Lesson-1
BASIC CONCEPTS OF ACCOUNTING
Accounting:-
Accounting is the art of recording, summarizing, reporting, and analyzing
financial transactions.
OR
Accounting is the art of recording, classifying,
summarizing,in significant manner and in terms of money,
Transaction and events which are in part of at least and
Interpreting the results there of.
Transactions:-
In accounting or business terms, any dealing between two persons involving
money or a valuable thing is called transaction.
Barter Transaction
:-
Every transaction where goods are exchanged for goods is called a “Barter
Transaction”.
Types of Business Organizations:-
1. Sole Proprietorship
According to D.W.T. Stafford, “It is the simplest form of business
organization, which is owned and controlled by one man”
• Easy Formation
• Unlimited Liability
• Ownership
• Profit
• Management
• Easy Dissolution
2. Partnership
According to Partnership Act, 1932, “Partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or
any of them acting for all.”
• Legal Entity
• Profit and Loss
Distribution
• Unlimited Liability
• Transfer of Rights
• Management
• Number of Partners
3. Joint Stock Company
According to S. E. Thomas, “A company is an incorporated association of
persons formed usually for the pursuit of some commercial purposes”
• Creation of Law
• Separate Legal
Entity
• Limited Liability
• Transferability of
shares
• Number of Members
• Common Seal
Lesson-2
RECORD KEEPING AND SOME BASIC CONCEPTS
Types of Business Entities:-
Commercial Organizations (Profit Oriented)
- Sole proprietor
- Partnership
- Limited companies
Non-Commercial Organizations (Non-Profit Oriented)
- NGO’s (Non-government
Organizations)
- Trusts
- Societies
Goodwill:-
This is simply the value attached to the good reputation earned through good
and clean conduct of business over a number of years. This good reputation also
has a value and becomes part of investment in business
Budget:-
Budget Is a plan of income, expenses & other financial operation for a
future period.
Lesson-4
SINGLE AND DOUBLE ENTRY RECORD KEEPING
Single Entry Book Keeping/cash accounting:-
In Single Entry Book Keeping Only one aspect of the transaction is recorded.
Double Entry Book Keeping/commercial accounting:-
In Double Entry Book Keeping every transaction has two aspects i.e. receiving
a benefit and giving a benefit.
Debit:-
It
signifies the receiving of benefit. In simple words it is the left hand side.
Credit:-
It
signifies the providing of a benefit. In simple words it is the right hand
side.
Dual Aspect of Transactions:-
For every debit there is an equal credit. This is also called the
dual
aspect of the transaction.
Lesson-5
Account:-
Record that summarizes movement in an individual item is called an Account.
Classification of Accounts:-
The accounts are classified into following heads:
- Assets
- Liabilities
- Income
- Expenses (further divided
into capital and revenue expenses)
Assets:-
Assets are the properties and possessions of the business to pay in future.
Can be amount payable for material purchased, expenses etc.
Properties and possessions can be of two types:
- Tangible Assets
that have physical existence (are further divided into Fixed Assets and
Current Assets)(Furniture, vehicle etc).
- Intangible Assets
that have no physical existence (copyright, Good will etc).
Liabilities:-
Liabilities are the
debts and
obligations of the business.
Liability is the obligation of the business to provide a benefit or asset on a
future date.
Asset vs liability:-
Asset is a right to receive and liability is an obligation to pay,
therefore, these are opposite to each other.
Income & Expenses:-
- Income/revenue is the
value of goods and services that a business charges from its
customers.
- Expenses are the costs
incurred to earn the revenue.
Accounting Equation:-
Assets = Liabilities + Owner’s equity
Capital Expenditure:-
It is the expenditure to create an asset that helps in generating future
income and its life is more than 12 month. For example machinery purchases,
furniture purchases etc.
Revenue Expenditure:-
It is the day to day expenses whose benefit is drawn immediately. For
example, salary of the employee, rent of the building, etc.
Lesson-6
FLOW OF TRANSACTIONS
Event:-
Event is the happening of any thing but in accounting we discuss monetary
events
Monetary Events:-
If the financial position of a business is change due to the happening of
event that Event is called Monetary Event
The Voucher:-
Voucher is documentary evidence in a specific format that records the
details of a transaction.
The General Journal:-
The Journal is used to record financial transactions in chronological
(day-to-day) order. All vouchers were first recorded in books of accounts. It
was also called the Book of Original Entry or Day Book.
Ledger:-
It is a book that keeps separate record for each account (Book of Accounts).
BALANCE:-
The difference between the debit and the credit sides, known as the
BALANCE.
Lesson-7
Accounting Period:-
- Accounting period is any
period for which a Financial Statements are prepared. The length of the
accounting period can be anything between one day to one year.
- The legal or statutory
definition of accounting year is a maximum of one year.
- The only exception in this
case is the
- Formation of a new company
which is formed before the start of accounting period.
Financial year (A period of 12 month duration):-
In
Pakistan, financial year starts from 1st of July and ends on 30th of June.
Debit Balance:-
If debit side of a ledger is greater than credit side, the balance will be
written on the credit side and it will be called Debit Balance.
Credit Balance:-
If credit side is greater than debit side, the balance will be written on
the debit side. This balance is called Credit Balance.
Trial Balance:-
At the end of accounting period, a list of all ledger balances is prepared.
This list is called trial Balance.
Lesson-8
Income & Expenditure Vs Profit & Loss Account:-
- Income and Expenditure
Account is used for Non-Profit Organizations like Trusts, NGOs
- Profit and Loss Account is
used for Commercial organizations like limited companies.
Profit & Loss Account:-
Profit & Loss account is an account that summarizes the profitability of
the organization for a specific accounting period.
- First part is called Trading
account in which Gross Profit is calculated. Gross profit is
the excess of sales over cost of goods sold in an accounting period.
- 2nd part is called Profit
& Loss account in which Net Profit is calculated. Net Profit
is what is left of the gross profit after deducting all other expenses of
the organization in a specific time period.
Profit:-
It is the excess of income over expenses in a specified accounting period.
Profit= Income - expenses
Administrative expenses:-
Administrative expenses are the expenses incurred in running a business
effectively. Main components of this group are:
o Payment of utility bills
o Payment of rent
o Salaries of employees
o General office expenses
o Repair & maintenance of office equipment & vehicles.
Selling expenses:-
Selling expenses are the expenses incurred directly in connection with the
sale of goods. This head contains:
o Transportation/carriage of goods sold
o Tax/freight paid on sale
Financial expenses:-
Financial expenses are the interest paid on bank loan & charges deducted
by bank on entity’s bank accounts. It includes:
o Mark up on loan
o Bank charges
Lesson-9
Accounts payable:-
All businesses have liabilities; even the most successful companies’
purchase
stocks, supplies and receive services on credit. The liabilities arising
from such purchases are called
Accounts payable.
Capital:-
It is the funds invested by the owners of the business. Business has a
liability to return these funds to the owner.
Lesson-10
Debtor:-
A person or organization from whom money is receivable by the business is
called a debtor.
Creditor:-
A person
or organization to whom money is payable by the business is called a
creditor.
Lesson-11
Rules of Debit & Credit:-
•
Any account that obtains a benefit is Debit.
• Anything that will provide benefit to the business is Credit.
