PREFACE

There is no dearth of textbooks on accounting. So it may be pertinent to ask why we need another book.

This is not a book that is written as a book. This book is evolved from the notes prepared for satisfying the
needs of students. The only motivation was to explain accounting in a logical manner, whereby one could
master the methodology based on a deeper insight into the basic structure of accounting. The emphasis
here is not so much on the mechanical practice but on the conceptual understanding of the methodology.
The objective is to ensure that the study of this book enables the reader to understand accounting numbers

in a clearer and better perspective.

Various aids have been included in the book to facilitate learning and make it interesting.
Case Studies:

They not only make the concept clearer, the presentation leaves a vivid visual impact,
which has good recall value.

Pictures & Clipart: Uniformity in highlighting the important points and making reading interesting.
Concept Questions: Makes your concepts very clear and strengthen the base.
Class Work:

It help students to recall and test their knowledge and, going a step further, their
power to analyse and derive. Class work need students to seek out what is not
obvious from the information provided

If this approach builds confidence in the minds of students about accounting methodology & if it makes it
possible to understand & apply it logically, I believe, I have achieved my goal.

DEDICATION
Dedicated to Her, My Infinite Happiness, My Wife Hemlata Bhangariya
I am Feeling the tranquillity and happiness when I come to lay this book in your lap.
Say youre surprised? Say you like it? Say its just what you wanted? Because its yours

because I love you.

CHAPTER
NO.

NAME OF THE CHAPTER

PAGE NO

a
iy

CONCEPTUAL FRAMEWORK

UNDERWRITING OF SHARES

LIQUIDATION OF COMPANIES

BANKING COMPANIES

INSURANCE COMPANIES

ELECTRICITY COMPANIES

DISSOLUTION OF PARTNERSHIP ACCOUNTS

8.1 8. 19

AMALGAMATION & SALE OF FIRM TO A COMPANY

9.1 9.11

10

DEPARTMENTAL ACCOUNTS

10.1 10. 6

12

ESOP, BUYBACK, EQUITY SHARES WITH DIFFERENTIAL

RIGHTS

12.1 12.11

A
C

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2.1 2.8

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1.1 1.7

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3.1 3.19
4.1 4.11
5.1 5.16
6.1 6.9

1.1

A
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1.1

preparation of Financial Statements in compliance with AS.

Deal with the topics not covered by AS.
Development & review of AS
Promoting harmonisation of regulations, AS and procedures.
Interpretation of financial statements.

B
d

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a

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a
h

a
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Applicable to all general purpose financial statements prepared annually by all commercial,
industrial and business enterprises (Public or private)
Special purpose financial reports like prospectus, Tax computations are outside the scope.
Framework cant override Accounting Standards.

A
C

n
a

n
A

There are three fundamental accounting assumption:

1) Going Concern
2) Consistency
3) Accrual

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

1.2

Financial
performance

Financial position

Balance sheet
Assets

A
C

B
d

n
a

Profit and Loss A/c

n
A
Rs.

Debit

Rs. Credit

Rs.

r
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n

a
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Profit and loss

account
(P & L A/C)

Balance
Sheet

Liabilities Rs.

Cash flows

a
iy

Other relevant
information

Cash Flow
Statement

Notes to
accounts

Cash flow statement Notes to accounts

Particulars

Rs
.

m
n
n
k

In India, FS means B/s, P&L A/c, notes to Accounts & cash flow statement.

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

1.3

Investors

Employees

Whether to buy, sell / hold investment.

Ability of organisation to survive.
Ability of organisation to pay dividend.

Stability, continuity and growth of company.

Ability to provide remuneration, retirement and other
benefits.

Lenders

Interested in repayment of Interest and Loan principal.

A
C

n
A

Customers

CA Anand R. Bhangariya

94220 26740

B
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n
a

Suppliers

Govt.
agencies

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Ability to pay the dues

Decide credit policy

They want to know because they

Regulate the functioning of business for public good.
Charge excise duties and taxes.
Control the prices.

Employment
Contribution to the local economy
www.cavidya.com

1.4

Understandability

Useful to a wide
range of users in
making economic
decisions

Relevance

Reliability

Relevant for
decision-making
needs of users

Free from
material error
and bias and can
be depended
upon by users

a
iy

True and Fair View

g
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a

Within the entity

over time and
also between
different entities

a
h

B
d

n
a

n
A

Comparability

Application of the
principal qualitative
characteristics & of
appropriate
accounting
standards

Primarily transactions and events are measured in terms of money.

The three elements of measurement are:
1) Identification of objects and events to be measured;
2) Selection of standard or scale to be used;
3) Evaluation of dimension of measurement standard or scale.

A
C

Money as a scale of measurement is not stable. Thus information of one year measured in money
terms may not be comparable with that of another year.
CA Anand R. Bhangariya

94220 26740

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1.5

Historical Cost

Current Cost

Realisable value

Present Value

a
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r
a

You have purchased one Car on 01.01.2001 for Rs. 10 Lakhs Historical
Cost

g
n

Today i.e. on 01.08.2011, if you want to sell this car after 10 years, it will
fetch you Rs. 3 Lakhs. Realisable Value

a
h

B
d

Today same car is available in the market for Rs. 15 Lakhs. Current Cost

n
a

Present Value: As per present value, an asset is carried at the present discounted value of the
future net cash inflows that the item is expected to generate in the normal course of business.

n
A

Your dad invested Rs. 1,00,000 in Fixed deposit with Bank of Baroda for 1 year @ 10% p.a.

A
C

1,00,000
Present Value

CA Anand R. Bhangariya

10000 X 110/100

1,10,000 X 100/110
94220 26740

www.cavidya.com

1,10,000
Future Value
1.6

a
iy

Capital refers to net assets of a business. Since a business uses its assets for its operations, a fall in
net assets will usually mean a fall in its activity level.

r
a

It is therefore important for any business to maintain its net assets in such way, as to ensure
continued operations at least at the same level year after year.

g
n

In other words, dividends should not exceed profit after appropriate provisions for replacement of
assets consumed in operations. For this reason, the Companies Act does not permit distribution of
dividend without providing for depreciation on fixed assets.
P = (CA - CL) (OA OL) C + D
P = Profit
CA = Closing Assets
CL = Closing Liabilities
OA = Opening Assets

A
C

CA Anand R. Bhangariya

94220 26740

B
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n
a

n
A

a
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OL = Opening Liabilities
C = Introduction of Capital
D = Dividend / Drawings

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1.7

n
a

B
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n
A

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Definition: Underwriting is an agreement, with or without conditions,

to subscribe to the securities of a body corporate when existing
shareholders of the corporate or the public do not subscribe to the
securities offered to them.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

2.1

The underwriter is not eligible for

commission on shares taken by
the promoters, employees,
directors, their friends and
business associates.

subscribed for
200 shares.
Directors / Promoters

subscribed for
800 shares.

Company issues
1,000 shares of Rs.
10 for Rs. 12 each.
Commission is paid on the
issue price
i.e. Rs. 12 X 800 = 9,600

B
d

Commission = 9,600 X 5%
= 480.

n
a

n
A

The maximum amount of commission:

5% of the issue price of shares

2 % of the issue price of debentures

rate authorized by the articles

whichever is less.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

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Public

a
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Underwriter

It may be paid in cash or in fully

paid-up shares or debentures
or a combination of all these.

2.2

Company
issue 1,00,000
shares & appointed
an underwriter.

a
iy

r
a

If public do not subscribe the shares,

Underwriter will subscribe the same.

Underwriter

g
n

a
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Public

B
d

7 Banks have underwritten 557.14 crores value

of shares TATA Steel.

The company may

enter into underwriting
arrangement with
number of
underwriters. This
arrangement is called
Joint Underwriting.

A
C

n
a

n
A

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

2.3

Decided to issue 10000 shares and

appointed an underwriter

Company issue 10000 shares and

appointed an underwriter
With condition that HSBC will take at
least 2,000 shares

Public
Public applied for
12,000 shares.

A
C

B
d

n
a

n
A

HSBC will take 2,000

shares irrespective of
no. of shares applied
by public.

underwriter agrees to take up a specified

number of shares irrespective of the number
of shares subscribed for by the public.
CA Anand R. Bhangariya

94220 26740

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Public

Public applied for

6,000 shares.

HSBC will take

remaining 4,000
shares.

The underwriter agrees to take up agreed

proportion of shares, not taken up by the
public.
www.cavidya.com

2.4

Issue 1,00,000 shares for which they appointed underwriters with equal underwriting
'Marked' applications are those
applications which bear the stamp
of an underwriter.

a
iy

Unmarked' applications are those

applications which does not bear
the stamp of an underwriter.

Company

g
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r
a

Company received Marked Application for SBI 25,000, HSBC 15,000 and Unmarked 20,000

a
h

20,000 Unmarked applications

Distributed in the ratio of gross
liability i.e. 1 : 1.

A
C

n
a

n
A

50,000 Applications
(-) 25,000 Applications
(Marked)

(-) 10,000 Applications

(Unmarked)
15,000 shares

CA Anand R. Bhangariya

B
d

Net Liability
94220 26740

50,000 Applications
(-) 15,000 Applications
(Marked)
(-) 10,000 Applications
(Unmarked)
25,000 shares
www.cavidya.com

1.The distinction between marked

and unmarked applications
becomes immaterial when
The whole issue is subscribed
by only one underwriter.
The issue is fully subscribed
2.When there is more than one
underwriter, the unmarked
applications are divided amongst
underwriters in the ratio of their
gross liability.
2.5

Decided to issue 1,00,000 shares and

appointed an underwriter

Decided to issue 1,00,000 shares and

appointed an underwriter

n
a

n
A

100% issue is underwritten by

underwriter.

A
C

100% issue
underwritten by
Underwriter

CA Anand R. Bhangariya

94220 26740

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80% issue is
underwritten by
underwriter

20%
Company

a
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20% is treated as
having underwritten
by company

80%
Underwriters

Marked applications = Total number of

applications received x percentage of
underwriting.
www.cavidya.com

2.6

Statement Showing the Liability of Underwriters

[Figures - No. of shares]
Underwriters

B
d

n
a

Less: Unmarked applications allotted in

the ratio of gross liability

A
C

n
A

Less: Firm underwriting

Net Liability as per agreement

CA Anand R. Bhangariya

94220 26740

g
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a
h

Gross liability
Less: Marked applications (excluding
firm underwriting)

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C

2.7

No
1.

