300
7 Purchased furniture for Rs.1000
8 Sold goods for Rs.1,300
9 Received interest Rs.50
10 Deposited cash into bank Rs.1000
11 Paid wages Rs.100
12 Withdraw cash from Bank for personal use Rs.200
Prob:2 (Jan 2006) Prepare a trial balance from the following balances of the year ending
2002
Capital 28,000 Purchases 15,000
Stock of goods 4,000 Plant 15,000
Motor car 8,000 Furniture 5,000
Dis.recd. 400 Wages 8,200
Baddebts 400 Creditors 6,500
Sales 40,000 Salaries 2,800
Cash at bank 4,000 Commission (cr) 600
Return inwards 2,000 Returns outwards 1,000
Cash in hand 600 Debtors 5,600
Rent 3,500 General exp. 300
Dis. Allowed 300 Interest recd. 200
Carriage 1,500 Advertisement 500
Prob:3
Prepare a Trial balance from the following as on 31st
Mar 2002 Rs.
Rs.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 16
A subsidiary book is prepared when the transactions of similar nature are
large. It is prepared as a substitute for journal. By preparing this book, entries are
minimized.
E.g. Sales Book, Purchase Book etc.
Types of Subsidiary Books
1. Purchase book
2. Sales book
3. Purchases Return book
4. Sales Return book
5. Bills Receivable book
6. Bills Payable book
7. Cash book
1. Purchase book
This book is kept with the object of recording credit purchases of goods
for resale. Each inward invoice after it has been entered as to calculations and also to the
quantity, quality and price of the goods received is numbered consecutively and then
entered in the purchase books.
Format Purchase Book Postings: Each personal a/c is credited with its respective amount and the monthly total of this book is debited to purchases a/c in the Ledger.
2. Sales book
The object of this book is to record credit sales. An outward invoice is
made out for credit sale and checked as to quantity, quality and price of the goods before
the letter is sent out to the customer.
Format Sales Book Posting: Each personal a/c debited with its respective amount and the monthly total of the book is credited to sales a/c in the ledger.
3. Purchase Returns Book This book record returns outward, that is, return of goods bought. A debit
note is made out with a carbon duplicate and sent to the party to whom the goods are
returned.
Format Purchase Returns Book Postings: Each individual personal a/c is debited with its respective amount and the monthly total of the book is credited to returns outward a/c in the ledger.
4. Sales Returns Book Return inwards, that is, return of goods sold by us, are recorded in this
book. On receipt of goods, credit notes with carbon duplicates are made out and sent to
those customers who have returned us the goods.
Format Sales Returns Book
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Posting: Each personal a/c get the individual credit and the returns inwards account get the debit with the monthly total of the book.
5. Bills Receivable Book The purpose of this book is to keep a detailed record of all the bills
receivable received by a trader.
A bill receivable is one is respect of which the trader is entitled to receive
money at some specific date as shown on the face of the bill. Drawer is a person who is
drawing the bills. He is the supplier of the goods. Acceptor is accepting the bill. He is the
purchaser of the goods.
6. Bills Payable Book
This book is kept to record full details of all bills payable accepted by a trade
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A bill payable is one, which has been accepted by a person and the amount of which he is under obligation to pay at some definite future time.
• Cash Book
A cash book is a special journal which is used for recording all cash
receipts and cash payments.
A cash book is a book of original entry since transactions are recorded for
the first time from the source documents. The cash book is a ledger in the sense that it is
designed in the form of a cash a/c and records cash receipts on the debit side and cash
payments on the credit side.
Types of Cash Book
1. Single Column Cash Book
2. Cash Book with Discount Column
3. Cash Book with Bank & Discount Column
4. Petty Cash Book
5. Single Column Cash Book
Single column cash book has one amount column on each side. All cash
receipts are recorded on the debit side and all cash payments are recorded on the credit
side.
Format Single Column Cash Book
Dr Cr Prob:1 Enter the following transactions in Single Column Cash Book. 2001 Jan1 Cash in hand Rs.1,700
5 Paid to Bansal Rs.300 & discount allowed by him Rs.10
8 Purchased goods from Goyal & Co. for cash Rs.400
10 Received from Kansal Rs.980
16 Sold goods to Garg & Co for cash Rs.400
21 Paid to Ansal Rs. 295 & discount received Rs.5
25 Paid wages Rs.50
31 Paid to X & Co in full settlement of his account
(which shows a credit balance of Rs.400.)Rs. 390
31 Purchased Furniture Rs.200
Prob:2 Prepare a simple cash book from the following transactions of Mr. X of Delhi.
2001, Apl 1 Mr.X commenced business with cash Rs.4,800
3 He bought goods for cash Rs.3,000
5 Sold goods for cash Rs.60
6 Received cash from Mr. Manohar Lal Rs.216
9 Paid into bank Rs.1,800
13 Paid cash to Hari Rs.129
16 Sold goods for cash Rs.900
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17 Paid for stationary Rs.9
Paid for office furniture Rs.1110
Received from Mr. Kailash Chand Rs.408
Paid for advertising Rs.54
Purchased postage stamp Rs.5
Paid rent Rs.60
Paid electricity charges Rs.9
2. Cash Book with Discount Column Cash book with discount column has two columns I.e cash column and
discount column in each side. All cash receipts & discounts allowed are recorded on the
debit side and all cash payments & discounts received are recorded on the credit side.
Format Double column Cash book
Dr Cr Prob:1 Prepare a double column cash book from the following transactions of Mr. R.K. Gupta:
2001 Jan1 Opening Cash balance Rs.4,000
3 Cash sales Rs.6000
5 Sold goods to Suresh for Rs.2,000 & received from him
Rs.1,980.
him Rs.2,470
6 Goods purchased for cash Rs.2,000
10 Wages paid Rs.40
19 Goods purchased from Mr. Manjunath Rs.2,500 and paid to
27 Cash paid to Radha Rs.400
28 Goods purchased for cash Rs.2,070
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 20
Prob:2 Prepare a double column cash book from the following transactions of Mr. Y:
2004 Mar 1 Mr. Y commenced business with cash Rs.3,900
3 Bought goods for cash Rs.4,110
4 Paid Mr.Mohanlal cash Rs.57 and discount recd. Rs.3
6 Deposited in Bank Rs.2,400
Paid for office furniture in cash Rs.279
9 Sold goods for cash Rs.1,800
12 Paid wages in cash Rs.72
13 Paid for stationary Rs. 24
15 Sold goods fro cash Rs.1500
17 Paid for miscellaneous exps.Rs.27
19 Received cash from Mr. Jindhal Chand Rs.291 and allowed his discount Rs.9
21 Purchased a radio set Rs.150
22 Paid salary RS.240
25 Paid rent Rs54
28 Paid electricity bill Rs.21
29 Paid advertising Rs.24
31 Paid into bank Rs.1,500
3. Three Column Cash Book Three column cash book has three amount columns (one for cash, one for
bank and one for discount) on each side. All cash receipts, deposits into bank and
discount allowed are recorded on debit side and all cash payments, withdrawals from
bank and discount received are recorded on the credit side.
Format Three Column Cash Book
Dr Cr Prob:1 Enter the following transactions in the Three Column Cash Book. 2005 Jan 1 Opened a bank a/c by depositing by Rs.6000 in cash
2 Goods sold to Mohan for cash Rs.250
allowed Rs.25
5 Settled Hari‘s a/c of Rs.200 at a discount of 5%
7 Received from Shyam a cheque for Rs.725. Dicount
10 Purchased a typewriter for Rs.200. Spent Rs.50 on its repairs.
12 Shyam‘s cheque was returned dishonored
15 Received a money order for Rs.25 from Hari
20 Shyam settled his account by means of a cheque for
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Rs.755. Rs.5 being for interest charged.
27 Purchased Machinery from Rajiv for Rs.5,000 and paid him by
means of a bank draft purchased from bank for Rs.5,005.
28 Cash withdrawn from the bank Rs.10,000.
Prob:2(June 2004)
From the following information, prepare suitable cash book:
2002, April
1 Cash at hand Rs.2,200
2 Cash at bank Rs.8,700
3 Bought goods from Rahim Rs.7,300
4 Cash sales deposited with the bank Rs.5,500
8 Sold goods to Das Rs.8,200
9 Received cheque in full settlement of Das‘s a/c Rs.8,000
10 Paid to settle Rahim‘s a/c Rs.7,000
12 Purchased office furniture by cheque Rs.3,500
13 Bought goods from Ghosh Rs.10,400
15 Paid carriage Rs.200
18 Bank collected dividend Rs.500
20 Withdrawn from bank Rs.2,000
25 Paid wages Rs.1,500
27 Paid to Ghosh by cheque Rs.10,000
Prob:3 (Jan 2005) Rule the Three column cash book of a merchant and record there in
the following transactions. Balance the cash book on 31st
July 1998.
July 1998 1 Commenced business with Rs.10,000
2 Paid into bank Rs.8,000
3 Purchased goods by cheque Rs.3,000
4 Paid rent Rs.150
12 Purchased furniture by cheque Rs.1,800
15 Cash sales Rs.650
16 Gave Gopal a cheque Rs.970 (allowed discount by him Rs.25)
18 Received from Narayan a cheque for Rs.1,500 and he was allowed a
discount of Rs.30
20 Paid into bank Rs.1,500
25 Paid wages Rs.60
26 Drew for office use Rs.400 from bank
27 Drew for personal use Rs.100 from bank
28 Issued a cheque to Amar was dishonored
30 Furniture purchased for resale for cash Rs.250.
Prob:4 Prepare a three column cash book from the following transactions:
2004, Oct 1 Cash in hand Rs.1,800
Cash at bank Rs.11,000
5 Discount a bill at 5% through bank Rs.4,000.
7 Bought goods by cheque Rs.7,000
8 Bought goods by cash Rs.500
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10 Honoured our own acceptance by cheque Rs.5,000
14 Paid trade exps.
16 Paid into bank
18 Ramesh who owed us Rs.500 became bankrupt and paid us
50p in the rupee
20 Received cash from Mohan Rs.400
Allowed discount Rs.10
23 Withdrew from bank Rs.400
Paid to Ganesh Rs.300
Allowed us discount Rs.10
24 Received Rs.2000 for a bill from Hari and deposited the
same into bank
25 Withdrew from bank for private exps. Rs.300
27 Sold goods for cash Rs.200
28 Received cheque for goods sold Rs.9,000
29 Received payment of a loan of Rs.5,000 and deposited Rs.3,000 out of it
into bank.
30 Bank charges as per pass book Rs.5
4. Petty Cash Book Petty cash book is the book which is used for the purposes of recording the
payment of petty cash expenses. E.g.Postage & stationary exps.
