TERMINOLOGY OF ACCOUNTING

Business: The business is an economic activity. The exchange of goods and services for the purpose of
earn the profit is known as business. The main objective of any business to earn the profit.

Classifications of business.

1. Sold trading business

2. Partnership business

3. Company business (Joint stock Company).

Capital: The initial investment of any business capital. It is introduced by the proprietor
in the firm of cash or goods or assets and proprietors.

Classifications of capital:

1. Share capital

2. Debt capital

3. Fixed capital

4. Working capital.

1. Share capital: If company to raising the capital from public by using equity and preference share are
known as share capital.

Ex: Equity share capital

Preference share capital.

2.Debt capital: If company to raising the capital from public, by using of debt instruments like; Bonds
and debentures are known as debt capital.

Ex: Debenture capital

Bond capital.
3. Fixed capital: The capital which is used for to purchase of fixed assets are known as fixed capital.
Like;

Ex: Purchase of land

“ “ Machinery

“ “ Perniture

“ “ Copy rights.

4. Working capital: The capital which is required for day to day running of business operation. Like;

Ex: Purchase of raw material

Payment of labor charges

Payment of operation exp. (rent, salaries, advertisement, e-bills etc….).

Drawings: The amount of cash is the values of the goods which are taken by the proprietor from the
business for its personal use are known s drawings.

Assets: If the businesses to purchase any article are tool for it is business use, but not resale is known as
assets.

Classifications of assets:

1. Fixed assets
a)Tangible
b)Intangible

2. Current assets

3. Wasting assets

4. Contingent assets

1. Fixed assets: Does assets which are not possible to converted into cash with in the one year are known
as fixed asset or non-current assets.
 Tangible fixed assets: It is a part fixed asset. Does assets which re possible to touch and see re known
as tangible fixed assets.

Ex: land & buildings, plant & machinery, perniture, motor vehicle, live stock etc…..

Intangible fixed assets: It is a part of fixed assets. Does assets which are not possible to touch and see
are known as intangible assets.

Ex: Good will, copy rights, trade marks, patents, computer software, brand names.

2. Current assets: Does assets which are possible to convert in to cash within the one year are known as
current asset.

Ex: cash& cash equalance

Account receivables

Inventory (closing stock)

Outstanding incomes

Prepaid exp

3. Wasting assets: If any asset which are carry wasting nature (once it is taken not possible to replace)
are known as wasting asset.

Ex; Coal mains, oil wells.

4. Contingent assets: (AS- 29): It is not a real asst. The future will be decides it a asset are not. It is a
uncertain event (may be it a asset and may not be it is asset).

Ex; Properties issues in the court.

Investment: If once company to perches another company equity shares or bonds for the purpose of
generating income like; Dividend received and interest revived as known as investment.

Ex: Equity investment

Debt investment.
Liabilities: Liability is an obligation. The amount payable by the business to the out sliders like; bankers,
suppliers re known as liabilities.

Classifications of liabilities:

1. Fixed liabilities
2. Non – current liabilities
3. Current liabilities
4. Contingent liabilities.

Fixed liabilities: The liabilities which settled in the event of liquidation (closing the company operations)
are known as liabilities.

Ex; Equity share capital.

Non – current liabilities: It is also known as long term liabilities. Which are not settled with in the one
year is known as non – current liabilities.

Ex: long term bank loans, bonds, debentures.

Current liabilities: The liabilities which are settled paid within the one year are known s current
liabilities.

Ex: bank over draft, a/c payables, outstanding exp, income received in advance.

Contingent liabilities: It is not real liability. The future event will be decides it is a liabilities are not. Is
reface in future. My be it is a liability of the company may not be is a liability of the organization,

Ex: outstanding low built, client against the companies, liabilities for bills received.

Expenses: The cost is incurred for to manufacturing and selling the goods and services are known s
expenses. The expenses which are classed in to 2 categories.

1. Direct expenses
2. Indirect expenses

Direct expenses: The expenses which are relating to manufacturing goods and services are known as
direct exp.
 Ex; Raw material, wages, oil& gas, carriage inwards.

Indirect expenses: The expenses which are relating to office and administration and selling &
distribution are known as indirect expenses.

Ex: rent, salaries, telephone bills, advertisement etc…..

Revenue: The amount which is generated by selling the goods & services are known as revenue.

Profit: If revenue more than expenses are known as profit.

Profit = revenue – expenses.

CORPORATE REPORTS

1. Annual reports
2. Interim reports
3. Quietly reports

Annual reports; Annual reports is a professional business report. It shows business review and financial
status of the org’. The annual reports with describes 12 months business data and 12 months financial
data of the org’.

In the annual reports it consists of 3 sub reports.

1. Direct report ( details of board of directors & 12 months business review)

2. Auditor reports ( GAAP rules, auditor opinion details of auditors)
3. Financial statement.

Interim reports: It is a business reports it describes only 6 months financial data and its provides limited
data.

Quietly reports: It is a business reports it consists of 3 months business data. It provides ltd financial
data. Ex: Q1, Q2, Q3, Q4.

NOTE: annual = I1 + I2, Annual=Q1+Q2+Q3+Q4

I1=Q1+Q2, I2=Q3+Q4, Q9=I1+Q3

 FINANCIAL STATEMENT ANALYSIS

Financial statement: Financial statements are statements which consist of financial transaction and
events. The main objective of preparation of financial statement.

I. To know the income position of the org’.( net profit)

II. To know financial position of the org’.
III. To know the cash position of the org’.

Financial statement as per Indian GAAP:

1) Income statement
2) Balance sheet
3) Cash flow statement

Financial statement as per IFRS GAP: ( international financial reporting standards).

1) Income statement
2) Balance sheet
3) Cash flow statement
4) Statement of share holder’s equity.

1. INCOME STATEMENT

Income statement is a important statement. It is also known as statement of profit and loss a/c or
statement of income. This is consisting of revenues, exp, incomes and gains & losses.

The income statement which having nominal a/c ledger. The main objective of preparation of
income statement to know the income position of the org’.
Income statement:

Particulars Amount
Net sales Xxx
Less: cost of goods sold (cogs) Xxx
…………………..
Gross profit…………………….. Xxx
Add: operating & non operating incomes xxx
…………………
Xxx
Less: op & non operating expenses
Except depreciation & amortization Xxx
……………………
EBIT DA……………………….. Xxx
Less: depreciation& amortization Xxx
……………………..
EBIT…………………………… Xxx
Less: interest expenses Xxx
…………………….
EBT or PBT…………………… Xxx
Less: tax Xxx
………………….
Profit after tax………………… Xxx
Less: preference dividend Xxx
…………………….
Net income or net profit………. Xxxxxx

Net sales: The total sales revenue or known as net sales, or net revenue, or total revenue, or total sales.

Total sales = cash sales +credit sales – sales returnee.

Cost of goods sold (cogs): The cost which is incurred for manufacturing goods & services are known as
cost of goods sold.

COGS = opening stock + purchases + direct exp – closing stock.

NOTE: the difference b/w Net sales and gross profit are known as cogs.

Cogs = Net sales – gross profit.

Gross profit: the difference b/w Net sales and cost of goods sold are known as gross profit.

Gross profit = Net sales – cost of goods sold.

Operating expenses: The expenses which are related to day today running of business operation are
known as operating exp.

Ex: Office & Administration exp (rent, salaries, electricity bill, telephone bill).

Selling & Distribution exp (Promotional exp, advertisement, mkt exp.)

Non – Operating expanses: The exp which are not related to day to day running of business operations
are known as non operating expenses.

Ex: Loss on sale of asset

Loss on sale of investment

Loss on sale of foreign exchanges

Loss on sale of fie exp.

Operating income: The income which is related to day to day running of business operation are known
as operating income.
 Ex: Commission received

Discount received.

Non – operating income: The income which are not related to day to day running of business operations
are known as non operating incomes.

Ex; Gain on sale of asset

Gain of sale of investment

Gain on sale of foreign currencies.

Operating profit (EBIT): The profit which is generated by using day to day business operations are
known as operating profit which shows overall profit of the org’n .

EBIT = Gross profit + op & non – operating incomes – op & non – operating exp.

Net profit: Net profits reface the difference between profit after tax and preference dividend are known
as net profit. It shows income position of the org’n.

Net profit = Profit after tax – preference dividend.

Important Elements in income statement:

1. Net sales
2. Cost of goods sold
3. Gross profit
4. Operating profit
5. PBT
6. PAT
7. Net profit.
2. BALANCE SHEET

Balance sheet is imp financial statement it is also known as positional statement. It consists of
assets and liabilities. The balance sheet which having real and personal account nature. The main
objective of preparation of balance sheet to know the financial position of the org’n.

The balance sheet is helpful to mgt, investors and financial institution to taking economical
decisions.

Methods of preparation balance sheet:

The balance sheet which is prepare by using 2 methods.

1. Vertical method
2. Horizontal method.

1. Vertical method: It is a method of preparation of balance sheet. Under this method asset & liabilities
which are arraigned in step by step process.