Particulars

L.F.

3.

4.

r
a

Dr.
To Underwriters Personal A/c

Underwriters Liability [Application + Allotment money]

Underwriters Personal A/c.
To Equity Share Capital A/c
To Share premium A/c

n
a

B
d

Commission due
Underwriters Commission A/c.
To Underwriters Personal A/c.

n
A

a
h

Settlement of Account
Bank A/c.
To Underwriters Personal A/c.
(in case of receipt)
(in case of payment, reverse the above entry)

A
C

CA Anand R. Bhangariya

94220 26740

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Dr.

Credit

a
iy

Applying Money received towards firm Underwriting

Bank A/c

2.

Debit

Dr.

Dr.

2.8

A
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3.1

Whatever may be the reason for insolvency, all companies going into for liquidation has to undergo
following steps....
Liquidator Statement of Accounts provides
the details of his receipts & payments during
the liquidation process.

Step 1

Step 2

Court receives petition

from Creditors
Court Appoints official
liquidators
Liquidator is the person
who conducts the
dissolution of the company

A
C
CA Anand R. Bhangariya

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Board of Directors upon the

order of High Court, prepares
Statement of Affairs & submits
the same to Liquidator.

Liquidator submits
"Liquidator Statement of
Accounts"

Liquidator takes the custody of

property

Court orders dissolution.

a
h

B
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a

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A
94220 26740

Step 3

a
iy

Prepares Statement of Affairs which provides the details like 1) The assets of the company
2) Its debts and liabilities;
3) The names of its creditors, stating separately the amount of
secured and unsecured debts;
4) The debts due to the company.

www.cavidya.com

3.2

Particulars
Assets not specifically pledged (as per list 'A')
Balance at Bank
Cash in Hand
Marketable Securities
Bills Receivable
Trade Debtors
Loans and Advances
Unpaid Calls
Stock-in-trade
Work-in-progress
Freehold Property, Land and Buildings . .
Leasehold Property
Plant and Machinery
Furniture, Fittings, Utensils, etc
Investments other than marketable securities
Livestock
Vehicles, etc.
Other property, viz.

A
C

CA Anand R. Bhangariya

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94220 26740

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Estimated
Realisable
Values (Rs)

3.3

*Assets specifically pledged (as per list B')

(a) Estimated
Realisable
Value

(Rs)

(b) Due to
Secured
Creditors

(Rs)

(c)
Deficiency
Ranking as
Unsecured

(d)Surplus
carried to
last
column

(Rs)

(Rs)

Estimated surplus from assets specifically pledged

r
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g
n

a
h

B
d

a
iy

Estimated total assets available for preferential creditors, debenture

holders secured by a floating charge, and unsecured creditors** (carried
forward)
Summary of Gross Assets

n
A

n
a

Gross realisable value of assets specifically pledged

Other Assets
Gross Assets
(Rs)

A
C

(d) Rs.
Rs

Estimated total assets available for preferential creditors,

debenture holders secured by a floating charge, and
unsecured creditors** (brought forward).

CA Anand R. Bhangariya

94220 26740

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3.4

(e)
Gross
Liabilities

A
C

Liabilities
(to be deducted from surplus or added to deficiency as the case may
be.)
Secured creditors (as per List 'B') to the extent to which claims are
estimated to be covered by assets specifically pledged
Preferential creditors (as per List 'C')
Estimated balance of assets available for Debenture holders secured
by
a floating charge and unsecured creditors
Debenture Holders secured by a floating charge (as per List 'D')
Estimated Surplus / Deficiency as regards Debenture Holders
Unsecured Creditors (as per List 'E')
Estimated unsecured balance of claims of creditors partly secured
on specific assets, brought from preceding page(c)
Trade Accounts
Bills Payable
Outstanding Expenses
Contingent Liabilities (state nature)
Estimated Surplus / Deficiency as regards Creditors
Issued and Called-up Capital:
... preference shares of... each... called-up (as per List 'F')
... equity shares of... each... called-up (as per List G)
Estimated Surplus/Deficiency as regards Members** (as per List 'H')

CA Anand R. Bhangariya

B
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A
94220 26740

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www.cavidya.com

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Rs

Rs

3.5

a
iy
Rs

Items contributing to deficiency (or Reducing Surplus):

r
a

Excess (if any) of Capital and Liabilities over Assets on the20 as

shown by Balance Sheet

Net dividends and bonuses declared during the period from..20 to the
date of the statement

Net trading losses

Losses other than trading losses written off or for which provision has been
made in the books during the same period

Estimated losses now written off or for which provision has been made for the
purpose of preparing the statement

Other items contributing to deficiency or reducing Surplus

Items reducing Deficiency (or contributing to Surplus):

Excess (if any) of assets over capital and liabilities on the.20.. as shown on
the Balance Sheet

8
9
10

A
C

n
A

a
h

B
d

n
a

g
n

Net trading profits (after charging items shown in note below) for the period
from 20 to the date of statement

Profits and income other than trading profits during the same period
Other items reducing Deficiency or contributing to Surplus
Deficiency/Surplus as shown by Statement

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

3.6

a
iy

Liability in respect of bills discounted by the company is contingent, any amount expected to be
paid in respect of bills discounted should be included in List E. This applies to all contingent
liabilities.
Bills payable are creditors and hence should be included in the appropriate list according to the
securities held by the holders of the bills. Generally Bills payable are unsecured and hence
included in unsecured creditors (list E).
Debentures should be assumed to have a floating chare, 3 if nothing is mentioned regarding the
security held by the debenture-holders (List D).
Unclaimed dividends should be included in unsecured creditors.
Uncalled capital should not be treated as an asset but calls in arrears should be treated as an
asset (List A).
Personal guarantees by directors are not considered as security.

A
C
CA Anand R. Bhangariya

B
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A
94220 26740

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3.7

a
iy

As per section 530, there are in totality 7 dues which has to be paid first in case of liquidation
which are as follows.
i.

ii.

iii.
iv.

v.

vi.
vii.

g
n

r
a

All revenues, taxes, cesses and rates due to Central Government or State Government or local
authorities. The amount should have become due and payable within 12 months before the winding
up order.
Wages or salaries of an employee for four months. The wages or salary for four months must be due
within 12 months next preceding to relevant date. The amount shall not exceed such sum as may be
notified by the Central Government (presently Rs 20,000) for any one claimant.
Accrued holiday remuneration which has become payable to an employee or in case of his death to
any other person.
All amounts due in respect of contributions payable by the company as employer under any law.
However, this is not payable if the company is being voluntarily wound up for reconstruction or
amalgamation.
Compensation payable under the Workmen's Compensation Act, 1923 in respect of the death or
disablement of any officer or employee of the company.
All sums due to any employee from the Provident Fund, Pension Fund, Gratuity Fund or any fund for
the welfare of the employee including any contribution due to the fund, and
Any expenses of investigation held in pursuance of Section 235 and 237 and appointed as payable by
the company.

A
C

CA Anand R. Bhangariya

B
d

n
a

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A
94220 26740

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www.cavidya.com

3.8

a
iy

r
a

However, even within these 7 dues, company has to first settle down the dues related to the
Workmen.
However, regular Secured Creditors of the company dont find any place in Section 530

Workman

B
d

Realisable value of security

given to Secured Creditors
Rs. 3,00,000

n
a

Amount Due is Rs. 1,00,000

n
A

a
h

g
n

Secured Creditor
Amount Due is Rs. 4,00,000

1,00,000 + 4,00,000 = 5,00,000

A
C

Question is who will get the

payment first?

CA Anand R. Bhangariya

94220 26740

Workers because they are preferential creditors

as per section 530 or Secured Creditors because
they have security???
www.cavidya.com

3.9

Workman
Amount Due is Rs. 1,00,000

Realisable value of security

given to Secured Creditors
Rs. 3,00,000

B
d

3,00,000 1/5 = 60,000

Realisable value of
Security
Rs. 3,00,000

n
A

n
a

g
n

3,00,000 4/5 = 2,40,000

As per Section 529 A ,Workman & Secured Creditors are

treated as Overriding Preferential Payments i.e. they
have preference over other preferential creditors.

A
C

Overriding Preferential Payment

Balance unpaid amount of workmen (1,00,000-60,000)

Short amount paid to secured creditors due to sharing of workmen
Total

CA Anand R. Bhangariya

94220 26740

r
a

Amount Due is Rs. 4,00,000

a
h

1,00,000 + 4,00,000 = 5,00,000

a
iy

Secured Creditor

www.cavidya.com

Rs. 40,000
Rs. 60,000
Rs. 1, 00,000
3.10

The liquidator must present an account of his receipts and payments at

least twice a year as long as he is in the office to

The court
(in case of compulsory winding up)

A
C

CA Anand R. Bhangariya

g
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a
h

B
d

n
a

94220 26740

r
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The Registrar
(in case of voluntary winding up)

Order of Payment :1) Workmen's dues and claims of the secured

creditors as mentioned in Section 529A
2) Overriding preferential payments
3) Legal charges,
4) Liquidator's remuneration
5) Cost of expenses of winding up, Section 530 (6)
6) Preferential creditors, Section 530 (1)
7) Creditors secured by floating charge
8) Unsecured creditors.
9) Preferential shareholders
10) Equity shareholders.

n
A

a
iy

www.cavidya.com

3.12

Receipts
To Cash and Bank Balances

Rs.

Payments
By legal charges

r
a

To Realisation of Assets (individually)

By Liquidators remuneration

To Surplus from secured creditors

% on amounts distributed

To Calls in arrears realized

% on realisation

A
C
CA Anand R. Bhangariya

% on amounts paid to shareholders

By Cost of winding up

n
a

n
A

g
n

a
h

B
d

To Calls on contributories realised

a
iy
Rs.