Differences between Main cash book and Petty cash book
1. In the main cash book all cash receipts are recorded whereas in the petty cash
book only cash receipts from main cashier are recorded.
2. In the main cash book all cash payments except payments of petty cash exps., are
recorded whereas in the petty cash book only payment of petty cash expenses are
recorded.
Imprest System of Petty Cash Book The amount which the main cashier hands over to the petty cashier in
order to meet the petty cash expenses of a given period is known as ‗imprest‘ or ‗float‘
Advantages of Imprest System of Petty Cash Book
1. Control over mistakes: Chances for mistakes are reduced since the chief cashier
regularly examines petty cash book.
2. Control over petty exps.: Petty expenses are kept within the limits of imprest since
the petty cashier can never spend more than the available petty cash.
3. Control over fraud: Misappropriation if any, is always kept within the limits of
imprest.
4. Saving of chief cashier‘s time: The time of chief cashier is saved when petty
exps.are recorded in petty cash book.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 23
Format Petty Cash Book Prob:1 From the following, prepare petty cash book on imprest system of Laxman & Co. for the month of Jan 2001.
2001 Jan1 Opening balance Rs.100
2 Paid for stamps Rs.12
3 Paid cleaners wages Rs.15
4 Paid for bus fare Rs.16
5 Paid tea etc. Rs.15
6 Paid for repairs of cycle Rs.10
7 Paid for advertisement Rs.30
8 Drew imprest from head cashier
9 Paid for cartage Rs.10
10 Paid for traveling exps. Rs.25 11 Paid for Telegram Rs.15
12 Paid for entertainment to salesman Rs.20
13 Paid for repairs of cycle Rs.10
14 Paid for printing bill Rs.5
15 Paid for stationary Rs.3
16 Drew imprest from head cashier
Preparation of Final Accounts / Statements Module 3
FINAL ACCOUNTS
Final accounts consists of two statements i.e. (I) Income
Statement or Trading, profit & Loss A/c and (ii) Balance Sheet.
Income statement which shows the net results of the firm.
Balance sheet shows the financial position of the business. As
these two statements provide the final result of any business,
they are called final accounts.
Income Statement • Income statement consists of both
• Trading A/c and
• Profit & Loss A/c
(i) Trading A/c The object of this account is to arrive at the results of trading operation.I.e.to find
out that the organization has derived profit or loss out of buying & selling operation.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 24
Gross profit 67,800 Rent 3,000
Salaries 7,000 Insurance 3,150
General exp 500 Discount (Dr.) 3,250 Depn.on furniture 650 Bad debts 1,250
Provision for Provision for
19
• Profit & Loss A/c This account is prepared to ascertain the net profit/loss of the business during an
accounting period. The P&L a/c can be defined as a statement that summarizes the
revenues and expenses of an accounting period so as to reflect the changes in
various critical areas of firm‘s operations.
Prob:1 Prepare a trading a/c for the year ended 31st
Dec,2005, from the following
information
Opening stock 30,000
Debit Credit
Rs. Rs.
Purchases 3,10,000
Purchase Returns 8,000
Sales 4,50,000
Sales Returns 6,000
Closing stock was valued at Rs.40,000
Prob:1 From the following balances extracted at the close of the year ended 31st
Dec,
1998, prepare the Profit & Loss a/c as at that date. Rs.
Rs.
Gross Profit 1,53,000 Carriage outward 7,500
Salaries 27,500 Discount (Dr.) 1,500
Apprentice Rent 3,300
Premium(Cr) 4,500 Traveling exp 600
Fire Insur. Premium 2,700 Rates & taxes 1,050
Printing & Stationary 750 Trade exps. 900
Bad debts 6,300
Prob:2 Prepare P&L a/c as on 31st
Dec, 1999 from the following information: Rs.
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Department of MBA/SJBIT Page 25
Rs. Rs.
Capital 35,000 Purchases 46,850
Building 18,750 Wages 2,500
Machinery 9,250 Electric charges 190
Debtors 7,000 Printing & Stationary 2,000 General exp. 800 Carriage inwards 850 Rent paid 3,710 Cash at bank 3,000 Drawings 650 Return outwards 110 Salaries 1,110 Cash in hand 1,800 Dis. Allowed 200 Sundry creditors 10,000
Stock (1st
Jan) 16,500 Returns inwards 450
Sales 65,900 Bills payable 5,000 Closing stock as Rs.18,210
Doubtful debts 250 Discount on Drs. 420
Discount recd. 1,850 Commission (cr) 1,000
Int. on investment 750 Traveling exp 1,500
Postage 270
Balance Sheet
A Balance Sheet is a statement depicting the financial position of the business on a specific date. Balance sheet is defined as a still-photograph of the state of affairs of
the business at a particular date. The financial position of a business is revealed by its
assets and liabilities on a particular date.
Prob:1 From the following particulars, prepare a balance sheet as at 31st
Dec, 1998
Rs. Rs.
Capital 75,000 Loan to Kumar 7,500
Buildings 82,500 Investments 4,500
Furniture 3,750 Cash in hand 300
Bills receivable 5,250 Cash at bank 5,250
Sundry debtors 30,000 Drawings 4,500
Bills payable 3,750 Net profit 58,350
Sundry creditors 23,700 Stock 10,500
Machinery 6,750
Prob:2 From the following balances, prepare Trading and Profit Loss A/c for the year
ending 31st, Dec 2003 and Balance Sheet on that date.
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Department of MBA/SJBIT Page 26
Prob:3 The following is the Trial Balance of Sri.Balaji on 30th
June 2003
Debit Credit
Rs. Rs.
Capital 1,86,000
Drawings 15,735
Stock (1-7-02) 17,280
Sundry creditors 18,900
Sundry debtors 43,500
Machinery
60,000
Patents 22,500 Freehold land 30,000 Buildings Sales
Purchase
Sales returns
96,000
1,22,025
2,040
2,96,340
Purchase returns Cash in hand
1,620
1,500
Cash at bank 7,890 Insurance 1,800 General exp 9,000 Salaries 45,000 Wages Factory fuel and power
Carriage on purchases
25,440
6,120
14,190
Carriage on sales 9,600
Rent 27,000
5,29,740 5,29,740
The following adjustments are to be effected:
• Stock on 30th
June 2003 Rs.20,400 • 5% on sundry debtors is to be written off as bad
• Salaries for the month of June 2003 amounting to Rs.4,500 were unpaid.
• Insurance include a premium of Rs.510 on a policy expiring on Dec, 31st
2003. • Rent Rs.3,000 is accrued but not received.
• Depreciate Machinery @ 10% and Patents @20%
You are required to prepare Trading, Profit & Loss A/c and the Balance Sheet as
on June 2003.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 27
Debit Stock 1.1.06
Rs. 6,65,000
Credit Rs. Equity share Capital 20,00,000
Discounts & rebates 30,000 (2,00,000 shares of Rs.10 each)
Carriage inwards 57,500 4% Debentures 5,00,000
Patterns 3,75,000 Bank overdraft 7,57,000
Rates, tax & insurance 55,000 Sundry creditors 2,40,500 Furniture & Fixtures 1,50,000 Sundry Creditors 2,40,500
Materials purchased 12,32,500 Sales 36,17,000
Repairs 46,500 Rent (cr) 30,000
Wages 13,05,000 Transfer fees 6,500
Coal & fuel 63,000 Profit & Loss A/c (cr) 67,000
Freehold land 12,50,000 Plant & Machinery 7,50,000 Engg. Tools 1,50,000 Goodwill 3,75,000 Sundry Debtors 2,66,000
COMPANY ACCOUNTS
Prob:1 The following are the balances of XYZ Ltd. as on 31st
March, 2005:
Debit Rs. Credit Rs. Premises 30,72,000 Share capital 40,00,000
Plant 33,00,000 12% Debentures 30,00,000
Stock 7,50,000 Profit & Loss A/c 2,62,500
Debtors 8,70,000 Bills payable 3,70,000
Goodwill 2,50,000 Creditors 4,00,000
Cash and bank 4,06,500 Sales 4,50,000
Calls in arrear 75,000 General reserve 2,50,000
Interim dividend paid 3,92,500 Bad debts provision on
Purchases 18,50,000 1.4.04 35,000
Preliminary exp 50,000
Wages 9,79,800
General exp 68,350
Salaries 2,02,250
Bad debts 21,100
Debentures Int. paid 1,80,000
1,24,67,500 1,24,67,500
Adjustments • Depreciate plant by 15% • Write off Rs5,000 from Preliminary expenses.
• Half year‘s Debenture Interest due.
• Credit 5% provision on debtors for doubtful debts.
• Provide for Income Tax @ 50%
• Stock on 31st
March, 2005 was Rs.9,50,000 Prepare Final Accounts of the company.
Prob:2 Sherry Engg. Ltd. have authorized capital of Rs.50 lakhs divided into 5,00,000
equity shares of Rs.10 each. Their books show the following balances as on 31st
Dec, 2006.
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 28
Bills receivables 1,34,500
Advertisement 15,000
Commission & brokerage 67,500
Business exp. 56,000
Bank Current A/c 45,500
Cash in hand 8,000
Debenture interest
(for half year 31.6.06) 10,000
Interest – banks 91,000
Preliminary exp. 10,000
Calls in arrear 10,000
Additional Information
The stock as on 31st
Dec 2006 was Rs. 7,08,000. Outstanding wages Rs.25,000 and
outstanding business expenses Rs.25,000. Dividend declared @ 10% on paid-up
capital.
Charge Depreciation: Plant & Machinery @5%; Engg. Tools @ 20%; Patterns @ 10%;
Furniture & Fixtures @10%
Provide 2% on debtors as doubtful debts after writing off Rs.21,500 as bad debts.
Write off preliminary expenses Rs.5,000 and create debenture redemption reserve
Rs.50,000. Provide Rs.2,40,000 for income tax. Prepare Final Accounts of this company.
Prob:3 On 31st
March, 2005 the following balances appears in the books of the Alpha
Hotels Ltd.
