Financial Accounting

Cover Financial Accounting Copyright Contents Preface 1 Accounting as an Information System Objective 1: Meaning and Definition of Accounting Objective 2: Characteristic Features of Accounting Objective 3: Concept of Accounting as Information System Objective 4: Characteristic Features of an Accounting System Objective 5: Users of Financial Accounting Information 5.1 Investors 5.2 Suppliers and Creditors 5.3 Lenders 5.4 Employees 5.5 Customers 5.6 Government and Regulatory Services 5.7 Security Analysts and Advisors 5.8 Public 5.9 Management Objective 6: Branches of Accounting 6.1 Financial Accounting 6.2 Cost Accounting 6.3 Management Accounting 6.4 Tax Accounting 6.5 Social Responsibility Accounting 6.6 Other Branches of Accounting Objective 7: Distinction Between Financial Accounting and Management Accounting Objective 8: Objectives of Financial Accounting Objective 9: General Purpose Statement Objective 10: Qualitative Characteristics of Accounting Information or Financial Statements 10.1 Understandability 10.2 Relevance 10.3 Reliability 10.4 Comparability Objective 11: Functions of Accounting Objective 12: Advantages of Accounting Objective 13: Limitations of Accounting Objective 14: Bases of Accounting Objective 15: Distinction Between Accrual Basis of Accounting and Cash Basis of Accounting Summary Key Terms Reference Objective-type Questions Short Answer-type Questions Essay-type Questions 2 Nature of Financial Accounting Principles Objective 1: Need and Meaning of Accounting Principles Objective 2: Meaning and Characteristic Features of Generally Accepted Accounting Principles (GAPP) 2.1 Meaning of GAPP 2.2 Salient Features of GAPP Objective 3: Basic Accounting Concepts 3.1 Entity Concept 3.2 Money Measurement Concept 3.3 Going Concern Concept 3.4 Periodicity Concept (Accounting Period Concept) 3.5 Cost Concepts 3.6 Realisation Concept 3.7 The Accrual Concept 3.8 Matching Concepts Objective 4: Basic Accounting Conventions 4.1 Convention of Conservatism (Prudence) 4.2 Convention of Consistency 4.3 Convention of Materiality 4.4 Convention of Disclosure Summary Key Terms Reference Objective-type Questions Short Answer-type Questions Essay-type Questions 3 Accounting Standards Objective 1: Meaning and Definition of Accounting Standards 1.1 Objectives of Accounting Standards 1.2 Development of Accounting Standards Objective 2: Constitution of Accounting Standard Board in India 2.1 Formation of the Accounting Standards Board 2.2 Objectives and Functions Objective 3: Scope of Accounting Standards in India Objective 4: Procedure of Issuing Accounting Standards Objective 5: Applicability of Accounting Standards 5.1 Level-I Enterprise 5.2 Level-II Enterprise 5.3 Level-III Enterprise Objective 6: Status of the Accounting Standards Issued by the Institute of Chartered Accountants of India Objective 7: Compliance with Accounting Standards Objective 8: Implementation of Accounting Standards Objective 9: Salient Features of “General Purpose Financial Statements” Objective 10: Benefits of Accounting Standards Objective 11: AS-1 – Disclosure of Accounting Policies 11.1 Disclosure of Significant Accounting Policies 11.2 Disclosure of Fundamental Accounting Assumptions 11.3 Selection of Accounting Policies 11.4 Disclosure of Changes in Accounting Policies Objective 12: Case Study 12.1 Convention 12.2 Basis of Accounting 12.3 Depreciation 12.4 Inventories 12.5 Revaluation of Assets 12.6 Investments 12.7 Sale 12.8 Turnover 12.9 Investment Income 12.10 Retirement Benefits 12.11 Provision for Income Tax 12.12 Lease Rentals 12.13 Research and Development 12.14 Foreign Currency Transaction 12.15 Claims 