By Debenture holders creditors

(having a floating charge) +
outstanding interest
By Preferential
By Unsecured creditors
By Payment to contributories
Preference shareholders +
Arrear dividends
By Equity shareholders

Total
94220 26740

www.cavidya.com

Total

3.13

r
a

g
n

Later on Co. goes into liquidation

Machinery
security worth Rs.
10,00,000

a
h

Plant & Machinery worth

Rs. 10,00,000/-

n
a

B
d

If Realised Rs. 9,00,000

Treated as
Receipts

A
C

n
A

Surplus amount of Rs.

(9,00,000 7,50,000) =
1,50,000

If Realised Rs. 5,00,000

Treated as
Unsecured
Creditors

Liquidators Statement of A/c

Unsecured creditors
2,50,000

Receipts 1,50,000

94220 26740

Loan of Rs. 7,50,000

Deficit amount Rs. (7,50,000

5,00,000) = 2,50,000

Liquidators Statement of A/c

CA Anand R. Bhangariya

a
iy

Insolvent Ltd.

Creditors

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3.14

a)
Balance Sheet (Extract) of Insolvent Ltd.

Particulars
Land & Building
Furniture
Stock
Cash in hand
Cash at bank
Loan from bank
(secured by pledge of stock)

Rs.
5,00,000
2,00,000
1,50,000
25,000
45,000

n
a

A
C

Commission =

100+

94220 26740

g
n

a
h

Particulars

Rs.

Land & Building

5,00,000

Furniture

2,00,000

Stock [1,50,000 1,00,000

Cash in hand
Cash at bank
Total
5% remuneration

50,000

Nil
7,50,000
37,500
Not entitled to get any
commission on cash &
bank balance

.
CA Anand R. Bhangariya

r
a

a
iy

[It is assumed that secured creditors

themselves realize the asset. Hence,
liquidator is eligible for remuneration
only on surplus]

B
d

1,00,000

If the amount available is insufficient to pay

unsecured creditors fully, the commission
due to the liquidator is calculated as per the
following formula

n
A

Liquidator is entitled to remuneration @

5% of the amount of asset realised by
him.

www.cavidya.com

3.15

Insolvent Ltd.

Liquidator repays debentureholders on

31-12-2011

Solvent

n
a

n
A

01-04-2011 to 31-12-2011

i.e. 5,00,000 X 12/100 X 9/12

= 45,000

A
C

CA Anand R. Bhangariya

94220 26740

r
a

g
n

a
h

B
d

Interest is payable upto the

date of actual payment loan

a
iy

Outstanding 12%
debenture of Rs.
5,00,000

Liquidated on 30-09-2011

Insolvent

Interest is payable upto the

date of liquidation

01-04-2011 to 30-09-2011
i.e. 5,00,000 X 12/100 X 6/12
= 30,000

Rule is applicable for all the

debts

www.cavidya.com

3.16

Particulars

Rs.

Equity share capital

Preference share capital

10,00,000
35,00,000

Particulars

Cash

1,00,000

2009-10

1,00,000

2010-11

1,00,000

r
a

g
n

a
h

B
d

a
iy

50,00,000

Pref. dividend (payable) :

2008-09

Rs.

If not declared by company, treated as Arrears

n
a

If declared by company in GM, treated as Debt.

n
A

Particulars
Cash

A
C
Debt

CA Anand R. Bhangariya

Rs.

Particulars

Cash =

Equity =

50,00,000
(-) 10,00,000
40,00,000

50,00,000
3,00,000

Rs.

Preference shares =

47,00,000
Dividend on PS

(-) 35,00,000
5,00,000
(-) 3,00,000
2,00,000

94220 26740

www.cavidya.com

3.17

Liabilities
Share Capital, Authorised and Subscribed:
5,000 6% Preference Shares of Rs.100 each fully paid
*2,500 Equity Shares of Rs. 100 each Rs. 75 paid up
7,500 Equity Shares of Rs. 100 each Rs. 60 paid up
Liabilities
Add: Deficit (Given)

n
a

5,00,000
1,87,500
4,50,000

Loss to be borne by 10,000 equity shareholders

Loss per share Rs 6,94,250 10,000

n
A

Amount of call for 7,500 equity shares of Rs. 100 each Rs. 60 paid (69.42 - 60)

A
C

Total Amount collected (7,500 shares x Rs. 9.425)

Amount of refund for 2,500 equity shares of Rs. 100 each Rs. 75 paid
(75 69.425)
Total amount refunded (2,500 shares x Rs. 5.575)

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

r
a

g
n

a
h

B
d

Total equity capital paid up (Rs 4,50,000 + 1,87,500)

a
iy

Rs.

Deficit = 56,750

Rs.
6,37,500
56,750

6,94,250
69.425
9.425
70687.5

5.575
13937.5

3.18

Liability Of ' B' List Of Contributors

a
iy

r
a

List A

List B

The 'A' list contains the names of persons

who are members for a period of one
year prior to the date of winding up.

The 'B' list contains the name of persons

who were members with a period of one
year prior to the date of winding up.

a
h

g
n

B
d

In case present shareholders (List A) fail to pay, money shall be called from the past shareholders (List
B) subject to certain conditions.
1) A past member holding partly paid shares who has ceased to be a member for one year or
upwards before the commencement of the winding up shall not be liable to contribute. Only
those members who have ceased to be members within one year before the commencement of
winding up may be called upon to contribute. Such contributories are called 'B' list
contributories.
2) A 'B' list contributory will be liable to pay only for those creditors or debts which were
contracted before he ceased to be member.
3) 'B' list contributory will be liable only if present member is unable to make payment.
4) Maximum amount which may be called from him will be the amount unpaid on his shares.

A
C

CA Anand R. Bhangariya

n
a

n
A
94220 26740

www.cavidya.com

3.19

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A

94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

4.1

An Asset becomes NPA when it ceases to generate income.

Term loan

Overdraft / cash credit

Bill purchased and

discounted

Mr. Sam

Mr. John

Mr. Ramesh

Overdraft = 1,00,000
Date of withdrawal =
31-12-2011

discounted bills of
exchange

Took loan of Rs. 25 lakhs

Due date = 31.12.2011

Bank dont receive

any amount towards
Installment till
31.3.2012

If Mr. John do not pay

any amount in the bank
then the account is
treated as Out of
Order

n
a

Difference of 90 days

The account has

remained out-oforder for a period
exceeding 90 days

The bill remains

overdue for a period
exceeding 90 days.

n
A

Out of order for

90 days

Difference of 90 days

A
C

Interest or Instalment
of principal has
remained overdue for
a period exceeding
90 days.
CA Anand R. Bhangariya

a
h

94220 26740

Nature

The bill remains

overdue up to
31.3.2012

www.cavidya.com

a
iy

r
a

g
n

Drawee dishonoured
the bill on due date
i.e. 31-12-2011

B
d

Agriculture
advances

Farmer

took agriculture
advance for short
duration crop.

He does not repay

any amount for a
period of two crop
season then it is
treated as NPA
The instalment of
principal or interest
thereon remains
overdueShort Duration Crops
Two Crop Seasons
Long Duration CropsOne Crop Seasons
4.2

Standard Assets

Sub-standard Assets

Doubtful Assets

Asset which do not

pose any problems
and which do not
carry more than
normal risk
attatched to the
business. They are
not NPAs.

Assets which have

remained an NPA
for a period not
exceeding 12
months.

An asset classified
as doubtful if it
remained in the
sub-standard
category for 12
months.

B
d

n
a

r
a

g
n

a
h

a
iy

Loss Assets

Asset, where loss has

been identified by
the bank or internal
/ External Auditors
or by the RBI
Inspection.

Term Loan taken on 31st Jan. 2006

n
A

Maturity on 30th June 2006

A
C

Upto 1st Oct. 2006 Term loan will be treated as NPA

From 1st Oct. 2006 to 30th Sept. 2007 Substandard Asset
After 1st Oct. 2007 Doubtful Asset

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Customer do not repay the loan

till 30th Sept. 2006 i.e. default
continues for 90 days after
maturity.
If Auditor stamps doubtful
asset as a bad, then it is Loss
Asset.

4.3

Nature of Asset

Standard Assets
Direct Advances to Agricultural and SME Sectors
Residential Housing Loans beyond Rs.20 Lakhs
advanced to Specific Sectors (E.g. Personal Loans-credit card,
commercial Real Estate Loans, Capital Market Exposures and Loans and
Advances to non deposit taking NBFC)
Others (Not Covered above)

Sub Standards Assets Irrespective of ECGC Cover & Security Available

(When Unsecured exposures is less than 10% of Total Outstanding Exposure
provide additional 10% on total outstanding, therefore totaling to 20%)

n
A

r
a

g
n

a
h

B
d

n
a

a
iy

Required Provision as a
% of Total Outstanding
0.25%
1%
2%
0.40%

15%

Doubtful Assets- Secured Portion

Up to 1 Year
1 3 Years
More than 3 years

25%
40%
100%

Doubtful Assets Unsecured Portion

Loss Assets

100%
100%

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

4.4

Particulars

a
iy

70,00,000

Term loan
(-) Security (Building)

Security
Realisable value
= 20 lakhs

Loan Rs.
70,00,000

B
d

Particulars
Balance Outstanding
Less:

Unsecured Portion
Less:

n
a

Realisable Value of Security

n
A

r
a

g
n

Unsecured portion

Rs.

A
C

Rs.
XXXX
XXXX
XXXX

Total Provision Required

94220 26740

30,00,000

XXXX

Provisioning Required:
1. For net Unsecured Portion (100% x Net Unsecured Portion)
2. For Secured Portion of Advance (Amount x Appropriate %)

CA Anand R. Bhangariya

50,00,000

XXXX

Extent of ECGC Cover

Net Unsecured Portion

20,00,000

(-) ECGC (50,00,00 X 40%) 20,00,000

a
h

Gives guarantee to the extent of 40%.

Rs.

www.cavidya.com

XXXX
XXXX
XXXX
4.5

Mr. Ram

Ram discounts bill with bank of amount Rs.

10,000 for 3 months @ 5% on 01.03.2011

Discount of Rs. 125 10,000 123 5% is Income for Bank

which they credited to its Revenue Account.