Debit Rs. Credit Rs. Interest on debentures 60,000 12% Mortgage debentures 5,00,000 Rates & Taxes 18,000 Share capital 40,00,000
Stock of provisions on General reserve 5,00,000
1.4.04 2,50,000 Unclaimed dividends 15,000
Purchase of provisions 25,00,000 Prov. For bad debts 50,000
Salaries and wages 7,50,000 Trade Creditors 2,50,000
Provident fund contbn. 30,000 Expenses owing 80,000
Misellaneous exp. 50,000 Visitors‘ credit balances 10,000
Directors fees 24,000 Staff Provident fund 7,50,000
Managing director‘s P & L A/c 81,000
Salary 2,15,000 Income from boarding & lodging 51,00,000
Land 15,00,000 Misc. receipts 65,000
Buildings 50,00,000 Depreciation A/c:
Furniture & Fittings 15,00,000 Buildings 20,00,000
Linen, Crockery, Glassware
Cutlery and utensils 3,20,000 Furniture 10,00,000
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Department of MBA/SJBIT Page 29
Sundry debtors 3,50,000 Linen, Crockery etc. 1,80,000
Prepaid exps. 25,000
Advance against 15,00,000
purchase of Buildings
Cash in hand 15,000
Balance at bank 4,74,000
1,45,81,000 1,45,81,000
After taking the following information into account prepare the company‘s
balance sheet as on 31st
March 2005 and its profit & loss a/c for the same period:
• Stock of provisions on 31st
March, 2005 was valued at 3,00,000
• Provide Rs.1,00,000 for depreciation of furniture and fittings; Rs.20,000 for
depreciation of linen, crockery etc.
• Make a provision for taxation @50%
• The directors decide to recommend a dividend @10% on the paid up capital of the
company and transfer the remaining balance in profit & loss a/c to general reserve.
• The entire paid up share capital of the company consists of fully paid equity shares
of Rs.10 each.
Prob:4 (July 2005) X Ltd. was registered with a nominal capital of Rs.10,00,000 divided
into shares of 10 each, of which 40,000 shares had been issued and fully paid. The
following is the trial balance extracted on 31.12.2003.
Stock (1.1.2003) 1,86,420 Manufacturing wages 1,09,740
Manufacturing exp. 19,240
Purchases and sales 8,21,460 11,69,900
Repair to machinery 8,610
Carriage inwards 4,910
Carriage outwards 9,260
Transfer fees 40
Advance income tax 14,290
Bank loan 50,000
Interest on loan 1,250
Debtors and creditors 1,64,400 92,220
P/L A/c (1.1.2003) 8,640
Returns 12,640 9,810
Bank current A/c 6,860
Cash in hand 1,920
Lease hold factory 64,210
Plant & machinery 78,400
Loose tools 12,500
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Department of MBA/SJBIT Page 30
Share capital 4,00,000
Commission 8,640
Calls in arrears 1,000
Electricity charges 17,610
(factory Rs.14,210, office Rs. 3400)
Directors fees 12,000
Office salaries 13,000
Audit fees 1,250
Office furniture 5,000
Preliminary exp. 6,000
Good will 1,50,000
17,30,610 17,30,610
You are required to prepare trading and P/L A/c for the year ending 31.12.03 and
a balance sheet as at that date after taking in to consideration the following
adjustments.
• Write off 1/3 of preliminary exp.
• Depreciation is to charged at 20% on plant and machinery and 10% on furniture.
• Manufacturing wages Rs.1,890 and offices salaries Rs.1,200 are outstanding.
• Provide for interest on bank loan for 6 months.
• Stock was valued at Rs.1,24,840 and loose tools at Rs.10,000
• Reserve Rs.8,500 on debtors for doubtful debts.
• Reserve further Rs.3,120 for discount on debtors
• The directors recommended dividend at 5% for the year ending 31.12.2003 after
providing for taxes amounting to Rs.23,000.
Module-4
Analysis of Financial Statement
INTRODUCTION TO FINANCIAL ANALYSIS
Analysis means methodical classification of the data given in the financial
statements.
Interpretation means explaining the meaning and significance of the data so
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 31
simplified.
Financial Analysis is the process of identifying the financial strengths and
weakness of the firm by properly establishing relationships between the items of
the balance sheet and the profit and loss account.
Different tools of financial Analysis The various tools used for the analysis of the financial statements of a firm are:
1. Comparative Financial Statements
2. Common size Financial Statements
3. Trend Analysis
4. Ratio Analysis.
ILLUSTRATION
The following illustration will be used for explaining the various tools of
financial analysis:
Illustration: From the following profit and loss Account and Balance sheets of
Swadeshi Polytex Ltd. For the year ended 31st
December 1987 and 1988, you are
required to prepare a Comparative Income Statement and a Comparative Balance Sheet.
Profit and Loss Account (in lakhs
of rupees)
Particulars 1987 Rs.
1988 Rs.
Particulars 1987 Rs.
1988 Rs.
To Cost of goods sold To Operating Expenses:
Administrative expenses
Selling expenses
To Net Profit
600
20
30
150
800
750
20
40
190
1000
By Net Sales 800
800
1000
1000
Balance Sheet (in lakhs
of rupees)
Liabilities 1987 Rs.
1988 Rs.
Assets 1987 Rs.
1988 Rs.
Bills Payable Sundry Creditors
Tax Payable
14% Debentures
16% Preference Capital
Equity Capital
Reserves
50 150
100
100
300
400
200
1,300
75 200
150
150
300
400
245
1, 520
Cash Sundry Debtors
Stock
Land
Building
Plant
Furniture
100 200
200
100
300
300
100
1,300
140 300
300
100
270
270
140
1,520
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COMPARATIVE FINANCIAL STATEMENTS
A simple method for financial analysis is Comparative Financial
Statements. Comparative financial statements will contain items at least for two
periods. Changes – increases and decreases – in income statement and balance sheet
over period are shown.
Comparative Financial Statements can be prepared for more than two periods or
on more than two dates.
Illustration: From the illustration of M/s Swadeshi Polytex Ltd prepare
comparative income statement comparative balance sheet.
Swadeshi Polytex Ltd.
Comparative Income Statement for the years ended 31st
December 1987 and 1988
(in lakhs of rupees)
Particulars
1987
Rs.
1988
Rs.
Absolute increase(+)
or decrease
(-) in 1988
Rs.
Absolute increase (+)
or
decrease(-)
in 1988
%
Net Sales Less: Cost of goods sold
Gross Profit
Operating Expenses:
Administrative expenses
Selling expenses
Total Operating expenses
Net Profit
800 600
200
20
30
1000 750
250
20
40
+200 +150
+50
--
+10
+25 +25
+25
--
+33.33
50 60 +20 +20
150
190
+40
+26.67
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Department of MBA/SJBIT Page 33
1987
Rs.
1988
Rs.
Absolute increase(+)
or decrease
(-) in 1988
Rs.
Absolute increase (+)
or
decrease(-)
in 1988
%
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Department of MBA/SJBIT Page 34
ASSETS
Current Assets Cash
Debtors
Stock
Total Current Assets
Fixed Assets
Land
Building
Plant
Furniture
Total Fixed Assets
Total Assets
LIABILITIES & CAPITAL Current liabilities Bills Payable
Sundry creditors
Taxes Payable
Total Current Liabilities
Long term Liabilities
14% Debentures
Total Liabilities
Capital and Reserves
16% Preference Capital
Equity Capital
Reserves
Total Share Holders Funds
Total Liabilities and capital
100
200
200
500
100
300
300
100
800
1,300
50
150
100
300
100
400
300
400
200
900
1,300
140
300
300
740
100
270
270
140
780
1,520
75
200
150
425
150
575
300
400
245
945
1,520
+40
+100
+100
+240
--
-30
-30
+40
-20
+220
+25
+50
+50
+125
+50
+175
--
--
+45
+45
220
+40
+50
+50
+50
--
-10
-10
+40
-2.50
+17
+50
+33.33
+50
+41.66
+50
+43.75
--
--
+22.50
+5.00
17.00
Accounting for Management 12MBA14
Department of MBA/SJBIT Page 35
Swadeshi Polytex Ltd.
Comparative Balance Sheet for the years ended 31st
December 1987 and 1988
(in lakhs of rupees)
COMMON SIZE FINANCIAL STATEMENTS
Comparative Financial Statements can be prepared for more than two periods or
on more than two dates. However, it becomes very cumbersome to study the trend with
more than two periods data. Trend percentages are more useful in such cases.
Common size financial statements are those in which figures reported are
converted into percentages to some common base. In the income statement, the sale
figure is assumed to be 100 and all figures are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total of assets or liabilities is taken as 100 and all figures are expressed as a percentage of this total.
Illustration: On the basis of the data given in the previous illustration pertaining to
Swadeshi Polytex limited, prepare the common size income statement and common size
balance sheet for the years ended 31st
March 1987 and 1988.
Solution:
Swadeshi Polytex limited
Common Size Income Statement for the years ended 31st
March 1987 and 1988
Particulars 1987 1988
Figures in %
Net sales 100 100
Less: Cost of goods sold
75 75
GROSS PROFIT 25 25
Operating Expenses:
Administrative Expenses 2.50 2.00
Selling Expenses 3.75 4.00
Total Operating Expenses
6.25 6.00
Interpretation
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Department of MBA/SJBIT Page 36
The above statement shows that though in absolute terms, the cost of goods has
gone up, the percentage of its cost to sales remains consistent at 75%. This is the reason
why the gross profit continues at 25% of sales. Similarly, n absolute terms the amount of
administrative remains the same but as percentage to sales it has come down by 0.5%.
Selling expenses have increased by0.25%. These all lead to net increase in net profit by
0.25%.
Swadeshi Polytex limited
Common Size Balance Sheet for the years ended 31st
March 1987 and 1988
Particulars
1987 1988 % %
100 100 CURRENT ASSETS Cash 7.70 9.21 Debtors 15.38 19.74 Stock 15.38 19.74 Total Current Assets 38.46 48.69 FIXED ASSETS Building 23.07 17.76 Plant 23.07 17.76 Furniture 7.70 9.21 Land 7.70 6.68 Total fixed assets 61.54 51.31
TOTAL ASSETS 100.00 100.00
Particulars 1987 1988
% % 100 100
CURRENT LIABILITIES Bills Payable 3.84 4.93 Sundry Creditors 11.54 13.16 Taxes payable 7.69 9.86 Total Current Liabilities 23.07 27.95 LONG TERM LIABILITIES 14% Debentures 7.69 9.86 CAPITAL & RESERVES 16% Preference share capital 23.10 19.72 Equity share capital 30.76 26.32 Reserves 15.38 16.15 Total Shareholders' Funds 76.93 72.05
TOTAL LIABILITIES AND CAPITAL 100 100
Interpretation The percentage of current assets to total assets was 38.46 in 1987. It has gone up
to 48.69 in 1988. Similarly the percentage of current liabilities to total liabilities
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Department of MBA/SJBIT Page 37
(including capital) has gone up from 2307 in 1987 to 27.95 in 1988. Thus the proportion
of current assets has increased by percentage of 10 as compared to increase in the
proportion of current liabilities, which is about 5%. This has improved the working
capital position of the company. There has been a slight deterioration in the debt-equity
ratio though it continues to be sound. The proportion of shareholders‘ funds in the total
liabilities has come down from 69.24% to 61.19% while that of debenture holders has
gone up from 7.69% to 9.86%.
