Introduction Joint stock company is an association of persons and has an objective carrying out some business for profit. Company form come into existence after industrial revolution due to limitations of proprietorship and partnership firms in carrying out business on a large scale. Capital of a company is called share capital, which can be divided into transferable small denominations . Each such unit of denomination is known as share. Company has separate legal existence. Types of Companies Statutory Companies: These companies are created by the special Act of State or Central legislature. E.g., Life Insurance Corporation of India, State Bank of India, Gujarat State Financial Corporation etc. Registered Companies: The companies, which are registered and formed under the Companies Act, are called Registered Company. Companies limited by shares: In these companies, liability of the shareholders is limited up to the extent of the face value of shares held by them. Most of the companies are of this kind. Company Limited by Guarantee: In such companies, in the event of liquidation, the liability of shareholders is limited to a specified amount as guaranteed. Unlimited Company: Liability of members of such company is unlimited. In other words, in these companies, every shareholder is liable for all the liabilities of the company till all creditors of the company are paid off. Currently, there is no such provision in the companies act for incorporation of such companies. Private company: A private company is one which, by its articles, (i) restricts the right to transfer of shares, (ii) limits the number of its members to fifty, (iii) prohibits any invitation to the public to subscribe for any shares or debentures. Public company: A public company is all companies other than private companies. SHARE CAPITAL TRANSACTIONS 1
Transcript
Introduction Joint stock company is an association of persons and has an objective carrying out some business for profit. Company form come into existence after industrial revolution due to limitations of proprietorship and partnership firms in carrying out business on a large scale. Capital of a company is called share capital, which can be divided into transferable small denominations. Each such unit of denomination is known as share. Company has separate legal existence.
Types of CompaniesStatutory Companies: These companies are created by the special Act of State or Central legislature. E.g., Life Insurance Corporation of India, State Bank of India, Gujarat State Financial Corporation etc.
Registered Companies: The companies, which are registered and formed under the Companies Act, are called Registered Company.
Companies limited by shares: In these companies, liability of the shareholders is limited up to the extent of the face value of shares held by them. Most of the companies are of this kind.
Company Limited by Guarantee: In such companies, in the event of liquidation, the liability of shareholders is limited to a specified amount as guaranteed.
Unlimited Company: Liability of members of such company is unlimited. In other words, in these companies, every shareholder is liable for all the liabilities of the company till all creditors of the company are paid off. Currently, there is no such provision in the companies act for incorporation of such companies.
Private company: A private company is one which, by its articles,
(i) restricts the right to transfer of shares, (ii) limits the number of its members to fifty, (iii) prohibits any invitation to the public to subscribe for any shares or debentures.
Public company: A public company is all companies other than private companies.
Private company should have minimum 2 members whereas public company should have minimum 7 members. There is no limit to the maximum number of members in case of public company.
Kinds of Shares
Total share capital of a company is divided in small denominations of units is known as shares. For, shareholders, shares indicate the extent of ownership of company. Each such share is allotted a distinctive number. Share is an asset which is movable and transferable.
1SHARE CAPITAL TRANSACTIONS
Authorized or Registered or Nominal Capital : This is the amount stated in the capital clause of the memorandum of Association with which the company was registered. This is the maximum capital which the company can raise during its lifetime. The share capital is divided into shares of specified denomination such as Rs. 10 , 50 , 100 and so on. It is not necessary for a company to issue the entire amount of capital mentioned in the memorandum at one and the same time.
Issued capital : The part of authorized capital which is offered to the public for subscription , including shares offered to the vendors for subscription other than cash is called issued capital.
The part of authorized capital not offered for subscription to the public is known as Un- issued capital, which can be offered to the public at a later date.
Subscribed capital: It is that part of issued capital which represents face or nominal value of shares subscribed for by persons i.e. applied for by prospective share holders and allotted by company.
Minimum subscription should not be less than 90% of the issued capital.
If this condition is not satisfied ,the company shall refund the entire subscription. If a delay beyond 8 days occurs the company shall be liable to pay interest @ 15%.
Called up capital: The portion of the subscribed capital that the directors require the share holders to pay on the shares allotted to them is known as called up capital.
It is not necessary for directors to call for the entire amount on shares subscribed by the share holders.
The balance of subscribed capital which has not been called up denotes uncalled capital. This can be required to be paid by the shareholders as and when the directors feel the necessity of additional resources by making calls.
Paid up capital: The amount of called up capital which has been actually paid by the shareholders is called paid up capital. The difference between called up capital and paid up capital is termed as calls in arrears means shareholders failed to pay call money.
Reserve capital: A company may by special resolution keep certain portion of its uncalled capital for the purpose of liquidation which is called reserve capital.
Issue of shares:
The shares of the company can be issued in 2 ways , (1) for cash (2) for consideration other than cash.
Issue of shares for cash
Again these shares can be issued in 3 ways,
(1) at par (2) at premium (3) at discount .
At ParIf the issue price of a share is equal to the face/par value of the shares it is said to be an issue at par . e.g. when a share of Rs.10 is issued at Rs.10 only , it is said to be issued at par
At PremiumWhen a company issues its securities at a price more than the face value, it is said to be
an issue at a premium. Premium is the excess of issue price over face value of the security. e.g. When a share of nominal value of Rs.100 is issued at Rs.105, it is said to have been issued at premium of 5%.
Premium is generally called with the amount due on allotment however sometimes it may be called with application money and rarely with the call money.
The amount received as premium has to be credited to separate account called share/securities premium a/c. According to section 78, share premium a/c can be applied for :
1. Issue of bonus shares2. Writing off preliminary expenses3. Writing off discount allowed on issue of shares or debentures 4. For providing premium payable on redemption of any redeemable preference shares or
debenture.
At Discount1. When a share is issued at a price lower than its face value, it is said that the shares are
issued at discount, e.g. shares par value s Rs.100 , issued at Rs.90, it is said that shares are issued at discount of 10%.
2. According to section 79 of Companies Act , 1956, a company can issue shares at discount, subject to following,
3. Issue of shares at discount is authorized by a ordinary resolution passed by the company in general meeting and sanction by the Company Law Board
4. Not less than 1 year elapsed since the date on which company was entitled to commence business
5. The shares are of a class which have already been issued6. The ordinary resolution should specify the maximum discount at which shares are to be
issued7. Issued at discount to be made within a period of 2 months from the sanction from the
company.
Short Questions1. What are the different categories of share capital by which they are shown on the
balance sheet of a Company?àAuthorised Capital, Issued Capital, Subscribe Capital, Called up Capital, Paid up Capital.
2. Discuss various types of shares of a company.à There are two types of share of company:
(i) Ordinary shares or Equity shares and
(ii) Preference shares.
3. What is a Redeemable Preference Share?à Those preference shares, on which the share capital is to be returned (redeemed) after certain years, are called redeemable Preference Shares.
4. What is the minimum amount that must be called by the company alongwith share application?
à The company must call a minimum of 5% of the face value of shares alongwith share application.
5. What are the uses of share premium?à A company can utilize share premium (i) in issuing fully paid bonus shares and (ii) in writing of preliminary expenses.
6. If a company wants to issue shares at a discount, what can be the maximum rate of discount?
à The maximum rate of discount is 10%, with some exception.
7. When can a company issue shares at a discount?à A company can issue only those shares at a discount which it had issued previously.
8. When a company forfeits the shares, which is the main account that is debited? With what amount?
à The main account debited on forfeiting the shares is the ‘Share Capital Account.’ It is debited with the actual amount called up by the company till the date of forfeiture.
9. Can a company forfeit shares, even through there is no provision in the Companies Act for forfeited shares? When?
à Yes, the company can forfeit the shares, if there is a provision in the Articles of the company, even though there is no provision for forfeiting shares in the companies Act.
10. What is Forfeited Shares Account? Which amount is credited to this account?à Forfeited Shares Account is an account opened when shares are forfeited by the company to credit the amount forfeited. The amount so far paid by the shareholder is credited to this account.
11. If a company want to reissue forfeited shares, at what minimum price can it do so?à When forfeited shares are reissued, the company can give maximum discount
upto the amount received from the previous shareholder.
12. To what account is the balance of Forfeited Share Account transferred?à When forfeited shares are all reissued, the balance of Forfeited Shares
Account is transferred to Capital Reserve account.
13. When can Share Premium Account be debited on forfeiture of shares? Is it necessary to keep balance of share premium account in proportion to Share Capital
Account when forfeited shares are reissued?
à When the shareholder has not paid the amount of Share Premium, the said amount is debited to Share premium Account when his shares are forfeited. But when such shares are reissued, it is not necessary to Credit Share Premium Account with proportionate amount.
14. When a company forfeits shares issued at a discount and when such shares arereissued, what would be the effect on Share Discount Account?
à When sares issued at a discount are forfeited, the proportionate amount of discount on such shares is credited to ‘Share Discount Account’. When such forfeited shares are reissued, the same amount is again debited to ‘Share Discount Account’.
15. Explain the meaning of Authorised Capital.à The maximum amount of share capital that company is authorized to issue during its life time is stated in its memorandum of association and is known as authorized capital. It is also known as Nominal Capital.
16. Where is the balance of share discount account indicated in the balance sheet?à The balance of share discount account is shown in the balance sheet on the
asset side under the heading “Miscellaneous Expenditure” (not written)
17. What is sweat equity share?à By Amendment to Companies Act in 1999, Sec. 79A has been inserted providing for issue of equity shares by the company to employees or directors at a discount or for consideration other than cash is called sweet equity share.
18. How many percent p.a. interest, the company can charge under the provisions of Companies Act if the called amount is in parts?
à The company can charge upto 5% interest p.a.
Statements : Whether True of False1. A company is not allowed to return any amount received on any type of shares during its
lifetime.à False, the companies are allowed to return money received on redeemable preference shares.
2. A company can issue shares at any rate of discount.àFalse, a company can issue shares at a maximum discount of 10%.
3. A company cannot accept calls in advance.àFalse, a company is entitled to receive calls in advance.
4. There is provision in the Articles of the company that the shares are to be forfeited, if the holder of the shares does not pay call money.
à False, there is no provision in the Companies Act for forfeiting shares, but companies make provisions in the Articles for forfeiting shares.
5. When a company forfeits shares, it returns the money paid on it to its shareholders.à False, when shares are forfeited, the company forfeits the amount paid on them by the shareholder.
6. When a company forfeits shares, it will debit the Call Account, which is not paid and will credit share capital account.
à False, on forfeiting shares, a company debits Share Capital Account and credits Calls Accounts on which money is not paid.
7. When shares are forfeited, the amount not paid on calls is credited to Forfeited Shares Account.
à False, when shares are forfeited, the forfeited shares account is credited with the amount paid by the shareholder so far.
8. Forfeited shares can be reissued at any price.à False, a company can reissue forfeited shares at the maximum discount equal to the amount forfeited only. It cannot, reissue shares at a lower price.
9. When a company forfeits shares which are issued at a premium, it will always debit Securities Premium A/c along with Share Capital A/c.
à False, if the amount of premium is already, received on shares forfeited, then Securities Premium Account is not debited.
10. When Securities Premium A/c is debited on forfeiture of shares, the proportionate account must always be credited to Securities Premium A/c at the time of reissue of these shares.
à False, it is not necessary to credit Securities Premium Account when forfeited shares are reissued.
11. In case of share application, the first entry is made for amount of application money received and then it is transferred to Share Capital A/c. Similarly, in case of allotment also, an entry for allotment money received is made first.
à False, in case of allotment, first entry is made for allotment money due and then an entry is made for allotment money received.
12. As soon as shares are forfeited, balance of forfeiture account in transferred to Capital Reserve.
à False, the balance of Forfeited Shares A/c in transferred to Capital Reserve A/c only when all forfeited shares are reissued.
13. Paid – up Capital is the subscribed Capital.à False, paid up capital is the amount paid by shareholders towards share capital, while subscribed capital is the amount of face value of shares subscribed by shareholders.
14. The company always debited Forfeited Shares Account while forfeiting shares.à False, share capital A/c is debited.
15. The balance of forfeiture account is generally transferred to capital reserve account.à True
16. When the Company issues the shares at a price less than its face value it is said that company has issued the shares at a discount.
à True
Introduction
The long term requirement of capital is usually met by a company from two broad sources: (i) Share Capital (Owners' Capital) and (ii) Loan or borrowed capital. Large and financially sound companies take long-term loans from financial institutions. Sometimes, instead of borrowing such loans from financial institutions or in addition to
2.DEBENTURES
borrowing such loan, companies can raise funds from the public by issue of securities. Such a security is also popularly known as bond or debenture.
Companies carrying on business have the inherent power or authority to bor row money. Based on this inherent power, companies borrow long-term funds from the public. Against the money so borrowed, the company issues a document ac - knowledging its debt to the investor. Such a document is known as a debenture.
Debenture is a document that confirms , the debt of the company and its acknowl - edgement of the debt. It is issued under the common seal of the company. The company repays the money borrowed against a debenture at a future date as per the terms of issue of debentures to the holders of the debentures. Such investors or holders of the debentures who have invested money in the company are known as debenture holders.
Debenture is a document relating to the money lent or given as a loan to the company.
Debenture is a security that bears a fixed rate of interest on which the interest is payable on a predetermined date. Such interest payment has nothing to do with the profit of -the company. In other words, it is compulsory and the company has to pay the interest on the debentures even if it has not earned a profit.
Debentures can be issued with or without charge on the assets of the company. Charge on the asset means the asset is offered as a security against the debt of the company. Such a charge is also known as mortgage or hypothecation.
Usually, debentures are listed on the stock exchange after the issue thereof and are traded at the stock exchanges where they are listed. The market value of such debentures could be more or less than the price of the issue. If the terms of the issue of debentures so provide, the debentures can be converted into shares.
Debentures are shown under the heading "Secured Loans" in the balance sheet of a company, if they are secured.
When debentures are issued for a fixed term, the money borrowed against such debentures is repaid at the end of a fixed term in accordance with the agreed terms.
Debenture holders do not have any voting right in any matter of the company. Debentures cannot be forfeited if some debenture holders do not pay, money thereon.
In the event of the liquidation of a company, the debenture holders are repaid their money before the payment to equity shareholders.
Types of Debentures
Classification of debentures is made as under
Based on Security :
(1) Secured or Mortgage Debentures: When this type of debentures are issued, some or all of the assets of the company are given as security. In other words, a charge is created on the assets of the company. Such a charge could be of two types - fixed charge or floating charge. The company cannot dispose off such charged or mortgaged assets without the consent of the debenture holders.