1st March 2011

Discount of Rs. 41.67

(125 13)

A
C

n
A

n
a

F. Y. 2010-2011

As per
accrual
concept

r
a

g
n

a
h

B
d

31st March 2011

a
iy

Rebate on bills
discounted refers to
the unearned
discount on those bills
that will mature after
the date of closing of
accounts or that
portion of the discount
which relates to the
period falling after
the close of the year.

31th May 2011

Discount of Rs. 83.33

(125 23)
F. Y. 2011-2012

Unearned interest = bill value

X discount rate X (No. of days
to maturity on balance sheet
date / 365 days)

This unearned discount of Rs.83 which belongs to next F.Y. is

called as Rebate on Bill Discounted.
CA Anand R. Bhangariya

94220 26740

www.cavidya.com

4.6

No
1.

Particulars

L.F.

For discounting of bill by customer and recording the discount

income:
Bill Discounted A/c

Dr.

2.

3.

a
h

B
d

For transfer of unearned discount to Rebate on Bills Discounted:

Discount on Bill A/c
To Rebate on Bills Discounted A/c (at Unearned Discount)

n
a

n
A

For transfer of Opening Balance of unearned interest to Interest

and Discount for the year:
Rebate on Bills Discounted A/c
To Discount on Bills A/c

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Credit

r
a

g
n

To Customers A/c (at Present Value)

To Discount on Bills A/c (Balancing figure=Income of the Bank)

a
iy

Debit

Dr.

Dr.

4.7

banks are required to

maintain capital adequacy
ratio of 9%.

Mr. Ram

A
C
CA Anand R. Bhangariya

g
n

a
h

1,000 X 9% = Rs. 90

B
d

r
a

a
iy
Mr. Mohan

n
a

n
A

94220 26740

www.cavidya.com

4.8

Tier I capital is permanent capital and are readily available at the time of crisis.
Tier II capital is less permanent and are less readily available.
Computation of Tier I Capital
Paid up Equity Share Capital 50 crore shares of Rs. 10 each
Add:
(i) Statutory Reserve

g
n

(iii) Other free reserves

a
h

(iv) Capital Reserve arising out of surplus from sale of assets

B
d

(i) Equity Investment in Subsidiaries

(ii) Intangible Assets
(iii) Current and brought forward losses

r
a
XXX

(ii) Share Premium

Less:

a
iy

Rs.

XXX
XXX
XXX

Rs.
XXX

XXX
XXX

XXX
XXX
XXX

XXX
XXX
Any deferred revenue expenditure related to Voluntary Retirement Scheme (VRS) would not be
deducted from Tier I capital

n
a

n
A

Computation of Tier II Capital

(ii) Cumulative perpetual preference shares
(iii) Revaluation reserve at a discount of 55%
(iv) Contingency and Loss Reserves

A
C

Rs.

Rs.
XXX
XXX
XXX
XXX

Tier II capital is limited to maximum of 100% of Tier I capital.

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

4.9

Computation of Off Balance Sheet Items

No
I
II
III

IV

V
VI

Asset
Cash and Balance with RBI
Balances with banks
Money at call and short notice
Investments
a. Government and other approved securities
b. Others
Advances
Bills purchased and discounted and other credit facilities
a. Claims guaranteed by Government of India
b. Claims guaranteed by State of Government
c. Claims on Public sector undertakings
d. Others
Fixed Assets (net of depreciation)
Other Assets
a. Advance income tax, TDS, Interest accrued on Government
securities and interest accrued on balance with RBI
b. Others

A
C

n
a

n
A

94220 26740

0
100

0
0
100
100
100

0
100

Computation of Risk Weighted Assets

Acceptances, Endorsements, Other obligations, etc.

a. Guaranteed by Central / State Government
b. Others
CA Anand R. Bhangariya

a
iy

r
a

g
n

a
h

B
d

% Weight to Book Value

0
0
0

www.cavidya.com

0
100
5.10

Financial Statement

Form

Schedule
No.

A
C

a
iy

r
a

n
a

8
9
10
11
12

Capital
Reserves and Surplus
Deposits
Borrowings
Other liabilities and provisions
Cash and balance with RBI
Balance with banks, money at call and
short notice
Investments
Advances
Fixed assets
Other assets
Contingent liability

Profit and Loss Account

13
14
15
16

Interest earned
Other income
Interest expended
Operating expenses

1
2
3
4
5
6
7

Name

Balance Sheet

CA Anand R. Bhangariya

n
A

94220 26740

g
n

a
h

B
d

www.cavidya.com

5.11

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A
94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

5.1

Covers the risk on

account of

Fire

n
a

B
d

n
A

Insurance cover on property.

Insurable value determinable.
Policy cant be cancelled.
Claims is payable by insurance company in
the event of loss suffered by insured due
to a specialised cause.

A
C

CA Anand R. Bhangariya

94220 26740

Accidental Death

a
iy

r
a

g
n

a
h

Flood

Theft

Covers the risk on

account of

Death on account
of disease

Insurance cover on life of human

Insurable value determined by policy
holder.
Policy can be terminated.
Claims is payable either on death or on
expiry of stipulated period in the policy.

www.cavidya.com

5.2

Insurance Company

g
n

Insurance contract

a
h

Premium

Premium is the
payment made by
the insured as
consideration for
the grant of the
insurance.

A
C

The contract in which insurance company

undertakes to indemnify the insured on the
happening of certain event in consideration
of a specified amount.

n
a

B
d

The period for which an insurance policy is taken

is known as Term of the Policy.

n
A

The amount for which the insurance policy is taken

is called as Sum Insured

a
iy

r
a

Agent

Businessman

Term of policy
Sum Insured

Insurance policy

The document which

contains all the term
&
conditions
of
insurance & risk
covered.

Agents Balance: It has a Credit balance. It also include the premium collected by
them from the policyholders. It has a Debit balance.

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

5.3

Car

Term of policy 1 yr.

(Every year needs renewal)

Claim arises only when the loss occurs or

the liability arises.

A
C
CA Anand R. Bhangariya

n
A
94220 26740

g
n

a
h

B
d

n
a

r
a

Businessman

Taken insurance on vehicle.

www.cavidya.com

a
iy
LIC

Taken insurance on his life.

Term of policy = 10 years
Claim is payable in
case of

Death

OR

Maturity of
policy

5.4

The surrender value under an Insurance Policy is the value of the insured is eligible to receive on closure or
surrender of a life insurance before its claim falls due.

a
iy

Mr. X taken Insurance policy of Rs. 10 Lakhs for 10 years on 1-1-2011

LIC
Premium paid
for 5 years

n
A

31-12-2015
Could not pay
premium but
decided to continue
the policy.

r
a

g
n

a
h

B
d

n
a

1-1-2011

A
C

Could not pay

premium decided to
discontinue the
policy.

Mr. X

The amount paid on discontinue of

the policy is called Surrender value.

31-12-2020

Paid Up Value = Sum Assured x

(No. of Premium Paid Total
Number of Premium Payable)
5

Paid Up Value = 10,00,000

10
= 5,00,000.

Paid up policy is the policy converted in case the insured is unable to continue paying premiums on his life
policy, and discontinues the payment.
CA Anand R. Bhangariya

94220 26740

www.cavidya.com

5.5

LIC
Company earned profit of Rs. 2.5 Crores.
Taken Life Insurance policy Rs. 10 Lakhs each.

On Maturity
Mr. X

Mr. X

Share in profit

n
a

n
A

10,00,000

10,000

r
a

g
n

a
h

B
d

Policy Amount

a
iy

Mr. Y

10,00,000
Mr. Y

Bonus is the share of policy holders in the surplus balance in Life Fund.
With profit policy:-Under this policy, a policy holder is entitled to participate in profits of life insurance
company in addition to fixed sum payable on maturity.
Without profit policy:-Under this policy the insured is not entitled to share profit of life insurance
company. The insured receives only fixed sum of money on maturity. The premium on this policy is
comparatively less than in the case of with profit policies.
The bonus can be distributed either in cash or by reduction in the future premium or may be distributed
upon maturity of the policy.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

5.6

Mr. X has taken policy of 15 years on 1-1-2011.

LIC

B
d

15 Premiums

n
a

g
n

a
h

31-12-2025

1-1-2011

31-12-2030

a
iy

r
a

On attaining the age of 45, insurance company will

pay fixed annual payment to Mr. X till death.

Mr. X

Death

Fixed annual
payment (Annuity)

Insurance Company guarantees to pay money regularly as long as one lives, in consideration of
lump sum money received from the insured.
The payment of annuity depends upon the age of annuitant and the prevailing rate of interest.
The annual (or regular) payment is called annuity and the lump sum money received is called
"Consideration for annuities granted".
Annuity paid represents an expenditure of the life insurance business and consideration received
for annuities is an item of income.

A
C

CA Anand R. Bhangariya

n
A
94220 26740

www.cavidya.com

5.7

Insured

From Bajaj
Allianz point
of view,
Insurance is
Ceded.

Insured approaches
Bajaj Allianz for
Insurance Cover

Bajaj Allianz contacts

TATA AIG to cover
itself against larger
risk.

A
C

CA Anand R. Bhangariya

94220 26740

B
d

n
a

TATA AIG will pay

commission to Bajaj
Allianz for business
received

a
iy

r
a

g
n

a
h

On the happening of
uncertain event
covered under policy

n
A

First Insured will pay

premium to Bajaj
Allianz

Bajaj Allianz General

Insurance Company

From TATA
AIG point of
view,
Insurance is
Accepted.

Bajaj Allianz will pay

the claims to the
insured.

TATA AIG will repay

the amount of claim
to Bajaj Allianz

Bajaj Allianz will

transfer the premium
to TATA AIG for risk
undertaken
www.cavidya.com

5.8

Premium:

a
iy

Particulars

Rs.

Total premium received on direct business

Add:

Premium received on reinsurance accepted

Less:

Premium o/s received for last year

B
d

Transfer to revenue a/c

Commission:

n
a

n
A

Particulars

Commission on direct business

Add:

a
h

Premium paid on reinsurance ceded

r
a

g
n

Premium o/s at the end of the year

Rs.