TREND ANALYSIS
Trend percentages are immensely useful in making a comparative study
of financial statements for several years.
The method of calculating trend percentages involves the calculation of
percentage relationship that each item bears to the same item in the base
year.
Any year may be taken as the base year. It is usually the earliest
year. Any intervening year may also be taken as the base year.
Each item of base year is taken as 100 and on that basis the percentage
for each item of the years is calculated.
These percentages can also be taken as Index Numbers showing relative
changes in the financial data resulting with the passage of time.
Illustration: From the following data relating to the assets side of the
balance sheet of Kamadhenu Ltd., for the period 31st
December 1985 to
31st
December 1988 you are required to calculate the trend percentage taking
1985 as the base year.
In lakhs of Rs. As on 31st December Assets 1985 1986 1987 1988
Cash 100 120 80 140 Debtors 200 250 325 400 Stock-in-trade 300 400 350 500 Others current assets 50 75 125 150 Land 400 500 500 500 Building 800 1,000 1,200 1,500 Plant 1,000 1,000 1,200 1,500
TOTAL 2,850 3,345 3,780 4,690
Solution
ASSETS December 31st (Rupees in lakhs) Trend percentages Base year 1985
1985 1986 1987 1988 1985 1986 1987 1988
Current Assets
Cash 100 120 80 140 100 120 80 140
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Debtors 200 250 325 400 100 125 163 200 Stock-in-trade 300 400 350 500 100 133 117 167
Other Current Assets 50 75 125 150 100 150 250 300
Total Current Assets 650 845 880 1190 100 129 135 183
Fixed Assets
Land 400 500 500 500 100 125 125 125 Building 800 1000 1200 1500 100 125 150 175
Plant 1000 1000 1200 1500 100 100 100 150
Total Fixed Assets 2200 2500 2900 3500 100 114 132 159
Ratios for Financial Statement Analysis
A ratio gives the mathematical relationship between one variable and another.
Ratios are well known and most widely used tools for financial analysis.
The various types of ratios have been classified into the following categories:
1. Liquidity ratios
2. Turnover ratios
3. Profitability ratios
4. Ownership ratios
Earnings ratio
Dividend ratios
Leverage ratios -- Capital structure ratios
-- Coverage ratios
LIQUIDITY RATIOS
Liquidity implies a firm‟s ability to pay its debts in the short term. This ability
can be measured by the use of liquidity ratios. Short term liquidity involves the
relationship between current assets and current liabilities.
1. Current Ratio
Current Assets
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Department of MBA/SJBIT Page 39
Current Ratio = ----------------------------
Current Liabilities
Current assets include cash, marketable securities, debtors, inventories, loans and
advances and prepaid expenses. Current liabilities include loans and advances taken,
trade creditors, accrued expenses and provisions.
2. Quick Ratio This ratio is also termed as Acid Test Ratio.
Quick Assets
Quick Ratio = -----------------------------
Current Liabilities
Quick Assets = Current Assets – Inventories
TURNOVER RATIOS
3. Accounts Receivable Turnover Ratio
Accounts Receivable Ratio
(Debtors turnover ratio) = Net sales (or) Net Credit sales
Receivables Average Accounts Receivables
The average accounts receivable is obtained by adding the beginning receivables
of the period and the ending receivables and by dividing the sum by 2. The net sales or
net credit sales made by the firm should be taken for analysis.
4. Average Collection Period
The average number of days for which the debtors remain outstanding is
called the average collection period. It is calculated as under:
Average Collection period = 360
Average Accounts Receivables Turnover
(Or)
= Average Accounts Receivables
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Average daily sales
5. Inventory turnover ratio
The liquidity of a firm‘s inventory may be calculated by dividing the cost of gods sold, by the firm‘s inventory. The inventory or
stock turnover, measures how fast the inventory is moving through the firm and generating sales. It is calculated by the following formula:
Inventory turnover = Cost of goods sold (or) Net sales
Average inventory Inventory
Where, average inventory is the average of the opening and closing
inventory in any year and inventory means only the closing inventory at the end of a
year.
6. Fixed Assets Turnover ratio
Fixed assets turnover ratio = Net sales (or) _Cost of goods sold
Fixed assets fixed sales
This ratio is supposed to measure the efficiency with which the fixed assets are
employed
7. Total Assets Turnover Ratio
Total Assets Turnover Ratio = Net sales
Total Assets.
Total assets are simply the balance sheet total at the end of the year.
PROFITABILITY RATIOS 8. Gross Profit Margin Ratio
Gross profit is the difference between the net sales and the cost of goods sold
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Gross Profit Margin Ratio = Gross profit
Net sales
This ratio shows the margin left after meeting manufacturing costs.
9. Net Profit Margin Ratio
Net Profit Margin Ratio = Net profit
Net sales
It shows the earnings left for the shareholders (both equity and preference) as a
percentage of net sales.
10. Earnings power
Earnings is a measure of the operating profitability and is arrived at by the following
formula:
Earnings Power = Earnings before interest and taxes
Average total assets
EARNINGS RATIO 11. Earnings per share
The shareholders are concerned about the earnings of the firm in two ways. One is the availability of the funds with the firm to pay their dividends and the other is to expand
their interest in the form of retained earnings that the firm can use to improve its
profitability. Earnings are expressed on a per share basis which is in short called EPS.
Earnings Per Share = Net Profit after Tax
Number of outstanding shares
12. P/E Ratio It is calculated as under
Price – Earnings Ratio = Market Value per share
Earnings per share
13. Capitalization Rate
The capitalisation rate is just the inverse of the Price-Earnings Ratio.
Capitalisation Rate = Earnings per share
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Market Value per share
LEVERAGE RATIOS
Leverage refers to the use of debt finance. While debt capital is a cheaper source
of finance, it is also riskier source of finance. Leverage ratios help in assessing the risk
arising form the use of debt capital.
14. Debt Ratio
The firm may be interested to know the proportion of interest bearing funded debt in the capital structure. Then this debt ratio will be helpful. It is arrived at by
dividing the total debt (TD) by the capital employed (CE) or Net Assets (NA)
(TD)
Debt Ratio = Total Debt (TD) = Total Debt
(CE)
Total Debt (TD) + Net Worth (NW) Capital Employed
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Note: 1. Capital Employed = Net Assets = Net Fixed Assets + Net Current Assets
2. Net Current Assets = Current Assets – Current liabilities excluding
interest
bearing short term debt for working capital.
NFA + CA = NW + TD + CL
NFA + CA – CL = NW + TD
NFA + NCA = NW + TD
NA = CE
Because equality of capital employed and Net assets, the debt ratio can also expressed as
Debt Ratio = Total Debt (TD)
Capital Employed (CE)
15. Debt-Equity Ratio This ratio indicates the relative contributions of creditors and owners
Debt – Equity ratio = Debt
Equity
CASH FLOW STATEMENT MEANING
Cash flow statement is a statement, which describes the inflows and outflows of cash and cash equivalents in an enterprise during a specific period of time. Such
statement takes into account the receipts and disbursements of cash. A cash flow
statement summarises the causes of changes in cash position of a business enterprise
between two dates.
CLASSIFICATION OF CASH FLOWS
The cash flow are classified into three main categories as:
1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities
1. CASH FLOW FROM OPERATING ACTIVITIES
Operating activities are the principal revenue – producing activities of the enterprise and other activities that are not investing or financing activities. Cash flow
from operating activities is principally derived from the principal revenue-producing
activities of the enterprise.
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The cash inflows from operating activities include receipts from customers for sales
or goods and services (including collection from debtors). Cash outflows from
operating activities include payments to suppliers for purchase of materials and for
services, payments to employees for services and payments to governments for tax duties.
2. CASH FLOW FROM INVESTING ACTIVITIES
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. It involves making and collecting of loans
and acquiring and disposing of debt and equity instruments and fixed assets.
The cash inflows from investing activities are receipts from collection of loans,
receipts from sales of shares, debt or similar instruments of other enterprises, receipts
from sales of fixed assets, and interest and dividends received on loans and investments.
Cash outflows from investing activities are disbursements of loans, payments to acquire
shares, debt or similar instruments of other enterprises, and payments (including advance
and down payments) to acquire fixed assets.
3. CASH FLOW FROM FINANCING ACTIVITIES
Financing activities are the activities that result in change in the size and consumption of the owners capital (including preference share capital in case of a company) and
borrowings of the enterprise.
Cash inflows from financing activities are proceeds from issuing shares or other
similar instruments, debentures, mortgages, bonds and other short or long-term
borrowings. Cash outflows from financing activities are the payments of dividends,
payments to acquire or redeem shares or other similar instruments of the enterprise,
repayments of amounts borrowed, principal payments to creditors who have extended
long-term credit, and interest paid.
Cash flow statement for the year ended
Particulars Rs. Rs.
Cash flows from Operating Activities
Either
Cash receipts from customers
(-) Cash paid to customers
Cash generated from operations
(-) Income tax paid
Cash flow before extra ordinary items
Extraordinary items
Net cash from (used in) operating activities
OR
Net profit before tax and extraordinary items
Adjustments for non-cash and non-operating items
xxxxx
(xxx)
xxxxx
xxxxx
(xxx) xxxxx
xxxxx
xxxxx
xxx
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[List of individual items such as depreciation, foreign
exchange loss, loss on sale of fixed assets, interest
Income, dividend income, interest expense etc.]
Operating profit before working capital changes
Adjustments for changes in current assets and
Current liabilities ( list of individual items)
Cash generated from (used in) operations before tax
(-) Income tax paid
Cash flow before extra ordinary items
Extraordinary items
Net cash from (used in) operating activities
Cash flow from Investing Activities
Individual items of cash inflows and cash outflows from investing activities
[Such as purchase/sale of fixed assets, purchase or sale of investments,
Interest received, dividend received etc.]
Net cash from (used in) investing activities
Cash flows from Finance Activities
Individual items of cash inflows and cash outflows from financing activities
[Such as proceeds from issue of shares, long-term borrowings, repayments
of long-term borrowings, interest paid, dividend paid etc.