Balance sheet

Particulars Amount

Assets:
I. Non – current asset ( fixed asset)

a) Tangible asset Xxx

b) Intangible sset Xxx
…………..
Total non – current assets………. Xxxx
…………….
II. Non – current investment
( long term investment)
 A) Equity investment Xxx
B) Debt investment Xxx
C) Mutual fund investment Xxx
……………
Total non – current investment…... Xxx
……………
III. Current assets
a) Cash & cash equalence Xxx
b) a/c receivables Xxx
c) closing stock Xxx
d) out standing income Xxx
e) prepaid expenses Xxx
…………….
Total current assets……………… Xxx
………….
Total assets 1 + 2 + 3…………….. Xxxx
……………
Equity and liabilities:

1. share holders equity

a) share capital Xxx
b) reserve & surplus Xxx
………….
Total share holders equity…………… Xxx
…………..
2. Non – current liabilities
( Long term liabilities)
a) Bonds Xxx
b) Long term bank loans Xxx
c) Long term payables Xxx
…………..
 Total non – current liabilities………... Xxx
…………
3. Current liabilities
a) Bank over draft Xxx
b) a/c payables Xxx
c) out standing exp Xxx
d) income received in advance Xxx
………….
Total current liabilities……………… Xxxxx
………….
Total equity & liabilities 1 + 2 + 3………. Xxxxxxxx
…………..

Important formulas relating to balance sheet:

1. share capital = equity share capital + preference share capital

2. Reserves & surpluses = General reserve + capital reserve + dividend equalization fund + capital
redemption reserve + investment flocculation reserve + foreign exchange translation reserves.
3. External liabilities = Non – current liabilities + current liabilities.

NET WORTH:

The differences between total assets and external liabilities are known as net worth. It helpful to
calculation of book value for share.

Net worth = Total asset – External liabilities.

Total assets = Non – current asset + investment + current asset.

External liabilities = Non – current liabilities + current liabilities.

BOOK VALUE PER SHARE:

It is relating to equity share holders it refaced one equity share how much amount will receive
from the company after settlement of external liabilities.

𝑁𝐸𝑇𝑊𝑅𝑂𝑇𝐻
B.V.P.S =𝑁𝑂.𝑂𝐹 𝐸𝑄𝑈𝐼𝑇𝑌 𝑆𝐻𝐴𝑅𝐸𝑆 (OR)

𝑆𝐻𝐴𝑅𝐸 𝐻𝑂𝐿𝐷𝐸𝑅𝑆 𝐸𝑄𝑈𝐼𝑇𝑌

B.V.P.S= 𝑁𝑂.𝑂𝐹 𝐸𝑄𝑈𝐼𝑇𝑌 𝑆𝐻𝐴𝑅𝐸𝑆

2. Horizontal method:

It is a method of preparation of balance sheet. Under this method assts and liabilities which are
arraigned in left and right sides.

BALANCE SHEET

LIABILITIES AMOUNT ASSETS AMOUNT

1. Share holders equity 1. Non – current asset

a) Share capital Xxx a) Tangible Xxx
b) Reserve & surplues Xxx b) Intangible Xxx
Xxx Xxxx

2. Non – current liabilities 2. Non – current investment

a) Bonds Xxx a) Equity investment Xxx
b) Long-term bank loans Xxx b) Debt investment Xxx
c) Long term payables Xxx c) Mutual investment Xxx
Xxx Xxx

3. Current liabilities 3. Current assets

a) Bank over draft a) Cash & cash equalance
Xxx Xxx
b) a/c payables b) A / c receivables
Xxx Xxx
 c) outstanding exp Xxx c) Closing stock prepaid Xxx
d) income received in exp
advance Xxx d) Outstanding income Xxx
Xxxx ----------------------------------------- Xxx
- xxxxx
total 1+ 2+ 3 Xxxxx Total 1+ 2+ 3

Retained earnings:

The past accumulated profits which are retained by the company to overcome future
uncertainty. Like; expansion of business activity, amount used for working capital, payment of the
dividend to the settled if company having negative profit.

Retained earnings = opening retained earning + net profit – dividend.

(Or)

Retained earnings = opening retained earning – Net loss + dividend

3. CASH FLOW STATEMENT

It is important financial statement. The main objective of cash flow statement to know the cash
position of the org’n. Under this statement prepared by direct and indirect methods.

The cash flow statement which prepared by 3 activities.

1. Operating activity
2. Investment activity
3. Financing activity.
 DIRECT METHOD:

PARTICULARS AMOUNT

1.Operating activity
I. Cash inflow:
a) Cash received from sales of goods & services Xxx
b) Cash received from customers Xxx
Xxx
Total cash inflow –
1…………………..

II. Cash out flow: Xxx

a) Purchase of raw material Xxx
b) Cash paid to suppliers Xxx
c) Cash paid to labor charges & wages Xxx
d) Payment opening expenses Xxx
e) Tax paid Xxxx

Total cash out flow –

2…………………...
Xxxxxxxxxx

Net cash flow from operating activity …….1 + 2

=…………………..
Xxxx
2.Investment activity
Xxx
I. Cash inflow:
Xxx
a) Cash received from sale of tangible asset
Xxx
b) Cash received from sale of intangible asset
Xxx
c) Cash received from sale of investment
d) Interest received
Xxxx
e) Dividend received
 Total cash inflow –
1…………………….. Xxx
Xxx
II. Cash out flow Xxx
a) Payment of cash purchase from tangible asset Xxx
b) Payment of cash purchase from intangible assets
c) Payment of cash purchase from investment

Xxxx
Total cash outflow –
2…………………….

Net cash flow from investment activity …1 + 2

=………….. Xxx
Xxx
Xxx
3.Financing activity
Xxx
I. Cash inflows
a) Cash received from issue of equity of share holders
b) Cash received from issue of preference share holders
Xxx
c) Loan taken by SBI
Xxxx
Xxx
Total cash inflow -
Xxx
1………………………
XXx
Xxxx
II. Cash outflows
a) Interest paid
b) Dividend paid
Xxxx
c) Redemption of preference share
d) Repayment of andrabank loan
e) By bank of equity shares
 Xxxx
Total cash out floes – 2 Xxxx
………………….

Net cash flow from financing activity…..1 + 2 =…………… xxxxxx

4. Cash & cash equalence (1 + 2 +

3)……………………………………………

Add: opening cash

balance…………………………………………..

5. Closing cash & cash equalance ( year

ending)………………………………
 WORKING CAPITAL

The capital which is required for day to day running of business operations are known as working
capital. Like;

- Cash required for purchase of raw material

- Payment of labor charges
- Payment of operating expenses

Classifications of working capital:

The working capital which classified in two categories based on time and concept.

Working capital

Concept time

Gross w.c Net w.c permanent w.c temporary w.c

Gross working capital: The capital current assets of the company are known as gross working capital.

Gross working capital = Total current asset

Net working capital: The difference between current assets and current liabilities are known as net
working capital.

Net working capital = Current asset – Current liabilities

Fixed working capital: To maintained some of the assets throughout financial year for the running of
day to day business operations are known as fixed w.c (or) permanent w.c (or) core working capital.

Temporary working capital: The value working capital it should be fluxuvated based on output or
production levels are known as temporary working capital.

WORKING CAPITAL CYCLE

It is also known as operating cycle. The time duration between purchases of raw material it
cash collection from customer are known as working capital cycle.

The working capital cycle which is starts with purchase of raw material and ends with cash
collection from customer.

Working capital cycle process:

Purchase of raw material

Working process

Finished goods

Sales

Account received

Cash collection from customer

Note: Low operating cycle is favorable of the company. (With in the short time to collecting the due for
customer).

High operating cycle is not favorable of the company. (The companies to take more time collecting
the dues from customers.)

Ex: A & B both are manufacturing companies A’Ltd. Company operating cycle 40 days, B ‘Ltd co”
operating cycle 140 days. Based on operating cycle approach to select efficient co’. From A & B.

Sol: A company is a efficient co’. Why because within the 40 days only to collecting the due’s from
customers.

Working capital strategies:

➢ If C.A are increased W.C also increased

➢ If C.A are decreased W.C also decreased
➢ If C.L are increased W.C will be decreased
➢ If C.L are decreased W.C will be increased.

Note: Increasing W.C is cash out flow

Decreasing W.C is a cash inflow.

IN – DIRECT METHOD:

It is a method of preparation of cash flow statement. Under this method cash flow statement
which is prepare by using 3 activities. Like;

1) Operating activity
2) Investment activity
3) Financing activity
IN – DIRECT METHOD

Particulars Amount
1.Oprating activity:

Net income ( net loss ) Xxx

Add: Depreciation & Amortization Xxx
Xxx
Add: loss on sale of asset xxx Xxx
Loss on sale of investment xxx…………….

Less: Gain on sale of asset xxx Xxx

Gain on sale of investment xxx Xxx
-------------- Xxx
Xxx
Add: decreasing working capital
Xxx
Xxx
Less: Increasing working capital

Xxxx

Net cash flow from operating activities…………………

2.investment activity:
I. Cash inflows
Xxx
a) Cash received from sale intangible assets
b) Cash received from sale of equity
Xxx
investment
Xxx
c) Interest received
Xxx
d) Dividend received
 Total cash inflows…………………………………. Xxx

II. Cash out flows

a) Purchase of intangible assets for cash
b) Purchase of debt instruments Xxx
Xxx
Total cash out flows……………………………….

Xxx
Total net cash flow from investment activity....1 + 2 =

Xxx
3.financing activity
I. Cash inflows
a) Cash received from issue of equity share
b) Loan taken from ICICI
Xxx
Xxx
Total cash inflow…………………………………….