•
Expenditure
o Increase in Expenditure is Debit
o Decrease in Expenditure is Credit
•
Income
o Increase in Income is Credit
o Decrease in Income is Debit
•
Assets
o Increase in Asset is Debit
o Decrease in Asset is Credit
•
Liability
o Increase in Liability is Credit
o Decrease in Liability is Debit
Lesson-12
The Accounting Equation
Capital:-
The
amount of resources supplied by the owner is called capital.
Asset:-
The
actual resources which are in the business are called assets.
Asset = Capital
Long Term Assets:-
These are the assets of the business that are receivable after twelve
months of the balance sheet date. For example, if business has invested some
money for two
years in any saving scheme or has purchased saving certificates for more
than one year, it is a
long term asset.
Liabilities:-
It is the name given to the amounts owing to these people for these assets.
Assets = Capital + Liabilities
Long Term Liabilities:-
These are the liabilities that will become payable after a period of
more than one year of the balance sheet date. For example, if business
has taken a loan from bank or any third person and it is payable after ten
years, it will be treated as a long term liability for the business.
Working Capital:-
It is the
net value of current assets and current liabilities.
Current Assets:-
Current
assets are the resources of the business that are expected to be received
within 12 months in an accounting cycle.
Current liabilities:-
Current
liabilities are the amount owing to the business that is expected to be paid
within one year In a financial year.
Working capital = current Assets – current liabilities
Stock:-
It is the
value of goods available to the business that are ready for sale.
OR
It
is the quantity of unutilized or unsold goods.
Opening Stock:-
It is the value of goods available for sale in the beginning of an
accounting year.
Closing Stock:-
It is the
value of goods unsold at the end of accounting year.
Treatment of depreciation:-
In profit and loss Account it is considered as expense and in balance sheet
it is deducted from the concerned asset.
Drawing:-
Sometimes, the owner wants to take cash or kind out of the business for
personal use. This known as drawing. Any money taken out as drawings will
reduce capital.
Lesson-13
Voucher:-
It is the
first document to record an entry.
It is used to record cash or bank receipt.
It is used to record a payment of cash or cheque.
It is used to record transaction that do not affect cash or bank.
Debit balance when carried forward, is writer on the debit side.
Credit balance when carried forward, is written on the credit side.
Difference between expenses & Purchases:-
- If business purchases items
for its own use (items that are not meant to be resold) are charged to
expense account.
- If business purchases items
for resale purposes are charged to purchases account.
Raw material:-
It is the
basic part of an item, which is processed to make a complete item.
Work in process:-
At the end of the year, some part of raw material remains under process,
I-e, it is neither in shape of raw material nor in shape of finished goods.
Finished Goods:-
It contains items that are ready for sale, but could not be sold in that
accounting period.
Purchase of stock:-
Debit:
Stock Account
Credit:
Cash/supplier/creditor Account
Payment to creditors:-
Debit:
cost of goods sold
Credit:
Stock
Account
Cost of goods sold:-
- In trading concern, It is
the value of goods unsold
- In manufacturing concern,
it is the value of raw material consumed plus any other manufacturing cost
Lesson-15
Stock
Journal Entries:-
(In case of Trading Concern)
Purchase Of Goods:
Debit:
Stock/Material Account
Credit:
Cash/Bank/Creditor
Consumption of goods:
Debit:
Cost of goods sold
Credit:
Stock
Payment in case of credit purchase:
Debit:
Creditors Account
Credit:
Cash/Bank
(In case of Trading Concern)
Purchase of raw material:
Debit:
Stock/Material Account
Credit:
Cash/Bank/Creditors
Other direct costs incurred:
Debit:
Relevant cost/Expenses Head
Credit:
Cash/Bank/Payables
Raw material issued and other costs allocated to production of units:
Debit:
Work in process
Credit:
Stock
Material Account
Debit:
Work in process
Credit:
relevant
expense head Account
When production is completed:
Debit:
Finished Goods Stock Account
Credit:
Work in
process Account
Entry for cost of sale:
Debit:
Cost of Goods sold Account
Credit:
finished
Goods stock Account
Entry for sale of goods:
Debit:
cash/Account receivable Account
Credit:
Sale account
Return of Purchase Material:
Debit:
Goods return Account
Credit:
stock
material Account
And
Debit:
Cash/Bank Account
Credit:
Goods Return
Account
If our suppliers supplies us some other material in exchange of
material returned:
Debit:
Raw material Stock Account
Credit:
Goods return
Account
Lesson-16
COST OF GOODS SOLD STATEMENT
cost of goods sold statement:-
The statement shows the value of raw material consumed, amount spent on
labor and other factory expenses, finished goods produced and goods unsold (in
stock).
Standard format of cost of goods sold statement is given below:
Raw Material:
O/S Raw
Material
+ Purchases
+ Cost Incurred to Purchase RM
- C/S Raw Material
Cost of Material Consumed
Conversion Cost:
+ Direct Labor Cost
+ Factory Overheads
Total Factory Cost
Work in Process:
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
Finished Goods:
+ O/S of Finished Goods
- C/S of Finished Goods
Cost of Good Sold
Cost of material consumed:-
It is the cost of material used for consumption that has been put in the
production process.
Over Heads:-
Over Heads are the other costs incurred in relation of manufacturing of
goods. Examples are factory utilities, supervisor salaries, equipment repairs
etc.
Total factory cost:-
It is the cost of material consumed plus labor and over heads. In other
words it is the total cost incurred in the factory.
Cost of goods manufactured:-
It is total factory cost plus opening stock of work in process less closing
stock of work in process.
Cost of goods sold:-
It is the cost of goods manufactured plus opening stock of finished goods
less closing stock of finished goods.
Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labor
cost
Conversion cost:-
It is the cost incurred to convert raw material to finished goods.
Conversion cost = Labor cost + factory overhead
Valuation of Stock:-
Any manufacturing organization purchases different material through out the
year. The prices of purchases may be different due to inflationary conditions
of the economy. The question is, what item should be issued first & what
item should be issued later for manufacturing. For this purpose, the
organization has to make a policy for issue of stock. All the issues for
manufacturing and valuation of stock are recorded according to the policy of
the organization.
Mostly these three methods are used for the valuation of stock:
• First in first out (
FIFO)
• Last in first out (
LIFO)
• Weighted average
First in first out (FIFO)
The FIFO method is based on the assumption that the first merchandise
purchased is the first merchandised issued. The FIFO uses actual purchase cost.
Last in first out (LIFO)
The LIFO method is based on the assumption that the recently purchased
merchandise is issued first. The LIFO uses actual purchase cost.
Weighted average method
This average cost is computed by dividing the total cost of goods available
for sale by the number of units in inventory.
Lesson-17
DEPRECATION
Fixed Assets:-
Fixed Assets are those assets which are:
• Of long life
• To be used in the business to generate revenue
• Not bought with the main purpose of resale.
Fixed assets are also called “
Depreciable Assets”
Accumulated Depreciation:-
It is the depreciation that has been charged on a particular asset from
the time of purchase of the asset to the present time.
Amortization:-
No depreciation is charged for ‘Land’. In case of ‘Leased Asset/Lease Hold
Land’ the amount paid for it is charged over the life of the lease and is
called
Amortization.
Methods of calculating Depreciation:-
1: Straight line method/
Original cost method/
Fixed
installment method:-
Depreciation = (cost – Residual value) / Expected useful life of the asset
Residual value:
It is the cost of the asset after the expiry of its useful life.