Net cash from (used in) investing activities
Net Increase (Decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
xxxxx
xxxx
xxxxx
xxxxx
xxx
xxxx
(xxx) xxxx
xxxx
xxx
xxx
xxx
xxxx
xxxx
xxxx
xxx
xxxxx
xxxxx
CASH INFLOWS ACTIVITIES CASH
OUTFLOWS
Payments to suppliers and
employees for materials
and services
Receipts from customers
for sales of goods and
services activities
OPERATING ACTIVITIES
Receipts from sale of
fixed assets
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Payments to
government for
taxes and duties
Payment for
purchase of
fixed assets
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Receipts from sales of investments and fro collection of loans
INVESTING ACTIVITIES
Receipts from interest
and dividends on loans
and investments
Payments for purchase
of investments and
making loans
Receipts from
issuance of share
capital
Payments for
dividends on share
capital
Receipts from
issuance of debentures
FINANCING
ACTIVITIES
Payments for principal
on debentures and
other borrowings
Receipts from other
long-term borrowings
Payments for interest
on debentures and
other borrowings
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Module-5
ACCOUNTING STANDARDS
The Accounting standards bring uniformity in the preparation and presentation of
financial statements and aids in comparison of different financial statements of
companies in the same or different industries.
Procedure for framing Accounting Standards
The International Accounting Standards are issued by the IASC
These Standards are received by ICAI assigned to ASB
The Accounting standards are issued under the authority of the council of ICAI. So far
the ASB of ICAI has issued 28 Accounting standards as shown below
Accounting Standard
Title
Mandatory for
Accounting period
beginning on or
after
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AS-1 Disclosure of Accounting Policies 1.4.1991
AS-2(Revised) Valuation of inventories 1.4.1999
AS-3(Revised) Cash Flow Statements 1.4.2001
AS-4(Revised) Contingencies and Events occurring after Balance Sheet Date
1.4.1995
AS-5(Revised) Net Profit or Loss, prior period items and changes in Accounting policies
1.4.1996
AS-6(Revised) Depreciation Accounting 1.4.1995
AS-7(Revised) Accounting for construction contracts 1.4.2003
AS-8 Accounting for Research and Development 1.4.1991
AS-9 Revenue Recognition 1.4.1991
AS-10 Accounting of Fixed Assets 1.4.1991
AS-11(Revised) Accounting for the effect of changes in foreign exchange rates
1.4.1995
AS-12 Accounting for Government Grants 1.4.1994
AS-13 Accounting for Investments 1.4.1995
AS-14 Accounting for Amalgamations 1.4.1994
AS-15 Accounting for retirement benefits in the financial statements of employers
1.4.1995
AS-16 Borrowing costs 1.4.2000
AS-17 Segment reporting 1.4.2001
AS-18 Related Party Disclosures 1.4.2001
AS-19 Leases 1.4.2001
AS-20 Consolidated Financial Statements 1.4.2001
AS-21 Earnings per share 1.4.2001
AS-22 Accounting for taxes on income 1.4.2001
AS-23 Accounting for investments in consolidated finance statements
1.4.2002
AS-24 Discounting operations 1.4.2004
AS-25 Interim financial reporting 1.4.2002
AS-26 Intangible assets 1.4.2003
AS-27 Financial reporting of interest in joint ventures 1.4.2002
AS-28 Impairment of Assets 1.4.2004
AS-29 Provisions, Contingent Liabilities and Contingent Assets
1-4-2004
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IFRS vs. Indian Accounting Standards
The International Financial Reporting Standards refer to the reporting standards of finance as
set by the international accounting standards. Both IFRS and Indian Accounting Standards
have different accounting standards. However, with the growing market trend, the need of a
common set of accounting standards was felt by all. Hence, IFRS is to be followed. However,
with the differences in the standards existing between both the bodies, a careful handling is to
be carried out. Following are few changes that will be made in case IFRS is issued and made
compulsory:
•AS-1: Disclosure of Accounting principles
IFRS-/IAS-1: Adoption of international financial reporting standards/presentation of
financial statements.
•AS-3:cash flow statements
IAS-7: cash flow statements
•AS-4: events after the balance sheet date
IAS-10: events recorded after the balance sheet date
• AS-5: changes in accounting policies and accounting errors
IAS-8: prior period changes and accounting policies and errors changes
•AS-6 and AS-10: Depreciation and fixed assets
IAS-16: plants, property and equipment‘s
• AS-9: revenue recognition
IAS-18: revenue
The above mentioned standards were some of the examples to the changes in accounting standards
of both the bodies. Not only that, IFRS deals with the balance sheet in the reverse manner as ours.
The first emphasis is laid on to the assets in the order of liquidity. The next recorded details are that
of the liabilities starting with the borrowings. Then finally the next recorded details are that of the
equity capital which is completely
opposite according to the Indian Accounting standards
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Module-VI
Audit of a company
Audit means a systematic verification of the books of a company to give a true and fair
view about its working and also about the financial results of the company.
In India only a Chartered Accountant who has passed the professional
examination conducted by the Institute of Chartered Accountant can conduct the audit and
certify under his hand about his opinion on the maintenance of the books of accounts.
The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal
auditor or an independent external auditor as a result of an internal or external audit or
evaluation performed on a legal entity or subdivision thereof (called an
―auditee‖). The report is subsequently provided to a ―user‖ (such as an individual, a
group of persons, a company, a government, or even the general public, among others) as an
assurance service in order for the user to make decisions based on the results of the audit.
An auditor‘s report is considered an essential tool when reporting financial information to users,
particularly in business. Since many third-party users prefer, or even require financial information
to be certified by an independent external auditor, many auditees rely on auditor reports to certify
their information in order to attract investors, obtain loans, and improve public appearance. Some
have even stated that financial information without an auditor‘s report is ―essentially worthless‖
for investing purposes
There are four common types of auditor‘s reports, each one presenting a different situation
encountered during the auditor‘s work. The four reports are as follows:
1. Unqualified Opinion
An opinion is said to be unqualified when the Auditor concludes that the Financial Statements give
a true and fair view in accordance with the financial reporting framework used for the preparation
and presentation of the Financial Statements. An Auditor gives a Clean opinion of Unqualified
Opinion when he or she does not have any significant reservation in respect of matters contained in
the Financial Statements. The most frequent type of report is referred to as the Unqualified
Opinion, and is regarded by many as the equivalent of a ―clean bill of health‖ to a patient,[2]
which
has led many to call it the
Clean Opinion, but in reality it is not a clean bill of health, because the Auditor can only
provide reasonable assurance that there are no material misstatements within the Financial
Statements.[3]
This type of report is issued by an auditor when the financial statements presented
are free of material misstatements and are represented fairly in accordance with the Generally
Accepted Accounting Principles (GAAP), which in other words means that the company‘s
financial condition, position, and operations are fairly presented in the financial statements. It is
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the best type of report an auditee may receive from an external auditor.
2. Qualified Opinion report A Qualified Opinion report is issued when the auditor encountered one of two types of situations
which do not comply with generally accepted accounting principles, however the rest of the
financial statements are fairly presented. This type of opinion is very similar to an unqualified or
―clean opinion‖, but the report states that the financial statements are fairly presented with a
certain exception which is otherwise misstated. The two types of situations which would cause an
auditor to issue this opinion over the Unqualified opinion are:
Single deviation from GAAP – this type of qualification occurs when one or more areas of
the financial statements do not conform with GAAP (e.g. are misstated), but do not affect
the rest of the financial statements from being fairly presented when taken as a whole.
Examples of this include a company dedicated to a retail business that did not correctly
calculate the depreciation expense of its building. Even if this expense is considered
material, since the rest of the financial statements do conform with GAAP, then the auditor
qualifies the opinion by describing the depreciation misstatement in the report and
continues to issue a clean opinion on the rest of the financial statements.
Limitation of scope - this type of qualification occurs when the auditor could not audit one
or more areas of the financial statements, and although they could not be verified, the rest
of the financial statements were audited and they conform
GAAP. Examples of this include an auditor not being able to observe and test a company‘s
inventory of goods. If the auditor audited the rest of the financial statements and is
reasonably sure that they conform with GAAP, then the auditor simply states that the
financial statements are fairly presented, with the exception of the inventory which could
not be audited.
3. Adverse Opinion report An Adverse Opinion is issued when the auditor determines that the financial statements of an
auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is
considered the opposite of an unqualified or clean opinion, essentially stating that the information
contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee‘s
financial position and results of operations. Investors,
lending institutions, and governments very rarely accept an auditee‘s financial statements if the
auditor issued an adverse opinion, and usually request the auditee to correct the financial
statements and obtain another audit report.
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4. Disclaimer of Opinion report A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the
auditor could not form, and consequently refuses to present, an opinion on the financial statements.
This type of report is issued when the auditor tried to audit an entity but could not complete the
work due to various reasons and does not issue an opinion. The disclaimer of opinion report can be
traced back to 1949, when the Statement on Auditing Procedure No. 23: Recommendation Made
To Clarify Accountant’s Representations When Opinion Is Not Expressed was published in order
to provide guidance to auditors in presenting a disclaimer.
Directors‟ report
This is essentially an account of a company‘s performance in the previous year and its
prospects as seen by its board of directors.
The objective is to give the reader a sense of the state of the business. It touches upon both
quantitative and qualitative issues.
Typically, it starts with a summary of the company‘s performance in the previous
year, and the dividends and bonuses declared.
Then, it launches into a discussion of which parts of the business did well and which didn‘t,
what were the conditions in the industry, the enabling factors and the limitations, and
the outlook for the business.
Provisions of Companies Act of 1956 Regarding Financial Statements
Sec 209 - Books of account to be kept by company.
Sec 209A - Inspection of books of account, etc., of companies.
Sec 210 - Annual accounts and balance sheet.
Sec 211 - Form and contents of balance sheet and profit and loss account.
Sec 215 - Authentication of balance sheet and profit and loss account.
Sec 219 - Right of members to copies of Balance Sheet and Auditors' Report.
Sec 220 - Three copies of Balance Sheet, etc., to be filed with Registrar.
Sec 224
Provisions of Companies Act of 1956 Regarding the Auditors
- Appointment and remuneration of Auditors.
Sec 226 - Qualifications and disqualifications of Auditors.
Sec 227 - Powers and duties of auditors.
Sec 229 - Signature of audit report, etc.
Sec 230 - Reading and inspection of auditor's report.
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MAOCARO Under the powers conferred by S. 227(4A), the Central Government first issued an order called the manufacturing and other companies (auditor‘s report) order, 1975, (MAOCARO-1975).