Xxx
II. Cash out flows
a) Redemption of bonds
b) Repayment of HDFC bank loan
Xxx
c) By back of equity share
Xxx
d) Interest paid
Xxx
e) Dividend paid
Xxx
Xxx

Net cash flow from financing activity……………….

Xxx
4. Cash & cash equivalence 1 + 2 + 3 =……………………
Xxx
Opening cash balance……………………….

Xxx
Closing cash & cash equivalence………………………
 Xxx

Difference between Direct and Indirect method of cash flow statement?

As per accounting standard 3 .both direct and indirect methods are prepare cash flow
statements by using 3 activities. Like;

1. Operating activity
2. Investment activity
3. Financing activity.
Under direct method net cash flow for operating activity are calculated by using cash inflows
and out flows, which are related to day to day running of business operations.
Under indirect method net cash flow from operating activity are calculated by using net
income & non cash expenses. Like; depreciation & amortization and working capital changes.

As per SEBI guidelines all the listed insurance companies are prepaire cash flow statement by using
direct method.

As per SEBI guidelines all the listed companies except insurance companies are preapire cash flow
statements by using direct method.

As per SEBI guidelines all the listed companies except insurance companies are prepaire cash flow
statement by using indirect method.

CASH PROFIT:

If the total net incomes which are adding with non- cash expenses like; depreciation and
amortization are known as cash profit.

Cash profit =net profit + depreciation & amortization + asset written of + investment written of

Non – cash expenses:

The expenses which are not relating to cash ( not involving with cash ) are known as non cash
expenses.
Ex: Depreciation & amortization

Assets written of

Investment written of etc…..

Important questions:

1. Is there any reason the non cash expenses is considered in the indirect method of cash flow
statement?

Ans: Reason is there, indirect method net cash flow from operating activities are depend on cash profit.

He want calculate cash profit the non cash expenses must be added to net income.

Note: Non cash transactions are consider in cash flow statement. Like;

1) Purchase of assets by issue of equity shares

2) Purchase of assets by issue of bonds
3) Payment of salaries by giving the goods to the companies.

Ex: purchase of land Rs 1000000/- by issue of equity shares. Above transaction are comes under which
activities of cash flow statement?

Ans: Above transaction is a cash transaction. That’s why it is not recorded in cash flow statement.

Note: a) Issue of bonus shares is a non cash transaction. That’s why it is not recorded in cash flow
statement. b) By back of equity shares are recorded in financing activities.

2. His there any relationship between balance sheet and cash flow statement?

Ans: yes. Relation is their, balance sheet current assets cash and cash equalances are depended on closing
balance of cash flow statement.

2. His their any relationship between income statement and balance sheet?

Ans: yes. Relation is their, balance sheet retained earnings are depended on closing balance of income
statement (Net profit).
 RATIO ANALYSIS

Ratio: In general time the mathematical relationship between two numerical values are known as ratio.

Ratio Analysis: Ratio analysis is a important tool of financial statement analysis. The mathematical
relationships between two financial variables or accounting variables are known as ratio analysis.

1) Percentage
2) How many times
3) Proposition (1:1, 2:1, 3:1 etc)

Objectives of the ratio analysis:

1) To know the short term solvency of the organization

2) To know the long term solvency of the organization
3) To know the profitability of the company
4) To know the growth of the organization.

Classifications of accounting ratios:

1) Liquidity ratio
2) Long term solvency ratio ( Leverage ratio)
3) Turn over ratio ( Activity ratio)
4) Profitability ratio.

1. Liquidity ratio:

The liquidity ratio also known as short term solvency ratios. It measures solvency of the
organization by using current assets, liquid assets and current liabilities.
Important liquidity ratios:

1) Current ratio

2) Liquid ratio (Acid test ratio) or (quick ratio)

3) Absolute liquidity ratio

1. Current ratio: it is also known as working capital ratio. It shows relationship between current assets
and current liabilities. It measures short term solvency of the organization. With reference of current
assets and current liabilities.

The standard current ratio is 2:1

Here; 2 indicates current assets

1 indicates current liabilities.

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Note: If current ratio is more than standard (2:1). Like: 3:1 or 10:1 or 5:1 is favorable of the company.
Why because the company to maintained more than standard current ratio.

If company current ratio is less than standard. Is not favorable of the company. Why because the
company to maintained less than standard ratio.

2. Liquid ratio (Acid test ratio): It is also known as acid test ratio or quick ratio. It explains relationship
between quick assets and current liabilities. It measures short term liquidity of the company. With
reference of liquid asset and current liability.

The standard liquid ratio is 1:1

Here; 1 indicates quick asset and

Another 1 indicate current liability.

𝐿𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡
𝐿𝑖𝑞𝑢𝑖𝑑 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

Liquid asst = Total current asset – stock & prepaid exp

Note: if liquid ratio is more than standard is favorable of the company. If liquid ratio is less than standard
is not favorable of the company.

3. Absolute liquid ratio: It is also known as cash ratio. It shows relationship between cash & cash
equalence and current liabilities. It measures short term solvency of the organization. With reference of
cash & cash equalance and current liabilities.

The standard absolute liquid ratio is 0.5:1.

Here; 0.5 indicate cash & cash equalance and

1 indicate current liabilities

𝑐𝑎𝑠ℎ & 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑎𝑙𝑎𝑛𝑐𝑒

𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑙𝑖𝑞𝑢𝑖𝑑 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Cash & cash equalance = cash in hand + cash at bank + marketable securities.

Marketable securities = treasury bills + commercial paper & certificate of deposits.

Note: If cash ratio is more than standard is favorable of the company. If cash ratio is less than standard
is not favorable of the company.

2. Long term solvency ratios (Leverage ratio):

1. Debt equity ratio

2. Interest coverage ratio

1. Debt equity ratio: it is a important long term solvency ratio. It explains relationship between long
term debt and share holders equity. The main objective of calculation of debt equity ratio to know the
financial policy of the organization.

𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡

𝐷𝑒𝑏𝑡 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑠ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

Long term debt = long term bank loans+ bonds + debentures

Share holders equity = share capital + reserves & surplus.

2. Interest coverage ratio: It is important long term solvency ratio. It explains relationship between
operating profit and fixed interest exp. It measures interest paying of the organization. With reference of
operating profit and fixed interest exp.

𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝑓𝑖𝑥𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝

Fixed interest exp = interest on bank loans + interest an bonds.

3. Turn over ratios (Activity ratio):

1) Working capital turns over ratio

2) Total asset turnover ratio

3) Interest turnover ratio

4) Debtor turns over ratio

5) Creditor turns over ratio

6) Fixed asset turnover ratio

1) Working capital turnover ratio: It is an important ratio. It explains relationship between net sales
and working capital. It measures companies how to use working capital during the accounting period.

➢ High working capital turnover ratio indicates the companies to effective utilization of
working capital.
➢ Low working capital turnover ratio indicates the companies are not effective utilization
of working capital.
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑢𝑟𝑛 𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 =
𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Net sales = cash sales + credit sales – sales returns

Working capital = current asset – current liabilities.

2) Total asset turnover ratio: It is important ratio. It explains relationship between net sales and total
assets. It measures the companies how to utilize total assets during the year.
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛 𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Total assets= Net fixed assets + current assets

 Net fixed assets = Total fixed assets – depreciation & Amortization.

3) Interest turnover ratio: It is also known as stock turnover ratio. It explains relationship between costs
of goods sold and average inventory. It measures efficiency of inventory management and how to utilize
the inventory during the year.

As per inventory turnover ratio the manufacturing company no need to maintained high level of
inventory and low level of inventories of the companies always maintained optimum level of inventory.

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛 𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦+𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Average inventory=
2

4) Debtor turnover ratio: It is also known as receivable turnover ratio. It relationship between net credit
sales and average accounting receivables. It measures nature of credit policy of the organization. It means
how many times we are receiving the cash from the customer.

Net credit sales

Debtor turn over ratio =
average accounting receivable

Net credit sales= Total credit sales – sales returns

𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠+𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑔 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
Avg accounting receivables=
2

5) Creditor turnover ratio: It is important ratio. It explain relationship between net credit sales
purchases and average account payables. It measures how many times companies to paying the money
to the suppliers during the year.

net credit sales purchases

Creditor turn over rati =
average account payables

Net credit sales purchases= Total credit purchases – purchase returns

𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠+𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑖 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

Average account payables =
2

6) Fixed asset turnover ratio: It is a important turnover ratio. It shows relationship between net sales
and net fixed assets. It measures how the companies effective utilize total fixed assets during the year.
 ➢ High fixed turnover ratio, the company to effective utilize fixed asset.
➢ Low fixed turnover ratio, the companies not effective utilize total fixed asset

net sales
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑡𝑢𝑟𝑛 𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 =
net fixed assets
Net fixed asset = Total fixed assets – Depreciation & Amortization.

4. Profitability ratios:

If any accounting ratios to measures financial performance or profitability of the company are
known as profitability ratios.

Important profitability ratios:

1) Gross profit ratio

2) Operating profit ratio

3) Net profit ratio

4) Return on capital employed or Return on investment ratio.

1) Gross profit ratio: It is a important profitability ratio. It shows relationship between gross profit and
net sales. It measures percentage of the gross profit with reference of gross and net sales.

➢ High gross profit ratio is favorable of the company, (Less cost of goods sold).
➢ Low gross profit ratio is not favorable of the company, (more cost of goods sold).