12.16 Financial and Management Information System Objective 13: Accounting Standard-2 (AS–2) Revised and Valuation of Inventories 13.1 Valuation of Inventories Objective 14: Accounting Standard-3 (AS–3) and Cash Flow Statements Objective 15: AS–4: Contingencies and Events Occurring after Balance Sheet Date Objective 16: AS–5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Summary Key Terms Reference Objective-type Questions Short Answer-type Questions Essay-type Questions 4a Accounting Process – Journal Objective 1: Concept of Accounting Process and Stages Objective 2: Recording of Business Transactions and its Classification 2.1 Meaning of Business Transaction 2.2 Classification of Business Transactions 2.3 Another Way of Classification of Business Transactions Objective 3: Meaning of Account and its Classification 3.1 Meaning of Account 3.2 Classification of Accounts Objective 4: Classification of Accounts 4.1 Personal Accounts 4.2 Impersonal Accounts 4.3 Nominal Accounts Treated as Personal Accounts Objective 5: Meaning of Double Entry and Double Entry System 5.1 Meaning of Double Entry Objective 6: Methods of Recording Business Transactions 6.1 Traditional Approach 6.2 Accounting Equation Approach Objective 7: Traditional Approach for Recording Business Transactions and Debit–Credit Rules for Three Types of Accounts Objective 8: Meaning and Format of Journal 8.1 Meaning of Journal 8.2 Format of Journal Objective 9: Meaning of Journalising 9.1 Meaning 9.2 Process in Journalising Objective 10: Analysis of Business Transactions Objective 11: Recording the Results of Analysis Objective 12: Types of Entries 12.1 Simple Entry 12.2 Compound Entry 12.3 Opening Entry Objective 13: Source Documents – Formats, Uses and Methods of Recording 13.1 Cash Memo 13.2 Invoice 13.3 Receipt 13.4 Debit Note 13.5 Credit Note 13.6 Voucher 13.7 Pay-in-slip 13.8 Cheque Objective 14: Recording of Trade Discount and Cash Discount Objective 15: Accounting Equation Approach – Meaning and Classification of Accounts 15.1 Meaning of Accounting Equation 15.2 Classifications of Accounts Objective 16: Rules of Debit and Credit as per Accounting Equation Approach 16.1 Accounting Equation Reaming and Features Objective 17: Analysis of Business Transactions Applying Accounting Equation Technique Summary Key Terms Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 4b Accounting Process – Ledger Objective 1: Meaning of “Ledger” Objective 2: Standard Form of Ledger and its Contents 2.1 Explanation of Ledger Account Format Objective 3: Meaning of Posting Objective 4: Procedure of Posting Objective 5: Distinction Between Journal and Ledger Objective 6: Posting of an Opening Entry Objective 7: Balancing an Account and Procedure for Balancing 7.1 Balancing of Different Accounts 7.2 Procedure for Balancing Summary Objective-type Questions Multiple-choice Questions Short Answer-type Questions Essay-type Questions Exercises 4c Accounting Process – Subsidiary Books Objective 1: Meaning of Subsidiary Books Objective 2: Kinds and Purposes of Subsidiary Books Objective 3: Advantages of Subsidiary Books (or) Special Journals Objective 4: Difference Between Subsidiary Books and Ledger Objective 5: Meaning and Type of Cash Book 5.1 Meaning 5.2 Types of Cash Book Objective 6: Meaning, Format and Recording of Transactions in Single Column Cash Book 6.1 Meaning 6.2 Format of Single Column Cash Book 6.3 Balancing of Cash Book Objective 7: Meaning and Format of Double Column Cash Book (Cash Book with Discount and Cash Column) Objective 8: Method of Entering Bank Transactions in Two Columns (Bank and Discount Column) Objective 9: Meaning of Triple Column