Commission paid on reinsurance accepted

A
C

Commission o/s at the end of the year

Less:

Commission received on reinsurance ceded

Commission o/s paid for last year

Transfer to revenue a/c

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

5.9

Claims Less Reinsurance:

a
iy

Particulars

Rs.

r
a

Total claims paid on direct business (Including all incidental expenses incurred
in settlement of claims)
Add:
Claims on reinsurance accepted
Claims o/s at the end of the year
Less:

B
d

Claims o/s paid for last year

Transfer to revenue a/c

A
C
CA Anand R. Bhangariya

n
a

n
A
94220 26740

g
n

a
h

Claims paid on reinsurance ceded

www.cavidya.com

5.10

a
iy

Mr. X insured his Car on 1-1-2011 for a period

of 1 year.
Mr. X

Policy is taken for one year.

i.e. Risk is for one year

1-1-2011
financial year ends

n
a

n
A

a
h

B
d

31-3-2011

g
n

r
a

31-12-2011

On 31-3-2011 company has to make provision for

unexpired risk for the next financial year.

Marine Hull Insurance 100% of Net Premium

Fire, Marine Cargo and Miscellaneous Business 50% of Net Premium

A
C

If company feels that reserves is not sufficient to meet

claims to the date of closing of the financial year, they
may build up additional reserves for unexpired risks.
CA Anand R. Bhangariya

94220 26740

www.cavidya.com

This is the voluntary reserve and

company will decide its percentage
on net premium.
5.11

Form
B - RA

Financial Statement
No.
1

Revenue A/c

Schedule
Name
Premiums earned net

Commission

Operating Expenses related to Insurance Business

-

g
n

B - PL

Profit and Loss A/c

B - BS

Balance Sheet

Share Capital

Reserves and Surplus

Borrowings

Investments

Loans

10

Fixed Assets

11

Cash and Bank Balances

12

Advances and Other Assets

13
14
15

Current Liabilities

A
C
CA Anand R. Bhangariya

a
h

B
d

n
a

94220 26740

r
a

Claims Incurred (Net)

4
-

n
A

a
iy

Provisions
Miscellaneous Expenditure
www.cavidya.com

5.12

 This represents the excess of revenue receipts over revenue expenditure relating to life insurance
business.
The fund is available to meet the aggregate liability on all policies outstanding.
Revenue account is prepared every year to ascertain the balance of life insurance fund at the end of
the year.
Closing Balance of Life Insurance Fund:

Opening balance

B
d

Add : Revenue Income

Less : Revenue Expenses

Closing balance

A
C
CA Anand R. Bhangariya

n
A

n
a

94220 26740

www.cavidya.com

r
a

g
n

a
h

Particulars

a
iy

Amount

5.13

a)
b)

c)
d)
e)
f)
g)

h)

The balance in the life assurance fund can not be taken as the profit made by the life insurance
business.
For the purpose of ascertaining the profit insurance company has to calculate its net liability on all
outstanding policies.
For calculating net liability, the actuaries calculate the present value of liability on all the policies in force
as well as present value of future premium to be received on policies in force.
The excess of the present value of future liability over the present value of future premium is called the
net liability.
If the life insurance fund is more than the net liability, the difference represents the profit.
On the other hand, the excess of net liability over the life assurance fund represents the loss for the
inter-valuation period.
95 % of the profit of life business must be distributed to the policy holders by way of "Bonus ", on with
profit policies and the remaining 5 % has to the utilised for such purpose as the Government may
determine.
The profit or loss to the life insurance business is ascertained by preparing a statement called "Valuation
Balance Sheet.

n
a

n
A

Particulars

A
C

To Net Liability as per Actuarial

Valuation

Valuation Balance Sheet As on

Amount
XXX
XXX

To Surplus (Net Profit)

CA Anand R. Bhangariya

B
d

Total
94220 26740

r
a

g
n

a
h

a
iy

Particulars
By Life Assurance Fund as per
Balance Sheet

XXX

By Deficiency (Net Loss)

XXX

Total
www.cavidya.com

Amount
XXX

XXX
5.14

a
iy

Particulars

Rs.

Profit as per Valuation Balance Sheet

r
a

Add: Interim Bonus paid

g
n

Less: Loss on sale of Investments

Less: Provision for taxation

a
h

Profit made during the Year

B
d

Add: Balance Brought Forward

Total Profit

n
a

Less: Transfer to Fund

Available for Distribution

n
A

XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

Distribution to Shareholders (@ 5%)

XXX

Distribution to Policyholders (@ 95%)

XXX

Less: Interim Bonus paid

XXX

Amount due to policyholders

XXX

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

5.15

Form
A - RA

Financial Statement
No.
1

Revenue A/c

Schedule
Name
Premiums earned net

Operating Expenses related to Insurance Business

Benefits Paid (Net)

g
n

A - PL

Profit and Loss A/c

A - BS

Balance Sheet

Share Capital

Reserves and Surplus

Borrowings

Investments

Loans

10

Fixed Assets

11

Cash and Bank Balances

12

Advances and Other Assets

13
14
15

Current Liabilities

A
C
CA Anand R. Bhangariya

a
h

B
d

n
a

94220 26740

r
a

Commission

4
-

n
A

a
iy

Provisions
Miscellaneous Expenditure
www.cavidya.com

5.16

A
C

n
a

n
A

CA Anand R. Bhangariya

B
d

94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

6.1

Double Account System is a special method of presenting the Final accounts rather than a special
system of keeping accounts. The main objective of this system is to disclose how much capital has
been raised and how much capital has been utilised in the acquisition of assets.

a
h

B
d

n
a

Particulars

Rs.

r
a

g
n

Amount spent for Extension as well as

Repairs jointly

a
iy

Particulars

Rs.

Amount equal to the present cost of

replacement of the old asset

XXX

Total cost of replacement

XXX

Less Sale proceeds of scrap of the old

aset

XXX

Add Value of materials of old asset used

in rebuilding the new asset

XXX

Less Value of materials of old asset

used in rebuilding the new asset

XXX

Less present cost of replacement of the

old asset

XXX

A
C

n
A

Capitalised

XXX

Charged to Revenue XXX

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

6.2

No
1.

Particulars

L.F.

For Cash Expenses incurred

New Main A/c

2.

3.

4.

For use of old materials in new construction

New Main A/c
To Replacement A/c

n
A

a
h

B
d

n
a

For sale of old materials

Bank A/c
To Replacement A/c

A
C

g
n
Dr.

Credit

r
a

Dr.

Replacement A/c
To Bank A/c

a
iy

Debit

Dr.

Dr.

For closing replacement account

Revenue A/c
To Replacement A/c

CA Anand R. Bhangariya

94220 26740

Dr.

www.cavidya.com

6.3

1. Contingency Reserve:
A sum equal to not less than 1/4 % and not more 1/2 % of the original cost of fixed assets must be
transferred from the Revenue Account to Contigency Reserve until it equals 5 % of the original cost of
fixed assets. The amount of the reserve is required to be kept invested in trust securities.
The balance in reserve can be utilised with the approval of the State Government for the following
purposes:
a) To meet expenses or loss of profits arising out of accidents, strikes or circumstances beyond the
control of the management;
b) To meet expenses on replacement or removal of plant or works other than the expenses necessary
for normal maintenance or renewal; and
c) to pay compensation payable under law for which no other provision has been made.

B
d

r
a

g
n

a
h

a
iy

2. Consumer Rebate reserve: This reserve is used for reduction in rates or otherwise return to the
consumers.

n
a

n
A

3. Tariffs and Dividend control reserve: This can be utilised whenever the clear profit is less than the
reasonable return. This is like Dividend Equalisation Reserve.
4. General Reserve:
a) Section 67 of the Act, lays down that after interest and depreciation have been provided, a
contribution to general reserve shall be made at the rate not exceeding 1/2% of the original cost
of the fixed assets until the total of such reserve come to 8 % of the original cost of the Assets.
b) This applies only to the Electricity Boards though there is nothing to stop electricity companies
from building up reserves.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

6.4

a
iy

The Electricity (Supply) Act, 1948 provides that an electricity company can not charge any rates as they
like.
They are entitled to charge such rates which gives them a reasonable return.
They must so adjust the rate that the amount of clear profit in any year does not exceed the
reasonable return by more than 20%.

a
h

g
n

B
d

r
a

1)

Objective:
The law seeks to prevent an Electricity Company from earning very high profit,. For the purpose,
concept of Reasonable Return has been propounded. Reasonable Return is the normal which a
Electricity Company can e expected to earn.

2)

Standard Rate:
Standard Rate is determined for the purpose of determining yield on the Capital Base in
computation of Reasonable Return. Standard Rate = Reserve Bank of India Rate + 2%

3)

Computation of Reasonable Return

A
C

n
a

n
A

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

6.5

Particulars
Yield on Capital Base= Capital Base x Standard Rate of Return
Income on Investments
Contingencies Reserve

Add:

1/2% of Loans advanced by the Electricity Boards

Add:

1/2% of amount borrowed from State Government approved

organisation/ Institutions

Add:

1/2% of amount raised by the Issue of Debentures

XXX

Add:

1/2% of on balance in Development Reserve

XXX

Add:

Other amount as allowed by Central Govt. having regard to the

prevailing tax structure

XXX

Reasonable Return

XXX

A
C

CA Anand R. Bhangariya

Investment

g
n

a
h

B
d

n
a

94220 26740

than

r
a

Add:

n
A

other

a
iy

www.cavidya.com

against

Rs. Lakhs
XXX
XXX
XXX
XXX

6.6

a
iy

a) The original cost of fixed assets available for use and necessary for the purpose of the
undertaking less contribution, if any, made by the consumers for construction of service
lines.
b) The cost of intangible assets.
c) The original cost of works in progress.
d) The amount of investments made compulsorily against Contingency Reserve;
e) The monthly average of stores, materials, supplies and cash and bank balances. [Monthly
average of Current Assets, excluding amount due from Consumer].
Less:
i. Depreciation on tangible assets and amounts written off from intangible assets.
ii. Loans advanced by the Board;
iii. Loans from approved institutions
iv. Debentures
v. Security deposits of consumers held in cash
vi. The amount standing to the credit of the Tariff and Dividends Control Reserve
vii. The amount set apart for the Development Reserve and
viii. Balance in consumer Rebate/ Benefit Reserve.