2: Write Down value/
Reducing method/
diminishing
method:-
WDV = Original cost of fixed asset – Accumulated Depreciation
Entries for Recording Disposal:-
Debit:
Fixed Asset Disposal A/c
Credit:
Fixed Asset
Cost A/c
(With the cost of asset
)
Debit:
Accumulated Dep. A/c
Credit:
Fixed
Asset Disposal A/c
(With the depreciation accumulated to date)
Debit:
Cash / Bank / Receivable A/c
Credit:
Fixed
Asset Disposal A/c
(With the price at which asset is sold)
Lesson-19
METHODS OF CHARGING DEPRECIATION
Capital Work in Progress Account:-
If an asset is not completed at that time when balance sheet is
prepared, all costs incurred on that asset
up to the balance sheet date are transferred to an account called
Capital
Work in Progress Account.
Debit: Relevant asset account
Credit:
Capital work in progress account
Lesson-21
REVALUATION OF FIXED ASSETS
Fair Value:-
It is the value, at which an asset would bring to the management, when sold
to a knowledgeable party in a fair deal.
Rules for Revaluation:-
• Revaluation has to be carried out at regular intervals
• The change in the value should be permanent
• Whole class of asset has to be revalued
Capital Expenses / Capitalized:-
Capital Expenses are those expenses for which benefit is enjoyed for more
than one accounting period. For example, the business has bought a car. Now,
car will be used for many years. So, it is a capital expense.
Capital Expenditures are incurred in two ways:
• When an asset is acquired, and
• When an improvement is made in an existing asset.
Revenue / Deferred Expenses / Charged Off:-
Revenue Expenses are those expenses for which, the benefit is enjoyed within
one accounting period. For example, the business has purchased stationery for
office use. Now, the stationery is used within one year in the office. So, this
will be a revenue expense.
Revenue Expenses are those expenses that are:
• Incurred in day to day running of the business.
• Incurred to maintain fixed assets in their original / useable condition.
Prepaid Expenses:
Prepaid Expenses are amounts that are paid in advance to a vender or
creditor for goods and services. E-g. insurance.
Capital Receipts:-
Receipts which are non-recurring and whose benefits are enjoyed over a long
period are called ‘Capital Receipts’. For instance, Capital invested, Loan from
bank, Sale proceed of fixed assets etc. Capital receipts are shown on the
liability side of the balance sheet.
w
Revenue Receipts:-
Receipts which are recurring by nature and which are available for meeting
all day to day expenses of a business concern are known as ‘Revenue Receipts’.
For example, sale proceeds of goods, interest received, rent received etc.
Lesson-22
BANK RECONCILIATION STATEMENTS
Bank statement:-
It is the detail of transactions in one’s account provided by the bank.
Unpresented Cheques:-
a cheque
is issued but it has not been presented
in the account, such kind of cheques are called Un-presented Cheques.
Un-Credited Cheques:-
a
cheque that has not been cleared in the bank
account as yet.
Example 1
• Consider the following data for the month of June of T Company
• Balance as per bank book is Rs. 70,240
• Bank statement showed a favourable balance of Rs. 73,920..
• Examination of bank book and bank statement revealed the following:
nA cheque of Rs. 4,920 paid into bank was not credited by the bank until July 3rd.
nA standing order for payment of annual payment of Rs. 1,000 had not been entered into bank book.
nOn 27thJune two customers of T Co. paid directly into bank Rs. 5,500, advice of which was received in July.
nCheques issued but not presented in the bank amounted to Rs. 4,600.
nThe bank had debited the account by Rs. 500 on account of bank charges.
• Lets assume that T Co. has not closed its books.
• You are required to adjust the bank book and then prepare a bank reconciliation statement.
Solution
• Following require adjustment in bank book:
nPayment of an annual subscription Rs. 1,000, not entered in bank book.
Debit Relevant Expense A/c 1,000
Credit Bank 1,000
nReceipts from two customers of directly into bank Rs. 5,500,
Debit Bank 5,500
Credit Customer’s Accounts 5,500
nBank charges Rs. 500
Debit Bank Charges Account 500
Credit Bank 500
Adjustments in Bank Book
Original Balance As Per bank book 70,240
Credit / Less Payment on standing orders (1,000)
Credit / Less bank charges (500)
Add Receipts from customers 5,500
Adjusted balance as per bank book 74,240
Solution
T. Co.
Bank Reconciliation Statement as on June 30, 20—
Balance as per Bank Book 74,240
Add Un presented cheques 4,600
Less Un credited cheques (4,920)
Balance s per bank statement 73,920
Example 2
• Same data as previous example.
• Balance as per bank book is Credit Rs. 56,000
• As per bank statement unfavorable balance of Rs. 52,320
Solution
Adjustments in Bank Book
Original Balance As Per bank book (56,000)
Credit / Less Payment on standing orders (1,000)
Debit / Add Receipts from customers 5,500
Credit / Less bank charges (500)
Adjusted balance as per bank book (52,000)
Solution
T. Co.
Bank Reconciliation Statement as on June 30, 20—
Balance as per Bank Book (52,000)
Add Un presented cheques 4,600
Less Un credited cheques (4,920)
Balance as per bank statement (52,320)
Example 3
• From the following data ascertain the balance as per bank statement of Nasir & Co on March 31, 20--
n Balance as per bank book Rs. 63,000
n Cheques issued but not presented for payment Rs. 12,000.
n Cheques deposited but not cleared Rs. 20,000
n Profit on deposit was credited by bank but not debited in bank book Rs. 2,000.
n A customer paid into bank directly Rs. 15,000 but the same was not recorded in bank book.
nOther receipts in bank that were not recorded in bank book Rs. 8,000.
Solution
Nasir and Co.
Balance as per Bank Book 63,000
Add Un presented cheques 12,000
Less Un credited cheques (20,000)
Add Profit received 2,000
Add amount deposited by customer 15,000
Add other receipts in bank 8,000
Balance as per bank statement 80,000
Solution
Nasir and Co.
Balance as per Bank Statement 80,000
Less Un presented cheques (12,000)
Add Un credited cheques 20,000
Less Interest received (2,000)
Less amount deposited by customer (15,000)
Less other receipts in bank (8,000)
Balance as per bank book 63,000
• Debtors OR Trade Debtors – are the receivables by the organization against the sale of goods.
• Receivables / Other Receivables – are all receivables other than trade debtors e.g. advances to staff, suppliers.
• Creditors OR Trade Creditors – are the payables by the organization against the purchase of stock.
• Payables / Other Payables – are all payables other than trade creditors e.g. advances received from customers.
• Accruals – are the expenses of the business that are payable at the end of the accounting period.
• Payables / Other Payables – are all payables other than trade creditors e.g. advances received from customers.
• Provision – where an expense is incurred but the actual amount is not known at the time of recording at the end of accounting period.
Accounting for Creditors
• Purchase of goods
Debit Stocks Account
Credit Creditors Account
• Goods returned
Debit Creditors Account
Credit Stocks Account
• At the time of payment
Debit Creditors Account
Credit Cash / Bank Account
• Discount received from creditors
Debit Creditors
Credit Stock OR Discount Received
Discounts Allowed to Customers
• Discount allowed to debtors
Debit Sales OR Discounts Allowed
Credit Debtors
Recording of Accrual
• At the time of recording accrual
Debit Relevant expense account
Credit Accrued expenses / Expenses Payable
• At the time of payment
Debit Accrued expenses / Expenses Payable
Credit Cash / Bank
• Recording of rebate
Debit Accrued expenses / Expenses Payable
Credit Expense Account
Recording of Accrual
• At the time of recording accrual
Debit Relevant expense account
Credit Accrued expenses / Expenses Payable
• At the time of payment
Debit Accrued expenses / Expenses Payable
Credit Cash / Bank
• Recording of rebate
Debit Accrued expenses / Expenses Payable
Credit Expense Account
Difference Between Accrual and Provision
• Accrual is made when exact amount of expense is known at the time of recording.