Cash Book with Discount, Cash and Bank Columns and Procedure of Recording Business Transactions in Triple Column Cash Books Objective 10: Meaning, Salient Features and Advantages of Petty Cash Book 10.1 Meaning 10.2 Advantages 10.3 Salient Features Objective 11: Format and Method of Recording Transactions in the Analytical Form of Petty Cash Book 11.1 Format of Analytical Petty Cash Book of... 11.2 Explanations of Column and Procedure for Recording 11.3 Balancing Procedure 11.4 Passing of Journal Entries 11.5 Posting to Ledger Objective 12: Purchases Book – Meaning and Format and Methods of Preparing Purchase Book and Ledger Accounts 12.1 Meaning of Purchase Book 12.2 Format Objective 13: Meaning, Format and Features of Sales Book 13.1 Format of Sales Book 13.2 Explanation and Procedure for Recording Transaction Objective 14: Meaning and Features of Purchases Returns Book 14.1 Explanation and Procedure for Recording Purchases Returns Transactions 14.2 What is an ‘Allowance’? Objective 15: Meaning and Features of Purchases Returns Book 15.1 Format Objective 16: Meaning of Bills of Exchange Specimen and Meaning of Some Important Terms 16.1 Bills of Exchange 16.2 Specimen or Format of Bill of Exchange 16.3 Meaning of Important Terms Objective 17: Procedure of Recording Transactions in B/R and B/P Books 17.1 Bills Receivable and Bills Payable Books 17.2 Bills Receivable Book 17.3 Bills Payable Book 17.4 Posting of Bills Receivable and Bills Payable Books Objective 18: Journal Proper and Different Kinds of Entries Summary Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 4d Accounting Process – From Journal to Trial Balance Objective 1: Meaning of Trial Balance Objective 2: Objectives and Salient Features of Trial Balance 2.1 Objectives of a Trial Balance 2.2 Salient Features of a Trial Balance Objective 3: Methods of Preparation of a Trial Balance 3.1 Totals Method 3.2 Balances Method 3.3 Totals cum Balances Method Objective 4: Concept of Errors Objective 5: Kinds of Errors 5.1 Errors of Principle 5.2 Clerical Errors 5.3 Compensating Errors Objective 6: Classification of Errors (Based on the Impact of Errors on Trial Balance) Objective 7: Rectification of Errors 7.1 Rectification of Errors which do not Affect the Trial Balance 7.2 Rectification of Errors Affecting Trial Balance Objective 8: Steps to Locate the Errors in Trial Balance Objective 9: Meaning of Suspense Account and its Accounting Treatment Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 5a Accounting Process – From Trial Balance to Final Accounts and Final Accounts of Non-corporate Business Entities Objective 1: Accounting Process – Preparation of Final Accounts from Trial Balance Objective 2: Trading Account 2.1 Trading Account: A Constituent of Final Accounts 2.2 Preparation of Trading Account Objective 3: Manufacturing Account 3.1 Meaning of Manufacturing Account 3.2 Pro-forma of a Manufacturing Account 3.3 Differences Between Trading Account and Manufacturing Account Objective 4: Profit and Loss Account 4.1 Profit and Loss Account: Meaning and Features 4.2 Closing Entries Relating to Profit and Loss Account 4.3 Pro-forma of Profit and Loss Account 4.4 Explanation of Some of the Terms Appearing in Profit and Loss Account Objective 5: Balance Sheet 5.1 Meaning and Features of a Balance Sheet 5.2 Contents of the Balance Sheet 5.3 Grouping and Marshalling of Assets and Liabilities: Meaning of Grouping and Marshalling 5.4 In the Order of Liquidity 5.5 In the Order of Performance Objective 6: Uses of Balance Sheet Objective 7: Differences Between Trial Balance and Balance Sheet 7.1 Stock at the End or Closing Stock 7.2 Accrued Expenses or