(2) Unsecured or simple or Naked Debentures: Such debentures are issued without giving any security or creating any charge on the assets of the company. On such debentures, the company only gives a promise to pay the interest on the due dates and the repayment of the principal amount on the date of maturity. From the investors' viewpoint, such debentures are risky for them.
Based on Conditions of Redemption :
(1) Redeemable Debentures : The debentures which are issued with a condition that the amount of debentures can be repaid after a certain period are known . as redeemable debentures. The period of redemption is stated in the Debenture or Trust deed.
(2) Irredeemable Debentures : Generally, money borrowed against such debentures is repaid only at the time of the liquidation of a company. Thus, there is no undertaking by the company about the specific time at which the money will be repaid.
(C) Based on Negotiability and Record Viewpoint :
(1) Registered Debentures : The Company maintains a Register of Debenture holders. The Register contains the name, address and other particulars related to debenture holders. For the transfer of such debentures, it is essential to get the transfer registered with the company and the company makes an entry of the transfer in register maintained by it
(2) Bearer Debentures : There is no need to register the transfer of such debentures with the company. The Purchaser has to make a payment to the seller of the debentures and take the delivery of the debenture instrument. Thus, bearer debentures are like currency notes and can be transferred by mere delivery. The person who possesses such debentures is the holder thereof and enjoys all the rights thereof. The Interest coupons are attached with such debentures for periodic interest payments and such coupons are like cheques or orders for payment of interest which can be enchased through the bank on due dates for the payment of the interest.
Based on Convertibility.:
(1)Convertible Debentures : The debentures which can be converted into equity shares or is automatically converted into shares for full or part of the amount of the debentures after a specified period are known as convertible debentures.
(2) Non-Convertible Debenture : Such, debentures cannot be converted into shares.
Based on Priority of Redemption
(1) First Debentures : Such debentures have first charge on the assets given as security and are repaid before any other, debentures are paid out..
(2) Second Debentures : Such debentures are paid off only after the first charge or the first debentures are paid off.
Formalities for the issue of Debentures and the Related Provisions of the Companies Act
● When it is decided to issue debentures, a resolution is passed at the meeting of Board of Directors of the company.
● The resolution should state the amount of the debentures, the number of debentures, rate of interest thereon, date of redemption and other terms related to the issue of the debentures.
● If the amount of the debentures together with other borrowed funds exceeds the total amount of, paid up capital plus free reserves of the company, a resolution for the issue of debentures is required to be passed at a general meeting. of the company.
● For the issue of the debentures, a company should issue a Prospectus or a Statement in lieu of the prospectus inviting the public to subscribe for debentures giving full information as required by the provisions of the Companies Act.
● If the debentures are redeemable beyond a period of 18 months from the date of issue, debenture trustees are also required to be appointed to protect the interest of the investors and their names are to be disclosed. A Debenture Redemption Fund is also required to be created for the purpose of the redemption of debentures.
● For public subscription or rights offer of debentures, credit rating, by a recognized rating agency, is also mandatory.
● When debentures are issued to the public, the money received on the applica tion has to be kept credited in a scheduled bank in a separate account opened for the purpose. The company secretary prepares a list of applications received and the statement of allotment after the closure of public subscription.
Issue of Debentures at Par
When the full amount of the debentures is called up at a time
For example, a company issued 5000 10% debentures of Rs 100 each.
Issue of Debentures at a Premium :
The way a company is able to issue shares at a price higher than the face value of the shares, the debentures can also be issued at a price higher than the nominal or face value of the debentures. Such an additional amount is called a premium and is credited to the 'Debentures Premium Account' or 'Securities Premium' account. Like share premium, debentures premium is also a capital profit and hence the same cannot be used for distribution of the dividend but can be used for writing off expenses like
preliminary expenses, discount on issue of shares or debentures, share or debenture issue expenses, etc. The amount of Debenture Premium (balance of account) is shown under the heading Reserves and Surplus in the balance sheet like Securities Premium.
Issue of Debentures at a Discount
When debentures 'are issued at a price less than the face value of the debentures, the reduced amount of the face value is known as 'debenture discount'. This amount ,of discount is debited to the 'Debenture Discount Account' or Discount on Issue of Debentures Account'.
There is no restriction in the Companies Act as regards the maximum discount which can be given on the issue of the debentures. If there. is no restriction in the Articles of Association of the company, debentures can be issued at a discount. Like 'Share Discount', 'Debenture Discount' is also shown on the asset side in the balance sheet .Under the heading 'Miscellaneous Expenditure'.
Important Note
● When calls on debentures are in arrears, such amount of arrears will be shown in the balance sheet of the company by way of deduction from the called up amount of debentures in the inner column and only net amount will be shown in the outer column.
● the debentures cannot be forfeited even if the calls thereon are in arrears as it is debt of the company.
Accounting Entries [Various cases] for Writing Off Debenture Discount
Discount given at the time of issue of debentures is a loss for the company. Since the company uses funds raised through debentures for many years, the debenture discount is not written off to the profit and loss account of the year in which debentures are issued. Usually, debenture discount is written off over a period of certain years according to the following methods.
[a] If debentures are redeemable after a certain specified period, the debenture discount is written off equally over such period.
[b] If some part of the amount of the debentures is to be repaid every year, the debenture discount is to be written off in proportion to the amount for which the benefit is received every year by the company.
[c] Debenture discount in respect or permanent or irredeemable debentures should be written off over a longer period.
The amount of debenture discount written off every year is debited to Profit and Loss Account of the respective year and is credited to the Debenture Discount Account.
Issue of Debentures as Collateral Security● When a company borrows money or avails of an overdraft from the bank, it sometimes gives its own debentures as security. The debentures so issued are known as debentures issued as
collateral security. If the company repays its dues to the bank the bank will return the debentures to the company and the debentures so received are cancelled by the company.
● However, if the company fails to repay the dues. Of the bank by the due date, the bank can recover its money by selling off the debentures in the market. The persons purchasing debentures from the bank will get all the rights of the debenture holders.
There are two methods to show such debentures in the books of account.
Debentures given to a bank as security are only for the security of the loan. No accounting entry is passed in the books of the company for the same. However, along with the bank loan the same will be shown in the inner column under the heading 'secured loans' on the liability side of the balance sheet (As shown below).
For example,
Balance Sheet as at 31st March 2005
Capital Liabilities Amount Rs.
Assets Amount Rs.
Bank Loan
(Against which
Company has given
its 9% debentures
Of Rs. 2,50,000 as
Collateral security)
2,00,000
● If a company fails to repay the bank loan, the bank becomes the owner of such debentures issued as collateral security and becomes the debenture holder.Of course, the bank can recover the amount of the loan by selling off such debentures in the market. In such circumstance, accounting entry is passed in the books of the company for debentures.
If the debentures given as collateral security are to be recorded in the books
of account, the entry will be as under:
Date
Particulars L.F. Debit Rs. Credit Rs.
Debenture Suspense Account Dr
To Debentures Account
(Entry for giving debentures of Rs 2,50,000 a collateral security to the bank against a loan of Rs 2,00,000)
2,50,000
2,50,000
● The Debenture Suspense Account will be shown on the asset side of the balance sheet and the Debentures will be shown on the liability side of the balance sheet If the money due to the bank is repaid, the debentures received back from the bank will be cancelled and the above entry in the books of the company will be reversed.
Issue of Debentures for Consideration other than Cash● Like shares, debentures are also sometimes issued for consideration other than cash. For example, the issue of debentures against the purchase of assets like land-building, plant and machinery, issue of debentures against purchase consideration at the time of purchase of business etc. In such cases, the journal entries will be as, under.
Sundry Assets Account Dr (Business assets taken over)
To Sundry Liabilities Account (Business liabilities taken over)
To Vendor Account (Purchase price)
(Entry for purchase of business assets and liabilities)
Vendor Account Dr
To Debentures Account
(Entry for issue of debentures of the company against purchase price)
Redemption of Convertible Debentures During last few years, companies have issued convertible debentures in India. Under this method, a company issues certain fixed shares after a specified period to the debenture holders against their debentures as per the agreed terms. Debentures attract investors if the price of the company's shares is high.
The following journal entry is passed in the books of the company when the debentures are converted into equity or preference shares.
Debentures Account , Dr
To Equity/Preference Share Capital Account
When debentures are converted into shares, such shares should be issued at par or at premium. In other words, when debentures are converted into equity shares before the due date, care should be taken to see that such shares are not issued at a discount ; otherwise it will amount to violation of provisions of Companies Act.
Methods of Redemption of Debentures
Any of the following methods may be chosen by the company for the redemption of debentures.
(1).Redemption of Debentures on a Fixed Date : Since the amount of Redeemable debentures is to be repaid on a predetermined fixed date or dates, such a date is mentioned in
the Debenture Certificate when issued If such a date is not fixed, the company can redeem such debentures by serving a notice of a certain period to the debenture holders.
(2) Redemption of Part of Debentures Every Year : If it is provided in the terms of issue of debentures that a certain part of the total debentures will be redeemed every year, the debentures can be redeemed every year according to such terms.
(3) Purchase from Open Market : Companies can buy its own debentures from the market. If at the time of issue it is provided that the company can buy its own debentures from the market, the company can purchase the same from the open market and cancel them. If the market price of debentures is less than the face value, it will be a gain for the company.
(4) Buy-Back Method : If a provision is made at the time of issue of debentures that the company can buy back its debentures from debenture holders, the company can buy such debentures from the debenture holders after a period of one year from the date of issue thereof. In such a case, the company can repay the money to the debenture holders by periodic repurchase or buy back of debentures.
(5) Conversion of Debentures into Shares : As per the terms of the issue of debentures, a company can issue its equity or preference shares in lieu of debentures to the debenture holders. Debentures can be so redeemed by the issue of shares in lieu of debentures. When debentures are converted into shares,
Provision of Funds for Redemption of Debentures
When debentures are to be redeemed after a fixed period, the company is aware about the time and amount of money required for such redemption. When the funds of the year are used to repay the amount of the debentures then the working capital of the year will decrease. However, it is advisable that the company sets aside a certain amount every year out of its profit for the 'purpose of redemption and creates fund for the redemption as it will not create an adverse impact on its working capital.
Debenture Redemption Fund (or Reserve) or Sinking Fund MethodAccording to this method, A company transfers a certain amount of its profit every year to the Debenture Redemption Fund (DRF). The amount to be transferred can be readily known from the Sinking Fund Table. This amount is determined in such a way that the amount so set aside out of the profit every year together with the interest earned thereon will make an amount. equal to the funds required for the redemption of debentures on the due date. Every year a certain amount is appropriated out of the profit and credited to the Debenture Redemption Fund account. Such amount is also invested. Interest earned on this amount every year is also credited to, the Debenture Redemption Fund account and the same is also reinvested.
Short Questions1. What are Convertible Debentures?à Those debentures which are partly or fully converted into equity shares of a company after a fixed period, are called Convertible Debenture.
2. If a company redeems few debentures every year, how should it write off debenture discount?
à If the company redeems some debentures every year, the debenture discount is written off in proportion to the debentures outstanding during the year.
3. State various types of considerations in which debentures are redeemed.à Debentures can be redeemed in three forms of consideration : (1) Cash (2)New Shares (3) New Debentures.
4. State the names of main methods of redemption of debentures.à Debentures are redeemed mainly in following four ways (a) Redemption at a fixed time in future (b) By purchasing debentures from open market (c) By redeeming certain number of debentures every year (d) By Buy – back of debentures from debenture holders.
5. Give names of two methods according to which provision is made for redemption of debentures.
à Provision for redemption of debentures is made by either Sinking Fund method or by Insurance Policy Method.
6. In which account is the interest received on Debentures Redemption Fund Investments credited?
à Interest received on debenture redemption fund investments is credited to Debenture Redemption Fund.
7. In case of issue of which debentures, it is not necessary to create Debenture Redemption Fund?
à When a company has issued convertible debentures, it is not necessary to raise debenture redemption fund.
8. When the purpose of debenture redemption fund is over, where is that account transferred?
à When the purpose of debenture redemption fund is over, that is, when debentures are redeemed, its balance is transferred to General Reserve Account.
9. Where is the profit or loss on sale of debenture redemption fund investment transferred?à Profit or loss on sale of debenture redemption fund investments is transferred to Debenture Redemption Fund A/c.
10. Where is the amount of debenture redemption premium transferred?à Debenture redemption premium account is closed by transfer to either Securities Premium a/c or to Debenture Premium A/c.
11. At the time of redemption of debentures, if the outstanding interest is also paid what journal entry is made?
à Sometimes when debentures are redeemed in the middle of the year, some interest is still not paid on it. To pay this interest, two entries are made (i) In the first entry, profit and loss account is debited and debenture interest is credited. (ii) In the second entry, debenture interest account is debited and debenture holders’ account is credited.
12. Where is the amount of debenture premium used for?à Debenture premium is used for writing off debenture or share issue discount,
preliminary expenses, goodwill etc.
13. What is debenture issued as collateral security?à When the company may make out debentures in proper form and lodge them
with the bank as an additional security that may be agreed upon for loan or overdraft granted by the bank is called debenture issued as collateral security.
14. When it is necessary to create debenture redemption reserve?à By amendment to the Companies Act in 2000, Section – 117 C was added andit is provided that where a company issues debentures, it shall create ‘debenture redemption reserve’ for the redemption of debentures.
15. What is Second Charge on Debentures?à While issuing debentures, if second charge is created on assets they are
Debentures having second charge. They have a right to claim money only after the first charge holders get full amount.
Statements : Whether True of False1. Debenture premium is a capital loss and debenture redemption premium is capital
profit.à False
2. Interest received on debenture redemption fund investments is credited to Profit and Loss A/c.
à False
3. After redemption of debentures, the debenture redemption fund is closed by transfer to debenture redemption fund investments.
à False
4. Even after all debentures are redeemed, the discount on issue of debentures can be shown in the books of account.
à False
5. Non-convertible debentures are borrowed capital.à True
6. Debentures represent a short term liability of business.à False
7. Debenture redemption premium is a revenue profit.à False
8. For debentures issued as collateral security, the Bank Loan A/c is debited and Debenture A/c is credited.
à False
9. Debenture discount still not written of is shown on liabilities side of balance sheet.à False
10. On issue of right debenture or debentures issued for public, it is compulsory to get recognized credit rating.
à True
11. If the company has issued convertible debentures, it is necessary to create debenture redemption fund.
à False
Financial Statements of Company - Meaning and Scope
Meaning: Company is required to present its financial statements every year as.. required by the provisions of the Companies Act. Generally, these financial statements comprise of Balance Sheet and Profit and Loss Account. Profit and Loss Account is also known as Income Statement . Balance sheet shows the financial position of the company as on the date of balance sheet. The financial position comprises of what company/entity owns and what it owes. In other words, financial position shows what are the assets and liabilities of the enterprise.