This order came into force from 1-1-1976 and applied to all companies engaged in manu-
facturing, service, trading and finance activities. There were in all 22 items on which auditor was
required to give his specific report. With changes in economic environment, the above order was
replaced by another order called MAOCARO-1988 which come into force on 1-11-1988. This
order contained 27 items
on which auditor was required to make specific comments depending on the nature of activities
of the company. It may be noted that the 1988 order replaced 1975 order after
13 years. Now, after 15 years, the Central Government has issued, in consultation with ICAI, a
new order u/s.227(4A) called the Companies (Auditor‘s Report) Order, 2003. This can be called
‗CARO-2003‘ which has come into force from 1st July 2003. There are 33 items in CARO on
which the auditor has to make specific comments. Some of the items in MAOCARO-1988 and
CARO-2003 are common
and some items from MAOCARO are omitted. Since some additional responsibilities are being
placed on the auditor under CARO-2003, the discussion in this article is mainly restricted to the
new items added under this new order.
Back Ground:
With the introduction of CARO, the responsibility of the auditors as well as the
companies to which this report applies has increased.
This article makes an attempt to compare the reporting requirements in MAOCARO with
that prescribed in CARO. This will help the practicing members as well as members in
industry to understand the new requirement and comply with it.
Clause by Clause comparison of MAOCARO with CARO
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Sr.
No.
Particulars
MAOCARO
CARO
1. Full name Manufacturing and
Other Companies
(Auditor's Report) Order
1988
Companies (Auditor's Report)
Order 2003
2. With effect from Accounting periods ending
on any day on or after 1st
November 1988
Accounting periods ending on
any day on or after 1st
July 2003
3. Applicability The order does not apply to Banking, Insurance
Company and Company
formed u/s. 25 of
Companies Act
The order does not apply to Banking, Insurance Company,
Company formed u/s. 25 of
Companies Act and private limited
company if:
paid up capital and reserves not
more that Rs. 50 Lacs and has not
accepted any public deposits and
does not have outstanding loan of
Rs. 10 Lacs or more from any
bank or financial institution and
does not have turnover exceeding
Rs. 5 Crs.
4. Clause relating to
Fixed Assets
Maintenance of proper records offixed assets,
physical verification of
fixed assets and
accounting of material
discrepancies on physical
verification
Same as MAOCARO
Whether any fixed assets
have been revalued during
the year and if so the basis
of revaluation should be
indicated
No such reporting is required
47
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No such reporting is
required
If substantial part of fixed assets
have been disposed off during
the year whether it has affected
the going concern
5. Clause relating to Inventories
Whether physical verification carried out at
reasonable intervals in
respect of finished goods,
store, spare parts and raw
materials
Same as MAOCARO. However, instead ofmentioning finished
goods, stores, spare parts and raw
materials CARO mentions the
word "inventory". Thus, now WIP
can also be included in the list
which earlier was not there.
Whether procedures
relating to physical
verification of stocks
reasonable and adequate in
relation to the size of and
nature of the business of
the company. If not
inadequacies to be
reported
Same as MAOCARO
Whether material
discrepancies relating to
physical verification
properly accounted for
Same as MAOCARO. However,
one aspect added here is whether
the company is maintaining
proper records of inventory
Whether stock valuation
has been done in
accordance with accepted
accounting principles
Deleted
6. Clause relating to Loans granted and
taken from parties
listed in register
maintained u/s.
301and Companies
under the same
management as
defined u/s. 370 (1B)
No such reporting required The number of parties and amount involved in the transactions has to
be reported only for parties listed
in register maintained u/s. 301. No
reporting for companies under
same management
Whether rate of interest
and other terms and
conditions are prima facei
prejudicial to the interests
of the company
Same as MAOCARO. However,
no reporting required for loans
granted to /taken from companies
under the same management
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7. Clause relating to other loans or
advances in the nature
of loans granted or
Whether the parties to whom loans or advances in
the nature of loans are
given is regular in
Same as MAOCATO.
taken by the company repayment
No such reporting required Whether the rate of interest and
other terms and conditions of loans
(secured or unsecured) are prima
facei prejudicial to the interest of
the company
If the parties are not
regular in repayment,
whether reasonable steps
have been taken by the
company for
recovery/payment of the
principal and interest.
Same as MAOCARO. However,
reporting required only if
overdue amount is more one
lakhs
8. Clause relating to
Internal Control
procedures
Is there adequate internal control procedures
commensurate with the
size of and the nature of
the business of the
company relating to
inventory and fixed assets
and for the sale of goods.
Same as MAOCARO. However, one very important additional thing
to be reported is whether there is
a continuing failure to correct
major weaknesses in internal
control
9. Clause relating to transactions entered
with parties
mentioned in register
mentioned u/s. 301
No such reporting required Whether transactions that need to be entered into a register in
pursuance of section 301 have been
so entered
Whether transactions are
effected at market prices.
Reporting required only
for transactions exceeding
Rs. 50,000/-
Same as MAOCARO. However,
the limit of Rs. 50,000/- has been
increased to Rs. 5,00,000/-
10. Clause relating to
unserviceable or
damaged stores, raw
materials or finished
goods.
Whether any unserviceable or damaged stores, raw
materials or finished goods
are determined and
whether provisions for the
loss, if any, have been
made in the accounts
Deleted
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Forensic Accounting
Module-VII
Forensic Accounting
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A branch of accounting that uses investigative skills to determine the accuracy of a
company's financial statements in a legal dispute. The word forensic means "suitable for
a court of law." Thus, forensic accountants are used in fraud investigations, breach of
contract disputes, and other disagreements that require court action. Forensic accountants
are often retained by one or both parties in such dispute to bolster their cases
Example:
Embezzlement - Government Employees County government employees executed a massive fraud scheme in collusion with members of an outside organization to steal and sell close to $500,000 worth of County
property. We were engaged by County officials to provide forensic accounting services,
assist the police in the investigation and uncover other areas of fraud exposure that
existed in the government operations
NATURE AND INCIDENCE OF WINDOW DRESSING Window Dressing
It is the act or instance of making something appear deceptively attractive or favourable; something used to create a deceptively attractive or favourable impression.
The act or practice of giving something superficial appeal by skilful presentation.
Nature of Window Dressing 1. Inflate the sales from the current year by advancing the sales from the following
year.
2. Alter the ‗other income‘ figure by playing with non-operational figures like sale
of fixed assets.
3. Fiddle with the method and rate of depreciation. (A switch may be effected from
the written down value method to the straight line method or vice versa.)
4. Change the method of stock valuation from, say, direct costing to absorption, to
minimize the cost of goods sold.
5. Capitalise certain expenses like research and development costs and product
promotion cost, that are ordinarily written off in the profit and loss account.
6. Defer certain discretionary expenditures (like repairs, advertising, research and
development) to the following year.
7. Make inadequate provision for certain known liabilities (gratuity etc.,) and treat
certain liabilities as contingent liabilities
8. Make extra provisions during prosperous years and written them back in lean
years.
9. Use totally unacceptable accounting practices. 10. Revalue assets to create the impression of substantial reserves.
Corporate governance
Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way in which a corporation is directed, administered or controlled.
Corporate governance also includes the relationships among the many players involved
(the stakeholders) and the goals for which the corporation is governed. The principal
players are the shareholders, management and the board of directors. Other stakeholders
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include employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance deals with issues of accountability and fiduciary duty, essentially advocating
the implementation of guidelines and mechanisms to ensure good behaviour and protect
shareholders. Another key focus is the economic efficiency view, through which the
corporate governance system should aim to optimize economic results, with a strong
emphasis on shareholders welfare. There are yet other aspects to the corporate
governance subject, such as the stakeholder view, which calls for more attention and
accountability to players other than the shareholders (e.g.: the employees or the
environment).
Definition
The term corporate governance has come to mean two things.
* the processes by which companies are directed and controlled.
* a field in economics, which studies the many issues arising from the separation of
ownership and control.
In A Board Culture of Corporate Governance business author Gabrielle O'Donovan
defines corporate governance as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity and integrity.
Sound corporate governance is reliant on external marketplace commitment and
legislation, plus a healthy board culture which safeguards policies and processes'.
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and the
community at large.
Issues involving corporate governance principles include:
* oversight of the preparation of the entity's financial statements
* internal controls and the independence of the entity's auditors
* review of the compensation arrangements for the chief executive officer and other
senior executives
* the way in which individuals are nominated for positions on the board
* the resources made available to directors in carrying out their duties
* oversight and management of risk
* dividend policy
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Human Resource Accounting
Human Resource Accounting (HRA) means to measure the cost and value of the people
(i.e. of employees and managers) in the organisation. It measures the cost incurred to
recruit, hire, train and develop employees and managers.
HRA also finds out the present economic value of its employees and managers. After
measuring the cost and value of its employees and managers, the organisation prepares a
report. This report is called HRA Report. It is shown to the top level management. It can
also be shown to the employees, managers and outside investors.
What is Human Resource Accounting?
Human Resource Accounting is the process of identifying and measuring data about
Human Resources and communicating this information to the interested parties. It is an
attempt to identify and report the Investments made in Human Resources of an
organisation that are currently not accounted for in the Conventional Accounting
Practices.
Methods of Human Resource Accounting
Quite a few Models have been suggested in the past for the Human Resource
Accounting and these can be classified into 2 parts each having various Models. Some of
the Important ones are:-
A. Cost Based Models
I. Capitalisation of Historical Costs Model
II. Replacement Costs Model
III. Opportunity Cost Model
B. Value Based Models
I. Present Value of Future Earnings Model/ Lev and Schwartz Model
II. Reward Valuation Model/ Flamholtz Model
III. Valuation on Group Basis
A. COST BASED MODELS
I. Capitalisation of Historical Costs
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As per this Method of HR Accounting, the sum of all costs related to Human Resources
(i.e. Recruitment, Acquisition, Formal Training, Informal Training, Informal
Familiarisation, experience and development) is taken together to represent the value of
the human resources.
II. Replacement Costs
The Historical Cost Method was highly criticised as it only takes into account the Sunk
Costs which are irrelevant for Decision Making. Thus, a new model for Human Resource
Accounting was conceptualised which took into the account, the costs that would be
incurred to replace its existing human resources by an identical one.
1. Individual Replacement Costs – which refers to the cost that would have to be
incurred to replace an individual by a substitute who can provide the same set of
services as that of the individual being replaced
2. Positional Replacement Costs – which refers to the cost of replacing the set of
services referred by an incumbent in a defined position
III. Opportunity Cost Model
This model was advocated by Hekimian and Jones in the year 1967 and is also known as
the Market Value Method.
This method of measuring Human Resources under this Model is based on the concept of
opportunity cost i.e. the value of an employee in its alternative best use, as a basis of
estimating the value of human resources. The opportunity cost value may be established
by competitive bidding within the firm, so that in effect, managers bid for any scarce
employee. A human asset therefore, will have a value only if it is a scarce resource, that
is, when its employment in one division denies it to another division.