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = × 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

2) Operating profit ratio: It is a profitability ratio. It shows relationship between operating profit and
net sales. It measures percentage of operating profit on total sales.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 = × 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

3) Net profit ratio: It is a important profitability ratio. It shows relationship between net profit and net
sales. It measures percentage of the profit on total sales.

➢ High net profit ratio is favorable of the company

 ➢ Low net profit ratio is not favorable of the company.

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑟𝑎𝑡𝑖𝑜 = × 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

4) Return on capital employed or Return on investment ratio: It is a profitability ratio. It explains

relationship between operating profit and capital employed. It measures overall profitability of the
organization.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅. 𝐶. 𝐸. 𝑅 = × 100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Capital Employed: The total long term funds which are associated with business are known as
capital employed.

Capital employed= Share holders equity + long term debt.

(Or)

= Fixed asset + working capital.

Market price ratios:

1) Earnings per share (EPS)

2) Price earnings ratio (PER)

3) Dividend per share (DPS)

4) Dividend pays out ratio

5) Dividend yield

6) Earning yield

7) Book value per share.

1) Earnings per share (EPS): It is a important ratio. It shows relationship between net profit and
common share outstanding (No. of share). It measures per share earnings. It shows earning capacity of
the organization.
 Case -1: Only net income and no. of equity shares or no. of ordinary shares or no. of common
shares are available.

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝐸𝑃𝑆 =
𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

(or)

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑣𝑖𝑙𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠

𝐸𝑃𝑆 =
𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

Case – 2: If treasury shares are treasury stock or by back of shares are available.

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐸𝑃𝑆 =
𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡 𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡 𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 𝐼𝑠𝑠𝑢𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 – 𝑡𝑟𝑒𝑠𝑢𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

Note: Issued shares = common shares outstanding + Treasury shares.

Case – 3: When additional equity shares are available

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐸𝑃𝑆 =
𝑊𝑎𝑖𝑡𝑒𝑑 𝐴𝑉𝐺 𝑛𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

𝑊𝑎𝑖𝑡𝑒𝑑 𝐴𝑉𝐺 𝑛𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

= 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
(𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 × 𝑛𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑠ℎ𝑎𝑟𝑒𝑠 𝑎𝑟𝑒 𝑢𝑠𝑖𝑛𝑔 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
+
12

Case – 4: When additional shares and by back of shares ( Re-acquire of share or Treasury stock)
are available.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐸𝑃𝑆 = 𝑊𝑎𝑖𝑡𝑒𝑑 𝐴𝑉𝐺 𝑛𝑜.𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
 𝑊𝑎𝑖𝑡𝑒𝑑 𝐴𝑉𝐺 𝑛𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
= 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
+ 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠
( 𝑁𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑠ℎ𝑎𝑟𝑒𝑠 𝑎𝑟𝑒 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
× – 𝐵𝑦 𝑏𝑎𝑐𝑘 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
12
𝑁𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠 𝑎𝑟𝑒 𝑛𝑜𝑡 𝑢𝑠𝑖𝑛𝑔 𝑑𝑢𝑟𝑖𝑛𝑔 𝑦𝑒𝑎𝑟
×
12

Case – 5: When converted equity shares are available.

Diluted EPS: If decreasing value of EPS give to increase no. of equity shares are known as diluted EPS.

The main reasons for increasing no. Of equity shares

1) Some of preference shares are converted in to equity shares.

2) Some of the bonds are converted in to equity shares

3) Some of the debentures are converted in to equity shares.

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 =
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝑠ℎ𝑎𝑒𝑟𝑠
Diluted shares= Basic equity shares+ convertible preference shares+ callable bonds+C.debentures.

Ex: To calculate basic and diluted EPS by using following information.

Issued date Type of security No. Of security Data conversion No. Of stocks are
are issued converted in to
E.S
1/1/2005 E.S 10,000
1/1/2005 P.S 10,000 1/1/2015 3000
1/1/2005 Bonds 20,000 1/1/2015 7000

Net income as on 31/12/2015 is Rs.2,00,000

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 2,00,000

𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 = = = 20
𝐵𝑎𝑠𝑖𝑐 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 10,000

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 2,00,000 2,00,000

𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 = = = = 10
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝑠ℎ𝑎𝑒𝑟𝑠 3000 + 7000 10,000
2) Price earning ratio (PER): It is a important accounting ratio. It explain relationship between market
price of the shares and earning per share. It measures the investors how much amount will invest our
organization based on generating 1 rupee earnings.

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑠ℎ𝑎𝑟𝑒

𝑃𝐸𝑅 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

3) Dividend per share (DPS): It is a important accounting ratio. It explain relationship between amount
of equity dividend and no. of equity shares. It measures per share dividend. ( 1 share dividend).

𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒

4) Dividend pay out ratio: It is important accounting ratio. It explains relationship between amount of
equity divided and not income. It measures rate of divided (percentage of dividend) with reference of
amount equity dividend and net income.

𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦 𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = × 100
𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
(or)
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦 𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = × 100
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

5) Dividend yield: It is a important ratio. It explains relationship between dividend per share and market
price of the share. It measures percentage of dividend (Rate of dividend with reference of DPS & MPS).

𝐷𝑃𝑆
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 = × 100
𝑀𝑃𝑆

6) Earning yield: It is a important ratio. It explains relationship between earning per share and market
price of the share. It measures rate of earnings. (Percentage of earnings with reference of EPS and MPS).
𝐸𝑃𝑆
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑦𝑖𝑒𝑙𝑑 = × 100
𝑀𝑃𝑆
7) Book value per share: This ratio which is related to equity share holders. It reforce how much
amount will receive 1 equity share from company after settlement of external liabilities.

Case-1: 𝑁𝑒𝑡 𝑤𝑜𝑟𝑡ℎ

𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = 𝑁𝑜.𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒

Net worth = Total assets – external liabilities.

(or)

Case-2: 𝑠ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑁𝑜. 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒
Share holders equity = Equity share capital + Reserves & surplus
 CORPORATE ANALYSIS

Elements of corporate analysis:

1) Company law

2) Company accounts

3) Holding company accounts

4) Corporate actions.

1) Company law:
A joint stock company is an artificial person created by law. With a fixed capital divisible in to
transferable share with a perpetual succession and common shares.

Features of company:

1) Artificial person

2) Created by law

3) Capital divisible in to transferable share

4) Limited liability

5) Perpetual succession

6) Professional management

7) Book of accounts.

Life’s of companies:

I. On basic of incorporation:
1) Charted company.
2) Statuary Company.
3) Registered company.

1) Charted company: A charted company is an incorporated. Under royal ‘char turn’ issued by king or
queen. (The companies which are incorporated after taking the permission from king are queen).

Ex: East India Company

Charted bank of England.

2) Statuary company: A statuary company is established by a special act of parliament.

Ex: RBI, Industrial financial corporation, LIC, SBI etc.

3) Registered company: These companies are incorporated. Under the Indian company are 1956.

II. On the basis of liability:

1) Limited liability of by share
2) Company limited by guarantee
3) Company unlimited liability.

1) Limited liability of by share: It is a registered company. In these companies the company liquidated
the share holder liability up to three face value of the share. In this companies the share holders will loss
there investment only but not responsible for further liability.

Ex: The present market value of total assets 20, 00,000. The details of liabilities are given below.

Secure loan – 500000

Unsecure loan – 500000

Bonds – 15, 00,000

Preference share capital – 1000000

Equity share capital (50000 x 10 f.v) – 500000

Liquidated rumination – 100000.

Q: The prepare the liquidator status as for the company act 1956.

Sol:

Receipts Amount Payment

Amount
Sales of assets 2000000 Secured loan 500000
Unsecured loan 500000
Liquidity remuneration 100000
Bonds (1500000) 900000
2000000 2000000
Sales of assets - 2000000

Less: S.L - 500000

Less: U.L - 500000

Less: L.R - 100000

--------------
900000
 Note: Remaining liability bonds – 600000

Preferential share capital – 1000000

-------------------

Total---- 1600000 ………….not responsible for share capital.

--------------------

2) Company limited by guarantee: It is a registered company. Under this company if the company
liquidator the share holders will loss their investment and guaranteed amount (% of guaranty is mentioned
in memorandum of association (MOA).)

3) Company with unlimited liability: Under this company share holders are responsible for total
liability of company.

III. On the basis of transferability of share:

Public enterprises (Ltd.company) Private Ltd company

1. The minimum members in public ltd 1. The minimum members in private ltd
company are 7. And maximum members company 2. And maximum 50.
unlimited.
2. Public ltd company shares are freely 2. Private ltd shares are not possible to
transferable. transferable.
3. Public ltd company to raising the capital 3. Private ltd company is not gather the
from public. capital from public. But there are gather
friendly and family members.
4. The minimum member’s ore board of 4. The minimum members are board of
directors 3. And maximum as for articles. directors 2. And maximum unlimited.
5. Public ltd company to start business 5. The private ltd company to start the
operations after getting the commitment business operations after getting the
of business certificate. certificates of incorporation.
6. All the public ltd companies must be 6. Private ltd company not required to
conduct the statuary meeting. conducting statuary meeting.
7. All the public ltd companies must be 7. A prospector is not required for private ltd
issued preceptors to the public. company.
8. The minimum quorum in public ltd 8. The minimum quorum in private ltd
company 5. company 2.
9. Minimum paid up capital is 500000. 9. The minimum paid up capital is 100000.

IV. Based on the nationality:

1) Indian company
2) Foreign company.