Scope : Company records day to day transactions in its books of account. From this information, financial statements are prepared at the end of the year. These financial statements comprise mainly of the following two statements
► Balance sheet showing financial position of business; and
► Profit and loss account showing the performance or result of business during the year.
3.FINANCIAL STATMENTS AND ITS ANALYSIS
● Financial statements are prepared in terms of provisions of law. They are prepared in the form prescribed in the Companies Act.
● These financial statements are prepared in accordance with generally accepted accounting principles and accounting standards. For example, stock is valued at cost or market price whichever is lower.
● The financial statements are used for various objectives. For example, for determining profit for the purpose of managerial remuneration, for making provision for income tax, for determining taxable profit, etc.
● Despite the financial statements being prepared in accordance with accounting principles and standards, account writer's and management's personal opinions to have an impact on these accounts. For example, method of providing depreciation, quantum of provision for doubtful debts, period during which fictitious asset is to be written off, etc. depend upon the perception of the persons at the helm of affairs.
● Thus, financial statements are prepared based on the recorded facts, accounting principles and accounting standards. Where options are permitted, personal opinions do affect these statements. Thus, the financial statements are produced by combination of
1. Recorded facts 2. Underlying accounting principles and standards and 3. Personal views of preparers.
● Of course, there are many important events, which affect efficiency and profitability of the enterprise but are not recorded in the accounts at all. For example, high labour turnover rate, retirement or death of an efficient managing director, etc
Form of Balance Sheet of CompanyForm of Balance Sheet is given in Schedule VI of the Companies Act. Abridged version of the Form can also be presented. The following format gives the details in brief. For presenting the balance sheet in vertical form the Companies are not required to seek permission from Central Government.
Horizontal Form of Balance Sheet according to Companies Act is as under
Balance sheet as on…..
Capital and Liabilities Amount Rs.
Assets Amount Rs.
1. Share Capital
Authorised Capital :
...shares of Rs. ... each
Issued Capital :
...shares of Rs.... each
(1) Fixed Assets
(2) Investments
(3)Current Assets, Loans and Advances
(i) Current Assets
Subscribed Capital
…shares of Rs. ... each
Less : Calls in Arrears
………
____
+Shares forfeited ______
(2) Reserves & Surplus
(3) Secured Loans
(4) Unsecured Loans
(5) Current Liabilities
and Provisions
(i) Current Liabilities....
(ii) Provisions
(6) Contingent Liabilities (Not provided for)
(ii) Loans and Advances
(4) Miscellaneous Expenditure (To the extent not written off)
(5) Profit and Loss Account (Debit balance)
● Alternatively, contingent liabilities can also be shown as foot note to the balance sheet. When shown in balance sheet, contingent liabilities are shown in inner column only as information and its amount is not taken into account for totaling the balance sheet.
Contingent liabilities include
▪ Claims against the company not acknowledged as debts
▪ Uncalled liability on partly paid shares.
▪ Arrears of fixed cumulative dividend
▪ estimated amount of contracts remaining to be executed on capital account and not provided for
▪ other moneys for which the company is contingently liable. For example, for guarantees given; for bills discounted but not matured.
Vertical Form of Balance Sheet as per Companies ActBalance Sheet of As at…...
Particulars Schedule No. Figures at the end of current financial
Figures at the endof previous financial year
year
(1) Sources of funds:
(1) Shareholders' Funds
(A) Capital
(B) Reserves and Surplus
(ii)Loan Funds
(A) Secured Loans
(B) Unsecured Loans
Total
(2) Application of funds
(i) Fixed Assets :
(A) Gross Block
(B) Less : Depreciation
(C) Net Block
(D) Capital work-in-progress
(ii) Investments
(iii) Current Assets, Loans and Advances
Inventories
Sundry debtors
Cash and Bank balances
Other current assets
Loans and Advances
Less: Current Liabilities and Provisions
(A) Liabilities
(B) Provisions
Net Current Assets/Working Capital
_____________
_____________
_ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _
_____________
______________
______________
______________
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
(iv) (A) Miscellaneous Expenditure to the extent not written off or adjusted
(B) Profit and Loss Account
Published Annual Financial Statements
● Financial statements are also known as Annual Accounts or Published Accounts.
● Financial statements or Annual Accounts or Published Financial Statements include following reports and statements apart from audited Profit and Loss Account and Balance Sheet :
(1) Directors' Report(2) Auditors' Report
(3) Cash Flow Statement
(4) Statement under section 212 relating to subsidiary company
(5) Other Statements
For better presentation, some companies give the following along with financial statements :
Comparative information with the help of charts and graphs.
Key financial information about past years (say, 10 years).
Objectives or Utilities of Financial StatementsObjectives or utilities of financial statements are as under
1. Published financial statements are relied upon by the public at large and increase the credibility of the company.
2. Shareholders get more information about the company thereby increasing their level of confidence in the company.
3. Financial statements add to the reputation of company.4. Financial statements give information about performance, progress and position
to all stakeholders.5. Lenders lending money to company and creditors supplying goods to company
get information useful to them from the financial statements.Analysis of Financial Statements
● Information published in financial statements may not be sufficient from the view point of different parties.
● Different parties or stakeholders are interested in arriving at conclusions for their own objectives based on information contained in financial statements.
● For such conclusions, the information may not be readily available from financial statements. For example, position of the company from the viewpoint of (i) liquidity, (ii) profitability or (iii) solvency may not be known directly from the face of financial statements.
● For this purpose, information contained in financial statements is to be analysed based on the figures of financial statements and other related supplementary information. Such conclusions cannot be drawn straight from the numbers shown in financial statements.
● For the purpose of analysis different information and figures have to be compared and such information can be obtained in the form of percentage or rate of turnover.
● Thus, conclusions drawn based on different financial numbers given in the financial statements is known as analysis and the opinions framed based on such conclusion is known as interpretation.
For example, sales during the year 2004-05 is Rs. 6,50,000 and the sales during the year 2003-04 were of Rs. 5,20,000. It can be said that the sales during the current year has gone up by Rs. 1,30,000 as compared to the last year. In other words, as compared to previous year, sale has gone up by 25% during the current year 2004-05.
Importance of Financial Statements Analysis
The following different parties use the financial statements
Equity Shareholders : By financial statement analysis, equity shareholders are interested in knowing whether their investment is safe or not and whether regular and increasing dividend shall be received on capital invested or not-They are also expecting appreciation in market price of shares with the growth of the company.
Preference Shareholders : They are interested in analyzing financial statements to know whether they will be able to get regular dividend or not; whether their investment is safe; whether they will be able to get back their capital on expiry of specified term, etc.
Potential Investors : Prospective or potential investors are interested in analysis to know whether to invest in shares of company or not, whether their investment is safe, regularity of return, probability of capital gain due to growth of the company, etc.
Debenture holders and other lenders or institutions : This class is interested in analyzing financial statements to know about safety of money and regular return on investment.
Creditors : They are interested in financial statements analysis to know whether they will be able to recover the money in respect of goods or services supplied to company and also to know about the possibility of continued business with the company.
Management : By financial statement analysis, Management of the company wants to measure its efficiency in managing company.
Employees / Trade unions : They are interested in analyzing financial statements from the view point of possibility of better salaries, perks and operating efficiency.
Society or Public : Company emerges and develops in the society and accordingly is a part of the society. It has to fulfill its obligations towards society. By financial statement analysis,. the society or public gets information relating to the manner and method by which the company has discharged its social responsibility.
Government : Government is interested in financial statements analysis from the viewpoint of taxation and planning.
Competitors : Competitors are interested in knowing the strategies of an enterprise by financial statement analysis so that they can also formulate their appropriate policies.
Thus, financial statement analysis is important and has following utilities
To know the profitability
To know liquidity position
To know operating efficiency
To know information about solvency
To know how quickly money is collected from customers
To know the proportion of debt to equity
To know about the cost and profitability of competitors
To get guidance about demand of workers for increase in wages and bonus
Such analysis is important from the viewpoint of bakers and other lenders lending money.
Shareholders and owners can know the efficiency with which their investments are, used in the business.
To know about the position of progress of a company
Objectives of Financial Statement AnalysisFinancial statements analysis has many objectives. Financial statements are useful to many parties. We have seen that the financial statements are useful to different parties for different reasons. Analysis is also" made to ascertain to what extent the requirements for preparation of financial statements are complied with. These objectives are :
1. Whether provisions of Companies Act are complied with or not.2. To ascertain true and fair profit of the company and to determine income tax
liability based on that.
3. When shares of the company are listed at stock exchange, whether the guidelines and requirements laid down by `SEBI' and other controlling authorities are complied with.
4. To help management in framing different policies.5. Apart from above, the objectives with which different parties are interested in
financial statements analysis are discussed earlier.
Limitations of Financial Statements
A company or an enterprise prepares profit and loss account to know the result of the business at the end of year. It prepares balance sheet to know financial position. Such financial statements also have certain limitations. These limitations are as under :
1. Efficiency of management cannot be directly presented in such statements. This is an important limitation. Efficiency of management is an important factor affecting profitability of business. However, profit and loss account cannot depict this factor on the face of it.
2. Generally, fixed assets are shown in balance sheet at their depreciated values. However, market values of these assets are different and balance sheet cannot show usefulness or efficiency of these assets. Method of providing depreciation is- also subjective at times.
3. Financial statements are prepared based on specific accounting principles and standards. Some information disclosed in financial statements is incomplete and to that extent is less accurate. For example, amount of gratuity payable to workers.
4. Under inflationary condition, the values of assets constantly increase. However, such assets are shown at their cost price. Because of cost price, less depreciation is provided and as a result, profit appears to be more. This is also a limitation.
5. Financial statements may not show proper picture if method of valuation of stock is not appropriate.
6. Many external factors like policies of competitors; general economic condition, political factors and monopolistic conditions affect the economic position of business. As a result, the financial statements may not present true or proper financial position.
7. Financial statements are not prepared from the viewpoints of all stakeholders associated with the enterprise. Usually, they are presented from the viewpoint of shareholders and management and less from the viewpoint of other parties. Thus, they do not satisfy requirements of all the parties making it a limitation.
Limitations of financial statement Analysis
1. If the financial statements which are analyzed are not prepared with accuracy, the analysis and interpretations based on such analysis cannot be reliable.
2. Changing Government rules and controls affect preparation of financial statements. This wi l l have , i ts effect on analysis of financial statements also.
3. Limitations of 'alternative accounting treatments inbuilt and permitted by the accounting standards also affect the analysis of financial statements.
4. Changes in provisions of Companies Act also have an effect on quality of financial analysis.
5. Efficiency and maturity of professionals analyzing financial statements could also become a limitation of analysis.
6. Methods of Analysis of Financial Statements7. One gets information based on financial statements. Analysis of such information by
comparison or with the help of percentages or formula and arriving at conclusions based on such analysis is known as financial statement analysis. Following are
Different methods or tools of analysis of financial statements
1. Comparative statements2. Common-size statements3. Trend percentages4. Statement of changes in working capital5. Cash flow statement6. Ratio Analysis
Comparative Statements : One can not get an idea about profitability and financial position by analyzing only one year's financial statements. Under this method of analysis, one needs at least two years' figures. By putting figures of different years together, one can know about the change of trend in business. This method is useful to know about the business trend of various matters. To understand the presentation for analysis of financial statements with the help of comparative statements, the following two financial statements are prepared in this method
1. Profit and Loss Statement
From the given Comparative statement, we can compare incomes and expenses. Under this. method, comparison can be made with the help of figures of two, three or five years. For such comparison, two methods. are used.
By presenting figures of increase/decrease in income/expenses:
By comparing figures of each element as percentage of total amount.
2. Balance Sheet
In the same manner comparison is taking place for assets and debts. In this method comparison is made between two-three or five years. For such comparison two methods are used.
(i) By presenting figures of increase and decrease in the assets.
(ii) By comparing each element in the statement. On the basis of percentages (%).
Common-size Statements :
Ø These statements are prepared to know percentage of each of assets to total assets and percentage of each element of expense as percentage of total sales. Such statements are also known as '100 percentage statement'.
Ø Common-size statements are also useful in comparing financial position of two companies. While analyzing balance sheet, each asset as a percentage of total assets and each liability as a percentage of total liabilities is calculated. Similarly, in analyzing profit and loss account, each item of expense and income is calculated as percentage of total sales.
For example, cash is 7% of total assets and the same is 10% in case of some other company. It means that the liquidity position of other company is better.
Ø Thus, common-size statements can tell us about how much difference is there and where the difference lies. However, to know about the ideal position and about the reasons for differences, detailed investigation becomes necessary.
Ø The enterprises should prepare balance sheets on uniform basis to facilitate comparison. An illustration of common-size statement is given below.
For the following multiple choice questions select correct alternative from given choices and put its order in the bracket.1. Profit and Loss account is known as ____________
2. A company prepares its Financial Statements at the end of accounting period as per _________ act.
(a) Companies (b) Partnership(c) Income Tax (d) Contract
3. Which of the following is followed to prepare Financial Statements?(a) Certain accounting principles, traditions and accounting standards.(b) Certain thoughts, principles and Interpretation.(c) Certain figures, details and accounts.(d) Certain group, traditions and accounting principles.
4. What is the correct order to show items of liabilities side of company’s balance sheet?
(a) Share Capital, Secured Loan, Unsecured Loan, Reserve and Surplus, Current Liabilities
(b) Share Capital, Current Liabilities, Secured Loan, Unsecured Loans, Reserve and Surplus.
(c) Share Capital, Reserve and Surplus, Secured Loans, Unsecured Loans, Current Liabilities.(d) Reserve and Surplus, Share Capital, Secured Loans, Unsecured Loans,
Current Liabilities5. What is the correct order to show items of assets side of company’s balance
sheet?
(a) Fixed Assets, Current Assets, Investments, Miscellaneous Expenses.(b) Current Assets, investments, Fixed Assets, Miscellaneous Expenses.(c) Fixed Assets, Investments, Current Assets, Miscellaneous
Expenses. (d) Fixed Assets, Current Assets, Miscellaneous Expenses, Investments.