• Provision is made when it is known that an expense will arise but the exact amount is not known.
Recording of Provision for Doubtful Debts
• At the time of creating the provision
Debit Profit and Loss Account
Credit Provision for Doubtful Debts
• At the time of actual bad debt
Debit Provision for Doubtful Debts
Credit Trade Debtors
• In case of bad debt where no provision was made
Debit Profit and Loss Account
Credit Trade Debtors
Provision for Expenses (e.g. Electricity)
• At the time of creating the provision
Debit Relevant Expense Account
Credit Accrued Expenses
• At the time actual amount is known
n Where actual bill is less than the provision
Debit Accrued Expenses
Credit Expense Account
• Recording of payment
Debit Accrued Expenses
Credit Cash / Bank
Presentation of Provision
• Provisions are presented as current liabilities in the balance sheet.
• Exceptions
nDepreciation
nProvision for doubtful debts
• Provision for Doubtful Debts is shown as a reduction from debtors in the balance sheet.
Recording of Debtors
• At the time of sale
Debit Debtors
Credit Sale
• At the time of receipt
Debit Cash / Bank
Credit Debtors
Recording of Debtors
• Return of goods by debtors
Debit Sale
Credit Debtors
Debit Stock
Credit Cost of Sales
Recording of Provision
Extract of Profit and Loss Account
• Extract of Profit and Loss to show the Provision for Doubtful Debts
Profit and Loss Account
For the year ended --—
Gross Profit 90,000
Less: Expenses
Provision for bad debts (5,000)
Extract of Balance Sheet
• Extract of Balance Sheet to show the Provision
Balance Sheet
As At ----------
Current Assets
Debtors 100,000
Provision for Bad Debts (5,000) 95,000
Recording of Bad Debt
• Where provision has already been made for that debt:
Debit Provision for Bad and Doubtful Debts
Credit Debtors
• No expense will be charged.
Recording Change in Provision
• Reducing the provision
Debit Provision for Bad and Doubtful Debts
Credit Profit and Loss Account
• Increasing the provision
Debit Profit and Loss Account
Credit Provision for Bad and Doubtful Debts
Example
• Following information is available for A Ltd. For the year ended June 30, 20--.
n Bad Debts During the year
November 1,100
January 640
April 120
n At the year end total debtors amounted to Rs. 68,000 out which Rs. 2,200 is considered to be doubtful / bad.
• Show the relevant accounts and extracts from Profit and Loss and Balance Sheet.
Example
Presentation
A Ltd.
• Profit and Loss Account for the year ended June 30, 20—
Gross Profit -------
Less: Expenses
Bad Debts (1,860)
Provision for bad debts (2,200)
• Extract of Balance Sheet As On June 30, 20--
Current Assets
Debtors 68,000
Provision for Bad Debts (2,200) 65,800
Example 2
• A business creates a provision for bad debts @ 5% of its debtors on balance sheet date.
• On Jan 01, 20-- the balance of Provision was 6,600.
• During the year debts written off amounted to Rs. 5,400.
• On December 31, 20--, debtors totaled Rs. 62,000.
• Show Bad debts Account and provision for bad debts account.
Solution
• Required closing balance of Provision
62000 x 5% = 3,100
Example 2
Presentation
• Extract of Balance Sheet
Current Assets
Debtors 62,000
Provision for Bad Debts (3,100) 58,900
Control Accounts
• In general ledger summarized record is maintained in the account called “Control Account”. Separate control account is used for Debtors and Creditors.
• Details of individual accounts are kept in a separate Register / Ledger called subsidiary ledger.
Control Accounts
• Control accounts are part of Double Entry recording.
• Entries in Subsidiary Accounts are not part of double entry.
• Total of transactions in subsidiary ledger should match with the transactions in control accounts.
Information for Control Accounts - Debtors
Control Accounts
• Cash sales are usually not recorded in control accounts.
Example
• Prepare a Debtors control Account from the following data and work out the closing balance on May 31, of debtors.
n May 1 Opening Balance 55,000
Totals for May
Total Credit Sales 45,000
Returns Inward 8,000
Cheques and Cash received 40,000
Discounts allowed 4,500
Example 2
• Prepare a Creditors Control Account from the following data and work out the closing balance on April 30, of creditors.
n Apr. 1 Opening Balance 44,500
Totals for May
Total Credit Purchases 32,000
Purchase Return 6,200
Cheques and Cash paid 28,800
Discounts received 2,500
Recap
• With the increase in business, it becomes difficult to maintain separate accounts for every Debtor and every Creditor.
• Control Accounts are opened in the ledger for both Debtors and Creditors.
• Control Accounts are part of double Entry system.
• Subsidiary ledgers are not part of double entry system.
• Control Account system is used only for credit sale and credit purchase.
Subsidiary Books
• To reduce the volume of general ledger, number of books are opened that are called Subsidiary books.
Subsidiary Books- Debtors
• Three subsidiary books are maintained in case of sales / debtors.
n Sales Journal / Sales Day Book – individual invoice wise sales are recorded in this Journal.
n Sales Return / Return Inward Journal – in case the volume of returns is also high then these are also recorded in a separate register.
n Debtors Ledger – this ledger maintains record of individual debtor.
• Cash sale is not included in the debtors control accounts.
Information for Control Accounts
Opening balance of debtors List of debtors balances drawn up to the end of previous period confirms with the aggregate balance of the Control Account.
Credit Sales Periodically total of sales journal is posted into the debtors control account.
Sales Return In case the transaction volume of sales return is high then these are recorded in the sales return journal. Periodically the total is posted in the debtors control a/c.
Cheques / Cash Received List of receipts is extracted from cash and bank book. Or a separate column is maintained in cash and bank books for this purpose
Closing Balance This is the balancing figure. It can also be checked with the total of balances in
debtors Control Account.
• Again if we total the balance of three accounts of the debtors ledger on Jan 30,:
n A 8,500
n B 10,000
n C 15,000
n Total 33,500
• It will be the same as the balance in the debtors control account of the general ledger.
Receipts From Debtors
• When control accounts are used we maintain cash and bank books with separate pages for receipts and payments i.e. two column cash/bank books are not used.
• On the receipts side of the cash and bank book a column is added in which receipts from debtors are separately noted.
• This type of cash / bank book is also called multi column cash / bank book.
Recording of Receipts – Multi Column Cash Book
Subsidiary Books- Creditors
• The recording of creditors is similar to debtors. The subsidiary books maintained in case of purchases / creditors are:
n Purchase Journal / Purchase Day Book – individual purchases are recorded in this Journal.
n Purchase Return / Return outward Journal – in case the volume of returns is also high then these are also recorded in a separate register.
n Creditors Ledger – this ledger maintains record of individual creditors.
• Cash purchase is not included in the creditors control accounts.
Subsidiary Books - Creditors
Opening balance of Creditors List of creditors balances drawn up to the end of previous period confirms with the aggregate balance of the Control Account.
Credit Purchases Periodically total of purchase journal is posted into the creditors control account.
Purchase Return In case the transaction volume of purchase return is high then these are recorded in the purchase return journal. Periodically the total is posted in the creditors control a/c.