1) Indian company: A company which is registered and incorporated in India is called Indian company.
 Ex: TCS, WIPRO.

2) Foreign company: The Company which is incorporated out sides of the country by running the
business operations in India are known as foreign company.

Ex: MICROSOFT, IBM.

Basic documents of the company:

1) Memorandum of association (MOA).
2) Articles of association (AOA).
3) Prospector.

1) Memorandum of association (MOA): It is a important company document. Which contain the

fundamental rules and regulation of a company in MOA include different clauses. Like;

➢ Name clause
➢ Registered clause
➢ Objective clause
➢ Location clause
➢ Capital clause
➢ Liability clause.

Alteration of MOA: If the company wants alter in MOA. The company management must be take central
government and to pass the ordinary special remuneration in company meeting.

2) Articles of association (AOA): AOA is a document which contains the rules and regulation for the
internal management of the company. Like;

➢ Types of number of shares

➢ Voting of the right share holders
➢ Alteration of share capital
➢ Prospectors of company meeting
➢ Appointment and remuneration
➢ Removal of board of directors.

3) Prospector: Prospectors is a advertisement document. Which are issued by public ltd company to the
public it describe details about company share capital.

Contents of prospectors:
 ➢ Name and full address of the company
➢ Existing and future objectives of the company
➢ Duties of board of directors
➢ Preliminary expenses of the company
➢ Name and under writers
➢ Name and adders of the auditors
➢ Total share capital
➢ Number of share and face value.

Company meetings
1) Statuary meeting
2) Annual general meeting
3) Extraordinary general meeting

1) Statuary meeting: It is a first meeting of all public ltd companies. Will be conduct statuary meetings
after 3 months or with in the 6 months of getting the certificate of commencement of business. In the
statuary meeting will describe about statuary reports and preliminary expenses of the organization.

2) Annual general meeting (AGM): All the public ltd companies will be conduct annual general
meeting after completion of financial year. In the meting will discuss;

➢ Annual accounts of company

➢ Declaration of company
➢ Appointment and removal of directors and auditors.

Terms and conditions of AGM:

a) The first AGM Company must be held with in 18 months from date of incorporation.
b) The time duration between two annual general meetings not exist 15 months.
c) The annual general meeting must be conduct with in the 6 months after completion of annual
general meeting.

3) Extraordinary general meeting: The share holders meeting accepts statuary meting and annual
general meeting are known as extraordinary general meeting. It will be conducted for special vacations
like; mergers and acquigations.

Proxy: proxy is an authorized agent. Is appointed by equity share holders, we have to right and participate
company meetings.

Resolution: It reface the company mgt will be take official decision in company meeting by using share
holder voting power are known as resolution.
Classification of resolution:

1) Ordinary resolution

2) Special resolution

1) Ordinary resolution: It is a type of resolution. This is passed by simple majority of the votes (more
than 50%).

Ex: passing annual accounts in AGM

Declaration of dividend

Selection of board of directors

Selection of auditors.

2) Special resolution: It is a type of resolution. Within passed with more than 70% of goods ( 2/3).

Ex: Alteration of MOA

Alteration of share holders

Liquidation of the company.

Quorum: It reface the minimum members which are required for conducting valued company meeting
are known as quorum.

1. The minimum members which are required conducting public ltd company meeting (quorum) 5.
2. In private ltd company the minimum members which are required for conducting meeting 2.

2) Company accounts
Company accounts terminology:

Share capital: If companies to rising total capital from public by using equity and preforece shares are
known as share capital.

The share capital classified in to 2 categories

1) Based on ownership

2) Based on nature

Share capital
 Based on ownership Based on nature

Authorized capital

Equity share capital preference share capital Issued capital

Subscribed capital

Called up capital

Paid up capital

Reserve capital

Based on ownership
Equity share capital:

- The equity shares are also known as common shares or ordinary shares.
- The capital which gather from public by issue of equity shares are known as equity share
capital.
- The person who purchase equity shares are known as equity share holders
- The equity share holder’s real owner of the organization.
- The equity share holders they are enjoyed with voting rights and participated company
management activities.
- The equity share holder dividend is not a constant which is fluctuated based on company
profits.

Preference share capital:

- If companies to raising capital from public by using of preference share are known as
preference share capital.
- The person who invested in preference share are known as preference share holders.
- The preference share holders are not enjoyed with but they are enjoyed with preference share
right.
1. Fixed rate of dividend
2. The process of distribution of liability to giving the first priority or preference share
holders.
Difference between equity share and preference share

Equity share Preference share

- The equity share holder’s real owners - The p.s holders are not owners of the
of the company and participated mgt company and not possible to
activities. participated company activities.
- The equity share holders they enjoyed - The p.s holders are not enjoyed with
with voting right. voting rights.
- The equity share holders are not - The p.s holders are enjoyed with
enjoyed preferential rights. preferential rights.
- The equity share holders dividend is - The p.s holders dividend is consist
depend on company profits. ant.

Based on nature
1) Authorized capital: It is also known as maximum capital or registered capital or nominal capital. This
capital which is mentioned in MOA. As per company act 1956 do not exceed this much of capitals hold
life of the organization (over all life).

2) Issued capital: It is a part of authorized capital. The company actual shares are issued to the public
are known as issued capital.

3) Subscribed capital: It is a part of issued capital. The public actual subscriptions are issued are known
as subscribed capital.

-If subscribed capital is more than issued capital are known as over subscription.

- If subscribed capital is less than issued capital are known as under subscription.

4) Called up capital: If is a part of subscribed capital. If companies sending the information to applied
share holders for the payment of share capital are known as called up capital.

5) paid up capital: It is a part of called up capital. If the share holders to paid amount to the company as
a share capital are known as paid up capital.

6) Reserve capital: It is a uncalled capital. The capital which is called in the event of liquidation are
known as reserved capital.

Accounting treatment of equity share capital:

 When company to collect total share amount in single installment.

Bank a/c Dr………. xxx

To share capital a/c ……..xxx

Note: the companies we collect total share amount in different installments, like;

1) Share application
2) Share allotment
3) Share first call
4) Share second call
5) Share third call
When application money is received
Bank a/c Dr…….xxx
To share capital a/c……..xxx
When share application money in transfer to share capital
Share application a/c Dr…….xxx
To share capital a/c………..xxx
When allotment money is give
Share allotment a/c Dr……….xxx
To share capital a/c………..xxx
When allotment money is received
Bank a/c Dr…………xxx
To share allotment a/c……xxx
When first call amount is give
Share first call a/c Dr………xxx
To share capital a/c……….xxx
When share first amount is received
Bank a/c Dr………..xxx
To share first call a/c…..xxx
When final call amount is give
Share final call a/c Dr……..xxx
To share capital a/c……..xxx
When final call amount is received
Bank a/c Dr…………xxx
To share final call a/c……xxx

Calls in arrears:
 The unpaid share installment money will be treated was calls in arrears. As per company act 1956
and table ‘A’ the minimum interest charge on calls in arrears 5% annum.

When calls in arrears are arrays

Bank a/c Dr……………xxx

Calls in arrears a/c Dr….xxx

To share installment a/c …..Xxx

Forfeiture of share:

When the share holders are not able to payment of unpaid installment like; allotment and calls
money the board of directors are cancelled sum of the shares the cancelation the share are known as
forfeiture of the share.

Before cancelation of the share the board of directors must be sending the note is to the share
holders the notice period not less than 15 days.

Account treatment of forfeiture of the share:

When share of forfeiture

Share capital a/c Dr……………..xxx

To forfeiture share/c……………xxx

To calls in arrears a/c……………xxx

When forfeiture shares are re3issud with discount

Bank a/c Dr……………………xxx

Forfeiture of share a/c Dr…….xxx

To share capital a/c……………..xxx

When Forfeiture of shares are reissued with premium

Bank a/c Dr…………………..xxx

To share capital a/c…………….xxx

To security premium a/c……….xxx

When balance of forfeiture amount is transfer to capital reserve

 Forfeiture of share a/c Dr………….xxx

To capital reserve a/c………………xxx

Ex: ABC Ltd 100000 equity shares are for featured for the share holders are paid application Rs 3,
allotment Rs3 and share holders not paid share first call Rs2, second and final call Rs2.

All the 100000 for featured shares are reissued with each Rs 9 (f.v). to write general entries and
prepare balance sheet ?.

Sol: When 100000 shares are forfeitures

Share capital a/c Dr…………100000

To for featured share a/c (100000 x 6)……..600000

To calls in arrears a/c (100000 x 4)………...400000

When 100000 shares reissued with discount

Bank a/c Dr………………………900000

For feature share a/c Dr…………..100000

To share capital a/c……………………..1000000

Note: balance for feature amount = 600000 – 100000

= 500000

When balance of for featured amount is transfer to capital reserve

For featured share a/c Dr………………500000

To capital reserve a/c…………………….500000

Balance sheet:

Liabilities Amount Assets Amount

Share capital 1000000 Bank 1500000

Reserves & surplus

For featured share a/c 500000

1500000 1500000

Calls in advance:
 When the public ltd companies to issue share by using following methods.

1) Issue of share at par value

2) Issue of share at premium
3) Issue shares under discount.

1) Issue of share at par value: when company issued the shares to the public which actual value or
nominal value or face value are known as share issued at par value.