6. Information of how many minimum years is required to prepare comparative statement.(a) 1 (b) 2 (c) 3 (d) 4
7. Common Size Financial Statements are also known as ______________ statements.(a) 100% (b) 200%(c) 10% (d) 20%
8. Which of the following method is not used for analysis of Financial Statements?(a) Cash flow statement (b) Ratio Analysis(c) Comparative Statement (d) Profit – Loss Statements
9. Which statement are used to compare two companies condition?(a) Common Size Statements (b) Comparative Statements
(c) Income Statements (d) Profit – Loss Statements 10. Which statements are called or known as 100% statements?
(a) Common – size statement
(b) Comparative statement
(c) Statement of changes in working capital
(d) Cash flow statement
11. By what other name are the financial statements known?
(a) Unpublished accounts (b) Balance sheet
(c) Private statement (d) Published accounts
12. Which position of business is shown by balance sheet?
(a) Profitability of business (b) Result of business
(c) Financial position of business (d) working capacity of business
13. Which statements are most useful for comparing the conoution of two companies?
(a) Common – size statement
(b) Comparative statement
(c) Cash flow statement
(d) Statement of changes in working capital
14. Which is not included in Contigent liabilities?
(a) Appears fixed cumulative dividend.
(b) Bills discounted but not matures
(c) Guarantees given
(d) Creditor
Fill in the blanks with appropriate words1. Generally ……….. and …….. are included in Financial Statements.2. ……… statements are prepared according to law.3. ………. statements are also known as annual accounts or published accounts.4. In comparative profit and loss accounts items of …….. and ……… are compared.
5. Common – size statements are also known as ………. statements.6. In calculation of opening ratio ………. and …………. will be ignored.[Ans: 1. Balance Sheet Profit & Loss Account 2. Financial 3. Financial 4. Incomes, Expenses 5. 100% 6. Taxation and Financial expenses]
Short Questions1. Which accounts or statements are included in financial statements?à Generally, profit and loss account and balance sheet are included in financial statements.
2. Give the names of main methods of analysis of financial statements.à The following are the main methods of analysis of Financial Statements: (i) Comparative statements (ii) Common – size statements (iii) Trend percentages (iv) Changes in working capital statement (v) Cash flow statement (vi) Ratio analysis (vii) Value added statement.
3. For accounting analysis by means of comparative statements, which methods are generally used?
à For analysis by comparative statements, comparative profit and loss account and comparative balance sheets are used.
4. Why are common-size statements prepared?à Common-size statements are prepared to show the percentage of various assets to total assets, the percentages of various expenses to sale and to show the percentage of net profit to sales.
5. How analysis of financial statement useful to preference shareholders?à From the analysis of financial statements, preference shareholders can get an idea that they will get their fixed dividend regularly, whether their capital is safe and whether they will get their capital bank on maturity.
6. Where is the form of balance sheet of company given?
à The form in which balance sheet is to be prepared by all companies is given in Part I of Schedule VI of Companies Act.
7. Write the importance of analysis of financial statements?à Importants of Analysis of financial statements: (1) To know the profit and financial strength. (2) To known the managerial efficiently. (3) To decide whether the employees are justified in demanding bonus and wage rise. (4) To give an idea of collection period of credit sales. (5) To take corrective steps for proper planning.
8. What is called financial statements?à The end product of financial accounting process is a set of reports which are called financial statements. viz. a balance sheet, a profit and loss account and trading account etc.
9. Mention the importance of financial statement analysis for potential Investors.àProspective investors who want to invest in shares of the company would like to know whether it is safe to invest in shares of the company, whether they will get reasonable return and whether there is any likehood of appreciation in value of shares.
Statements : Whether True of False1. Financial statements are prepared according to provisions of law.à True
2. Financial statements are not known as published accounts.à False
3. Details given in financial statements and quantitative data are enough of all parties concerned.
à False
4. Details about or loss can be obtained from comparative statements.à False
5. Comparative statements are useful for comparing state of affairs of two companies.à False
IntroductionThe True owners of a company are the shareholders. Representatives of these shareholders are known as directors. A company is managed by its directors. The Companies Act came into existence to protect the interest of the shareholders. Financial statements of the company are to be presented at the general meeting of the shareholders within a prescribed time limit.
In this chapter, we shall discuss method of ratio analysis for analyzing financial statements. Accounting ratios is one of the very efficient tools of financial statement analysis.
Meaning of Accounting RatioFigures presented in financial statements may not be self-explanatory[figures it
self does not say any thing but you have to interpret those figures.] and for interpretation, one needs to find the proportion or the ratios by comparing various figures given in the financial statements. Thus, interrelationship derived by comparing different relevant and related figures is known as accounting ratio
Definition of Accounting RatioAccounting ratio is a relationship expressed between numbers reflected in profit and
loss account, balance sheet or any other part of accounts.
Such relationships maybe expressed mainly into the following three forms
1. In percentage or2. In proportion or ratio or3. Turnover or Number of times
(i) Percentage :
The sales of R Ltd. during the year 2003-04 is Rs 5,00,000 and it has earned a gross profit of Rs 75,000. Thus, on the sales of Rs 5,00,000, it has earned a gross profit of Rs 75,000. In place of figures, if this information is presented in the form of percentage, we can say that the rate of gross profit on sales is 15 %. This is called presentation of interrelationship between sales and gross profit. This expression is in percentage.
(ii) Proportion :
4.ACOUNTING RATIOS
Balance sheet of S Ltd. shows current assets of Rs 4,00,000 and current liabilities of Rs 2,00,000. Alternatively, this information presented through figures can be expressed by stating that current assets are twice the current liabilities or the proportion of current assets to current liabilities is 2:1. Thus, the current ratio is 2:1. If the same information is to be expressed in one number, we say that the current ratio is 2.
(ii) Turnover :
With the help of stock turnover ratio, we get to know the number of times the average stock is turned over or sold. Cost of goods sold and average stock are Rs 3,20,000 and Rs 80,000 as per financial statements for the year 2003-04. This means that the stock turnover rate is 4. This ratio tells us how fast or how many times the stock is sold during the year.
With the help of debtors ratio/debtors turnover, we can know the time frame of the collection of money from the customers to whom goods are sold on credit. Based on debtors turnover, the credit period allowed to the customers can be known. Similarly, the number of days of credit allowed by the creditors or suppliers can be known with the help of the creditors' ratio.
From the above discussion, we can say that the ratio is defined as the relationship between two variables. Ratio expresses relationship between; different related accounting numbers the financial statements. Ratio is the expression of such accounting numbers by the numerator and the denominator. Such ratios can be expressed in an appropriate manner according to the methods discussed above. Ratio analysis fulfils objectives of different stakeholders interested in studying the financial the statements. These ratios are useful in studying financial position of an enterprise.
Objectives/Utility and Importance of Accounting RatiosEach party uses financial statements according to its own different objectives. Ratio analysis is one of the important methods of financial statement analysis. Therefore, objectives of financial analysis and ratio analysis are the same.
Let us first discuss about the utility of ratios to various parties.
Managers : Financial ' statements are useful for planning and policy making. From the accounting ratios, managers can get information about profitability, solvency and liquidity of the enterprise.
Equity Shareholders : Equity shareholders are owners of the company. Being owners, they are obviously interested to know about profitability, solvency and liquidity of the company. Apart from this, the rate of dividend is not fixed. Based on profitability, they are also interested in knowing if there is a possibility of an increase in the dividend and the dividend rate.
Preference Shareholders : Preference shareholders are interested to know about the safety of their capital and the possibility of regular dividend.
Employees : Employees expect an increase in the remuneration they get from the company. They expect better perquisites and facilities and therefore are interested in financial statement analysis.
Creditors : With the help of ratio analysis, creditors are interested to know whether their business with the company will continue or not, the possibility of growth therein and the capability of the company to pay their dues.
Lenders : Debenture holders,. bankers and financial institutions can be included in lenders. With the help of ratio analysis, this class is interested to know about the safety and security of their money, possibility of regular payment of interest and repayment of dues on the date of maturity.
Public : Companies have certain social responsibilities. Therefore, society is also interested in financial statement analysis. By ratio analysis, the public at large and society is also interested to know about the possibility of the progress of the company. They are also interested to know about the impact of the progress on the share price, of the company.
Competitors Competitors are interested in such analysis to frame their own strategy.
Government The government is interested in analysis from the viewpoint of impact on economy and planning.
Limitations of Accounting RatiosAccounting ratios suffer from certain limitations, which areas under:
1. Accounting ratios present true position to the extent the financial statements are correct because the accounting ratios are calculated based on these financial statements. For example, ratio will not be useful if stock valuation is not proper and correct.
2. Mere accounting ratios cannot measure the financial position of the business. Factors Eke monopoly, general economic condition, policies of the competitors, Government controls and political changes are also the other factors affecting business condition.
3. One cannot get a complete picture of the company's profitability and efficiency merely based on one year's ratios.
4. At times, the decisions taken for the entire business based on one or two ratios can prove risky.
5. Two companies can be properly compared with the help of ratios only if these companies have the same method of preparing accounts or providing depreciation.
6. Sticking rigidly to a particular ratio can be harmful. For example, current assets should be twice the current liabilities. Such rigidity based on two unrelated variables is not useful. These are limitations of ratios. Ratios can be useful if these limitations are kept in mind while using them.
Types of Accounting Ratios
Accounting ratios are classified in two ways
Classification based on financial statements; and
Functional classification
Sub-classification based on these types is as under
(I) Classification based on financial statements
Ratios based on profitability statement These ratios include the following which show relationship between two or more items in the Trading Account/ Profit & Loss account.
Ø Gross Profit Ratio Ø Net Profit Ratio Ø Expense Ratio Ø Operating Ratio and Ø Stock Turnover
Balance Sheet Ratios : These ratios include the following which show relationship between two or more items of the balance sheet :
Ø Current Ratio Ø Liquid Ratio Ø Proprietary Ratio Ø Debt-Equity Ratio Ø Total Assets to Debt Ratio
Composite Ratios : Calculation of such ratios shows relationship between figures of profitability statement and balance sheet. They include:
Ø Debtors Ratio Ø Creditors Ratio Ø Working Capital Turnover..
(II) Functional Classification : Such classification is made keeping in mind the function or purpose of the ratio. Based on functions, the following sub-classification can be made.
Profitability Ratios
Gross Profit Ratio
Ø Operating RatioØ Net Profit RatioØ Liquidity RatiosØ Current RatioØ Liquid Ratio
Activity- Ratios
Ø Stock Turnover RatioØ Debtors TurnoverØ Creditors TurnoverØ Working Capital Turnover
Solvency Ratios (Long-term Ratios)
Ø Debt- Equity Ratio
Ø Total Assets to DebtØ Proprietary Ratio
For the following multiple choice questions select correct alternative from given choices and put its order in the bracket.
1. Real Owners of the company are
(a) Management (b) Share holders
(c) Auditors (d) Government
2. Which of the following act is prevailing to protect the interest of shareholders?
(a) Partnership Act (b) Companies Act
(c) Contract Act (d) Sale of Goods Act
3. In whose meeting of the following forms Financial Statements are presented for approval?
(a) Management (b) Share holders
(c) Both a & b (d) None of these
4. Under which of the following accounting ratios are presented?
(a) In percentage (b) In proportion
(c) In Turnover (d) In all forms i.e. a,b &c
5. Operating ratio is ___________ ratio of the business unit.
(a) Liquidity (b) Solvency
(c) Profitability (d) Trustworthy
6. A business has credit sales of Rs. 5,00,000 and cost of goods sold is Rs. 3,60,000. What is gross profit ratio?
(a) 72% (b) 28% (c) 25% (d) 82%
7. What is measured by liquidity ratio?
(a) Short term solvency (b) Long term solvency
(c) Short term profitability (d) Long Term Profitability
Fill in the blanks with appropriate words1. The relationship obtained by comparing different figures of financial statements is
called ………2. In the computations of operating ratio ……… will be treated as operating expense. 3. ……… = Sales – Gross profit.4. In the liquid assets, current assets except …….. and in liquid liabilities, current liabilities
except ……. are included.5. Stock turnover suggest how many times …….. stock is turned over.6. Debtors ratio indicates the average number of days of ……..7. Gross current assets means gross …….. capital.8. By deducting …….. from the total debts we get long term ……….. of business. 9. …….. ratio is calculated to know the proportion of owners’ funds to total funds
employed in business.
10. Average stock is considered for calculation of ……. ratio.11. Average daily credit sale is considered for calculating ………….. ratio.12. Liquid assets means current assets less ……….13. Liquid liabilities means current liabilities less ……….14. ………. ratio suggest the short – term solvency of the business.15. ………. ratio is not useful for knowing the profitability of business.
Ans: 1. Ratios 2. Depreciation 3. Cost of goods 4. Stock, Bank overdraft 5. Average 6. Collection of Credit sales 7. Working 8. Current liabilities, Long – term liabilities 9. Proprietary 10. Stock 11. Debtors 12. Stock (closing) 13. Bank Overdraft 14. Current Ratio 15. Current Ratio]
Short Questions1. Give definition of Accounting Ratio.àAccounting ratios are the inter – relationship between any two relevant figures taken from financial statements.
2. In what forms can the data relating to inter-relationship of two figures be presented?à The information relating to inter-relationship between two figures can be presented in any one of the following forms: (A) In Percentage (B) In Ratio (C) In Simple Figure.
3. Classify accounting ratios on the basis of financial statements and state their types.à Classification of ratios on the basis of financial statements is (A) Profit and Loss A/c Ratios (1) Gross Profit Ratio (2) Net Profit Ratio (3) Expenses Ratio (4) Operating Ratio (5) Stock Turnover (B) Balance-sheet Ratios (1) Current Ratio (2) Liquid Ratio (3) Proprietary Ratio (4) Debt – Equity Ratio (4) Total Assets – debts Ratio. (C) Combined Ratios: (1) Debtors Ratio (2) Creditors Ratio and (3) Working Capital Turnover.
4. Name the solvency ratios.à Solvency Ratios are as follows : (1) Debt – Equity Ratio (2) Assets – Debts Ratio and (3) Proprietary Ratio
5. Which information is known from Operating Ratio?à From operating ratio, it is possible to know the relationship of cost of sales and operating expenses with sales.
6. State the main purpose of finding out Proprietary Ratio.à Proprietary ratio is one of the solvency ratios. It is calculated to find the proportion of owner’s funds to the total funds employed in business.
7. State what information is available from total assets – debts ratio.àFrom the total assets – debts ratio, it is possible to know the proportion of long-term debts to total assets.
8. State the purpose of finding out working capital turnover.à Working capital turnover indicates the efficiency with which the working capital is used in business. This ratio shows relationship between net working capital and sales.