A
C

CA Anand R. Bhangariya

B
d

n
a

n
A

94220 26740

a
h

g
n

www.cavidya.com

r
a

6.7

a
iy

1)

Meaning: Clear Profit is the difference between the amount of income and the sum of
expenditure including specific appropriations. It is the net Profit of the Company.

2)

Computation of Clear Profit:

Particulars
To Losses brought forward from
previous year
To Income Tax
To Intangible asset written off
To Contribution to Contingency Reserve
To Arrears of Depreciation
To Development Reserve
To Other appropriations permitted by:
State Government.
To Balance being
CLEAR PROFIT
Total

A
C

CA Anand R. Bhangariya

94220 26740

g
n

r
a

Particulars
By Net Profit after usual working
charges and interest.

a
h

B
d

n
a

n
A

Rs

Rs

Total

www.cavidya.com

6.8

a
iy

Surplus is the difference between the Clear Profit and the Reasonable Return.

Disposal of Surplus
20% of Reasonable Return

Electricity Company (A) Least of the

following:
1/3rd of 20% of Reasonable Return
5% of reasonable return

A
C

CA Anand R. Bhangariya

B
d

n
a

n
A

(B) = 50% of Balance

50% Transfer to Tariff and
Dividend Control Reserve

94220 26740

g
n

a
h
Balance

www.cavidya.com

r
a

Balance (D)
Consumer Rebate Reserve

(C) = 50% of Balance

50% Transfer to Consumer
Control Rebate Reserve

6.9

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A
94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

8.1

a
iy

Dissolution of Partnership

Dissolution of Firm

Change in existing relationship between the

partners.
Firm continues its business as before
It may take place in following ways.
a) Change in existing PSR among partners
b) Admission of new partner
c) Retirement of a Partner.
d) Death of a Partner
e) Insolvency of a Partner
f) Completion of the venture if partnership is
formed for that
g) Expiry of the period of partnership, if it is
for the specific period of the time.

According to Section 39 of the

partnership Act 1932, the dissolution of
partnership between all the partners of a
firm is called the Dissolution of The Firm.
That means the Act recognises the
difference in the breaking of relationship
between all the partners of a firm and
between some of the partners;

A
C

CA Anand R. Bhangariya

n
a

n
A

g
n

a
h

B
d

r
a

Death of Partner

94220 26740

www.cavidya.com

8.2

Second Step

Prepare Balance
Sheet of the firm as
on date of
dissolution.

First Step

Non cash assets are

converted into cash
Profit or loss on sale of
assets is transferred to
Realisation account.

A
C

n
a

B
d

n
A

r
a

g
n

a
h

a
iy

Balance in Realisation
account is transferred to
Capital account.
Available cash is
distributed to creditors
& partners.

Last Step

Object of Realisation Account

Whatever may be the reason for dissolving the partnership, the accounts have to be closed. A
special account called Realisation Account is used to record the closing transactions, showing net
gain or loss that has resulted from the realisation of assets & settlement of liabilities.
CA Anand R. Bhangariya

94220 26740

www.cavidya.com

8.3

No
Particulars
(a) Transfer of recorded Assets to Realisation A/c
Realisation A/c (With the total)
Dr.
To Sundry Assets A/c (With their individual book values)
(b) Transfer of Liabilities, Provisions to Realisation A/c
Liabilities A/c (With their individual book figures)
Provision for Doubtful Debt A/c
Provision for Depreciation A/c
To Realisation A/c (with the total)
(c)
1.

2.

n
a

Realisation all Assets (whether recorded or unrecorded)

When assets are sold for cash
Cash/ Bank A/c
To Realisation A/c

A
C

n
A

Assets are taken away by partner

Partners Capital A/c
To Realisation A/c

CA Anand R. Bhangariya

94220 26740

Dr.
Dr.
Dr.

Debit

Credit

a
iy

r
a

g
n

a
h

B
d

L.F.

Dr.

Dr.

www.cavidya.com

8.4

No
Particulars
3. Assets are given away to any of the creditors towards the
full/partial payment of his dues.
No Journal Entry may be passed

L.F.

2.

a
h

n
a

B
d

Partner agreeing to discharge a liability

Realisation A/c
To Respective Partners Capital A/c

A
C

n
A

(e) Payment of Realisation Expenses

1. When expenses are paid in cash
Realisation A/c
To Cash / Bank A/c
CA Anand R. Bhangariya

94220 26740

Credit

a
iy

r
a

g
n

(d) Discharge of outsiders Liabilities (whether recorded or

unrecorded)
1. When Liabilities are discharged in cash
Realisation A/c
Dr.
To Cash / Bank A/c

Debit

Dr.

Dr.

www.cavidya.com

8.5

No
Particulars
2. When expenses are paid by partner
Realisation A/c
To Partners Capital A/c

L.F.

g
n

When any of the partners agrees to do dissolution work for

an agreed remuneration
Realisation A/c
Dr.
To Concerned Partners Capital A/c

4.

When expenses are paid by a partner who has to bear such

expenses
No Entry

5.

When exps. are paid by the firm on behalf of a partner who

has to bear such expenses
Concerned Partners Capital A/c
Dr.
To Cash/ Bank A/c

A
C

CA Anand R. Bhangariya

B
d

n
a

n
A
94220 26740

a
h

www.cavidya.com

Credit

a
iy

r
a

Dr.

3.

Debit

8.6

No
Particulars
(f) Transfer of Profit in PSR on Realisation
Realisation A/c
To All Partners Capital A/cs
(g)

Transfer of Loss in PSR on Realisation

All Partners capital A/cs
To Realisation A/c

L.F.

g
n

a
h

B
d

Credit

a
iy

r
a

Dr.

Dr.

Debit

(h) Payment of Partner Loan/ Advances

Partners Loan/ Advance A/c
Dr.
To Capital A/c (Only to the extent of Dr. Balance in capital A/c)
To Cash A/c (with the Balance)
(i)

A
C

n
a

n
A

Transfer of Accumulated Profit in PSR

Profit & Loss A/c
General Reserve A/c
To All Partners Capital A/c

CA Anand R. Bhangariya

94220 26740

Dr.
Dr.

www.cavidya.com

8.7

No
Particulars
(j) Transfer of Accumulated Losses in PSR
All Partners Capital A/c
To Profit & Loss A/c
To Deferred Revenue Expenditure A/c

L.F.

2.

n
a

n
A

In case of credit balance in a Current Account of a Partner

Concerned Partners Current A/c
To concerned Partners Capital A/c

A
C

CA Anand R. Bhangariya

94220 26740

g
n

a
h

B
d

Concerned Partners Capital A/c

To concerned Partners Current A/c

www.cavidya.com

Credit

a
iy

r
a

Dr.

(k) Transfer of the Balance in Current Account(s)

1. In case of debit balance in a Current Account of a partner

Debit

Dr.

Dr.

8.8

No
Particulars
(l) Payment to/by a Partner
1. In case of payment by a partner having a debit balance in
his Capital A/c
Cash /Bank A/c
Dr.
To Concerned Partners Capital A/c
2.

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A
94220 26740

www.cavidya.com

Debit

Credit

a
iy

r
a

g
n

a
h

Payment to a partner having a credit balance in his Capital

A/c
Concerned partners Capital A/c
To Cash/ Bank A/c

L.F.

Dr.

8.9

The treatment of goodwill in case of dissolution of a firm may be summarized as follows:

a
iy

No.

Particulars

If Goodwill is Already
appearing in the Books

If Goodwill is not Appearing in

the Books

(a)

On Transfer to

Realisation A/c

The question of transfer

Realisation A/c
(b)

Dr.

On sale for cash

Cash/ Bank A/c

does not arise at all

Dr.

a
h

To Realisation A/c
(c)

On being taken over

A
C
CA Anand R. Bhangariya

n
a

n
A
94220 26740

B
d

Concerned Partners Capital A/c

Dr.

By any of the partners

To Realisation A/c

r
a

g
n

To Goodwill A/c

www.cavidya.com

Cash/Bank A/c

To Realisation A/c

Concerned Partners Capital A/c

Dr.
To Realisation A/c

8.10

Trial Balance
Particulars
Debtors

50,000

g
n
3,00,000

a
h

Realisation A/c

1)
2)

B
d

3,00,000

Debtors

n
a

n
A

r
a

3,50,000

Less: Provision for bad debts

Debtors

a
iy

Rs.

Realisation A/c

3,50,000

Provision 50,000

An Asset against which a provision or reserve has been created, should be transferred at its
gross figure and not at its net figure e.g. Debtors
Provision/Reserve against an asset is a separate account and thus, it should be transferred to
Realisation Account separately like other liabilities, e.g. Provision for Doubtful Debts A/c,
Machinery Replacement Reserve

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

8.11

Trial Balance
Particulars

r
a

Creditors

5,00,000

Provision for discount on creditors

1,00,000

4,00,000

n
a

n
A

Realisation A/c

Provis. 1,00,000

B
d

(5,00,000 1,00,000)

g
n

a
h

Realisation A/c
Creditors

a
iy

Rs.

Creditors 5,00,000

1) Provision /Reserve against a liability is a separate account and thus, it should be transferred to
Realisation A/c separately like other assets, e.g. Provisions for Discount on Creditors.
2) A liability against which a provision or reserve has been created, should be transferred at its
gross figure and not at its net figure, e.g., Creditors.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

8.12

Trial Balance

Particulars
Bank balance

A
C
CA Anand R. Bhangariya

g
n

a
h

Cash & bank is never realized but same is

distributed in its present form.

B
d

n
a

n
A
94220 26740

r
a

2,00,000

Realisation A/c
Bank 2,00,000

a
iy

Rs.

www.cavidya.com

8.13

Trial Balance
Particulars

Assets Realised
Loan from Relatives of the partners

30,000

g
n

Creditors

20,000

a
h

Partners Loan

To Bank
By Bank
Partners Loan 40,000
Creditors
20,000
Loan frm. Rel. 30,000

A
C

r
a

1,00,000

B
d

Realisation A/c

1,00,000

n
a

n
A

At par

a
iy

Rs.