B. ECONOMIC VALUE MODELS
I. Present Value of Future Earnings Model
This Model of human resource accounting was developed by Lev and Schwartz in the
year 1971 and involves determining the value of human resources as per the present value
of estimated future earnings discounted by the rate of return on Investment (Cost of
Capital).
II. Reward Valuation Model/ Flamholtz Model
Flamholtz advocated that an Individual‘s Value to an organisation is determined by
theservices he is expected to render. This model of Human Resource Accounting is
an improvement to the ―Present Value of Future Earnings Model‖ as it takes into account
the probability that an individual is expected to move through a set of mutually
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exclusive organisational roles or service states during a time interval. Such
movement can be estimated probabilistically by using the following model
III. Valuation on Group Basis
While applying the above models, the Accountants realised that proper Valuation as
per Human Resources Accounting is not possible unless the contributions of the
Individuals as a Group are taken into consideration.
Module-VIII
VARIOUS HEADS OF INCOME
All income shall be classified under the following heads of income for the purpose of
charge of income tax and computation of total income.
Income from Salaries
Income from house property
Profits and gains of business or profession
Income from Capital gains
Income from other sources
Income from Salaries:
Under section 15, the following incomes are chargeable under the head „salaries‟
Any salary due from an employer or former employer to an assessee in the
previous year, whether paid or not;
Any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, though not due or before it became due to him.
Any arrears of salary paid or allowed to him in the previous year by or on behalf
of an employer of former employer, if not charged to income tax for any earlier
previous year.
Definitions: Under section 17 of the Act the following have been defined.
Salary
Perquisites
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Profits in lieu of salary
Salary [Sec. 17(1)]: Salary includes
Wages
Any annuity or pension
Any gratuity
Any fees, commission, perquisites or profits in lieu of or in addition to any salary
or wages.
Any advance of salary, but not advance for purchasing a car, cycle, scooter or a
house; etc
Any payment received by an employee in respect of any period of leave not
availed of by him.
The annual accretion to RPF to the extent of the following
o Employer‘s contribution in excess of 12% of salary o Interest on the balance in the RPF credited in excess of 9.5%
The accumulated transferred balance from URPF account to a RPF account to the extent of it is chargeable.
The contribution made by the central government or any other employer in the
previous year to the account of an employee under a pension scheme referred to in
sec 80CCD.
Deductions: The income chargeable under the head salaries shall be computed after
making the following deductions from gross salary: -
Deduction for entertainment allowance
Deduction in respect of professional tax
Entertainment Allowance [sec. 16(ii)]
Entertainment allowance is not eligible for exemption but it only qualifies for
deduction. Therefore, entertainment allowance is first included in gross salary and then
deduction is allowed under section 16(ii). This deduction is available only in case of
government employees and not in case of other employees. The deduction allowable in
the case of government employees is to the extent of least of the following: -
Rs. 5,000; or 1/5 of salary; or
Actual entertainment allowance received for the previous year.
Salary for the purpose of entertainment allowance deduction means only basic
salary.
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Deduction is allowed in respect of any sum paid by the assessee on account of a tax
on employment. In case, if the professional tax is paid by the employer on behalf of
the employee, the amount so paid should be included in gross salary as a perquisite
and then deduction under section 16(iii) can be claimed.
Death-cum-retirement Gratuity: [Sec. 10(10)]
In case of Government employees: Any death cum retirement gratuity received by
government employees is fully exempt from tax.
In case of non-government employees covered by the payment of gratuity Act, 1972: Any gratuity received by a non government employee who is covered by the payment of gratuity act of 1972, is exempt from tax to the extent of least of the
following:
(a) Rs. 3,50,000; or
(b) 15 days salary (last drawn salary *15/26)
based on last drawn salary for each completed year of
service or part of the year in excess of 6 months; or
(c) Gratuity actually received.
Salary for this purpose means basic salary and dearness allowance
In case of non government employees who are not covered by the payment of
gratuity Act of 1972
Any gratuity received by any other employee on retirement, death, termination or
resignation is exempt from tax to the extent of the least of the following;
(a) Rs. 3,50,000; or
(b) Half month‘s salary (on the basis of last 10 months average immediately
preceding the month in which any such event occurs) for each completed year
of service (fraction to be ignored); or
(c) Gratuity actually received.
Salary for this purpose means basic salary, dearness allowance-if provided in terms
of employment and commission as a percentage of turnover achieved by the
employee.
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Note:
(a) Gratuity received during the period of service is always taxable
(b) Where gratuity is received by an employee from 2 or more employers in the
same previous year then the aggregate amount of gratuity exempt form tax
cannot exceed the above limits prescribed.
(c) In case where the employee has received gratuity in any earlier year from his
former employer and also receives gratuity from another employer in a later
year, the limit of Rs. 3,50,000 will be reduced by the amount of gratuity
exempt from tax in any earlier year.
Commuted Pension [Sec 10(10A)]
Uncommuted pension refers to the pension periodically received by the employee.
Commuted pension means lump sum amount taken by commuting the pension or part
of the pension. Where an employee commutes, under pension rules, part of pension,
the remaining portion will periodically received.
Uncommuted pension is taxable as salary u/s 15 in the hands of both government
and non-government employees.
Any commuted pension received by a government employee is wholly exempt
from tax. CBDT has clarified by circular number 623-dated 6-1-92 that judges of the
High courts and Supreme courts are also entitled to the exemption.
A non-government employee can avail exemption to the following extent
(1) If the employee is in receipt of gratuity, 1/3 of the full value of the pension.
(2) If the employee is not in receipt of gratuity, ½ of the full value of the pension.
Leave Salary [sec. 10(10AA)]
Government employee: Any amount received as cash equivalent of leave in respect
of period of earned leave to his credit at the time of retirement whether on
superannuation or otherwise, is exempt from tax.
Non-Government Employees: Leave salary is exempt from tax to the extent of least
of the following;
Cash equivalent of the leave (on the basis of average of last 10 months‘
salary) to the credit of the employee at the time of retirement (calculated at 30
days credit for each completed year of service); or
10months‘ salary (on the basis of average of 10 months‘ salary); or
The amount specified by the government --- Rs. 3,00,000
Leave encashment actually received.
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Even in the case of voluntary retirement by way of resignation, leave salary received
qualifies for exemption.
Salary for this purpose means basic salary, dearness allowance if provided in terms
of employment and commission as a percentage of turnover achieved by the
employee.
Note:
1. Leave salary received during the period of service is taxable
2. Where leave salary is received by an employee from 2 or more employers in the
same previous year then the aggregate amount of leave salary exempt from tax
cannot exceed the limits prescribed.
3. In case where the employee has received cash equivalent of earned leave in any
earlier year from his former employer and also receives leave salary from another
employer in a later year, the limit of Rs. 3,00,000 will be reduced by the amount
of gratuity exempt from tax in any earlier year.
ALLOWANCES
The various allowances, which are allowed from the employer to the employees, are
classified under three categories
Fully taxable Allowances
Partly taxable allowances or allowances exempted up to specified limit.
Fully exempted allowances.
Fully Taxable Allowances.
(1) Dearness allowance or dearness pay
(2) Medical allowances
(3) Tiffin allowance
(4) Servant allowance
(5) Non-practicing allowance
(6) Warden allowance and proctor allowance
(7) Deputation allowance
(8) Overtime allowances
Partly taxable allowances or allowances exempted up to specified limit:
(1) House Rent Allowance [sec. 10(13A)]
House rent allowance granted to an assessee by his employer is exempt from tax to
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the extent of least of the following
(a) Excess of rent paid over 10% of salary, or
(b) If the accommodation is situated in Mumbai, Kolkatta, Chennai and Delhi---
50% of salary
If the accommodation is situated at any other places--- 40% of salary
(c) Actual HRA received for the relevant period
Exemption is not available to an assessee who lives in his own house; or in a house for
which he does not pay any rent.
Salary for this purpose means basic salary, dearness allowance if provided in terms of
employment and commission as a percentage of turnover achieved by the employee
calculated on due basis for the relevant period.
Relevant period means the period during which the said accommodation was occupied by
the assessee during the previous year.
(2) Any allowance granted to an employee working in any transport system to meet his
personal expenses during his duty performed in the course of running of such transport
form one place to another place is exempt from tax to the extent of 70% of such
allowance or Rs. 6,000 per month, whichever is less
(3) Transport allowance: any transport allowance granted to an employee to meet his
expenditure for the purpose of commuting between the place of his residence and place of
his duty to the extent of Rs. 800 per month. The same is exempted from tax up to Rs.
1,600 per month if it is given to an employee who is blind and/or physically handicapped.
(4) Children Education Allowance: It is exempt from tax up to Rs. 100 per month per
child up to a maximum of 2 children.
(5) Children Hostel Allowance: It is exempt from tax up to Rs. 300 per month per child
up to a maximum of 2 children.
Fully Exempted Allowances:
(1) Foreign allowance
(2) Sumptuary allowance to High court and Supreme court judges
(3) Allowances from U.N.O
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PERQUISITES
Perquisites mean any casual emoluments fee or profit attached to an office or
position in addition to salary or wages. It is a personal advantage--- something that
benefits a man by going into his own packet. It does not cover a mere reimbursement of
expenditure.
The perquisites may in cash or in kind or in the form of benefits and amenities,
whether they are convertible into money or not. The employer may provide it voluntarily
or under service contract.
For income tax purposes, the perquisites have been divided into three categories.
Tax-free perquisites
Taxable perquisites
Perquisites taxable under specified cases.
Tax-free Perquisites: The value of the following perquisites shall not be included in the
salary income of an employee.
Medical benefits
Tea and snacks or free food or beverages provided in office or factory (work
place) or through paid vouchers where are nor transferable and usable only at
eating joints.
Facility of motor car(s)
Residential accommodation provided at site
Facility of club or health club and similar facilities
Expenses on telephone including mobile phone
Employer‘s contribution to staff group insurance scheme
Scholarship to employees or their children paid by the employer
The facility of conveyance provided by the employer from residence to place of
employment and vice versa
Refreshment courses, etc. If the employer pays fees for an employee taking
refresher course or management course in order to enable to the employee to
perform his services more efficiently. Such expenses are treated as scholarship.
Free rations to armed forces personnel
Facility of guest house or holiday home‘
Welfare expenses
Entertainment expenses
Free or concessional ticket provided by the employer (engaged in the business of
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transport) for private journeys of the employee or his family members.
Any perquisites paid or allowed by the government to its employees who are
posted abroad.
The value of rent-free official residence and the value of conveyance facilities
provided to a judge.
The value of rent-free furnished residence (including maintenance thereof)
provided to a minister, an officer of parliament or a leader of the opposition in
parliament.