Cheques / Cash Paid List of payments is extracted from cash and bank book. Or a separate column is maintained in cash and bank books for this purpose
Closing Balance This is the balancing figure. It can also be checked with the total of balances in creditors Control Account.
Recording of Payments – Multi Column cash book
Recap
n The need for maintaining control accounts
n Subsidiary record maintained, and
nControl Accounts when a person is both Debtor & Creditor.
nNumerical Examples of Control Accounts.
When a person is both debtor and creditor
• When a person is both debtor & creditor, that means you are purchasing one thing from him and at the same time selling another thing to him.
• In the absence of written agreement, the way of settling the payable and receivable is that you pay him full and ask him to pay you full amount.
• If the agreement exists, the way and may be the wiser way is that you pay or receive from him, the net amount of payables and receivables.
When a person is both debtor and creditor
• For example, you purchase item A from Mr. ABC for Rs. 100,000 and sell him item B for Rs. 65,000.
o One way of settling the payable and receivable is that you can pay Mr. A 100,000 and ask him to pay Rs. 65,000.
o The other and may be the wiser method is that you pay him Rs. 35,000 and both the transactions are settled. And this is how such transactions are handled in real life.
When a person is both debtor and creditor
Normally where no control accounts are maintained, following entries will be passed:
Debit A (payable/creditor) account 65,000
Credit A (receivable/debtor) account 65,000
The other entry will be:
Debit A (payable/creditor) account 35,000
Credit Cash / Bank 35,000
This will settle the payable account fully.
When a person is both debtor and creditor
• Where control accounts are being maintained the above two entries are still passed but with slight modification:
Debit Creditors Control account 65,000
Credit Debtors Control account 65,000
The other entry will be:
Debit A (payable/creditor) account 35,000
Credit Cash / Bank 35,000
This entry comes from the creditors column of cash / bank book payment side as usual.
Bad Debts
• Provision does not effect debtors account in simple books. It will therefore, have no effect either on debtor control account or debtors ledger.
• At the time of actual bad debt, the journal entry
Debit Provision / Bad Debts
Credit Debtors Control Account
• In subsidiary ledger, the debit entry will be same but the credit effect will go to Individual Debtors Account in Debtors Ledger.
• Similar treatment is given to discounts received and allowed.
Example 1
• You are required to prepare the Creditors Control account for the month of March and calculate the closing balance from the following data.
n March 1 Opening balance Dr. 50,390
n Totals for the month
Sales from Sales Register 60,500
Sales Return (Sales Return Register) 1,550
Cheques and cash received 75,500
Discounts Allowed 2,000
Bad debts written off 1,800
n No provision for bad debts was made previously.
Example
• Prepare the Creditors Control account for the month of June and calculate the closing balance from the following data.
n June 1 Opening balance Cr. 35,500
n Totals for the month
Purchases from Purchase Register 50,000
Purchase Return (Purch. Return Register) 1,550
Payments made 45,500
Discounts received 1,500
Example
• The financial year of ABC Co. ended on June 30, 2002. You have been asked to prepare the Debtors and Creditors Control Account from the information extracted form subsidiary books. NOTE
n Sales Cash 140,500 1
Credit 255,000
n Purchases Cash 95,000 1
Credit 199,500
n Total Receipts 405,000 2
n Total Payments 275,000 2
n Discounts allowed(all credit cust.) 12,000
n Discounts received(all credit supp.) 9,500
Example 3
NOTE
n Bad debts written off 800
n Increase in prov. Doubtful debts 2,000 3
n Last year closing balances were
Debtors 285,000
Creditors 194,000
NOTES
1 Cash Sales and Purchases don’t effect debtors/creditors control accounts.
2 Total receipts and payments include cash sale and purchases.
3 Change in provision does not effect debtors actual write off .
Subsidiary Ledgers
• Subsidiary ledgers contain the record of all individuals Debtors and Creditors.
• Subsidiary ledgers give information about the main clients and slow moving clients which is helpful for the management in decision making.
• If the business has distributors in different areas, subsidiary ledger give information about sale of different distributors in different areas which is helpful for the management in decision making.
Recording of Bad Debts in Control Accounts
• In case no provision was created for doubtful debts:
Debit Bad Debts
Credit Debtors Control Account
• In case provision was created for doubtful debts:
Debit Provision for Doubtful Debts
Credit Debtors Control Account
• Recording is also made in the respective account of the debtor in subsidiary ledger.
Recording of Discounts Received in Control Accounts
Debit Creditors Control Account
Credit Discount Received Account
Recording is also made in the respective account of the creditor in subsidiary ledger.
Recording of Discounts Allowed in Control Accounts
Debit Discount Allowed Account
Credit Debtors Control Account
Recording is also made in the respective account of the debtor in subsidiary ledger.
Rectification of errors
• In recording transactions, there is always a chance of error.
• There can be clerical errors in the books of Accounts.
• Whatever the reason may be, there may be an error or two in the accounting process.
• Which means that we need a procedure to rectify those errors.
Rectification of errors
• One way is that we can simply erase or overwrite the incorrect entry and replace it with the correct one but this practice is not allowed in accounting.
• We have to Rectify / Correct the mistake by passing another entry.
Types of errors
ERRORS OF OMISSION.
n This means that an event occurred but we did not record it.
ERRORS OF COMMISSION.
n Event is classified and recorded correctly but classification of account is wrong.
ERRORS OF PRINCIPLE
n Entry is recorded in the wrong class of account.
ERRORS OF ORIGINAL ENTRY
n Recording of transaction is in correct account but incorrect figure is recorded.
Types of errors
REVERSAL OF ENTRY
n Entry is reversed by mistake. This means that the account that should have been Debited is Credited and vice versa.
Rectifying the errors
ERRORS OF OMISSION.
nYou have to record the entry that was omitted by mistake.
Example
A sale of Rs. 15,000 made to XYZ on Apr 15, was omitted by mistake
Rectification Entry on the date of discovery
Debit XYZ Account 15,000
Credit Sales 15,000
Narration: Rectification of omission of recording sale to XYZ on Apr 15.
Rectifying the errors
ERRORS OF COMMISSION / ERROR OF PRINCIPLE
nIn both these cases the effect given to incorrect account is reversed and effect is given to the correct account.
Example
Purchase of an asset for Rs. 50,000 is recorded in the expense account.
Rectification
Debit Asset Account 50,000
Credit Relevant Expense Account 50,000
Narration: Rectification of purchase of asset incorrectly recorded as expense.
Rectifying the errors
ERROR OF ORIGINAL ENTRY
nIf the entry recorded is of lesser amount than the required amount, then an entry of the balance amount is passed. On the other hand if the entry recorded is of a greater amount than the required amount, a reverse entry is passed that cancels the effect of the error.
Example
1) A receipt of cash Rs. 5,000 from B is recorded as Rs 500
2) A receipt of cash Rs. 5,000 from B is recorded as Rs 50,000
Rectifying the errors
Rectification
nIn the first instance the recorded figure is less by Rs. 4,500. The rectification entry will therefore be:
Debit Cash Account 4,500
Credit B Account 4,500
nIn the second instance the recorded figure exceeds by Rs. 45,000 from the desired figure. The rectification will, therefore be a reverse entry by Rs. 45,000
Debit B Account 45,000
Credit Cash Account 45,000
Rectifying the errors
• REVERSAL OF ENTRY
nIf a reverse entry is passed by mistake then two entries are required to rectify it, one to reverse the effect of mistake and the other to record correct entry. we can also pass one entry with double amount that serves the purpose of both the entries.