Outstanding Expenses 7.3 Prepaid Expenses 7.4 Accrued Income 7.5 Income Received in Advance (or) (Unearned Income or Unaccrued Income) 7.6 Description of Fixed Assets 7.7 Bad Debts 7.8 Provision for Bad and Doubtful Debts 7.9 Provision for Discount on Debtors 7.10 Provision (or) Reserve for Discount on Creditors 7.11 Adjustment of Interest on Capital 7.12 Interest on Drawings 7.13 Abnormal Loss of Stock 7.14 Insurance Premium 7.15 Salaries and Wages 7.16 Commission on Profit 7.17 Goods Sent on Approval: Meaning and Accounting Treatment 7.18 Goods-in-Transit 7.19 Bad Debts Written off Recovered 7.20 Withdrawals, Samples and Free Gifts 7.21 Income Tax 7.22 Provident Fund: Employee’s and Employer’s Contribution Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 5b Capital and Revenue – Expenditures and Receipts Objective 1: Meaning of Capital Expenditure and Examples 1.1 Examples Objective 2: Meaning and Features of Revenue Expenditure 2.1 Examples Objective 3: Deferred Revenue Expenditure Objective 4: Revenue Expenditure: To be Treated as Capital Expenditures Objective 5: Distinction Between Capital Expenditure and Revenue Expenditure Objective 6: Capital and Revenue Receipts 6.1 Concepts of Capital and Revenue Receipts Objective 7: Meaning of Capitalised Expenditure Objective 8: Capital Profit and Revenue Profit 8.1 Concepts of Capital Profit and Revenue Profit Objective 9: Capital and Revenue Losses 9.1 Capital and Revenue Payments Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 6 Accounting for Not-for-profit Organisations Objective 1: Meaning and Salient Features of NPOs 1.1 Salient Features of NPOs Objective 2: Meaning and Features of Receipts and Payments Account 2.1 Receipts and Payments Account 2.2 Features of Receipts and Payments Account Objective 3: Preparation of Receipts and Payments Account Objective 4: Meaning and Main Features of Income and Expenditure Account 4.1 Meaning 4.2 Main Features of Income and Expenditure Account Objective 5: Distinction Between Receipts and Payments Account and Income and Expenditure Account Objective 6: Accounting Treatment of Some Special Items 6.1 Subscription 6.2 Category II: Life Membership 6.3 Treatment of Fund Income (and Fund Expenses) 6.4 Legacy 6.5 Donations 6.6 Endowment Fund 6.7 Entrance Fees 6.8 Aid from Government and Other Institutions 6.9 Capital Expenditures 6.10 Current Years’ Expenditure Objective 7: Preparation of Income and Expenditure Account from Receipts and Payments Account Objective 8: Preparation of Opening and Closing Balance Sheets 8.1 Preparation of “Opening Balance Sheet” 8.2 Preparation of “Closing Balance Sheet” Objective 9: Preparation of Receipts and Payments Account from Income and Expenditure Account 9.1 Preparation of Various Accounts Objective 10: Preparation of Receipts and Expenditure Account for Professionals 10.1 General Features 10.2 Steps in the Preparation of Accounts of Professional Firm Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises Question Bank – Exercises 7 Financial Statements from Incomplete Records (Single Entry System) Objective 1: Meaning and Definition of Single Entry System Objective 2: Salient Features of Incomplete Records System 2.1 Advantages of Incomplete Double Entry System 2.2 Disadvantages of Single Entry System Objective 3: Differences Between Single Entry System (Incomplete Records System) and Double Entry System Objective 4: Preparation of Accounts (or) Ascertainment of Profit or Loss from Incomplete Records 4.1 Statement of Affairs Method (or) Net Worth Method Objective 5: Distinction Between Statement of Affairs and Balance Sheet Objective 6: Accounting Treatment 6.1 Model 1: Computation of Capital 6.2 Model 2: Ascertainment of Profit/Loss 6.3 Model 3: Ascertainment of Opening Capital, Closing Capital and Profit/Loss 6.4 Model 4: Computation of Net Profit (After Adjustments) 6.5 Model 5: Cheques Issued but not Presented 6.6 Model 6: Bank Transactions – Adjustments 6.7 Model 7: Net Increase in Assets or Net Decrease in Liabilities 6.8 Incomplete Records and Partnership Firms 6.9 Model 8: Single Entry and Partnership Firm Objective 7: Method 2: Conversion Method (or) Final Accounts Method 7.1 Meaning 7.2 Conversion Method Features 7.3 Procedure Under Conversion Method 7.4 Model: Calculation of Missing Figure – Opening Stock 7.5 Model: Calculation of Missing Figure – Purchases 7.6 Model: Calculation of Missing Figure – Credit Sales 7.7 Model: Calculation of Missing Figure – Bills Receivable 7.8 Cost of Goods Sold and Memorandum Trading Account 7.9 Revenue Expenses 7.10 Revenue Income 7.11 Model: Computation of Missing Figures (Combination of More Than One Item) 7.12 Model: Preparation of Trading and Profit and Loss Account Together with Balance Sheet Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 8 Measurement of Business Income Objective 1: Definition of Income Objective 2: Revenues and Expenses 2.1 Revenues 2.2 Expenses Objective 3: Meaning of Measurement of Business Income 3.1 Net Worth Method Objective 4: Measurement of “Net Income” or “Net Profit” Objective 5: Measurement of Net Income: Matching of Incomes and Expenses Method 5.1 Incomes and Expenses Objective 6: Comparison of “Net Worth Method” and “Matching Costs Against Revenue Method” Objective 7: Procedure for Measurement of Business Income Objective 8: Salient Features of Business Income Objective 9: Meaning of Economic Concept of Income Objective 10: Salient Features of Economic Concept of Income Objective 11: Procedure to Measure Economic Income Summary Key Terms Reference Objective-type Questions Short Answer-type Questions Essay-type Questions 9 Revenue Recognition and Recognition of Expenses Objective 1: Definition of Revenue 1.1 Meaning Objective 2: Factors Derived from the Definition Objective 3: Timing of Revenue Recognition 3.1 Recognition of Revenue Objective 4: Guidelines for Revenue Recognition Objective 5: Revenue Recognition at the Point of Sale Objective 6: A Method to Ascertain Recognition of Revenue 6.1 Proportionate or Percentage of Completion Method 6.2 Installment Method of Revenue Recognition 6.3 Recognition at Completion of Production Process 6.4 Revenue Recognition on Holding of Assets 6.5 On Service Contracts Objective 7: Concept of Recognition of Expenses (Costs) 7.1 Guidelines for Expense Recognition Objective 8: AS–9 Revenue Recognition 8.1 Introduction: Salient Features of AS–9 8.2 Definitions 8.3 Explanation 8.4 Sale of Goods 8.5 Rendering of Services 8.6 Effect of Uncertainties on Revenue Recognition 8.7 Accounting Standard Objective 9: Appendix Summary Key Terms Reference Objective-type Questions Short Answer-type Questions Essay-type Questions 10 The Nature of Depreciation Objective 1: Definition of Depreciation Objective 2: Characteristic Features of “Depreciation” Objective 3: Accounting Concept of Depreciation Objective 4: Salient Features Objective 5: The Causes of Depreciation 5.1 Physical Features 5.2 Functional Factors Objective 6: Need for Depreciation Objective 7: Factors Affecting Amount of Depreciation Objective 8: Depreciation on Assets Objective 9: Accounting Treatment 9.1 Method 1: By Charging to Asset Account Directly 9.2 Method 2: By Creating Provision for Depreciation Objective 10: Methods of Providing (Allocating) Depreciation 10.1 Straight Line Method: (or) Fixed (or) Equal Installment Method: Meaning, Formula, Merits, Demerits and Suitability 10.2 Written Down Value Method (or) Diminishing Balance Method (or) Reducing Balance Method: Meaning, Formula, Merit, Demerit and Suitability 10.3 Provision for Depreciation/Accumulated Depreciation: Passing of Entries and Preparation of Accounts 10.4 Procedure for Change in the Method of Depreciation 10.5 Annuity Method: Meaning and Features 10.6 Sinking Fund Method (or) Depreciation Fund Method: Meaning, Merits, Demerits and Suitability Objective 11: Choice of Depreciation Method Objective 12: Is Depreciation a Source of Income or Expense? Objective 13: Provision: Meaning, Examples, Objectives, Accounting Treatment and Disclosure 13.1 Meaning 13.2 Examples of Provisions 13.3 Objectives 13.4 Accounting Treatment 13.5 Disclosure Objective 14: Reserves 14.1 Meaning 14.2 Objectives 14.3 Distinction Between Provision and Reserve 14.4 Types of Reserves Objective 15: Provision for Repairs and Renewals: Meaning and Accounting Treatment Objective 16: Accounting Standard (AS)–6 16.1 Salient features of AS–6 (Revised) Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 11 Inventory – Valuation Objective 1: Meaning Objective 2: Significance of Inventory Valuation Objective 3: Inventory Record Systems 3.1 Periodic Inventory System 3.2 Perpetual Inventory System 3.3 Distinction Between Periodic Inventory System and Perpetual Inventory System Objective 4: Valuation of Inventories 4.1 Important Concepts 4.2 Cost Formulae Objective 5: Specific Identification of Costs Objective 6: First-in-first-out Method 6.1 Merits 6.2 Demerits Objective 7: Last-in-first-out Method (LIFO) 7.1 Merits 7.2 Demerits Objective 8: Weighted Average Method 8.1 Procedure Under Periodic Inventory System 8.2 Procedure Under Perpetual Inventory System Objective 9: Choice of Inventory Valuation Methods Objective 10: Valuation of Inventory as on the Balance Sheet 10.1 Method I 10.2 Method II Objective 11: Accounting Standard-2 (Revised) Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 12 Accounting for Hire-Purchase and Installment Objective 1: Definition of Hire-Purchase System 1.1 Explanation of Important Terms 1.2 Contents of Hire-Purchase Agreement 1.3 Salient Features of Hire-Purchase System Objective 2: Process of Calculation and Allocation of Interest 2.1 Situation 1 2.2 Situation 2 2.3 Situation 3 2.4 Situation 4 2.5 Situation 5 2.6 Situation 6 2.7 Rule 78 Objective 3: Accounting Treatment 3.1 Journal Entries in the Books of the Buyer (or) Hire Purchase 3.2 Accounting Treatment in the Books of Hire Vendor Objective 4: Default and Repossession 4.1 Full Repossession 4.2 Partial Repossession 4.3 Accounting Treatment Objective 5: Format of Hire-Purchase Sales Register for the Year Ended Objective 6: Methods of Ascertaining Profit 6.1 Debtors Method 6.2 Stock and Debtors System Objective 7: Installment System 7.1 Purchase System 7.2 Accounting Treatment Objective 8: Concepts of Operating and Financial Lease 8.1 Meaning 8.2 Lessor 8.3 Lessee 8.4 Leasing Agreement 8.5 Suitability Objective 9: Salient Features of Lease Objective 10: Advantages of Learning Objective 11: Disadvantages of Leasing Objective 12: Accounting Treatment Relating to Leases as per AS–19 12.1 Finance Lease (or) Full Pay-out Lease 12.2 Operating Lease (or) Non-pay-out Lease Objective 13: Distinction Between Financial Lease and Operating Lease Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 13 Accounting for Inland Branches Objective 1: Meaning of a Branch 1.1 Main Objectives of Opening a Branch Objective 2: Branch Accounting Objective 3: Accounting for Inland Dependent Branches 3.1 Salient