When shares are issued with par value

Bank a/c Dr…………xxx

To equity share capital/c……….xxx

Balance sheet:

Liabilities Amount Assets Amount

Share capital xxx Current assets
Bank xxx
xxx xxx
2) Issue of share at premium: When the shares are issued to the public more than its face value or actual
values are known as shares are issued at premium. Security premium is a capital profit of the company
that’s why it is credited in journal entry.

When total share amount including premium is collected a single installment.

Bank a/c Dr……………xxx

To share capital a/c …………xxx

To security premium a/c…….xxx

The security premium is associated with allotment money if share allotment money if gives.

Share allotment a/c Dr………..xxx

To share capital a/c………….xxx

To security premium a/c……..xxx

When allotment money is received

Bank a/c Dr…………….xxx

To share capital a/c……….xxx

Balance sheet:
 Liabilities Amount Assets Amount
Share capital Current assts
( no of shares x f.v ) Xxx
Bank xxx
Reserves & surplus
Security premium Xxx
Xxx Xxx

Note: security premium is a capital gain. So it is recorded in balance sheet enter the heading of reserves
& surplus.

As per company act 1956 section 78, the security premium can be utilize.

1. Issue of bonus shares

2. Writing of preliminary exp
3. Writing of discount of issue of share
4. Discount earn issued of debenture.

According to sec-77’A’ share discount can be utilize for by back of shares.

Ex: To write journal entries and prepare balance sheet by using following information.

‘X’ ltd company are issued 100000 equity shares Rs 10 each. But its face value is 10 (f.v 10 and
issued price 20).

Sol: Bank a/c Dr……………….2000000

To share capital a/c……………..1000000

To security premium a/c………..100000

Balance sheet:

Liabilities Amount Assets Amount

Share capital Xxx Current assets

Reserves & surplus Banks xxx

Security premium xxx
xxx Xxx

3) Shares are issued at discount: when shares are issued to the public less than face value or less than
actual value is known as share discount.

As per companies act 1956 the share discount do not exceeds 10% of its face value.
 Share discount is capital loss. That’s why it is recorded in balance sheet under the heading of
miscellaneous exp of the asset side.

Accounting treatment:

When total share amount which is received in single installment with a discount.

Bank a/c Dr………….xxx

Share discount a/c Dr…..xxx

To share capital a/c………..xxx

When the total share amount are collected by using discount installments the share discounts
which are included in share allotment.

Share allotment a/c Dr………….xxx

Share discount a/c Dr…………..xxx

To share capital a/c…………….xxx

When total share allotment money is received.

Bank a/c Dr………………xxx

To share allotment a/c……………..xxx

Balance sheet:

Liabilities Amount Assets Amount

Share capital xxx Current assets
Bank Xxx

Miscellaneous exp
Share discount xxx
xxx Xxx

RESERVES AND DIVIDEND

Dividend: Dividend is a part of company profit. The company profit will distribute among the share
holders according to their investment.

The dividend which is calculated based on face value of the share or paid up capital.

%
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 = 𝑓. 𝑣 ×
100

Ex: If ready labs market price of the share 1000 and earning per share Rs 20 and issued price Rs 200 and
f.v Rs 10. In annual general meeting board of directors is dividend to issue 50% of dividend. To calculate
per share dividend.
50
Sol: 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 = 10 × 100 = 𝑅𝑠 5

Classification of dividend:

Based on nature Mode of payment Based on time

Equity .D preference. D cash. D property. D stock. D intriem.D annual.D

Or

Final. D

Based on nature:

1) Equity dividend: It is a type of dividend. The dividend will distribute to equity share holders is known
as equity dividend.

The value of equity dividend is not constant it will be depend on companies profits.
2) Preference dividend: It is a type of dividend. The dividend will distribute to preference share holders
is known as preference dividend. The value of preference dividend constant.

Mode of payment:

1) Cash dividend: The dividend will be distributed to share holders in the firm of cash is known cash
dividend.

2) Property dividend: The dividend will be distributed to share holders in the firm of property. Like;
land, building and other properties is known as property dividend.

Based on time:

1) Interim dividend: It is a type of dividend. The dividend distributes to share holders in one financial
year in two times. Like; first 6 months and second 6 months.

2) Final dividend: The dividend which is declared in annual general meeting which is known as final
dividend or annual dividend.

RESERVES & SURPLUS

It is a part of company profit. This is related by the company for the purpose of to overcome
future uncertainty. Like; expansion of business activity and stable dividend to the share holders and usage
of working capital.

Types of reserves:

Open reserve secrete reserve

Revenue reserve capital reserve

General reserve special reserve

Open reserve: The reserve which is disclosed in balance sheet is known as open reserve.
Revenue reserve: It is a part of open reserve. The reserve which is created from company profit is known
as revenue reserve.

General reserve: The reserve which is used for general purpose. Like; expansion of business activities,
usage of working capital etc.

Special reserve: The reserve which is used for special case. Like; capital redemption, dividend
equalization fund, pensioned fund and foreign exchange transaction reserve.

Capital redemption reserve:

The reserve which is used for repayment of capital is known as capital redemption
reserve.

Capital reserve: It is part of open reserve. The capital reserve which is not created from company
profit. But which is created from capital gain. Like; security premium, profit on reissue for feature of
share, gain on sale of investment and gain on sale of assets.

Dividend equalization fund: The fund amount (reserve) which is used for to payment of the dividend
to the share holders are known as dividend equalization fund.

SECRETE RESERVE:

It is a type of reserve. The reserve which is not disclosed in balance sheet are known as secrete
reserve. The reserve which is created from by using following ways.

1) Over estimation of liabilities

2) Under estimation of assets
3) Under estimation of expenses etc.

Bonus shares:
It is also known as stock dividend. When companies to provide additional shares to existing
share holders with free of cost by using retained earnings of the company.

Reasons for providing bonus shares:

1. When company having hues reserve

2. When company not able to payment of dividend to the share holders in the place of dividend to
provide equity share with free of cost are known as bonus issue.

Accounting treatment of bonus issue:

When company to declare bonus share holders.

Retained earnings a/c Dr……………xxx

 To bonus to share holders a/c………..xxx

When bonus shares are issued to share holders.

Bonus to share holder’s a/c Dr…...........xxx

To share capital a/c…………………….xxx

After providing bonus share holders the comes under the balance sheet.

1) To increase no. of equity shares

2) To increase share capital
3) To decrease reserves & surplus
4) But having no changes in share holder’s equity.

Note:

1. When company to issued bonus shares the market price of the stock is adjusted.
2. When company to issued bonus share by using retained earnings of the company that’s why after
bonus issue some of the variables which are flaxuated in liability side of the balance sheet. The
issue of the bonus shares is not impact on assets of the balance sheet.
3. The bonus issue which is applicable to only equity share holders that’s why it is not impact on
no. Of preference shares and preference share capital.
4. The bonus share is a non cash transaction that’s why it is not presented in cash flow statement.

Right issue:
When company want additional capital the share which are issued to existing equity share holders.
Which costs are known as right issue.

Note: 1) Right issue which is not impact on reserve of the company.

2) After right issue some of the balance sheet variables are fluxuated.

I. Increase share capital

II. Increase no. Of equity share
III. Increase cash & cash equalence of the company.

DIFFERNCE BETWEEN RIGHT ISSUE AND BONUS ISSUE:

➢ Both right issue and bonus issue which is relating to existing equity share holders.
➢ The bonus issue referee when company to provide additional share to existing equity share holders
with free of cost.
 ➢ The right issue referee when company wants additional capital the share which are issued to
existing equity share holders.
➢ Reserve is a source of the bonus issue. But reserve is not a source of right issue.
➢ Bonus issue which is impact on only liability side of the balance sheet. But right issue which is
impact on total assets & liabilities of the balance sheet.

By back of share:

By back of share also known as treasury share or treasury stock or reacquired shares or company
own shares. When company to purchase their own shares from the share holders by using retained
earnings of the company are known as by back of shares.

Methods of by back of shares:

➢ Equity share buying back from existing equity share holders in open market with high market
price.
➢ Equity shares are buying back from existing equity share holders on proportionate (100:10,
1000:10, 10:1 etc) bases.

As per company act 1956 sec-78 to follow the some of the terms and conditions.

1. The by back should be authorized by articles.

2. Before going to by back the company must be conduct general meeting and past special
resolution.
3. The company must be field solvency declaration. With the ROC and SEBI.
4. The by back must be completed within the 12 months from the date of passing the resolution. All
the by back of the share must be fully paid.
5. The by back of the share not exceed 25% of the equity paid up capital.
6. After by back the debt equity ratio is not exceeding 2:1.

Accounting treatment:

When the equity share of by back

Equity share by back a/c Dr…………………xxx

To bank a/c………………………………….xxx

Note: 1) After by back of equity share the following balance sheet variables are fluxuated.

I. To decrease no. of equity share

II. To decrease reserves & surplus
III. To decrease cash & cash equalance of the company.
 2) After by back of equity share the total no. Of equity shares are decreased. That’s why earning
per share will be increase.

3) By back of equity share are presented in cash flow statement under financing activity.

3) Holding company accounts:

Holding company: When one company to purchase another company more than 51% of equity paid up
capital. Here; the purchasing company will be treated as holding company.

Subsidiary company: Subsidiary company is a type of company. The company which is under control
of holding company is known as subsidiary company.

Ex: If ABC ltd to acquire 80% equity paid up capital in XYZ ltd. Here; ABC ltd is a holding company
and XYZ led is a subsidiary company.