Example
nA payment of Rs. 10,000 made to Mr. D is recorded on the receipt side of the cash book and credit is given to D’s account.
Rectifying the errors
Rectification
nWe can correct this mistake by two entries
Debit Mr. D Account 10,000
Credit Cash Account 10,000
This will reverse the effect of mistake.
Debit Mr. D Account 10,000
Credit Cash Account 10,000
And this will record the transaction correctly.
Or we can record it through one entry.
Debit Mr. D Account 20,000
Credit Cash Account 20,000
Rectification of Errors – Example 2
• Assume that we received cash Rs. 50,000 from a debtor and instead of Debiting the Cash Book / Cash Account we Debited the Bank Book whereas the credit was given to the correct account.
Rectification of Errors
Step 1 Note down the correct entry
Debit Cash 50,000
Credit Debtors 50,000
Step 2 Note down the incorrect entry
Debit Bank 50,000
Credit Debtors 50,000
Step 3 See that Credit affect is correct. In case of Debit, affect has been given to Bank instead of cash. Therefore we will give the due affect to Cash by debiting it and Remove the incorrect affect from bank by crediting it.
Debit Cash Account 50,000
Credit Bank Account 50,000
Examples
Rectify the following errors
• Additional Capital paid in bank Rs. 100,000 credited to sales account.
• Purchase of goods of Rs. 5500 from Mr Amir recorded in books at Rs 5050
• Cash deposited in bank Rs. 20,000 credited to bank and debited to cash
• A purchase of Computer Rs. 25,000 recorded as maintenance expense.
• Completely omitted a payment of bank charges of Rs. 500
Solution
Rectify the following errors
• Additional Capital paid in bank Rs. 100,000 credited to sales account.
• Correct Entry
• Debit Bank 100,000
• Credit Capital 100,000
• Entry recorded
• Debit Bank 100,000
• Credit Sales 100,000
• Rectification
• Debit Sales 100,000
• Credit Capital 100,000
Solution
Rectify the following errors
• Purchase of goods of Rs. 5500 from Mr Amir recorded in books at Rs 5050
• Correct Entry
• Debit Stock 5,500
• Credit Amir 5,500
• Entry recorded
• Debit Stock 5,050
• Credit Amir 5,050
• Rectification
• Debit Stock 450
• Credit Amir 450
Solution
Rectify the following errors
• Cash deposited in bank Rs. 20,000 credited to bank and debited to cash
• Correct Entry
• Debit Bank 20,000
• Credit Cash 20,000
• Entry recorded
• Debit Cash 20,000
• Credit Bank 20,000
• Rectification
• Debit Bank 40,000
• Credit Cash 40,000
Solution
Rectify the following errors
• A purchase of Computer Rs. 25,000 recorded as maintenance expense.
• Correct Entry
• Debit Computers 25,000
• Credit Bank / Cash 25,000
• Entry recorded
• Debit Maintenance 25,000
• Credit Bank / Cash 25,000
• Rectification
• Debit Computers 25,000
• Credit Maintenance 25,000
Solution
Rectify the following errors
• Completely omitted a payment of bank charges of Rs. 500
• Correct Entry
• Debit Bank Charges 500
• Credit Bank 500
• Entry recorded
• -------
• Rectification
• Debit Bank Charges 500
• Credit Bank 500
Profit and Loss Account
Profit and Loss Account
• Sales
n Sales are the revenue against the sale of the product in which the organization deals.
n In case of a service organization, there will be Income Against Services Rendered instead of Sales and there will be no Cost of Sales or Gross Profit.
• Cost of Goods Sold / Gross Profit
n It is the direct cost incurred to manufacture the goods that are sold during the period.
n Gross Profit = Sales – Cost of Goods Sold
Profit and Loss Account
• Other Income
n Other income includes revenue from indirect source of income, such as return on investment, profit on PLS account, Sale of scrap etc.
• Administrative and Selling Expenses
n All costs that are incurred for the purpose of business but are not directly related to production are classified in Admin and Selling Expenses.
• All expenses should be distributed properly among the three classifications i.e. Cost of Goods Sold, Administrative Expenses and Selling Expenses to present the financial statements fairly.
Profit and Loss Account
• Financial Expenses
n Financial expense are the cost / interest paid on loans taken by the organization. These are shown separately in the Profit and Loss Account
Profit and Loss Account
• Income Tax
n Income Tax is paid on Net Profit.
n At the time of preparing annual financial statements, an estimate of expected tax liability is made.
n A provision is then created equal to that estimate.
n The treatment of Provision for tax is same as that of provision for Doubtful debts. i.e. provision is made at the time of preparing accounts which then adjusted accordingly at the time actual tax expense is known.
Balance Sheet (Assets)
• Fixed Assets
n Assets purchased not for resale are called fixed assets and these are presented at cost less accumulated depreciation OR revalued amount.
• Capital Work in Progress
n A fixed asset under completion is shown under this head. At the time of completion it is transferred to fixed assets.
• Deferred Costs
n These are revenue expenditures that benefit the organization for a period longer than one year.
n These are, therefore, initially shown in balance sheet and then charged to profit and loss (amortized) over the period they are expected to provide benefit to the organization.
Balance Sheet (Assets)
• Long Term and Short Term Investments
n Investments made with the intention that they will be held for a period longer than twelve months are classified as long term and those made for a period shorter than 12 months are classified as short term.
Balance Sheet (Assets)
n Following things are important to note here:
o Classification is to be made every time a balance sheet is prepared and the period is to be calculated from the date of balance sheet.
o An investment may initially be made as a current investment. Subsequently, if it is decided to hold it for a longer period. Then, its classification will have to be changed accordingly and vice versa.
n Therefore, investments are checked for classification every time a balance sheet is prepared and presented accordingly.
Classification of Investments
• Long term investments are those investments that are meant to be held for a long term period.
• If it is decided to dispose off a long term investment, then its classification is changed to current investment from long term.
Balance Sheet (Liabilities)
• Capital
n It is the total of resources supplied to a business by its owners.
n Capital is termed as “Share Capital” in case of Limited Companies.
• Capital Introduced By Owner In form of Assets
Debit Fixed Assets Account
Credit Capital Account
• Reserves
nReserve is the portion of profit set aside for use in future years for a specific purpose.
• Profit and Loss / Accumulated Profit and Loss Account
n It is that portion of the profit that is reemployed in the business.
OR
n This is the accumulated balance of undistributed profit.
• Accumulated Profit and Loss Account
n In the first year of business this account shows following figure:
Profit for the year X
Less: Transferred to Reserve X
Less: Profit distributed X
Balance carried to Balance Sheet X
n In Subsequent years balance brought forward from previous years and profit for the year is added and distributed as above and the balance is carried to next year.
• Long Term Loans
nLoans that are payable later than a period of more than twelve months from the balance sheet date.
Short Term Loans
nLoans that are payable within twelve months of the balance sheet date.
• Current Portion of Long Term Loans
nIt is that portion / installment of the long term loan that is payable with in next twelve months.
Other Long Term Liabilities
n These include all other liabilities that are payable after a period of one year of balance sheet date.
nFor example staff gratuity and other benefits, liability against lease finance and other liabilities that become payable after a period of one year.
• Provision
nProvision is charge created for an expected expense or loss whose actual amount is not known.
nIt is usually shown as a reduction in the asset to which it relates
• Reserves
nReserve is the portion of profit set aside for use in future years for a specific purpose.
nIt is usually created at the discretion of the owners an is shown as a liability.