9. Mention profitability ratios.
à Profitability ratios are : (1) Gross Profit Ratio (2) Net Profit Ratio (3) Expenses Ratio (4) Operating Ratio
10. By what formulae debtors turn – over can be calculated?à Debtors turn-over = Credit Sales of the year/Debtors + Bills Receivable.
Statements : Whether True of False1. Accounting ratios are useful only for getting bank loan.à False
2. Proprietary funds include only Reserve Fund and surplus profit.à False
3. Current ratio shows the profitability of business.à False
4. Gross profit ratio is not useful for knowing profitability of business.à False
5. Average stock is considered in computation of current ratio.à False
6. Liquid ratio means current assets less current liabilities.à False
7. For knowing the relationship between net working capital and sales, debt-equity ratio is used.
à False
8. In computing operation ratio, depreciation is not considered as an operating expense.à False
9. Debtors ratio indicates average credit sale.à False
10. Net working capital means excess of current assets over current liabilities.à True
11. If current liabilities are deducted from total liabilities, the total long-term debts are obtained.
à True
IntroductionDeshi Nama system. is a very old system to write accounts. It is similar to double entry accounting system. from the. view point of accounting principles. In this system, the books are known as 'Vahi'. Therefore, this system is also known as 'Vahi Paddhati'. Generally, the books under this system are written in the regional language. However, the use of figures in. English has increased.
Characteristics of Deshi Nama SystemBooks : The books under Deshi Nama are covered with the red cloth and are hard bound. These books are in the vertical form and contain plain blank sheets. However, now-a-days simple books of accounts, with lined pages, are also in use.
Sal (folds) : The pages in each of the books of accounts are with folds(sal). Rojmel, Bethomel and have pages are with eight folds. But pages in Subsidiary Books have six folds. However, now pages without folds and with columns drawn are being used.
Credit (Jama) and Debit (Udhar) Sides : In Books for Deshi Nama System, out of total eight folds, first four folds on the left hand side are known as Jama. (credit) side and the remaining four folds as udhar (debit) side. Thus, the left hand side is known as Jama side and the right hand side is known as udhar side.
Thus,
Jama Udhar
1 2 3 4 5 6 7 8
Ch: 5 & 6 DESHINAMA
Methods of writing in folds (Sal) : In Deshi Nama, while recording a transaction on either the credit or debit side, the amount of the economic transaction is recorded in the first fold (sal) of the side. In the remaining folds, the name of the account affected and the debit or credit to it is written. Below the name of the account, a brief detail/narration of the economic transaction is given and below such brief detail/narraction, ledger folio number is written in the third fold. In Deshi Nama, the name of the account of the transaction is written after drawing a line. Generally, the first fold, out of four folds, is for the amount and the remaining three folds are for the details/particulars/narration.
Use of the word `Shri' : In Deshi Nama, while recording an entry in the Rojmel, Bethomel or subsidiary Books, the name of the account (khata) is preceded with the word 'Shri' e.g., if salary (Pagar) Account is to be written, it will be written as `Shri Pagar (salary) Khate'. Shri is considered as a sign of omen.
Method -of writing the amount : While entering the amount in Deshi Nama books, a sign (J) known as `Olayo' is put between the amount in rupees and paise. Many business man, use the sign of equality (=)as is used in arithmatic, instead of `Olayo'. eg. An amount of Rs .125 and paise 45, as Rs 125/45 or Rs 125=45.
Vikram. Samvat (year) : Deshi Nama is usually maintained as per Vikram Samvat year i.e. from Kartak Sud I (Ekam) to Aso vad-15-(Amas) for every month, Paksh (Sud-Vad) and tithi (date). Though, now-a-days it is also maintained as per the English Calendar.
Page for Puja : In the first page in Rojmal or Bethomel, the businessman writes the name of God he worships and also a pray to the God. This page is termed as Puja Page. No accounting, entry is recorded on this page.
Language : In Deshi Nama, the recording in the books of accounts, is in the regional Language. e.g. In Gujarat, Deshi Nama is written in Gujarati.
Ink : Generally, Deshi Nama is written in black ink. However, blue ink is also used now-a-days.
Books of Accounts maintained under Deshi Nama System
(1) Rough Book : In business, transactions take place continuously during a day. It is not convenient to write the books during the day. At the same time, it is also not proper, if receipts and payments i.e. transactions are not at all recorded at the time, because there is a likelihood of forgetting to record some transactions.
Therefore, small traders record their transactions of the day on a slate or loose sheets or in a diary. Such record is known as Tanchan or Tippan.
For a big businessman, the transactions are many and hence, they record them either in a diary or notebook or a book maintained for the purpose. Such a record book is termed as 'Ghadiya', 'Sundiya' or 'Daniya'.
These are the different terms used for the rough book of record. A book in use for such rough records is known as 'Adadhiya'. The business man takes brief notes in such 'Adadhiya' as per his requirements. With the help of such a rough book, at the end of
the day or at convenient time, regular/organized accounting is done. If any transaction is forgotten to be recorded in the Rojmel or if any error has occurred, it can be traced/ verified with the help of such rough book.
(2) Rojmel : The way a Journal is maintained under the Double Entry System of Accounting, Rojmel is maintained in the same way under Deshi Nama. Thus, Rojmel is the basic or prime book of accounting under Deshi Nama.
In Rojmel, cash as well as credit transactions are recorded. In addition, based on the transactions recorded in such Rojmel cash balance is derived, which is termed , as Purant'.
Rojmel is maintained every day and at the end of the accounting entries for the day, cash balance is found out. That is why, it is known as Rojmel. Ledger is prepared 'with the help of Rojmel.
(3) Bethomel : Bethomel is another form of Rojmel. Small traders/ businessmen whose quantum of transactions is comparatively less, may maintain a complete `Mel' fora week, a fortnight or a month and find out the cash balance accordingly. Such 'Mel' is known as 'Bethomel' or 'Thammel'. Thus, Bethomel or Thammel is a composite or collective Rojmel for a pre-determined period of days.
(4) Khativahi (ledger) : Ledger (Khatavahi) is maintained under Deshi Nama, as in Double Entry System of Accounting. In ledger, ledger accounts are opened and posting is done in such ledger accounts, from Rojmel, Bethomel and Subsidiary Books. Like Rojmel, for Khatavahi (ledger) also, a book containing eight-fold pages is used. Usually, one page is. kept for each account.
(5) Subsidiary Books (Peta Nodho) : Big businessmen, whose quantum of business/economic transactions is comparatively larger, maintain certain additional books, in addition to Rojmel, which are known as subsidiary books. e.g., Jamanodh, Udharnodh, Jangadnodh etc. Transactions, which are recorded in Rojmel or Bethomel.
(6) Aavro : All those transactions recorded in Rojmel or Bethomel and Subsidiary Books, are again recorded in another book at the end of fifteen days or a month. Such book is called 'Avaro'. Aavro is prepard like Rojmel and for the purpose, a book that has pages with eight folds pages is used. Aavro is prepared fora specified period and all the transactions recorded in Rojmel or Bethomel and Subsidiary Books are recorded again in it and the closing balance (Purant Baki) is arrived at. Such closing balance is tallied with the closing balance (Purant Baki) as per Rojmel or Bethomel because such balance in both the books, should be the same.
Thus, the accounting accuracy is maintained by recording all the business transactions in 'Aavro'. 'Aavro' is also useful as a tool to find out and control errors in all the transactions recorded in the books of accounts. 'Aavro' is generally maintained by shroffs and big businessmen.
(7) Havalanodh or Havalamel :
Certain Special Accounts / Terms
Terms as per Double Entry System Terns as per Deshinama System
Debit Udhar
Credit Jama
Goods Mal
Journal Rojmel or Bethomel(Thammel)
Subsidiary Books Peta Nondho
Purshase Book Kharid nondh or Jama nondh
Sales Book Vechan/Vakara nondh or Udhar nondh
Ledger Khatavahi
Trial balance Utaro
Purchase Account Shri Kharid khatu
Sales Account Shri Vakara khatu
Goods destroyed by fire Account Shri Aag thi bali gayel mal khatu
Loss due to fire Account Shri Aag thi thayel Nuksan Khatu
Goods given in Charity Account Shri Dharmda thi gayel mal kahtu
Shri Bhandol Khatu : In Deshi Nama, capital is known as shri Bhandol. When the owner starts a new business, as well as during the year of the business, he brings in his personal funds in the form of cash, goods, assets, receivables and they are recorded in Shri Bhandol Khate. However, now-a-days many businessmen record their capital to Shri Mudi (Capital-Mudi) Khate. In a partnership firm, the total capital of the firm is not recorded in Shri Mudi (capital) Khate or shri Bhandol Khate. For the purpose, separate individual (name wise) capital accounts are maintained. e.g., Shri Uday's Mudi (capital) Khatu and Shri Vimal's Mudi Khatu.Shri
Gharkharch Khatu : In Deshi Nama, withdrawal by, the owner from the firm, for a personal purpose (use) is debited to Shri Gharkharch Khate. Whenever the owner takes away for personal use, the goods, asset or cash, or pays from the firm for his personal expenses, it is debited to Shri Ghar Kharch Khate. In a partnership firm, like capital account - separate drawings accounts for each partner is maintained. e.g. shri Udy's Drawings account and Shri Vimal's Drawings account. Many businessmen maintain Shri Drawings Khatu (account) instead of Shri Gharkarch Khatu.
Shri Dukan Kharch Khatu : The businessman keeps such account for miscellaneous expenses. When the expense amount is very small, it is considered as Shri Dukan Kharch. e.g., cold drinks and tea -expenses etc.
Shri Vatav Khatu : Shri Vatav Khatu in Deshi Nama has wide meaning than discount (vatav) account under Double Entry System. Here cash discount, commission, loss due to fire in the business, bad debts, loss (any other) etc. are debited to Shri Vatav Khate. At the same time, miscellaneous or accidental gain or profit are also credited to Shri Vatav Khate. However, now-a-days businessmen maintain separate accounts for expense or loss or profit or gain, e.g., Shri Ghalkhad (bad debts) Khatu, Shri Aadat (commission) Khatu etc.
Shri Vigat Khatu : When on any one particular day or in any one particular transaction, more than one account gets, debit or credit effect simultaneously, the total amount of the transaction is recorded against Shri Vigat Khate. In the subfolds below Shri Vigat Khate, the account which is affected, is written with the amount for each such account, separately. This saves both the time and labour.
Here, the important thing to be remembered is that in the ledger, Shri Vigat Khatu is not opened, because in reality there is no account named Shri Vigat Khatu, which is affected. Each of the accounts recorded in the sub-folds below Shri Vigat Khate are opened and the page no.of the ledger, on which each such account is opened, is recorded in Rojmel, below such affected account.
J U600=00 Shri Vigat Khate U d h a r300=00 Shri Bhada(rent) Khate
L.F.
100=00 Shri Majuri (wages) Khate
L.F.
200=00 Shri Commission Khate
L.F.
600=00
Shri Shah Khatu or Shri Khatu : During the course of the business if any transaction takes place with a person and if the name of such person is forgotten, it is recorded as Shri Shah Khate. Afterwards when such name is remembered, a reverse entry is passed against Shri Shah Khate and the correct entry is recorded against such a person's account. When the name of the person is not to be disclosed, in such a case also Shri Shah Khatu is used. Instead of using Shri Shah Khatu in the transaction, it may be recorded as Shri…. Khate. In such a case, whenever the name of the person is remembered, it is recorded in the space left after the word 'Shri' For the very purpose, some space is left blank between 'Shri' and 'Khate'. However, as this is a faulty method from the view point of accounting very less use of Shri ... Khate is found.
Shri Tasalmat Khatu : This account is like a suspense account under Double entry system of accounting. In a business, when an expense is incurred or income is earned and the name of such account (expense or income) is forgotten, such transaction is recorded to Shri Tasalmat Khate. Afterwards on recollecting the name of such expense or income, the reverse effect to Shri Tasalmat Khate is given and correct effect is given to such expense or income account. When it is uncertain as to which account the effect is to be given (recorded), it is temporarily recorded to Shri Tasalmat Khate. Afterwards on finally deciding the account to which the effect is to be given, it is correctly recorded to that specific account and the reverse effect is given to Shri Tasalmat Khate.
Shri Deshavar Khatu : Whenever any person of the firm, munim or the owner himself, goes out of station for purchase or sale of goods or for any other business purpose, a certain amount is given to him for use and expenses. Such amount is debited to such person's Deshavar Khate. Afterwards when such person returns, he submits the details of his transactions. With the help of such details, Shri Deshavar Khatu is credited and closed and the correct entry is recorded for each of the transactions. Thus, this is a temporary account.
Shri Haththu Khatu : When an a amount is to be paid to the creditor of the business and such amount is sent to him through some person or aangadia, such amount is debited to Shri Haththu Khate instead of debiting it to such creditor's account. Afterwards, on getting the receipt either from the creditor or aangadia, Shri Haththu Khatu is closed by crediting it and the creditor's account is debited. Such an account is a temporary one.
Shri Chanlla Khatu : The businessman develops business relations during the course of business. Due to such business relations, whenever there is any good occasion at the customer's or creditor's place, a gift or Chanlla is to be given. Such amount is debited to Shri Chanlla Khate. In the same way on a good occasion at his place, the businessman receives a Chanlla or a gift, which is credited to Shri Chanlla Khate. However, such tradition is now getting extinct. Now, whenever Chanlla or a gift is to be given, it is treated as a buisness expense and is debited to Shri Dukan Kharch Khate.
Shri Silak Vadhghat Khatu : Closing balance (Silak) as per Rojmel or Bethomel should tally with the actual cash on hand. If they do not tally, the necessary verification and efforts are made to find out the error. Still however, if the closing cash balance is more or less than the actual cash on hand, the differential amount is recorded in Shri Silak Vadhghat khate, Here, if the balance as per Rojmel is found less, it is debited to Shri Silak Vadhghat Khate and if it is found more, it is credited to Shri Silak Vadhghat Khate. Afterwards, when the reason for such difference is traced, the reverse effect is give to Shri Silak Vadhghat Khate and the correct effect is given to the concerned account. Thus, the correct balance is arrived at automatically.
Shri Ublek Khatu : Whenever an amount is lent fora few days to a person in the business, it is debited to such person's ublek account. Because, such amount is to be received back very shortly, its is not opened in the books. For the purpose,
Upartapke : When any person is lent an amount for a day or even for a shorter time, the amount so lent is not recorded as an entry in Rojmel. But in Rojmel, after finding out the closing balance such amount is shown as a part of balance as 'Upartapake'. The actual balance is less ,by such ' Upartapke ' amount and to tally the accounts, it is recorded in'such a way. Say, the total on Jama side of Rojmel is Rs 15,000 and the total on udhar side is Rs 12,000 and Mafatlal is given Rs 100 to be returned in the evening. In Rojmel, 'upartapake' will be recorded as follows :
Kabulat and Havalo(Acceplance and Transfer) : On mutual understanding the businessman agrees to pay an amount, payable to a creditor, to another person. This is known as Kabulat (acceptance).