Features of Dependent Branches 3.2 Accounting Treatment for Dependent Branches Objective 4: Accounting System 4.1 Debtors Method Objective 5: Stock-Debtors System or Stock and Debtors Method 5.1 Meaning of Stock-Debtors System 5.2 Different Accounts and their Purpose 5.3 Branch Stock Account 5.4 Branch Adjustment Account 5.5 Branch Expenses 5.6 Stock Reserve Account 5.7 Accounting Treatment 5.8 Final Account System 5.9 Item to be Shown in the Branch Account 5.10 Wholesale Branch Method Objective 6: Independent Branches 6.1 Accounting for Fixed Assets 6.2 Accounting for Goods in Transit 6.3 Accounting for Inter-branch Transactions Objective 7: Incorporation of Branch Trial Balance 7.1 Detailed Consolidated Method 7.2 Abridged Consolidated Method 7.3 Separate Final Accounts Method Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 14 Dissolution of Partnership Objective 1: Dissolution of Partnership 1.1 When May a Partnership be Dissolved? 1.2 Dissolution of a Firm 1.3 Dissolution by Notice 1.4 Dissolution by Court Objective 2: Distinction Between Dissolution of Partnership and Dissolution of Firm Objective 3: Treatment of Some Accounts at the Time of Dissolution 3.1 Treatment of Loss: Section 48 (a) 3.2 Treatment of Assets: Section 48 (b) 3.3 Treatment of Firm’s Debts and Private Debts Objective 4: Accounting Treatment 4.1 Preparation of Realisation Account 4.2 Meaning and Features of Realisation Account 4.3 Procedure to Record Entries for Various Items and Preparation of Realisation Account Objective 5: Accounting Treatment on Dissolution 5.1 Account Treatment on Dissolution of a Firm 5.2 Realisation Account 5.3 Cash or Bank Account (Ledger) 5.4 Partner’s Capital Account 5.5 Partners Loan Account: (Loan by Partner) Objective 6: Goodwill 6.1 Accounting Treatment 6.2 Unrecorded Assets and Liabilities 6.3 Memorandum Balance Sheet Objective 7: Preparation of Balance Sheet as on the Date of Dissolution 7.1 Preparation of Balance Sheet as on the Date of Dissolution 7.2 Accounting Procedure 7.3 Assets and Liabilities Taken Over by Partner(s) Accounting Procedure Objective 8: Return of Premium (Goodwill) (Section 51) 8.1 Gift of Firm – Asset to Partners 8.2 Gift to a Partner Objective 9: Insolvency of Partner(s) 9.1 Meaning of Insolvency 9.2 Garner vs. Murray Rule 9.3 Students Should Remember these Criteria 9.4 Accounting Procedure when Capitals are Fixed 9.5 Accounting Procedure when Capitals are Fluctuating or Floating Objective 10: All Partners are Insolvent 10.1 Acconting Treatment 10.2 Use of Algebraic Equation Objective 11: Minor and Partnership Dissolution 11.1 Minor’s Status in Partnership Dissolution 11.2 Minor and Insolvency 11.3 Garner vs. Murray Rule in Case of Commission to a Partner as Expense of the Business Objective 12: Sale of Partnership Firm to a Limited Company 12.1 Meaning 12.2 Salient Features 12.3 Meaning and Computation of “Purchase Consideration” 12.4 Procedure 12.5 Accounting Entries 12.6 Purchase Consideration Objective 13: Piecemeal Distribution 13.1 Meaning of Piecemeal Distribution 13.2 Proportionate or Surplus Capital Method 13.3 Maximum Possible Loss Method Summary Key Terms References Objective-type Questions Short Answer-type Questions Exercises 15 Financial Statement Analysis Objective 1: Meaning of Financial Statement Analysis Objective 2: Types or Classification of Financial Statement Analysis 2.1 Type 1 – According to the Material Used 2.2 Type 2 – According to Modus Operandi 2.3 Type 3 – According to the Objective of the Analysis 2.4 Distinction Between Horizontal Analysis and Vertical Analysis 2.5 Distinction Between Inter-firm and Intra-firm Analysis Objective 3: Process of