40,000

Realisation A/c

To Bank
Creditors
20,000
Loan frm. Rel. 30,000

By Bank 1,00,000

Partners Loan 40,000

Loan from relative of partner = external liability = at par with the creditors
Loan from partner = payment is made after paying creditors, but before repayment of capital

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

8.14

a
iy

Different Ways of Dissolution

When all Partners are

Solvent

n
a

n
A

a
h

B
d

r
a

g
n

Not all but some of the

partners are solvent

When all partners are

Insolvent

When all partners solvent, before balancing capital account of partners, the loan from any
partner is to be paid first. And if any partner has taken any loan from firm, he has to bring
necessary cash in to the business.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

8.15

a)

b)

At the time of dissolution of a partnership firm, the capital account of a partner may show a
debit balance after his share of any profit or loss on realisation has been included in his account.
But if he cannot make good the whole or part of a deficiency, then what should be done?
This deficiency must be shared by all the solvent partners.
Ratio to share deficiency by
Solvent partners

In their profit sharing ratio (like

any business loss)

No.

Case

a)

In Case of Fixed Capitals

b)

A
C

In the ratio of their last agreed capitals.

(This issue was upheld in the case of
Garner Vs. Murray.)

n
A

Meaning of Last Agreed Capital

94220 26740

www.cavidya.com

In Case of Fluctuating
Capitals

CA Anand R. Bhangariya

n
a

B
d

r
a

g
n

a
h

a
iy

Last Agreed Capital means the Fixed Capital (given in the Balance
Sheet) without any adjustment.
Last Agreed Capital Means the Capital after making adjustments
for past accumulated reserves, profits or losses, drawings,
interest on capitals, interest on drawings, remuneration to a
partner etc. to the date of dissolution but before making
adjustment for profit or loss on realisation.
8.16

a
iy

When all the partners are insolvent and the the assets of the firm are inadequate to meet the
firms liabilities, the firm is said to be insolvent.
In case of insolvency of firm, the creditors of
the firm cannot be paid in full. The available
cash with the firm is first used to pay
realisation expenses

n
A

g
n

a
h

B
d

n
a

r
a

The balance amount is paid to creditors

proportionately. Any balance remaining
unpaid to them represent their sacrifice on
account of insolvency of partners.

In order to close the acounts of firm, Realisation account is prepared in the usual manner.

A
C

However if loss on realisation is to be

determined before considering the amount
ultimately paid to creditors, the creditors are
not transferred to Realisation account.

CA Anand R. Bhangariya

94220 26740

if loss on realisation is to be determined after

considering the amount ultimately paid to
creditors, the creditors are transferred to
Realisation account.

www.cavidya.com

8.17

1. Till now, all the questions relating to dissolution (ireespective of solvency of partners) are based
on the assumptions that all the assets are reallised & all the liabilities are setteled together
before the partners are paid off.

a
iy

r
a

2.

In actual practice, it may not be possible to realise all assets on the date of dissolution and pay
the liabilities on that date. Assets are realised and cash collected gradually.

3.

Cash available is applied in following order:

a) Realisation expenses
b) Outside Creditors
c)
Partners Loan
d) Provision for Contingent Liability
e) Partners Capital.

A
C
CA Anand R. Bhangariya

B
d

n
a

n
A
94220 26740

a
h

g
n

www.cavidya.com

8.18

Capital of the partners are

not in PSR

Maximum loss
Method

A
C
CA Anand R. Bhangariya

B
d

Proportionate
Capital Method

n
a

n
A
94220 26740

g
n

a
h

www.cavidya.com

a
iy

r
a

Distribution of Cash

Capital of the partners are

in PSR

Distribution of cash in
PSR

8.19

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A
94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

9.1

Amalgamating Firms

Sun Associates

g
n

Decides to amalgamate and to form new partnership firm

a
h

B
d

a
iy

r
a

Moon Associates

Sun Moon Associates

n
a

Separate existence of Sun Associates and Moon Associates comes

to an end & a new firm Sun Moon Associates is formed.

A
C

n
A

Under amalgamation, two or more firms transfer their business to a new firm which is
formed to take over such businesses.
Usually all the assets and liabilities are revalued in order to ascertain the true position as
on the date of amalgamation.

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

9.2

No
Particulars
1 For Goodwill
the value of the goodwill will be ascertained in case of each firm
and amount will be credited to partners capital account in old PSR
Good will A/c
Dr.
To partners capital A/c
2.

3.

4.

For Reserves and other undistributed profits

Profit & Loss A/c
General Reserve A/c
To All Partners Capital A/c

n
a

For increase in value of assets or decrease in value of

liabilities
Assets /Liabilities A/c
To P & L Adjustment A/c

A
C

n
A

For decrease in value of assets or increase in value of

liabilities
P & L Adjustment A/c
To Assets /Liabilities A/c

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Debit

Credit

a
iy

r
a

g
n

a
h

B
d

L.F.

Dr.
Dr.

Dr.

Dr.

9.3

No
Particulars
5. For profit on Revaluation
P & L Adjustment A/c
To partners capital A/c
(For loss on revaluation entry will be reversed)
6.

7.

8.

For an Assets taken over by a partner

Partners Capital A/c
To Asset A/c

Dr.

n
a

For an Assets & Liabilities taken over by new firm

New Firm A/c
Liabilities Taken Over A/c
To Assets Taken Over A/c

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Dr.

Debit

Credit

a
iy

r
a

g
n

a
h

B
d

For an Liabilities taken over by a partner

Liabilities A/c
To Respective Partners Capital A/c

n
A

L.F.

Dr.

Dr.
Dr.

9.4

No
Particulars
9. Assets/Liabilities no taken over the new firm will be either sold
away or paid off and any profit or loss on such selling or payment
will be transferred to Partners capital A/c in ratio of their capitals.
10. Transfer of partners Capital A/c
Partners Capital A/c
To New Firm A/c

A
C

n
a

n
A

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Dr.

Debit

Credit

a
iy

r
a

g
n

a
h

B
d

L.F.

9.5

No
Particulars
1. For an Assets & Liabilities taken over
Assets taken over A/c

L.F.

g
n

a
h

2.

For any further contribution towards capital by the partners

Bank A/c
Dr.
To Partners Capital A/c

3.

For any capital withdrawn by the partners

Partners Capital A/c
To Bank A/c

A
C

n
a

n
A

CA Anand R. Bhangariya

B
d

94220 26740

www.cavidya.com

Credit

r
a

Dr.

To Partners Capital A/c

To Liabilities taken over

a
iy

Debit

Dr.

9.6

Sold its business to a

Tom & Jerry Associates

Existence of Tom & Jerry Associates comes

to an end

a
h

B
d

r
a

g
n

i.e. nothing but dissolution

a
iy

Disney Ltd.

We are going to follow same accounting treatment that we have followed in

Dissolution of Firm

n
a

n
A

Sometimes the business of the Partnership Firm may be sold to a limited company.
Procedure regarding closing of the books of account of Partnership firm is the same
as in case of dissolution of a firm.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

9.7

Will pay Purchase Consideration to

Disney Ltd.

a
h

Purchase Consideration

When Lump sum

figure is given

n
A

n
a

PC = Lump Sum Figure

For Eg. The company took over
the firms business for a total
consideration of Rs. 1,05,000

A
C

CA Anand R. Bhangariya

94220 26740

B
d

Tom & Jerry Associates

When Lump sum

figure is not given

Payment Method

www.cavidya.com

r
a

g
n

For Assets & Liabilities taken over by it.

a
iy

Net Asset Method

9.8

To arrive at Purchase consideration all payments made by the company to the firm are added
together. It is done as under :
Particulars

g
n

Issue price of Equity shares

Issue price of Preference shares

a
h

Issue price of Debentures

B
d

Total payment being the amount of Purchase consideration

a
iy

r
a

Cash Paid

Rs.

XXX
XXX

XXX
XXX
XXX

Example :- The purchase consideration was to be satisfied by a cash payment of Rs. 56,000, the
allotment of 8,000 equity shares of Rs. 10 each at 10% discount and the allotment of 2,000, 12%
preference shares of Rs. 10 each.
Solution :Particulars

A
C

Bank

n
a

n
A

Rs.
56,000

Equity shares (8,000 X 9)

72,000

Preference shares (2,000 X 10)

20,000

Total payment being the amount of Purchase consideration

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

1,48,000
9.9

The value of net assets taken over by the company is the amount payable. It is computed as follows

Particulars

g
n

Less : Agreed value of Individual Liabilities taken over

Value of Net Assets Taken Over (Purchasing Consideration)

A
C
CA Anand R. Bhangariya

B
d

n
a

n
A
94220 26740

a
h

www.cavidya.com

a
iy

r
a

Agreed value of the Individual Assets taken over

Rs.

XXX

XXX

XXX

9.10

Example : The agreed value of assets and Liabilities of partnership firm is as follows :
Land and Building Rs. 3,00,000; Plant Rs. 1,50,000; Sundry Debtors Rs. 47,500; Stock Rs.
1,40,000; Bills receivable 50,000; Sundry Creditors Rs. 38,000 and Bills Payable 80,000.
Solution :Land and Building

a
h

Plants
Sundry Debtors

B
d

Stock

n
a

Bills Receivable
Cash
Less :

n
A

Sundry Creditors

Bills Payable

A
C

CA Anand R. Bhangariya

94220 26740

r
a

g
n

Particulars

a
iy
Rs.

3,00,000
1,50,000

47,500

1,40,000
50,000
1,00,000
38,000
80,000

Total (Purchase consideration)

www.cavidya.com

6,69,500

9.11

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A

94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

10.1

Separate set of books are

kept for each department

This method of
Acconting is
employed when
the size of the
organisation is
very large or As
per the law.