Minority interest: It is also known as non controlling interest. The equity paid up capital as subsidiary
company other than holding company is known as minority interest.

Ex: the total equity paid up capital as XYZ ltd (100000 x 10 = 1000000). If ABC ltd to acquire 80%
equity paid up capital in XYZ ltd organization. Based on above information to calculate minority interest.

Sol: Here; ABC Ltd is a holding company, XYZ Ltd is a subsidiary company.

Now; minority interest = 20000 x 10 = 200000.

Note: The value of minority interest is a equity paid up capital of subsidiary company. It’s having
personal account nature that’s why it is presented in consolidated balance sheet under liabilities.

CONSOLIDATED FINANCIAL STATEMENT

It is a financial statement. It consists of group companies’ financial data. Like; holding &
subsidiary company. The main objective of preparation of consolidated financial statement to know the
financial status of group companies.

Classifications of consolidate statement;

1) Consolidated income statement: It is a financial statement. Its consists of revenues and expenses
which are relating to group companies. Like; Holding and subsidiary companies. The main objective of
preparation of consolidated income statement to know the income position of group companies.
2) Consolidated balance sheet: It is a financial statement. It consists of group companies’ assets &
liabilities. Like; holding and subsidiary companies. The main objective of preparation of consolidated
balance sheet to know the financial position of group companies.

3) Consolidated cash flow statement: It is a financial statement. It consists of group companies, like;
holding and subsidiaries cash inflows and cash out flows. The main objective of preparation of
consolidated cash flow statement to know the cash position of group companies.

Methods of investment:

1) Cost method of investment: One company to invest in another company 1 – 20% is known as cost
method of investment.

2) Equity method of investment: One company to invest another company more than 20% and less than
50% are known as equity method of investment.

3) Consolidation method: One company to invest to invest another company more than 51% or 100%
in another companies are known as consolidation method.

4) Corporate action:
Corporate actions are events. Which are initiated by public limited companies if any public ltd
company management decisions which are impact on market price of the stock. No. of shares and share
capital are known as corporate action. Like;

In the process of bonus issue the no. Of shares, share capital and market price are adjusted.

In the process of stock split the no. Of shares face value and market values are adjusted.

Important corporate actions:

1) Mergers
2) Take over’s
3) Stock split
4) Spin off
5) Split off
6) Bonus issue
7) By back of share
8) Declaration of dividend.

1) Mergers: If two or more companies will form a new company for carrying the business activity are
known as merger.
Classifications of mergers:

I. Horizontal merger
II. Vertical merger
III. Conglomerate merger
IV. Reverse merger

Horizontal merger: The merger between two companies. The merging company is must be manufacture
same products are to provide same services are known as horizontal merger. The main objective of
horizontal merger to elimination of competitions.

Ex: Merger between two software companies

Merger between two automobile companies

Merger between two banking companies

Vertical merger: The merger between two or more companies all the merging must be manufacture
single product in different stages. The main objective of vertical merger to minimize total cost of the
product.

Ex: Manufacturing automobile companies.

Conglomerate merger: The mergers between unrelated companies are known as conglomerate merger.
The main objective of conglomerate merger to diversification of business.

Ex: Automobile Company merging with Software Company

Software Company is merging banking company etc…

Reverse merger: If pvt ltd company is merging with public ltd company are known as reverse merger.

2) Take over: The take over also known as acquisition. It reface one company to acquire in anether
companies more than 51% of equity paid up capital for the purpose of to control other companies with
majority of voting rights.

Classifications of take over:

I. Friendly take over

II. Hostile take over
III. Bailout take over
IV. Reverse take over

Friendly takeover: It is also known as negotiated take over. Under this method the management of both
the companies mutually decides the terms and conditions of take over through negotiation (mutual
understanding).
Hostile takeover: It is a type take over. Under this type one target company to acquire majority of the
share in another companies with high market price in the market are known as hostile takeover.

Bail out take over: If one financially strong company to acquire majority of the shares in financially
Week Company are known as bailout take over.

Reverse takeover: If pvt ltd company to acquire majority of the shares in public ltd company are known
as reverse takeover.

3) Spin off: It is a important corporate action. To create new independent company by selling the
securities to the other companies. Like; parent companies are known as spin off.

4) Split off: It refers one existing companies are divided in to multiple companies or split in to multiple
companies are known as split off.

Ex: The reliance industries ltd

Reliance communication

Reliance oil & gas

Reliance power

Reliance energy

Reliance shopping malls.

5) Stock split: It is a important corporate actions. It reface the existing company shares are divided in to
multiple shares are multiple units are known as stock split. In the process of stock split some of the
variables are fluxuated. Like;

No. Of shares

Face vale

Market value

Earning per share.

Classifications of stock split:

1. Forward stock split

2. Reverse stock split.

Forward stock split: It is a method of stock split. It reface one existing company share are divided in to
multiple share. Like; 2 for 1, 3 for 1, 10 for 1 etc.
 The main objective of forward stock split to encourage small investors and to provide liquidity of
the investment after forward stock split.

1. The total no. Of equity shares are increase

2. To decrease face value of the share ( adjusted)
3. The total market price which is adjusted based on split
4. But having no changes in market capitalization.

Note: In forward stock split the total no. of equity shares are increased that’s why the earning per share
is decreased.

Ex: Company name ABC Ltd.

ABC ltd which is taken listing in NSE total no. of equity shares 100000.

Face value – 10

Share capital – 1000000

Market value - 50

Market capitalization (100000 x 50) – 5000000

Net income – 1000000

1000000
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = = 𝑅𝑠 10
100000
Nature of the stock split 2 for 1 forward stock split.

Sol: After 2 for 1 forward stock split the following elements which are flxuated.

Particulars Before stock split After stock split Impact

No. Of equity shares 100000 200000
Face value(10/2) 10 5 (10/2)
Market value 50 50
= 25
2
Market 5000000 5000000 constant
capitalization (100000 x 50) (200000 x 25)
Earning per share 1000000 1000000
=0 =5
100000 200000
Share capital 1000000 1000000 constant
(100000 x 10) (200000 x 5)

Reverse stock split: It is a method of stock split. Under this stock split the no. Of shares which are
converted in to single stock are known as reverse stock split. The main objective of reverse stock split to
encourage rating in stock exchange in the process of reverse stock split to fluxuate some of the variables.
Like;

1. Increase no. Of equity shares

2. Increase face value
3. The market price of stock which is adjusted. But having no changes in market capitalization.

Note: In the process of reverse stock split the total no. of equity shares are decreased. That’s why earning
per share is increase.

FIANACIL INSTRUMENT
Financial instruments also known as financial securities or financial stock or financial products. All the
financial securities which is helpful to raising the funds from public. Like;

-Equity shares

- Preference shares

– Bonds

- Debentures

Important financial securities:

1) Equity shares
2) Preference shares
3) Bonds
4) Debentures
5) Treasury bills
6) Commercial paper
7) Certificate of deposits.

1) Equity shares: Equity shares also known as common shares or ordinary shares which is helpful to
raising ling term capital from public.

The equity share holder is a real owner of the organization. The enjoyed with voting rights. The equity
shares holder’s dividend is depend on company profit.

Classifications of equity shares:

1. Right shares
2. By back of shares ( treasury shares)
3. Bonus shares
4. Blue chip equity shares
5. Sweat equity shares.

Right shares: When companies was additional equity share capital the share which are issued to existing
equity share holder are known as right issue.

By back of shares: When company to purchase their own share from existing equity share holders with
high market price by using retained earnings of the company.

Bonus shares: When company to provide additional equity share to existing equity share holders with
free of cost by using retained earnings of the company are known as bonus shares.

Blue chip shares: The well repudiated companies’ shares are also known s blue chip shares. Like; the
shares which are listen in BSE or NSE.
Sweat equity shares: The shares which are issued to the specific employees in the company and board
of directors is known as sweat equity shares. The sweat equity share holders are having the voting rights
like; a equity share holders. The dividend is the income for the sweat equity share holders for their
investment based on companies’ profits.

2) Preference shares: The shares which are issued to the specific person or specific financial institutions
is known as preference shares. The persons who are having preference share are known s preference
share holders.

The preference share holders not having a voting rights and they enjoyed with fixed rte of dividend based
on companies’ profits.

Classifications of preference shares:

1) Cumulative preference shares: It is type of preference share. Under this shares the arrears of
preference dividend is carry forward to subsequent years (next year).

2) Non cumulative p.s: Under this type of share the arrears of preference dividend is not carry forward
to subsequent year (next year).

3) Redeemable p.s: The p.s which are possible to repaid after specific period of the time is known s
redeemable preference share.

4) Irredeemable preference share: The p.s amount which is repaid in the event of liquidation is known
as irredeemable preference share.

5) Convertible P.S: If any P.S is converted in to equity shares are known as convertible preference
shares.

6) Non- convertible P.S: The p.s which is not possible to converted in to equity shares is known as non-
convertible preference shares.

7) Participative P.S: Under this type of P.S. the P.S holders are enjoyed with preferential rights and as
a P.S holders they having a right in surplus amount. It reface’s the profit after payment of equity dividend.

8) Non participative P.S: Under this type of shares the P.S holders they are enjoyed with preferential
rights. But P.S holders having no right in surplus amount.