• Current Liabilities
n Trade Creditors
n Short Term Borrowings
n Other Short Term Liabilities
o Salaries Payable
o Accrued Expenses
o Bills payable
o Advances From Customers
n Current Portion of Long Term Liabilities
Different Business Entities
• Commercial Organizations
n Sole proprietorship
n Partnership, and
n Limited Company
• In commercial organizations profit is distributed among the owners of the business.
Different Business Entities
• Non-Commercial Organizations
n Co-operative institutions
n NGO’s
n Trusts
• In non-commercial organizations profit is not distributed but is used for the objective of the organization.
Sole Proprietorship
• Sole Proprietorship is a business owned and run by an Individual called Proprietor / Sole Proprietor.
• It is the simplest form of business.
Partnership
• Partnership is a business owned and run by more than one persons called Partners.
• There can be a maximum of 20 partners.
Partnership
• Partners in a partnership business are Jointly and Severally liable for repayment of partnership’s liabilities.
• The liability of the partners is Unlimited.
Limited Companies
• The liability of the owners is limited to the extent of funds invested by them in the company.
Journal Entries for Drawings Account
• Cash Drawn by Proprietor
Debit Proprietor’s Drawing
Credit Cash
• The balance in drawings account is transferred to Capital Account at the year end.
Sole Proprietor – Capital Account
Balance Sheet - Sole Proprietor
Partnership – Capital Accounts
• Fixed Capital Account
n In this case capital account shows movement in capital only i.e. actual increase or decrease in capital, by partners.
n Other transactions such as Drawings and Profit etc. are not recorded in capital account
• Fluctuating Capital Account
n In fluctuating capital account all transactions relating to partners are recorded in capital account.
Partnership – Current Accounts
• Fixed Capital Account
n In case of fixed capital accounts other transactions such as Drawings and Profit etc. are recorded in a separate account called Current Account.
Partnership – Journal Entries
• Capital Introduced by Partner
Debit Cash / Bank
Credit Partner’s Capital Account
Separate capital account is opened in general ledger for each partner.
Partnership – Journal Entries
• Drawing by Partner
Debit Individual Partner’s Current Account
Credit Cash / Bank
• Excess Drawn Amount Returned by Partner
Debit Bank / cash
Credit Individual Partner’s Current Account
• Profit Distribution
Debit Profit and Loss Appropriation Account
Credit Partner A’s Current Account
Credit Partner B’s Current Account
Credit Partner C’s Current Account
Balance Sheet - Partnership
Limited Companies – Number of Shareholders
• Private Limited Company
n Two to fifty persons can form a private limited company.
n Minimum two members are elected to form a board. This board is given the responsibility to run day to day business of the company.
Limited Companies – Number of Shareholders
• Public Limited Company
n Minimum Seven persons can form a public limited company.
Limited Companies – Shareholders
• Capital of the company is divided into small units / denominations. These units / denominations are called shares.
• Owners purchase these shares and are therefore called shareholders.
Limited Companies – Shareholders
• Capital of the company is divided into small units / denominations. These units / denominations are called shares.
• Owners purchase these shares and are therefore called shareholders.
Distribution of Profits
• The profit of company is distributed in the form of Dividend.
• (5) Fixed Assets at WDV
Cost Rate Dep. WDV
Furniture 72,000 12.5% 9,000 63,000
Vehicle 120,000 20% 24,000 96,000
33,000 159,000
Solution
• Working
• (6) Debtors
Debtors 246,000
Less: Provision for Doubtful
Debts (note 4) (16,500)
229,500
Solution
• Working
• (7) Expenses Payable
Question
• Following trial balance has been extracted from the books of Javed Furniture Manufacturers on June 30, 2002.
Notes:
• Stocks on June 30, 2002
n Raw Material Rs. 60,000
n Finished Goods Rs. 100,000
n Work in Process Rs. 37,500.
• Out of total wages Rs. 450,000 is direct and balance indirect.
• 80% of Rent and Insurance are to be apportioned to factory and balance to administrative office.
• Depreciation to be charged on Machinery at 20% and Office Equipment at 10% on cost.
• Required
You are required to prepare profit and loss account for the year and balance sheet as on june30, 20-2
Solution
Working 1 – Cost of Goods Sold
Cost of Goods Sold Statement
Stock of Raw Material Jul 01, 2001 52,500
Add. Purchases 925,000
Add. Carriage Inward 8,750
986,250
Less: Closing Stock of Raw Material (60,000)
Raw Material Consumed 926,250
Direct labour 450,000
Factory Overheads
General Factory Overheads 77,500
Power 34,250
Rent (80% of 30,000) 24,000
Insurance (80% of 10,500) 8,400
Plant dep. (Note 5) 140,000
Indirect Labour 362,500 646,650
Total Factory Cost 2,022,900
Add: Work in Process Jul 01, 2001 33,750
Less: Work in Process Jun 30, 2002 (37,500)
Cost of Goods Manufactured 2,019,150
Add: Finished Goods Stock Jul 01, 2001 97,250
Less: Finished Goods Stock Jun 30, 2002 (100,000)
Cost of Goods Sold 2,016,400
Cost of Goods Sold Statement
Stock of Raw Material Jul 01, 2001 52,500
Add. Purchases 925,000
Add. Carriage Inward 8,750
986,250
Less: Closing Stock of Raw Material (60,000)
Raw Material Consumed 926,250
Direct labour 450,000
Raw Material Consumed 926,250
Direct labour 450,000
Factory Overheads
General Factory Overheads 77,500
Power 34,250
Rent (80% of 30,000) 24,000
Insurance (80% of 10,500) 8,400
Plant dep. (Note 5) 140,000
Indirect Labour 362,500 646,650
Total Factory Cost 2,022,900
Working 1 – Cost of Goods Sold
Total Factory Cost 2,022,900
Add: Work in Process Jul 01, 2001 33,750
Less: Work in Process Jun 30, 2002 (37,500)
Cost of Goods Manufactured 2,019,150
Add: Finished Goods Stock Jul 01, 2001 97,250
Less: Finished Goods Stock Jun 30, 2002 (100,000)
Cost of Goods Sold 2,016,400
Working 2 – Administrative Expenses
Administrative Salaries 110,000
Rent (20% of 30,000) 6,000
Insurance (20% of 10,500) 2,100
General Admin Expenses 33,500
Office Electricity 18,750
Depreciation Office Equip. (Note5) 5,000
Administrative Expenses 175,350
Working 3 – Selling Expenses
Salesman’s Salary 75,000
Commission on Sales 28,750
Carriage Outward 14,750
Administrative Expenses 118,500
Working 4 – Financial Expenses
Bank Charges 5,750
Discount Allowed 12,000
Administrative Expenses 17,750
Working 5 – Fixed Assets at WDV
Acc. Depreciation WDV
Cost Rate Opening For the Closing
Year
Plant and Mach. 700,000 20% 125,000 140,000 265,000 435,000
Office Equip. 50,000 10% 20,000 5,000 25,000 25,000
145,000 460,000
Working 6 – Current Assets
Stock
Raw Material 60,000
Work in Process 37,500
Finished Goods 100,000
Debtors 355,750
Bank 142,000
Cash 21,250
Current Assets 716,500
Working 7 – Current Liabilities
Creditors 312,500
Mark up on Capital
n A partner may be given markup on the capital invested by him.
n Markup can be calculated on the whole amount or an amount exceeding a specific limit depending upon the terms of the agreement.