A
C
CA Anand R. Bhangariya

Each department
is regarded as a
separate unit and
Accounts are kept
independently.

n
A
94220 26740

a
h

The central Accounts department

generally maintains columnar
Purchase and Sales Day Book to
distinguish between the purchases
and sales of different departments.
www.cavidya.com

r
a

g
n

At the year end the

trading results of all
the departments are
combined to get the
trading results of the
organisation as a
whole

B
d

n
a

a
iy

All the departments are kept

together in columnar form

A department
does not maintain
a full double-entry
book-keeping
system of its own.
10.2

Allocation of direct expenses to each department is easy.

But in case of common expenses like Rent, Electricity, Insurance allocation of these expenses is
difficult.

SI.

Expenses

1.

(a) Travelling salesman's salary and commission

g
n

(b) Selling expenses

a
h

(c) After-sales service

(d) Discount allowed
(e) Freight outwards

B
d

(f) Provision for discounts on debtors

n
a

(g) Sales manager's salary and other benefits

2.

(a) Rent, rates and taxes

n
A

(b) Air conditioning expenses

(c) Heating
3.
4.
5.
6.
7.

A
C

Lighting
Insurance on Stock
Insurance on Building
Insurance on Plant & Machinery
Group insurance premium

CA Anand R. Bhangariya

94220 26740

a
iy

r
a

Basis

Sales of each department (Excluding

inter-departmental transfers)

Area or value of floor space

Light points
Average stock carried
Area
Value of Plant & Machinery
Direct wages
www.cavidya.com

10.3

SI.

Expenses

8.
9.

Basis

Power
(a) Depreciation

g
n

10. (a) Canteen expenses

(b) Workman Compensation Insurance
(c) Labour welfare expenses
11. Works manager's salary

n
a

Time spent in each department

Purchases of each department

13. Expenses directly related to a particular

department

CA Anand R. Bhangariya

94220 26740

a
h

Number of employees

B
d

12. Carriage inwards

n
A

r
a

Value of assets in each department

(b) Repairs and renewals

A
C

a
iy

H.P. or H.P. x Hours worked

Charged to respective department.

www.cavidya.com

10.4

Some material has been transferred from grocery section to

Fruits & Vegetables section.
Cost is Rs. 100.00 But transfer is
made at Rs. 125.00

i.e. it includes profit element of Grocery

Section @25% on cost

a
h

B
d

r
a

g
n

Grocery Section

a
iy

Fruits & Vegetables

Section

At the end of FY, Fruits & Vegetable section will value its closing stock at its cost price i.e. Rs.
125.00 which is transfer price of Grocery section

n
a

n
A

Rs. 25 is unrealised profit which is equal to profit of grocery section. it is necessary to provide for
unrealised profit on stock held out of inter departmental transfer.

A
C

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

10.5

No
1.

Particulars

L.F.

g
n

At the beginning of the next year reverse entry will be

passed.
Stock Reserve Account
Dr.
To Profit and Loss Account

A
C
CA Anand R. Bhangariya

94220 26740

a
h

B
d

n
a

n
A

Liabilities

r
a

Dr.

Accounting entry:

Credit

a
iy

For Unrealised profit on stock

Profit and Loss Account
To Stock Reserve Account

2.

Debit

Balance Sheet

Amount

Assets

Amount

Current Assets
Closing Stock
Less: Stock Reserve

www.cavidya.com

10.6

n
a

B
d

r
a

g
n

a
h

a
iy

Definition :- The Companies (Amendment) Act 2000 has inserted a new

clause (15A) in section 2 of the Companies Act, 1956, which states that
Employee Stock Option means the option given to the whole time directors,
officers or employees of a company, which gives such directors, officers or
employees the benefit or right to purchase or subscribe at a future date , the
securities offered by the company at a pre determined price

A
C

CA Anand R. Bhangariya

n
A
94220 26740

www.cavidya.com

12.1

XYZ Co.
Company put the proposal in
Meeting to offer ESOP Mr. Joy
for approval.

Proposal contains
1) Mr. Joy should work with the
company at least 5 years.
2) Mr. Joy should be able to grab
the Indonesia Project.
3) Mr. Joy should achieve his yearly
targets, as decided.

A
C

Exercise
Price

CA Anand R. Bhangariya

n
a

B
d

n
A
Exercise
Period

94220 26740

r
a

g
n

a
h

Grant

Grant Date

a
iy

Mr. Joy
(Director)

Vesting
Conditions

Vesting Period

Mr. Joy is required to achieve

these conditions within a time
span of 6 years. i.e.
(15.09.2011 15.09.2017)
15.09.2011 15.09.2018

www.cavidya.com

Expected Life
of an Option

12.2

Say, Mr. Joy achieves the conditions given in

proposal on 01.09.2017

Mr. Joy will not

exercise the option

If market price of the share at the time

of exercise of option is Rs. 500.

Will apply for the

shares

A
C

n
a

n
A

a
h

B
d

r
a

g
n

Company offered Mr. Joy shares @ Rs.

150 but actual price of the shares in
the market at the time of exercise of
option is Rs. 100

a
iy

Its employees right to purchase the shares or not but its the obligation of the
company to sell the shares whatever may be the price of share.

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

12.3

On 01.01.2011, gives offer to its

Ethical Ltd

r
a

g
n

a
h

a
iy

Employees

To purchase 1,000 shares each at future date between 01.01.2014 - 01.01.2015

at a predetermined price of Rs. 200 subject to fulfillment of conditions on or
before 01.01.2014.

n
a

B
d

If employees want, they are free

to dispose of the shares subject to
lock-in-period if any.

A
C
CA Anand R. Bhangariya

n
A
94220 26740

On 01.01.2015, market price of

the shares is Rs. 500
i.e. market price is generally
lower than exercise price.

www.cavidya.com

12.4

No

1.

Particulars
In respect of options granted during any accounting period, the
accounting value of the options shall be treated as another form
of employee compensation in the financial statement of the
company.
The accounting value of the option = Number of options granted
* (Market Price Exercise Price)
To Employee Stock Options Outstanding A/c

2.

3.

B
d

n
a

Stock option exercised by employees during exercise period

Bank A/c
Employee Stock Options Outstanding A/c
To Equity Share Capital A/c
To Securities Premium A/c

A
C

n
A

Stock option lapsed on expiry of exercise period

Employee Stock Options Outstanding A/c
To General Reserve A/c

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

Dr.

Debit

Credit

a
iy

r
a

g
n

a
h

Employee Compensation Expenses A/c

L.F.

Dr.
Dr.

Dr.

12.5

4.

Transfer of balance in Employee Compensation

Expenses A/c

Dr.

Profit & Loss A/c

To Employee Compensation Expenses A/c

Dr.

B
d

r
a

g
n

a
h

a
iy

Decides to issue the shares to the

public at large on 01.01.2011.

Magical Ltd.
(Listed Co.)

A
C

n
a

n
A

Mr. Roy

As a part of public offer, Company gives offer to Mr. Roy to purchase 1,000 shares at a price
of Rs.200 immediately whose market price is Rs. 350 now to retain him in a company.
Mr. Roy can subscribe to the shares of the company, if & only if he is ready to
work in a organisation for a period of 5 years. (i.e. Lock in Period)

CA Anand R. Bhangariya

94220 26740

www.cavidya.com

12.6

Company offers performance bonus to Ms. Rozy, that is

linked to the performance of the company.
Empire Ltd.

Shares of the company are trading at Rs.

250 on 01.01.2011

a
h

g
n

After 5 years, i.e. on 01.01.2016, Value of

share becomes Rs. 900.

n
a

B
d

Now instead of giving her shares, Company

will pay her appreciation in the value of
shares of the company

A
C
CA Anand R. Bhangariya

n
A

94220 26740

r
a

a
iy
Ms. Rozy

i.e. Company will pay her (Rs. 900 Rs.

250) i.e. Rs. 650 per share.

If the value of Share becomes Rs. 100 on

01.01.2016, then option cant be exercised.

www.cavidya.com

12.7

Types of ESOP for Accounting Purpose

Under this plan,

employees receives the
shares.

A
C

n
A

n
a

CA Anand R. Bhangariya
94220 26740

B
d

Under this plans, the

employees receive cash
based on the price of
enterprises shares.

www.cavidya.com

r
a

g
n

a
h

Cash Settled

Equity Settled

a
iy

Employee share based

payment plans with cash
alternative

Under these plans, either the

enterprise or the employee has
a choice of whether the
enterprise settles the payment
in cash or by issue of shares.

12.8

No
A.
1.

2.

Particulars
Fresh issue of shares
Application money received
Bank A/c
To Share application & allotment A/c
Allotment of shares
Share application & allotment A/c
Discount on issue of shares A/c
To Equity Share Capital
To Securities Premium A/c

A
C
CA Anand R. Bhangariya

B
d

n
a

n
A
94220 26740

a
h

g
n

www.cavidya.com

Dr.

a
iy

r
a

L.F.

Debit

Credit

Dr.
Dr.

12.9

No
Particulars
B. Transfer of profits to Capital Redemption Reserve A/c
(to the extent of nominal value of shares purchased)
General Reserve A/c
Profit & Loss A/c
Other Reserves A/c
To Capital Redemption Reserve A/c
C. Amount due under Buy back
Equity Share Capital A/c
Securities Premium A/c
Divisible Profit A/c
To Equity Shareholders A/c

A
C

CA Anand R. Bhangariya

94220 26740

Dr.
Dr.
Dr.

Debit

Credit

a
iy

r
a

g
n

a
h

B
d

n
a

n
A

D. Payment of amount due

Equity Shareholders A/c
To Bank A/c

L.F.

Dr.
Dr.
Dr.

Dr.

www.cavidya.com

12.10

1)
2)

The Companies Amendment Act, 2000 has allowed companies to issue equity shares with
disproportionate rights.
The share capital of company limited by shares shall be only of two kinds, namely :
a) Preference Share capital
b) Equity share Capital
i.
With voting rights ; or
ii.
With differential rights as to dividend, voting or otherwise in accordance with such
rules and subject to such conditions as may be prescribed.

A
C
CA Anand R. Bhangariya

n
a

B
d

n
A

94220 26740

www.cavidya.com

r
a

g
n

a
h

a
iy

12.11