In the same way, when a businessman agrees to accept an amount from another person instead of from his debtor, it is also Kabulat (acceptance).
When instead of arriving at mutual understanding or Kabulat about a debt or receivable an instruction or order is given for that, it is known as Havalo (transfer). Because of Kabulat and Havalo, there is an effect on the businessman's debt and receivables. Due to such transactions the account of a person who has accepted to pay or from whom the receivable arises, is debited. And the opposite party's account is credited. Say Prakash accepted to pay Rs 400 to be paid by Deepak. Here, Deepak is a debtor, whose amount now will be paid by Prakash. Therefore, it will be. considered as the amount paid out by Dipak. At the same time, now it will be considered as the amount due from Prakash.
'Haste' : In business, the recovery of money or the payment is many a time from a person or to a person, who may not actually be a creditor or a debtor, but he may be a clerk or munimji or any other person. Therefore, for record purposes, below the name of the
debtor, who has paid the amount is written the name of the person who brings the amount with 'H' noted there, which is known as 'Haste'. So that the person, who came to pay the amount can be known. e.g. Received Rs 10 from Shri Pratapbhai 'H' Shardaben.
Miti : miti means Tithi. For that the full details regarding the month, the paksh (Sud or Vad), tithi and the year are written.
Rules of Debit-CreditWe know rules of debit and credit as per Double Entry System of Accounting. The
same rules are applied while writing accounts under the Deshi Nama System, because there is no difference in the principles under both the systems. However, the method of writing (format) under both the systems is different. Let us understand once again the rules of Debit and credit.
For Personal Accounts: “Debit the receiver and credit the giver”
For Real (assets) Accounts : “Debit what comes in and credit what goes out”
For Nominal Accounts: “Debit all expenses and losses and credit all incomes and gains”
RojmelØ Rojmel is a basic or primary book under Deshi Nama. Ø The businessman prepares Rojmel with the help of vouchers and the rough book. Ø Rojmel is written and prepared daily and the closing balance is derived daily. Hence, this
Mel is known as Rojmel.Ø Both cash and credit transactions are recorded in Rojmel. From this viewpoint Rojmel
is like a journal under double entry sytem of accounting.Ø Rojmel or Bethomel serves the purpose of'cash account also. Hence, in any transaction
the effect to a cash account i.e. debit or credit effect to cash account, need not be recorded in Rojmel or Bethomel. Thus, in a transaction related with cash receipt or payment, generally only the effect to the account (other than the cash account), is to be recorded. e.g., in cash purchase, only one effect - debit to the purchase account is recorded and the credit effect to cash account is not recorded. In case of non-cash or credit transaction, two or more effects are to be recorded. e.g., for goods purchased on credit from Mamta, purchase account will be recorded on 'Udhar' side and the other account - Mamta's account being non-cash account, will be recorded on 'Jama' side.
Ø The book of Rojmel contains blank pages with eight folds. Ø In the book of Rojmel, every page is given a chronological number which is mentioned
at the top of every page and is known as Rojmel page number.Ø At the top of the Rojmel page below the Rojmel page number, the name of the owner
of the firm is written. Then, below the name of the owner, is written the year, the month, the tithi, the date and the day.
Ø Both on jama side and udhar side the amount of the transaction. is recorded in the first fold' of the four folds. In the remaining three folds, the name of the account getting effect is written preceded by 'Shri' and besides the name of the account the effect is
indicated by the term udhar or jama whichever it is, e.g., 'Shri Kamlesh Khate jama' is written acccordingly. In the second fold below the name of the account the amount of the transaction and in the remaining two folds a brief narration of the transaction is written. Below the brief narration L.F. no. is recorded in the third or fourth fold.
Shri Purant Janase : The beginning of writting in Rojmel or Bethomel is with the cash balance on that day, which is shown as `Shri Purant Janase'. If there is no opening balance of cash or if it is a beginning of a new business, on the credit side, in the amount column, 'Shri IL is written as a good omen. And in the the particulars (narration) 'Shri Ganeshay Namah' is written.
Shri Purant Baki : In Rojmel or Bethomel closing cash balance is known as 'Shri Purant Baki'. This closing balance is equal to the actual closing cash balance on that day.
Note:Here, it should be noted that in Rojmel the total on the jama side is always more. Therefore, 'Shri Purant Baki' has to be on udhar side. Because, Rojmel is a kind of cash account. As per the rules of debit and credit, cash receipts are recorded on the jama side of Rojmel and expenses cash payments are recorded on the udhar side. In a business, there can't be more cash payments (outgoings) than cash receipts.
Subsidiary Books (Peta Nondho or PetaVahis)
In Deshi Nama, Rojmel or Bethomel is maintained to record the accounting entries for the daily transactions. When the transactions in a business are less in number, it is convenient for a businessman to record the daily transactions in such Rojmel or Bethomel. However, if the transactions in a business are large in number, only one such book is not convinient enough, because,
Ø The size of the book becomes very large,Ø Necessary information is not available speedily and easily,Ø The work of writing books of accounts can not be distrbuted,Ø There will be greater burden on only one person writing accounts and at times he
may not be able to manage it, andØ The transfer or movement of books may not be easy/convenient.
For the above reasons, bigger businessmen maintain certain additional books in addition to Rojmel or Bethomel. Such books are known as Peta Nondho or Peta Vahis (Subsidiary Books).
The following Peta Nondho are used under Deshi Nama :
(1) Jamanodh (Kharidnodh or Purchase Book) : In a business where the transactions for credit purchase are in substantial proportion a separate book is maintained to record such transactions. Such a book is known as Jamanodh or Jama Vahi or Kharidnodh. When the goods are purchased on credit, the purchase of the goods is credited to the seller's (the trader from whom the goods are purchased) account. Thus, every trader's account recorded in this book is credited by the amount recorded against his name. Hence, this book is known as Jamanodh.
(2) Udharnodh (Sales Book) : When in a business, the transactions for credit sales are in substantial proportion a separate book is maintained to record such transactions. Such a book is known as Udharnodh or Udharavahi or Vechan (vakara)nodh. When the goods are sold on
credit, the sales price (amount) of the goods is debited to the customer's account. Thus, every customer's account recorded in this book is debited by the amount recorded against his name. Hence, this book is known as Udhamodh.
(3) Daginamel (janasvahi or Stock Register) : In Deshi nama, a b000k, which is maintained to account for the incoming and outgoing of goods, is known as Daginamel or Janasvahi or Stock Register. There are two known methods of preparing a Daginamel. As per one method, Daginamel is prepared like Rojmel, with pages that have eight folds and with two columns Jama and Udhar. As per the other method, it is prepared in the format of a register, with three main columns that is Receipts (Avak or .Incoming) Outgoing (Javak) and the balance, as under Double Entry System.
(4) Aankdavahi (Sudha Vahi or Rough ledger - Kachi Khatavahi) : Aankdavahi is a Kachi Khatavahi. In it, the ledger accounts of the customers are opened and daily posting of their accounts is done from the Rojmel, Bethomel and Udhamodh. Afterwards at a convenient time, proper posting is done in the ledger (wherein all the ledger accounts for the business are opened). In this way, as the posting is done twice, chances of committing the errors or of forgetting to record a tratisactions are reduced. At the same time a person, who goes for collection, can carry it with him.
(5) Ughrani Nodh : A clerk or munim who goes for collection keeps with him a book or dairy. In such a book, the brief details/particulars, regarding the amounts due from the debtors, are shown. Such a book or diary is known as Ughraninodh. The person, who goes for collection, records there in, the amounts received by him during the collection, based on which the detailed/proper posting is done in the ledger.
(6) Jangad Nodh : In Jangad Nodh, the Jangad sale transactions of the business are recorded. Under Jangad sale transactions (transactions based on 'Sale or Return'), if the customer is not satisfied with the goods, he can return the goods within an agreed time limit. Thus, till the customer's confirms the purchase of such goods or the time limit (the date) for such Jangad sale is not over, it can not be treated as actual sale. After the time limit for such Jangad sale is over, even if no no intimation of the confirmation is received from the customer, such Jangad sale is treated as actual sale. Jangad Nodh is written in the same way as Rojmel. When in a business, the goods are sold on Jangad, it is recorded in this book on Jama side and when such goods on receiving back or at the end of the agreed time limit, it is recorded on the debit side, ofcourse, the entry for the real sale transaction is recordea in Udhamodh, by the businessman.
(7) Karar Nodh (Contract Book) : Many a time, many contracts are entered into regarding purchase, sale or any other matter in a business. These contracts are made with different terms and conditions. Some contracts which may be for a longer duration, should always be written contracts and it is also necessary to maintain a separate and proper note for each of them. For maintaining a record of such contracts in business, a separate book called Karar Nodh is kept.
(8) Vyajvahi : Generally, the shroffs or moneylenders maintain such a book, in which an entry is recorded for the interest. Such businessmen accept the deposits also and
lend the money to those, who are in need of funds (money). For the purpose, the businessman has to pay the interest to the depositor and charge the interest from the borrower. In it, an account per such depositer/borrower is opened and after calculating interest on its amount, an entry for the interest is passed/ recorded. In this Vyajvahi, in addition to interest in general, interest on the instalment ('Kandhu') is also recorded. If the businessman has borrowed an amount, its details and the interest on it is also recorded. In addition, interest on the debt amounts and receivables is also charged for the late payment of the balance. Such interest is also recorded in' this book.
(9) Hundivahi When there are numerous bill transactions by the businessmen, they maintain a separate book called 'Hundi Vahi' to record such information. Such Hundivahi is also prepared like a Rojmel. Of course, the accounting entries for the bills, are recorded in Rojmel or Bethomel. This Hundivahi (Bills Book) provides information, regarding the parties to bills, period, amount etc. to the businessman.
(10) Kabalavahi : The book, which is maintained by the businessmen in 'Forward Trading' to record the details of their forward transactions, is known as 'Kabalavahi'. Kabalavahi is also known as 'Sauda Patrak'.
(11) Bank Register : When a businessman maintains more than one bank account for his transactions with the bank, he ' maintains a register to record his numerous bank transactions. Such 'Register' is known as 'Bank Register. In it, different columns for each bank /bank accounts are kept , and the transactions are recorded in it.
KhatavahiØ In Deshi Nama the first accounting entry of transactions is recorded in Rojmel or
Bethomel and in Subsidiary Books. Such entry is as per the date (tithi) and month (mas).
Ø The book in which the personal accounts, real accounts and accounts, -pertaining to incomes and expenses of the business, are opened, is known as ‘Khatavahi'. Khatavahi is one of the main books of accounts.
Ø The book of Khatavahi is like that of Rojmel and Bethomel, hard bound and covered by red cloth, in a vertical form and pages with the eight folds. Out of eight folds, four folds on the left hand side are for Jama and the remaining four folds are for Udhar.
Ø On the first page of Khatavahi, the name of the owner of the business and the year for which the Khatavahi is to be prepared is written.
Ø Then, in the beginning of the book there is a page for serial number/table of contents, which is known as Sankaliyu (Anukramanika). In Sankaliyu, the name of the account and the page number of the Khatavahi, on which the said account is drawn, is written. This helps in finding out an account easily.
Fanku Maravu (sign indicating that the posting is done) :
Once the positng (khatavahi) for a transaction is done, a sign '(0)' is marked in the first fold below the amount of the transaction. This sign indicates that the posting is completed. Process of marking sign '(0)' is known as 'Fanku Marvu'.
Khata's Sandhan
Generally, one blank page is kept for each account in Khatavahi. But in case of certain accounts, when the space so provided is fully utilized, such account may be carried forward in the blank pages kept at the end of Khatavhi. Thus, the process of carrying forward an account to the blank pages at the end, is known as 'Khatanu Sandhan. On the page, which is completely used for an account, the page number of sandhan is mentioned and on the page of sandhan, the original page no. is shown. This helps in tallying the account easily.
Types/kinds of Khatavahi
In Deshi Nama, the following three types of -Khatavahis are used (1) Simple(sadi) Khatavahi (2) Bethi Khatavahi or Thham Khatavahi (3) Sama Daskatni Khatavahi
(1) Simple(Sadi) Klhatavahi : The Khatavahi, in which all the ledger accounts of the business are maintained, is known as Sadi KhatavahL At--the end of the year, on the basis such Khatavahi,-utaro (trial balance) and final accounts are prepared.
(2) Bethi Khatavahi or Thharn Khatavahi : The businessmen, whose transac-tions are comparatively less in number (they) maintain only personal i.e. creditor and debtor accounts in the Khatavahi (ledger) for their transactions. Such accounts are known as Betha Khata and such Khatavahi is known as Bethi Khatavahi or Thham Khatavahi. Such businessmen do not maintain Udhar Nodh and Jama Nodh. Instead of recording the transactions of purchase and sale, in Rojmel or Bethomel, they are recorded directly in the Khatavahi. Thus, Bethi Khatavahi serves the purpose of both Rojmel and Khatavahi. The main purpose of maintaining such khatavahi is to get the clear information regarding debts and receivables (dues) and it can be decided as to how much collection from debtors will be available and against that how much payment is to be made. However, such Khatavahi is not much in practical use these days.(3) Sama Daskatni Khatavahi : The money lenders, businessman and shroffs maintain this Khatavahi. In such case the shroff opens the customer's account in his books at the time of lending the money. In this account itself, the particulars regarding the amount lent, period for which it is lent the Miti on which the money is lent, rate of interest the asset mortgaged etc. are shown. Below these particulars, the necessary Revenue Stamp is affixed and on it the customer's signature is taken. Thus, this khatavahi serves the purpose of both a ledger (khatavahi) and a receipt for the money lent.
Kandhanu Vyaj (Interest on the installment) : Many a time, the shroff fixes up the installments, for repayment of the loan, for the customer's convenience. The amount for each instalment is called the amount of Kandhu. Now, if the customer delays the payment of the instalment (Kandhu), the customer is charged ab interest, for such delayed payment, which is called Kandhanu Vyaj.
Khatanu Mandaman : The shroff charges the customer a certain amount, for opening the customer's account in his books. Such an amount is known as Khatu Mandamani'.