Mark up on Drawings
n Markup may also be charged on drawings, depending upon the partnership agreement.
n Markup on capital and drawing do not become part of Profit and Loss Account. They are treated in the appropriation account.
Recording
• Mark up on Capital
Debit Profit and Loss Appropriation Account
Credit Partner A’s Current Account
Credit Partner B’s Current Account
Credit Partner C’s Current Account
Recording
• Mark up on Drawings
Debit Partner A’s Current Account
Debit Partner B’s Current Account
Debit Partner C’s Current Account
Credit Profit and Loss Appropriation Account
Calculation – Mark up on Capital
EXAMPLE
• Mr. Ali is a partner in AB Partnership.
• He is given mark up on capital @ 5 % on the proportionate amount of capital invested during the year.
• The details of his capital account are as follows:
n Opening balance as on July 01, Rs. 150,000
n Further capital invested on December 01, Rs. 75,000
• Calculate the markup on his capital.
Calculation – Mark up on Capital
SOLUTION
• From July 1 to November 30 capital was Rs. 150,000 and From December 1 to June 30 it increased to Rs. 225,000.
• Markup will be calculated as follows:
150,000 x 5% = 7,500 x 5 / 12 = 3,125.00
225,000 x 5% = 11,250 x 7 / 12 = 6,562.50
TOTAL 9,687.50
Calculation – Mark up on Drawings
EXAMPLE
• Mr. Umer is a partner in a partnership firm. He drew following amounts during the year:
n August 1 Rs. 2000
n October 1 Rs. 2500
n November 1 Rs. 1500
n March 1 Rs. 2000
n June 1 Rs. 3000
• Calculate the markup on his drawing if the rate is 5%.
• Consider a financial year from July to June.
Calculation – Mark up on Drawings
SOLUTION
Aug 1 Rs. 2,000 x 5% = 100 x 11 / 12 = 91.67
Oct 1 Rs. 2,500 x 5% = 125 x 9 / 12 = 93.75
Nov 1 Rs. 1,500 x 5% = 75 x 8 / 12 = 50.00
Mar 1 Rs. 2,000 x 5% = 100 x 4 / 12 = 33.33
Jun 1 Rs. 3,000 x 5% = 150 x 1 / 12 = 12.50
TOTAL 281.25
Admission Of A Partner
• At the time of admission of a partner:
n Assets and liabilities are revalued.
n Value of Goodwill is determined.
• The value (in monetary terms) of the reputation of the business is called GOODWILL. It is an intangible asset.
Dissolution Of A Firm
• When a partnership firm is dissolved, first of all, liabilities of the partnership are paid.
• The remaining amount (if available) is distributed among the partners in their profit/loss sharing ratios.
Maximum Number of Partners in a Partnership
• There can be a maximum of Twenty partners in a partnership firm.
• Exceptions – Partnership firms of professional can have more than twenty partners.
What is the Need to Form a Limited Company?
• Size of Project – The size of project may be so large that it constantly requires more capital and therefore a large number of persons is required to finance it.
• Limited Liability – In a limited company liability of the shareholders is limited to the amount invested in the company through the shares purchased.
• Tax Benefits – There are certain tax benefits that a limited company enjoys as compared to a partnership firm.
Limited Companies
• In Pakistan, affairs of Limited Companies are controlled by COMPANIES ORDINANCE issued in 1984.
• The formation of a company and other matters related to companies are governed by SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN (SECP).
Types of Companies
Types of Companies
• Private Limited Company:
n Can not ask public at large to invest in its shares.
n Can have a Minimum Two and Maximum Fifty members / shareholders.
n In case a shareholder decides to sell his shares, his shares are first offered to existing shareholders. If all existing shareholders decide not to purchase these shares, only then an outsider can buy them.
• Private Limited Company (Management):
n Minimum two persons are elected from the shareholders to run the affairs of the company. These persons are called directors.
n These directors form the Board of Directors of the company.
n Head of the board of the directors is called Chief Executive of the company.
Types of Companies
• Public Limited Company
n Restriction mentioned in case of Private Limited Company do not apply to Public Limited Companies.
n Minimum Seven persons can form a limited company. There is no restriction on the number of maximum shareholders in a public limited company.
n Minimum number of directors is Seven.
Types of Public Companies
• Non Listed Company
n A company whose shares are not traded by general public on a stock exchange.
• Listed company
n Listed companies are those companies whose shares are traded on a stock exchange.
• Name of the Company
n Words and parentheses (Private) Limited are added at the end of the name of a private limited company. Example ABC (Private) Limited.
n Word Limited is added at the end of the name of a public limited company. Example ABC Limited.
Formation of Companies
• Steps in the Formation of a Company:
n Availability of name of the company.
n Memorandum and Articles of Association Memorandum of Association
Formation of Companies
• Memorandum of Association
• Contains Following Information
n Objectives of the company.
n Place of registered office of the company
n Capital of the company.
n Division of capital into shares.
n Name, addresses and N.I.C. numbers of the persons forming the company.
Formation of Companies
• Articles of Association
n A document that contain the policies and procedures to run the company.
n These are also signed by the persons forming the company.
Share Capital
• Authorized Share Capital
n Maximum amount of the capital that a company can raise is called Authorized Capital.
n Authorized Capital can be enhanced with the prior approval of SECP.
n This total capital is divided into smaller denominations called shares.
Preliminary Expenses
n All expenses incurred before the registration (incorporation) of the company are called Preliminary Expenses.
Share Capital
• Issued Capital
n The actual amount of capital raised is called Issued Capital.
n It is also called Paid Up Capital.
n Accounting entry is recorded for Issued / Paid Up Capital and not for Authorized Capital.
Share capital
• Authorized Share Capital is the maximum capital, a company may raise.
• It can be increased with the approval of SECP.
Share capital
• Shares can be issued against cash or assets such as land etc.
• Share certificate is an evidence of ownership of number of shares held by a member.
Share capital
• Shares sold at a price higher than their face value are termed as Shares Issued at Premium.
• Shares sold on a price lesser than their face value are termed as Shares Issued on Discount.
Certificate of incorporation
• Certificate of Incorporation is the evidence of registration (incorporation) of the company.
• It is issued by the SECP.
Separate Legal Entity
• A company is a Separate Legal Entity.
• It can sue in its own name and be sued in its own name.
• It can purchase assets and contract liabilities in its name.
Dividend
• Profit distributed among the share holders is called Dividend.
• Dividend is approved by share holders in annual general meeting at the recommendation of the board of directors.
• Dividend is determined as a proportion of the face value of the share. Example 10% dividend means Rs. 1 on a Rs. 10 share.
Subscribers / Sponsors of the Company
• Subscribers / Sponsors are the persons who sign articles and memorandum of the company and contribute in the initial share capital of the company
Issuance of Further Capital
• Where a company wants to issue further capital (called raising of capital), shares are first offered to current shareholders.
• If shareholders refuse to accept these shares then these are offered to other people.
Issuance of further capital to current share holders
• Journal Entry:
nShares issued against cash
Debit Cash / Bank Account
Credit Share Capital Account
nShares issued against transfer of asset:
Debit Asset Account
Credit Share Capital Account
This is called issuance of asset in kind.
Right Issue
• The issuance of further capital to Present Shareholders is called Right Issue.
• This issue is in proportion to current shares held by the shareholders.
• The shareholders can accept or reject the offer.
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