Financial Statement Analysis 3.1 Re-arrangement 3.2 Comparison 3.3 Analysis 3.4 Interpretation Objective 4: Purposes and Significance of Financial Analysis 4.1 Earning Capacity 4.2 Managerial Efficiency 4.3 Solvency 4.4 Inter-firm Comparison 4.5 Budgets and Forecasts Objective 5: Tools or Techniques of Financial Statement Analysis 5.1 Comparative Financial Statements 5.2 Common Size Financial Statements 5.3 Trend Percentages 5.4 Ratio Analysis 5.5 Cash Flow Statement 5.6 Funds Flow Statement Objective 6: Comparative Financial Statements 6.1 Objectives of Comparative Financial Statements 6.2 Meaning of Comparative Balance Sheet Objective 7: Comparative Income Statement – Special Features 7.1 Objectives of Comparative Income Statements 7.2 Preparation of Comparative (P and L A/c) Income Statement 7.3 Percentage of Change is Calculate this Way 7.4 Computation of Percentage Change Objective 8: Meaning of Common Size Statements 8.1 Preparation of Common Size Balance Sheet 8.2 Accounting Treatment of Sources and Uses of Funds in the Preparation of Common Size Statements (Balance Sheet) Objective 9: Meaning and Computation of Trend Percentages 9.1 Trend Ratios 9.2 Steps Involved in Computation of Trend Percentages 9.3 Limitations of Trend Ratios (Percentage) Objective 10: Various Users of Financial Statements Objective 11: Limitations of Financial Statement Analysis Objective 12: Financial Statements of a Company – Types and Formats 12.1 Contents of Annual Report 12.2 Report of Board of Directors 12.3 Auditor’s Report 12.4 Balance Sheet 12.5 Profit and Loss Account 12.6 Notes to Accounts 12.7 Cash Flow Statement 12.8 Segment Report Summary Key Terms References Objective-type Questions Short Answer-type Questions Essay-type Questions Exercises 16 Accounting Ratios Objective 1: Meaning of Ratio Analysis – A Systematic Use of Ratios to Interpret the Performance of Entities 1.1 Meaning of Ratio and Ratio Analysis 1.2 Ratio Analysis Objective 2: Advantages and Uses of Ratio Analysis Objective 3: Limitations of Ratio Analysis Objective 4: Classification of Ratios or Types of Ratios Objective 5: Liquidity Ratios 5.1 Current Ratio – Relationship of Current Assets to Current Liabilities 5.2 Liquid Ratio or Quick Ratio or Acid Test Ratio 5.3 Absolute Liquid Ratio – Relationship of Absolute Liquid Assets to Liquid Liabilities Objective 6: Solvency Ratios (Long-term Solvency) 6.1 Debt Equity Ratio 6.2 Total Assets to Debt Ratio 6.3 Proprietary Ratio Objective 7: Profitability Ratios 7.1 Gross Profit Ratio 7.2 Net Profit Ratio 7.3 Operating Profit Ratio 7.4 Operating Ratio Objective 8: Activity Ratios 8.1 Inventory Turnover Ratio 8.2 Debtors Turnover Ratio or Receivables Turnover Ratio 8.3 Working Capital Turnover Ratio Objective 9: Ratios: Advanced Level 9.1 Turnover Ratio 9.2 Cash Cycle – Combined Effect of Turnover Ratios 9.3 Leverage Ratios 9.4 Profitability Ratios Summary Key Terms References Objective-type Questions Multiple-choice Questions Short Answer-type Questions Essay-type Questions Exercises 17 Cash Flow Statement Objective 1: Meaning of Cash Flow and Cash Flow Statement Objective 2: Uses of Cash Flow Statement Objective 3: Limitations of Cash Flow Statement 3.1 Meaning of Cash Flow, Cash and Cash Equivalents Objective 4: Preparation of Cash Flow Statements Objective 5: Cash Flow Statement: Preparation 5.1 Direct Method Pro-forma or Format of Cash Flow Statement for the Year Ended 5.2 Indirect Method Pro-forma or Format Cash Flow Statement for the Year Ended 5.3 Calculation of Cash Outflow on Purchases 5.4 Cash Outflow on Expenses Incurred 5.5 Adjustments 5.6 Cash Flow from Investing Activities 5.7 Cash Flow from