Gifts in kind laptops and computers provided by the employer for personal use of
employees or any member of his house hold
Interest free or concessional loan, if the amount loan in aggregate does not exceed Rs. 20,000 during the previous year.
Transfer without consideration to an employee of a movable asset (other than
computers, electronic items and car) by the employer after using it for ten years or
more.
Periodicals and journals required for discharge of work
INCOME FROM HOUSE PROPERTY
Basis of Charge: The annual value of property consisting of any building or lands
appurtenant thereto of which the assessee is the owner shall be chargeable to income tax
under this head. However, the said excludes the property used by the assessee for the
purpose of any business or profession carried on by him and profits of which are
chargeable to income tax under the head profits and gains of business or profession.
INCOME FROM OTHER SOURCES
This is a residuary head of income and sweeps all such taxable income, profits and gains
which are not chargeable to income tax under any of the first four heads specified above.
It is important to note that where there is a specified head for the income in question and
a specified section providing for the head, such income cannot be assessed under this
residuary head, ―income from other sources‖.
According to section 56(2), in a particular, the following incomes shall be
chargeable to income tax under the head income from other sources.
Dividend
Lottery, crossword Puzzles, etc.
Interest on securities.
Hire of machinery, plant, etc.
Hire of machinery, plant and buildings nor separately.
Gift. Where any sum of money, the aggregate value of which exceeds Rs.
50,000, is received without consideration, by an individual or a HUF, in any
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previous year form any person or persons on or after 01-04-2006, the value of
whole of the aggregate value of such sum.
INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS
OF BUSINESS OR PROFESSION” [Section 28]
(1) Profits and gains of any business or profession carried on by assesses at any time
during previous year.
(2) Compensation or other payment due to or received by any person –
(a) managing whole or substantially whole of affairs of an Indian company or any other
company in India at or in connection with the termination of his management or
modification of the terms and conditions relating thereto;
(b) on termination or modification of contract of his agency in India;
(c) For vesting the management of any property or business in Government or any
corporation owned or controlled by the Government.
(3) Income derived by trade, professional or other similar association from specific
services rendered to its members. This clause is an exception to general rule
that income from mutual activity is not chargeable to tax.
(4) Profits on sale of import licence; or Profits on transfer of Duty Entitlement Pass Book
(DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM Policy;
(5) Cash assistance against exports from Government of India and Duty
Drawback;
(6) Value of any benefit or perquisite, whether convertible into money or not arising from
exercise of business or profession;
(7) Interest, salary, bonus, commission or remuneration due to or received by partner
from the firm. Such income is taxable in hands of partners to the extent it is allowed as
deduction in hands of firm. Any amount not allowed as deduction to firm under Section
40(b), is not taxable in the hands of partner. (8) Any sum received or receivable, in cash or in kind, under an agreement for –
(a) Non-competition i.e. not carrying out any activity in relation to any business; or
(b) Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, license,
franchise or any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provision of
services.
Exceptions : However, sum received for transfer of business, or transfer of right to
manufacture, produce or process any article/thing, which is chargeable under ‗Capital
Gains‘ is not taxable under this Section.
(9) Any sum (including bonus) received under Keyman Insurance Policy.
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INCOME FROM CAPITAL GAINS
1. Chargeability u/s 45
Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year
in which transfer take place under the head "Capital Gains".
Definitions
Transfer: Sec. 2(47): Transfer in relation to a capital asset includes sale, Exchange, or
relinquishment of the asset or extinguishment of any rights therein or the compulsory
acquisition thereof under any law or conversion of the asset by the owner in stock-in-
trade of a business carried on by him or the maturity or redemption of a zero coupon
bond.
Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating,
movable, immovable, tangible or intangible) whether or not connected with business or
profession.
Exclusions —
a. Stock-in-trade
b. Personal effects of the assessee
c. Agricultural land in a rural area
d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds,
1980 issued by the Central Government
e. Special Bearer Bonds, 1991 issued by the Central Government.
f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999
Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not
more than thirty six months immediately preceding the date of its transfer. However, in
the following cases, an asset, held for not more than twelve months, is treated as short-
term capital asset—
a. Quoted or unquoted equity or preference shares in a company
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Circular No. 495 dated 22.9.1987 explaining amendments by Finance Act, 1987
whereby unquoted shares of a private limited company also if held more than 12
months falls in the category of LTCG. Also Refer the Judgment in 120 TTJ 699
for unquoted shares held for less than 36 months.
b. Quoted Securities
c. Quoted or unquoted Units of UTI
d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)
e. Quoted or unquoted zero coupon bonds
Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term
capital asset
2. Year of chargeability to tax
Capital gains are generally charged to tax in the year in which ‗transfer‘ takes place.
Exceptions —
a. Sec. 45(1A) — Insurance Claim — In the year of receipt.
b. Sec. 45(2) — Conversion of capital asset into stock-in-trade — In the year of
actual sale of the stock.
c. Sec. 45(5) — Compulsory acquisition — When consideration or part thereof is
first received.
Exempt Capital Gains under Section 10
10(33) : Transfer of US 64 on or after April 1, 2002
10(37) : Compulsory acquisition of Urban Agriculture Land where
consideration is received after March 31, 2004.
Long-term capital gain arising on transfer on or after
10(38) : October 1, 2004 of equity shares or units of equity oriented
mutual fund and the STT is paid at the time of transfer
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Income Tax Deductions u/s 80C
One can get following income tax deductions with qualified investments u/s 80C are
as appended below:
Section Details Quantum of Deduction
80C
Life Insurance Premium, PPF, NSC, EPF, 5-year
Fixed Deposit, Post Office
Senior Citizen Saving
Scheme, ELSS, Tuition
Fees including Admission
fees or college fees paid for
full time education of any
two children‘s, Housing
Loan Principal Repayment
Maximum Rs 100000
Income Tax Deductions u/s 80CCC
One can get following income tax deductions with qualified investments u/s 80CCC
and same are as appended below:
80CCD Notified pension scheme like NPS Max 10% of salary or 10% of
GTI, as case may be
Profit in lieu of
salary
Profit in lieu of salary is a part of salary income and accordingly it is taxable under
the head ―Income from Salary‖. Profit in lieu of salary means any payment made
to an employee on lieu of salary even if the same has no connection with the profits
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of the employer. The word ‗profit‘ is used only to convey any ‗advantage‘ or ‗gain‘
by receipt of any payment by the employee. As per the Income Tax Act, 1961
―Profit in lieu of salary‖ includes the following:
1. Any compensation due to or received by an assessee from his employer or
former employer at or in connection with the termination of his employment or the
modification
of the terms & conditions relating thereto is taxable as profit in lieu of salary. The
recipient may however claim exemption u/s 10(10B) or 10(10C), if eligible.
2. Any payment (except to the extent it is specifically exempt u/s 10) due to or received
by an employee from his employer or former employer or from a provident fund, or other
fund (to the extent it does not consist of contributions made by the assessee or interest
thereon) which may otherwise be taxable as income from salary. It may be noted that the
assessee is entitled to exemption to the prescribed extent in respect of the following
payments received by him-
a. Payment of Gratuity u/s 10(10);
b. Payment of commuted pension u/s 10(10A);
c. Payment of retrenchment compensation u/s 10(10B);
d. Payment from statutory provident fund and public provident fund u/s 10(11);
e. Payment from recognized provident fund u/s 10(12);
f. Payment from an approved superannuation fund u/s 10(13);
g. Payment of House Rent Allowance (HRA) u/s 10(13A).
3. Payment from unrecognized provident fund or superannuation fund to the extent it
does not consist of contribution by the employee or interest on employee‘s contribution
(at the time of payment to the employee).
4. Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy is taxable as ―profit in lieu of
salary‖.
5. Any amount received in lump sum or otherwise from any person prior to his joining
employment or after cessation of employment with that person.
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RATES OF INCOME-TAX
A. Normal Rates of
tax:
Where the total income does not exceed Rs. 1,80,000/-.
Nil
Where the total income exceeds Rs. 1,80,000 but
does not exceed Rs.
5,00,000/-
10 per cent of the amount by which the total income exceeds Rs. 1,80,000/-
Where the total income exceeds Rs. 5,00,000/- but
does not exceed Rs.
8,00,000/-.
Rs. 32,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.
Where the total income exceeds Rs. 8,00,000/-.
Rs. 92,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 8,00,000/-.
B. Rates of tax for a woman, resident in India and below sixty years of age at any
time during the financial
year:
Where the total income does not exceed Rs. 1,90,000/-.
Nil
Where the total income exceeds Rs. 1,90,000 but
does not exceed Rs.
5,00,000/-.
10 per cent, of the amount by which the total income exceeds Rs. 1,90,000/-
Where the total income exceeds Rs. 5,00,000/- but
does not exceed Rs.
8,00,000/-.
Rs. 31,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.
Where the total income exceeds Rs. 8,00,000/-.
Rs. 91,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 8,00,000/-.
C. Rates of tax for an individual, resident in India and of the age of sixty
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years or more but less than eighty years at any time during the
financial year:
Where the total income does Nil
not exceed Rs. 2,50,000/-.
Where the total income exceeds Rs. 2,50,000 but
does not exceed Rs.
5,00,000/-.
10 per cent, of the amount by which the total income exceeds Rs. 2,50,000/-
Where the total income exceeds Rs. 5,00,000/- but
does not exceed Rs.
8,00,000/-.
Rs. 25,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.
Where the total income exceeds Rs. 8,00,000/-.
Rs. 85,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 8,00,000/-.
D. In case of every individual being a resident in India , who is of the age of eighty
years or more at any time during the financial year:
Where the total income does not exceed Rs. 5,00,000/-
Nil
Where the total income2 exceeds Rs. 5,00,000/- but
does not exceed Rs.
8,00,000/-
0 per cent of the amount by which the total income exceeds Rs. 5,00,000/-
Where the total income exceeds Rs. 8,00,000/-
Rs. 60,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 8,00,000/-
Income Tax rates After Budget 2012-13 is available here
1. Surcharge on Income tax: There will be no surcharge on income tax
payments by individual taxpayers during FY 2011-12 (AY 2012-13).
2. Education Cess on Income tax: The amount of income-tax shall be increased
by
Education Cess on Income Tax at the rate of two percent of the income-tax.
3. Additional surcharge on Income Tax (Secondary and Higher Education
Cess on Income-tax):From Financial Year 2007-08 onwards, an
additional surcharge is chargeable at the rate of one percent of income-
tax (not including the Education Cess on income tax).
4. Education Cess, and Secondary and Higher Education Cess are payable
by both resident and non-resident assessees.