Kothali Chhodamani : Many a time, the shroff deducts a certain amount, while lending the money to a customer. It is known as Kothali chhodamani. The amount of Kothali Chhodamani is an income for the businessman (lender) and an expense for the customer (borrower).Khatani Baki (Balance in the account) : After posting a respective account, the account on both the sides is added up and the difference is found out, which is known as 'Baki' (balance). Generally, to know the result (profit or loss) of the business, at the end of the year, or to carry forward the accounts to the new pages, the balance (baki) is arrived at.
Kinds or types of Khata : In Deshi Nama, certain accounts are closed at the end of the year. While a balance (Baki) is arrived at for certain accounts, Now, which accounts are to be closed and in which accounts the balance is to be arrived at, depends upon the kind of account (Khatu). In Deshi Nama, the accounts are classified into two types : (1) Kacha Khatan, (2) Paka Khatan.
Kacha Khata : The accounts pertaining to the purchase and sale of goods, and accounts pertaining to incomes and expenses, in a business are known as Kacha Khatan. Kacha Khata are closed at the end of the year and their balances are not to be carried forward in the new year. e.g. Shri Kharid Khatu, Shri Majuri Khatu, Shri Commission Malel (Received) Khatu etc.
Paka Khata : In a business, out of all the accounts, the accounts pertaining to persons and assets (i.e. personal and real (assets) accounts) are known as Paka Khatan. At the end of the year, the balance (Bald) is found out in such accounts and such balances are carried forward in the Khatavahi (ledger) for the new year. The balances in Paka Khatan are known as : 'Baki Deva' if it is a credit balance, and 'Baki Lena' if it is a debit balance.
Utaro (Trial Balance): The businessman prepares a statement based on the Baki (balance) of every (all) account. This statement is called 'Utaro'. Under Double Entry System of accounting this statement is called 'Trial Balance'. With the help of utaro, it can ascertained whether the accounts are arithmetically correct or not. Utaro is prepared at the end of an accounting year, before preparing final accounts. Shri Purant Baki (Closing balance of cash) as per Rojmel or Bethomel can also be obtained on the basis of utaro.
Utaro is prepard in pages with eight folds like Rojmel. In Utaro, the closing balance (Baki) of each account is written. For the purpose, the account (Kahtu) having a credit (Jama) balance (Baki) is written on the Jama side of the Utaro and the account (Khatu)
having Udhar (debit) balance is written on the Udhar side of the Utaro. Then, the total of the amounts on Jama side and the total of the amounts on Udhar side, are arrived at and they are shown (written) on the respective sides in the third fold. Then, the difference, of the total of the amounts on both the sides, is found out and written on the side which is short (always on Udhar side) and it is wirtten as Shri Purant baki in the fold for particulars. Shri"Purant Baki as per Utaro, is tallied with Shri Purant Baki as per Rojmel or Bethomel. If Shri Purant Baki and actual cash on hand are the same, it can be assured that the accounts are arithmetically correct.
Havala and HavalamelIn order to ascertain profit or loss of the business, kacha khata is to be
closed. True (correct) profit or loss can be found out by giving accounting effects for closing stock, unpaid expenses, depreciation, bad debts, rectification or errors etc. Besides, at the end of the year, Gharkharcha khata is closed by transferring it to Bhandol khata Similarly, profit or loss arrived at in Kharid-Vakra khata or Vatav khata. or Nafa Nukshan Khata, is also transferred to bhandol khate..
The entries to be passed to give necessary accounting effects for such aspects in the books of accounts, are known as Havala or Havala nondh..
In order to record the entries (nondh) in Havalamel at the end of the year or specific period, Havalarnel is written on the last page of Rojmel or Bethomel. .
Havalamel is also known as Jama Kharchimel, Mandchhadnomel or Achalmel . This Havalamel is different form Jamakharchimel, which is prepard as a part of the Rojmel to record the credit transactions only. Entries (nondh) for the following matters (aspects) are passed in the Havalamel:
Stock of Goods : . For this purpose, kharid-vakra khatu is credited by debiting the closing stock khatu. Closing stock (Akhar Stock) khatu which is debited, is a newly opened account and it being an asset, is shown an the debit side of Sarvaiya as Akharmal Stock khate. the cost price or the market price, whichever is less, is taken into consideration.
In the next year, the debit balance of this stock account will be treated as opening stock (Sharuno Mal Stock) and at the end of the second year by debiting kharid-vakra khatu and crediting the stock khatu, this stock account is closed.
Unpaid (outstanding) Expenses : If any expense is outstanding at the, end of the year, the respective expense account is debited and credit is given to the
outstanding expense account or to respective person's account. The posting is done on the debit side of the respective expense account and on the credit side of the outstanding expense account or repective person's a/c and they are shown in Sarvaiya. e.g. Wages unpaid Rs 600.
Prepaid Expenses : If any expense of the following year, is paid during the current year, it is said as prepaid expense. Debiting the prepaid expense account, the respective expense account is credited. The posting is done on the credit side of the respective expense account and on the debit side of prepaid expense account, which is shown on the debit side of Sarvaiya.e.g. Prepaid insurance premium Rs 300.
Income (Revenue) due but not Received : At the end of the year, if any income is due but not received "income due but not received" or 'related person's' account is debited and the respective income/Revenue account is credited. The positing is done on the credit side of the income account and on the debit side of the income due but not on the received account (or to the related person's account) which is shown in Sarvaiva. c.g., interest on investments due but not received Rs 500.
Income (Revenue) Received in Advance : If any income pertaining to the following year is received and recorded in the current year as income, the respective income account is debited and income/revenue received in advance account is credited. The posting is done on the debit side of the income account and on the credit side of the income/revenue received in advance account which is shown in Sarvaiya. e.g, Rent received in advance Rs 200.
Depreciation : At the end of the year, to record the depreciation on depreciable asset, respective asset account is credited by debiting the depreciation account. It is posted on the debit side of the depreciation account and on the credit side of the asset account. As the amount of depreciation is credited to asset account, in Sarvaiya that much amount is shown as a deduction from the asset.
Bad Debts : At the end of the year, if the information is received regarding the bad debts, then in order to record the same, Debtor's (Devadar's) - account is credited by debiting the bad debt (Ghalkhadh) (Khatu) account or Vatav account which is posted on the debit side of Ghalkhad or Vatav Khata (account) and on the credit side of the Devadar's account and the balance of the outstanding receivables is shown in Sarvaiya, as reduced by such an amount.
Interest on Bhandol : If the owner of the business is to be given the Vyaj (interest) on Bhandol (capital), then Bhandol account is credited by debiting the Vyaj on Bhandol account. It is posted on the debit side of the Bhandol Par Vyaj Kate and on the credit side of the Bhandol (capital) khate. Vyaj on Bhadol is to be calculated at a fixed rate.
Havala to transfer Gharkharch Khatu to Bhandol khatu ; The amount of the withdrawls made by the owners of the business during the year, must be debited to Gharkharcha khate. At the end of the year the Gharkharcha khata is closed by tranfering the amount to the Bhandol khate. For this, Gharkharcha Khatu is credited by debiting Bhandol account. It is posted on the debit side of bhandol account and on the credit side of the Gharkharcha account. Gharkharch account will be closed and the balance of the Bhandol account will be reduced to that extent.
Havala for Rectification of Errors ; In order to rectify some of the accounting errors committed during the year, at the end of the year some account may be required to be debited or credited. It is also known as Havala nondh. e.g., If the wages of Rs 500, is debited to salaries, to rectify this mistake Majuri Khata is debited by crediting Pagar khata. Here it should be noted that if any error is committed in utaro, it can be rectified in utaro only for which no Havala nondh will be passed. Utaro will be prepared after rectifying the errors .
Havala Nondh or Akhar Nondh to Close Kacha Khata : After passing havalanondh for all adjustments, in Havalamel, and after its posting all kacha khatas shown in utaro are closed by transferring either to Kharid-vakra Khate or to Vatav Khate. It should be noted that because of the posting of the above Havala Nondh, the balances in some of the kacha-khata will be changed and some new kacha khata may be added. The new closing balances after the changes are made in the old kacha khata and the newly opened kacha khata, all kacha khatas are to be closed. In order to close kacha khata, the following accounting effects are given in Havalamel.
Havala to Transfer the Profit or Loss of the Business to Bhandol :
Havala Debit [Khate Udhar] Credit[ Khate Jama]
Opening stock Kharid-Vakara Sharuna stock
Closing stock Akhar Stock Kharid-Vakara
Outstanding expense Kharch Kharch na baki deva
Prepaid expense Agauthi Chukvel Kharch Kharch
Outstanding income[Avak] Outstanding income income
Income received in advance Income Income received in advance
Interest on capital [Bhandole Vyaj on Bhandole Bhandole
Interest on Drawings Gharkharch Gharkharch vyaj
Close exp[Kharch] khata Kharid-Vakara/ Vatav Respective Kharch Khata
Close income[Avak] Khata Respective Avak Khata Kharid-Vakara/ Vatav
Close Gharkharch Khata Bhandole Gharkharch
For the following multiple choice questions select correct alternative from given choices and put its order in the bracket.1. Which method of writing Accounting is invented in Indian subcontinent and is
the oldest method of Accounting.(a) Deshi Namu System (b) Double entry System(c) Single entry System (d) none of the above
2. Which System of accounting is known as “Vahi Khata” System?(a) Single entry accounting (b) Deshi Namu System(c) Double entry accounting (d) None of the above
3. How many folds (sal) are there in the books of Rojmel, Bethomel, Khata Vahe in Deshi Namu?(a) Four (b) Eight(c) Six (d) Twelve
4. In Deshi Namu System, at the time of accounting entry which word is written as a sign of omen before the name of khata?
(a) Aum (b) Shri(c) Namah (d) Swastik
5. In Deshi Namu System, at the time of writing amount “J” sign is put between Rs. and Paisa. What is the name of this sign?
(a) Avro (b) Olayo(c) Utaro (d) None of the three
6. Which one of the following is known as Sundiya and Daniya?(a) Peta Nodh (b) Bethomel(c) Rojmel (d) Kachi Nodh
7. Which book of Deshi Namu System is known as Basic book or Primary book?(a) Journal (b) Karar Nodh(c) Ledger (d) Rojmel
8. Which mel is known as Thammel?(a) Rojmel (b) Jama kharchi mel (c) Bethomel (d) Dagina mel
9. Rojmel and Bethomel serve the purpose of which Account?(a) Bhandol (b) Cash(c) Bank (d) Gharkharch
10. What is the name of the closing balance of Rojmel and Bethomel?
11. Which account is prepared by the business man for recording small and miscellaneous expenses of business?(a) Shri Ghar Kharch khatu (b) Shri Jaherat Kharch Khatu(c) Shri Dukan Kharch Khatu (d) Shri Dharmada Khatu
12. During business transaction, if the name of the other party is forgotten, then in which account it will be recorded?
16. How many folds are there in the pages of Jama Nodh and Udhar Nodh books in Deshi Namu System?
(a) Four (b) Six(c) Eight (d) twelve
17. In Deshi Namu System, a separate book is maintained for recording inward – outwards. What is the name of this book?(a) Janas Vahi (b) Kabala Vahi(c) Aankada Vahi (d) Hundi Vahi
18. Which book is prepared by the business man of vaida bazaar to record their vaida transaction?
19. The businessmen who have less transactions in business, in which khata Vahi do they record the transactions of debtors and creditors?(a) Simple khata Vahi (b) Thham Khata Vahi (c) Sama Dastak Khata Vahi (d) None of these three
20. On the basis of which record, it can be ensured that the accounts are arithmetically correct?
26. In Deshi Namu System, at the end of the year while preparing final A/c, Havala mel is recorded on the last page of which book? (a) Rojmel (b) Udhar Vahi
(c) Jama Vahi (d) Kabala Vahi27. Where is the closing entry of Kachcha Khata recorded in Deshi Namu System?
28. Where are the pakka khata recorded in Deshi Namu System?(a) In Havala mel (b) In Kharid Vakra Khate(c) In Vatav Khate (d) In Sarvaiya
29. Which of the following is a Paku Khatu?(a) Kharch Khatu (b) Upaj Khatu(c) Maal Khatu (d) Milkat Khatu
30. Where is the Gharkharch Khatu transferred at the end of the year?(a) Kharid Vakra Khate (b) Vatav Khate(c) Bhandol Khate (d) None
31. In Deshi Namu System, the difference of Jama and Udhar is shown as ____________ on debit side.(a) closing stock (b) closing balance of bank(c) Purant Janse (d) Shri Purant Baki
32. What is the form of Sarvaiya in Deshi Namu System?(a) Utaro (b) Dagina mel(c) Udhar Vahi (d) Jama Vahi
33. In Deshi Namu System, the left side of Sarvaiya is known as which side?(a) Udhar (b) Jama(c) Mudideva (d) Milkat lena
34. Which amount of closing stock is considered for Havala Nodh of closing stock
to know the profit or loss at the end of the year?(a) Book value (b) Market price(c) Book value or market price whichever is less.(d) Book value or market price whichever is more.
35. In Deshi Namu System while preparing final A/c through the method of Vatav Khate, the profit or loss of kharid vakra khatu is transferred to which A/c?
37. When money is given to Angadia to send it to some creditor in an other city, to which account it is debited?
(a) Deshavar Khatun (b) Shah Khatun
(c) Tasalmat Khatun (d) Hatthu Khatun
38. When the owner of business goes out of station, then the lump sum taken by
him is debited to which account?
(a) Hatthu Khatun (b) Deshavar Khatun
(c) Tasalmat Khatun (d) Shah Khatun
39. When money is given to someone for a day, then where it is shown?
(a) Ublek (b) Tasalmat
(c) Upar Tapake (d) Hatthu Khatun
40. To close Kacha Khatan, entry is made to which Mel?
(a) Hawala Mel of Jama – Kharchi Mel or Achad Mel
(b) Sudhavahi
(c) Udhar Nondh
(d) Jama Nodh
41. Which Khatas are shown in Sarvaiyu?
(a)Kacha Khatan (b) Paka Khatan
(c) Nominal Account (d) Real Account
42. What is the primary or original book of Deshi Nama?
(a) Havala Mel (b) Kachi Nondh
(c) Rojmel (d) Khatavahi
43. In Deshi Nama method, from the following which Khatun is not opened in
Khatavahi?
(a) Vatav Khatun (b) Salary Account
(c) Hathhu Khatun (d) Cash Account
44. By which other name, Betho Mel is known?
(a) Tham Mel (b) Roj Mel (c) Achad Mel (d) Dagina Mel
45. If any amount is received from or paid to someone whose name is forgotten or is not known, it is credited to which account?
(a) Shri Hathhu Khatun (b) Shri Shah Khatun
(c) Shri Deshavar Khatun (d) Shri Tasalmat Khatun
46. By which other name, Havala Mel is known?
(a) Rojmel
(b) Tham Mel
(c) Adhad Mel or Jama Kharchi Mel or Mand Chhand Mel
(d) Avaro
47. In Dagina Mel, which transactions are entered?
(a) Cash transaction
(b) Credit Transaction
(c) Money given to borrower
(d) Good received, sold and balance of stock on hand
48. What is the other name of Ankada Vahi?
(a) Sudhavahi (b) Janas Vahi
(c) Dagina Mel or Kachi Khatavahi (d) Kabala Vahi
49. In which book, the entry is made for credit sales?
(a) Jama Nondh (b) Udhar Nondh
(c) Havalamel (d) Kabala Vahi
50. Which book is kept for recording the transaction of forward trading?
(a) Vyaj Vahi (b) Kabal vahi
(c) Ankada Vahi (d) Degina Mel
51. What will you call debti – credit difference of Balance sheet?
(a) Shri Purant Baki (b) Shri Purnat Janase
(c) Akharani bank balance baki (d) Akhar stock
52. The business man prepares a statement based on the baki (balance) of every
(All) account in Deshi Nama system. What is called this statement?
(a) Khatavahi (b) Thammel
(c) Kabalavahi (d) Utaro
53. First of all the balance of which Khata is shown on Jama side of Sarvaiya in
Deshi Nama System?
(a) Bhandol Khata (b) Shri Purnat baki
(c) Shri Purant Janse (d)Bank Khata
Fill in the blanks with appropriate words1. Small traders generally keep “……. mel.”2. In Deshi Nama System ……… is not posted in Khatavahi.3. When the owner of the business goes out of station for the purpose of business, he
takes with him some amount which is debited to the ………. Account.4. In Deshi Nama, utaro means …….. .5. Another name of Deshi Nama System is ……. .6. Another name of Ankadavahi is ……. .7. Sama Daskatni Khatavahi is prepared by ……….. .8. The Sales Book is called …….. in Deshi Nama.9. Credit sale is recorded in …….. book is Deshi Nama.10. Only credit …… is recorded in Udhar Nondh.11. Amount of ………. is not posted in the ledger.12. When an amount is remitted to outstation creditor through Angadia, it is debited to
Angadia’s …….. Khate.13. If a transaction has taken place with some person, and his name is not known or is
forgotten, it is recorded in ………. account.14. When the trader submits the accounts after returning from outstation, the amount is
……… to his Deshavar Account.15. An amount borrowed by somebody on a promise to return after one day is called ………16. Rojmel is ……… in Deshi Nama.17. In Deshi Nama, the words ……… are used to suggest debit balance of an account.18. A book kept specially for making interest calculations is called ……..19. While preparing Tarij of Udhar nondh, the amount is ……. to ………. account.20. Dagina mel is kept to record ……… .
21. Traders, engaged in forward trading, record details of forward trading transactions in the book called ……..
22. In Deshi Nama Method a list of balances of ledger accounts is called ………23. ……. is used to write adjustment entries in Deshi Nama.24. If we return the goods purchased on credit, before taking out Tarij of the month, it is
shown as deduction in …….. .25. Jama Kharchi mel is prepared according to the rules of ……… .26. When a certain amount is paid or received but its account could not be decided upon,
that amount is recorded in ……… Khate.27. …….. Khatu is not opened under Deshi Nama System.28. To record the forward transactions ……… book is maintained.29. In Deshi Nama System, to make the accounting full proof …….. book is prepared.30. Shroffs prepare …….. book to record an entry for the interest.31. Kachi Nondh is also known as …….. .32. The credit sales transactions are recorded in …….. Nondh.
[Ans: 1. Betho 2. Ublek Rakam 3. Deshavar 4. Trial balance 5. Vahi Khata Method 6. Kachi Khatavahi (Sudhavahi) 7. Money lenders 8. Udhar Nondh 9. Udhar Nondh 10. Sale 11. Ublek 12. Hatthu 13. Shah 14. Credited 15. Upar tapke 16. a book of original entry 17. Baki Lena 18. Vyajvahi 19. Credited, Vakra 20. Stock of goods 21. Kabalavahi 22. Utaro 23. Havala Mel or Achad Mel 24. Jama Nondh. 25. Cash 26. Kabalavahi 27. Aavro 28. Vyajvahi 29. Tanchan 30. Udhar Nondh.]
Short Questions1. Why is “Ublek Rakam” not posted in ledger under Deshi Nama system?à As the Ublek amount is to be received back in a short time, it is not necessary to open a person’s accounts. Hence, it is not posted to the ledger.
2. What does “Uper tapke” mean Deshi Nama system?à When some person takes away some money from business, to be returned the next day, it is known as “Upar tapke Rakam.”
3. When is an amount debited to “Haththu Khate” under Deshi Nama system?à When balance some amount is sent to some trader in some other town through Angadia or through some employee, it is debited to his ‘Hatthu Khate.’
4. In Deshi Nama system where do we recorded “Uper Take Rakam”?à When balance of cash is found out at the end of the day from Rojmel, the upar takke rakam is recorded in the inner sale alongwith actual cash on hand.
5. When is an amount recorded in “Silak Vadh-ghat Khate”? When is this account closed?à When the actual cash on hand and the balance of Rojmel do not tally, the difference is recorded to “Silak Vadh Ghat Khate. When the reason for the difference or the error in accounts is found out the next day, it is recorded in ‘Silak Vadh – ghat’ Khate and the account is closed.
6. What are Kacha Khatan and Paka Khatan?à The goods accounts and nominal accounts of incomes and expenses, which are closed at the end of the year and transferred to Kharid Vakra Khate, are known as Kachan Khatan; while
the accounts of assets and of persons, whose balances are carried forward to next year are known as Pakan Khatan.
7. Where would you show “Kacha Khatan” and “Pakan Khatan” while preparing final accounts in Deshi Nama?
à In Deshi Nama, Kachan Khatan are transferred to Kharid – Vakra Khate or Nafa – Nukshan Khate and Pakan – Khatan are shown in Sarvaiun (Balance Sheet)
8. What is Aavro?à Avro is a book of account in which are recorded all transactions from Rojmel and other petanondhs at intervals of every two – three days or a week.
9. What is Sudhavahi? By what other name is it known?à Sudhavahi is a rough ledger of debtors. It is a book in which accounts of debtors are opened immediately on making entries in Rojmel and Udhar nondh and then amount is posted to that account showing necessary details. It is also known as Ankada Vahi.
10. What is Kabalavahi?à Kabalavahi is a book kept by traders dealing in forward trading to record the details of such contracts.
11. What is Vyajvahi in Deshi Nama system? Which traders keep this book generally?à Generally the Shroffs who accept deposits and pay interest on deposit as well as charge interest on advances given, keep a separate book to calculate interest. This book is called Vyaj Vahi.
12. When can it be said that “Mel has tallied” in Deshi Nama?à When at the end of the day, the actual cash on hand and balance of Rojmel
(Shri Purant baki) agree, it is said that ‘Mel has tallied.”
13. What is “Fankun Marvun” in Deshi Nama?à When entries from Rojmel, Udhar nondh and Jama nondh are posted into the ledger and sign ‘o’ is put below the figures in Rojmel and other petanondh, the process is called ‘Fankun Marvun.’
14. What is Mandamani?à While advancing money to a borrower, the Shroff deducts some money for
clerical work according to the usual custom. This is an addition to interest. The amount so deducted is called ‘Mandamani.’
15. For recording which type of transactions is the Kabalavahi kept?à Kabalavahi’s kept by a trader dealing in forward trading.
16. What is Utaro in Deshi Nama System?à Utaro in Deshi Nama is an account showing list of debit and credit balances
prepared at the end of the year to check the arithmetical accuracy of accounts.
17. Which ledger accounts balance are useful to know the financial position of the business?
à Balances of Pakan Khatan.
18. Balance of which accounts are useful to know the business results in Deshi Nama System?
à Balances of Kacha Khatan.
19. What is ‘Shree’ in Deshi Nama?à Shree means Laxmi, i.e. money or Goddess Laxmi. It is considered to be a
good omen in business. Secondly, when some person’s name is not to be disclosed or is not known, then also the word Shree is used.
20. What is Mand – Chhad Mel?à Mand – Chhad Mel means Hawala Mel. An account which is prepared after
preparing utaro but before preparing final accounts to check the accuracy of accounts, is called Mand – Chhadno Mel.
21. By what other name is the Deshi Nama System known?à Deshi nama system is also known by the other name of Vahi – Khata system.
22. Which particulars are mentioned in Dagina Mel?à Dagina Mel shows the data relating to receipts, issues and balance (stock) of materials and finished goods.
23. Who keeps the Kabala Vahi? Why?à Kabala vahi kept by traders doing futures trading to record futures
transactions.
24. Who prepares the Vijay Vahi? Why?à Vyaj vahi is prepared by Sharafs to know the interest incomes, total income and expenses incurred to earn it.
25. When is a Khata said to be Sarbhar Khata?à When the totals of both sides of an account are equal, the account is said to be Sarbhar.
26. By what other names is Kachinondh known?à Waste book is also known by the names Tanchan, Tippan, Sudiu, Ghadiu,
Danaiyu etc.
27. What is ‘Utaro’?à In order to verify whether accounts written in Deshi nama system are
arithmetically corredt, a statement of balances of accounts is prepared which is called ‘Utaro.” It is known as “Trial Balance” in double entry system.
28. What is Dagina Mel?à In Deshi Nama system, a book kept to record receipts and issues of goods is known as Dagina Mel, Janas Vahi or Stock Register.
29. What is “Uper Tapke Rakam”?à When some money is lent to somebody for a very short period of two-three
days, it is not to recorded in Rojmel. It is shown as Upar Tapke after finding out balance (Silak) of Rojmel or Bethomel.
30. Who maintains “Sama Dastakni Khatavahi” and why?à Sama Dastakni Khatvahi is generally kept by Shroffs or money lenders. An
account of each of the borrowers is opened in it. In it are recorded amount lent, miti, date, day, terms of loan. Revenue stamp is affixed according to the amount lent and signature of the borrower is obtained on it.
31. What is Achadmel? State its other names.à In order to prepare final accounts under Deshi Nama, some entries for
adjustements are to be made and for closing Kacha Khata. The account prepared to record these is called Achad Mel. It is also known as Havala Mel, Jama-Kharchi Mel or Mand – Chandno Mel.
32. What is Pamotri?à Panotri is the index prepared on the first page of the ledger (Khatavahi), just as we have index of lessons given in the text – book. From Panotri, it is possible to know the number of page on which a particular account is opened.
33. When is the symbol l į)0 used in Deshi Nama?à It is a specific symbol in Deshi Nama. When a new business is started and
there is not opening cash balance, the words l į)0 is written. It is considered as auspicious figure. There is no such balance or cash of this name and it is not used even in finding out closing cash balance.
34. What is the meaning of Kandhani Rakamk and Kandhanu Vyaj?à If money is payable in installment and if any instalment is not paid in time
then interest is charged on such instalment for the due date. The amount of instalment is called Kandhani Rakam. The interest charged in instalment after
36. State any four names of Peta-nondh under Deshi – Nama system of accounting.à Names of peta – nondh under Deshi – Nama system of accounting: (i) Udhar Nondh (ii) Jama Nondh (iii) Jangad Nondh (iv) Ugharani Nondh (v) Dagina Mel (vi) Karar Nondh (vii)
Ankada vahi(viii) Vyaj Vahi.
Statements : Whether True of False1. Sama Daskatni Khatavahi is kept by general traders.à False, Shroffs keep Sama Dastakni Khatavahi.
2. Ublek transaction is posted in “Deshi Nama Method”.à False, no posting of Ublek amount is done in Deshi Nama.
3. Some small traders maintain ‘Bethomel’ instead of Rojmel.à True
4. Ublek amount is not posted in the ledger.à True.
5. Rojmel is the main book of account in Deshi Nama.à False, Rojmel is the book of original entry in Deshi Nama.
6. Cash transactions are not recorded in Rojmel.à False, all cash as well as credit transactions are recorded in Rojmel.
7. All purchase transactions are recorded in Udhar Nondh.à False, in Udhar Nondh, only credit sale transactions are recorded.
8. The amount deducted by a Shroff at the time of lending money to a borrower is the interest deducted in advance.
à False, the amount deducted by Shroff at the time of lending money is called ‘Mandamani.
9. When an amount due to one person is agreed to be paid to another person, the amount is debited to ‘Hatthu Khate”.
à False, when money is sent to outstation traders through Agadia, the amount is debited to Hatth Khate.
10.Only adjusting entries are recorded in Havala Mel.à False, in Havalamel, the closing entries for closing nominal account are also
made.
11.In Deshi Nama system, the balances of Kachan Khatan are not carried forward.à True
12.Kharid-vakra Khatun prepared under Deshi Nama as a part of final accounts is similar to Trading A/c of Double Entry Vatav Khatun is similar to Profit and Loss Account.
à True
13.After preparing Tarij of Jama nondh, Vakra Khatun is credited with the total.à True
14.In Deshi Nama system, the transactions of credit sales are recorded in Udhar Nondh.à False, the purchase account (Kharid Khatun) is debited with the total of Tarij of Jama Nondh.
15.An order placed for purchase of goods or an order received from customer to supply him goods is not recorded in Purchases or Sales Book.
à True.
16.In Deshi Nama System, the transactions of all sales are recorded in Udhar Nondh.à True.
17.Under the influence of Western culture, no firm now writes accounts under Deshi Nama System.
à False, only credit sale transactions are recorded in Udhar Nondh.
18.The closing balance (Silak) of Bethomel is ascertained in the same manner as Rojmel.à False, Deshi Nama is still popular
19.Rojmel is considered as the basic book of accounting under deshi nama system.
à True
20.All sales transactions are recorded in Jama Nondh.à False, it is a book of original entry.
21.Transaction for credit purchases are recorded in Jama Nondh.à False, only credit sale transactions are recorded in Jama Nondh.
22.Trial balance is called ‘Sudiyu’ in Deshi Nama.à False, Trial balance is called ‘Utaro’ in Deshi Nama.
23.Credit purchase transactions are recorded in Jama Nondh.à True
24.Upar Tapke is the amount lent for a short period of two – three days.à False
25.Ublec is recorded in Rojmel.à True
26.Vyaj Vahi is kept to record the future transactions.à False