3) Bonds: Binds is a long term debt instruments. Which re issued by corporate and governments to raising
the debt capital from public. The bond which is carrying with fixed rate of invests.

Classifications of bonds:

1) Zero coupon bonds

2) Callable bonds
3) Floating rate bonds
 4) Convertible bonds.

1) Zero coupon bonds: It is type of bonds. The zero coupon bond is also known as discount bonds or
deep discount bond.

The bonds which are issued to the public with less than face value and after maturity it will repaid with
face value is known as zero coupon bonds.

All the zero coupon bonds are not carrying any specific rate of interest.

The difference between redemption price and issued price is a income for the bond holder.

Ex: The issued price of XYZ ltd bonds 100000 and its face value 125000 and redemption price 125000
(repayment). Calculate income for bond holder.

Sol: Income of the bond holder = redemption price – issued price

= 125000 – 100000 = 25000.

2) Callable bonds: It is a type of bond. The bonds which are repaid before the maturity date is known as
callable bond. The main reason for repayment is to decrease rate of interest in the market.

3) Floating rate bonds: It is a type of bond. The coupon rates of the bonds are fluxuted based on market
conditions is known as floating rate bonds.

4) Convertible bonds: The bonds which are converted in to equity shares is known as convertible bond.

4) Debentures: Debentures is long term debt securities which are issued by private ltd companies. For
the purpose of to raising the debt capital from public.

All the debentures they are carrying with fixed rate of interest.

Classifications of debentures:

1) Redeemable .D
2) Irredeemable .D
3) Convertible .D
4) Non – convertible .D
5) Mortgage .D
6) Necked .D

1) Redeemable .D: The debentures which are repaid after specific period of the time is known as
redeemable debentures.

2) Irredeemable .D: The debentures which are not possible to repaid after specific period of the time. It
will repaid only in the event of liquidation.
3) Convertible .D: If any debentures are converted in to equity shares is known as convertible debenture.

4) Non - convertible .D: The debentures which are not possible to convertible in to equity shares re
known s non – convertible debenture.

5) Mortgage .D: It is also called secured debentures. The debentures issuing company is to provide the
security if the company go to issue the debentures are known s secured debenture.

6) Necked .D: It is also known s unsecured debentures. The debenture issuing company they didn’t any
security to the debentures is known s necked debenture or UN secured debenture.

FIANCIAL MARKETS
Financial market is a place where selling and buying of financial instruments like; shares, bonds.
A treasury bill, commercial papers, certificates of deposits from one person to another person is known
as financial markets.

Functions of financial markets:

 1. To facilitate capital formulation
2. To provide financial convenience
3. To mobilization of savings
4. To economic growth

Financial markets

Money markets capital markets

(T-bill, Cp’s, CD’s)

Primary market secondary market

Public issue private issue right issue cash market derivative market

IPO FPO

MONEY MARKETS:

Money market is a part of financial market. The market which provide short term funds to
corporate and financial institutions by using short term financial instruments. Like;

1. Treasury bills
2. Commercial papers
3. Certificates of deposits.

In money market the RBI, commercial banks, mutual funds companies and insurance company are
play and important role.

Money markets instruments;

1) Treasury bills: It is a important money market instrument. It is a unsecured promissory note which
are issued by RBI, on the behalf of central government.

All the treasury bills which are issued less than face value and its will redemption with face value.

Ex: The issued price of treasury bills is 5000 and 9000 and redemption price (face value) Rs 10000.
 Based on above statement income fo investor is Rs 1000.

(Redemption price – issued price)

Classifications of T.biils:

1. 14 days t.bills
2. 91 days t.bills
3. 182 days t.bills
4. 364 days t.bills.

Participation in T-bills:

1. RBI
2. SBI
3. LIC & GIC
4. IDBI & Private commercial banks.

Advantages of T-bills:

➢ High liquidity
➢ Low risk
➢ Safety return
➢ Less maturity
➢ Low cost.

2) Commercial paper: It is a important money market instrument. It is an unsecured promissory note.

Which are issued by blue chip companies (well reputed companies). For the purpose of raising short term
funds from public. The minimum face value of commercial paper is Rs500000.

Eligibility for issue of commercial papers:

➢ The issuing company tangible assets worth must be 4 ‘cross as per latest balance sheet.
➢ The company should have working capital not less than 4’ cross.
➢ The company must be listed in recognized stock exchange.

3) Certificate of deposits (CD’S): It is a money market instrument. This is issued by commercial banks
and developmental financial institution for the purpose of raising the short term funds from public.

Note: All the money market instruments are having more liquidity.

CAPITAL MARKET:

It is a part of financial market. Its provide long term funds to the corporate by using different long
term financial securities. Like; equity shares, preference shares and bonds.
Classifications of capital market

1. Primary market
2. Secondary market

1. Primary market: It is a part of capital market. It is also known as new issue market. The market which
is provides fresh capital to newly started companies by issuing different financial securities.

Like; equity shares, preference shares and bonds.

Features of primary market

➢ Primary market deals with new long term capital

➢ Securities sold for first time in the market
➢ Securities are issued directly to the investors
➢ To facilitate capital formulation in the economy.

Operations in the primary market

Public issue: It is important method. To raising the capital from public. Under this method newly started
companies is to raising the funds from general public by using equity shares, bonds and government
securities.

In public issue underwriters and investment bankers are play and imp role.

Any public ltd company before going to public issue as per companies’ act 1956 must be disclose
prospectors.

Operations in public issue

A) Initial public offering(IPO)

B) Further public offering(FPO)

A) Initial public offering: It is imp method to raising the capital from public when newly started
companies to raising the funds from public in first time by using long term financial securities. Like;
shares and bonds are known as initial public offering.

B) Further public offering: When listed companies to raising the funds from public by issue of financial
securities are known as further public offering.

2) Private issue: It is also known as preferential allotment. Under this method public ltd companies to
raising the funds from specific persons or specific financial institutions.

3)Right issue: When company want to additional capital the share which are issued to existing equity
share holders which cost are known as right issue.
2. Secondary market: It is also known as stock exchange or after market. It is a place where selling and
buying of listed companies’ securities from one investor’s to other investors.

In secondary market the stock brokers and stock broking companies are play imp role.

Secondary market products

1. Liquidity shares
2. Corporate bonds
3. Treasury bills
4. Commercial papers

Market capitalization: it reface’s the total common share outstanding are mortified with present market
value of the share are known as market capitalization.

Classifications of mkt capitalization:

1. Large cap: If company mkt capitalization is more than 10 us billion dollars.

2. Mid cap: If company mkt capitalization more than 2 us billion dollars and less than 10 us billion
dollars.
3. Small cap: If company mkt capitalization is less than 2 us billion dollars.

Formula: Mkt capitalization = Total common shares outstanding x mkt price of the share

Free float: The total stock which is available for trading activities in particular stock exchange are known
as free float.

Free float = Total no. of shares – promoters shares

Free float market capitalization: If total free float is mortified with present mkt price of the share are
known as free float mkt capitalization.

Free float mkt capitalization = free float x mkt value

STOCK INDEX:

Stock index also known as stock indices. It shows mkt behavior of listed and selected securities
to the value of stock index is depend on free float mkt capitalization of selected listed securities and base
free float mkt capitalization of selected securities and base points.

NIFTY:

It reface national stock exchange fifty. It shows mkt behavior of selected fifty companies the
value of nifty which is calculated by using free float mkt capitalization of fifty companies and base free
float mkt capitalization fifty companies and base points 1000.
 𝑓𝑟𝑒𝑒 𝑓𝑙𝑜𝑎𝑡 𝑚𝑘𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑛 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 50 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠
NIFTY × 100
𝑏𝑎𝑠𝑒 𝑓𝑟𝑒𝑒 𝑓𝑙𝑜𝑎𝑡 𝑚𝑘𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 50 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠

Ex: To calculate closing nifty as on 4/9/2015

S.NO STOCK NAME FREE FLOAT MKT VALUE FREE FLOAT MKT
CAPITALIZATION
1 TCS 100000 20 2000000
2 WIPRO 200000 10 2000000
3 REDDY LABS 50000 20 1000000
SBI 2500 50 1250000
. . . . .
. . . . .
. . . . .
50 TATA STEEL 75000 10 750000
TOTAL 7000000

Note: If free float mkt capitalization are select 50 companies 1000000 and base points 1000.

Sol:
7000000
Nifty (4/4/15 3:30pm) =1000000 × 100

= 7000.

SENSEX:

It is a indicate of Bombay stock exchange. It shows mkt behavior of selected 30 companies. The
sen sex which is calculated by using free float mkt capitalization of selected 30 companies and base
free float mkt capitalization of selected 30 companies and base points 1000.

𝑓𝑟𝑒𝑒 𝑓𝑙𝑜𝑎𝑡 𝑚𝑘𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 30 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠 𝑜𝑛 𝑝𝑎𝑟𝑡𝑖𝑐𝑢𝑙𝑎𝑟 𝑑𝑎𝑡𝑎

𝑆𝐸𝑁𝑆𝐸𝑋 = × 100
𝑏𝑎𝑠𝑒𝑑 𝑓𝑟𝑒𝑒 𝑓𝑙𝑜𝑎𝑡 𝑚𝑘𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 30 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠

Note: The selected 50 and 30 companies which are selected from top 24 sectors, which are influenced by
Indian economy like; cement, iron, power, oil & gas, software, insurance, banking etc….

Price sensitive information:

Some of the economical information which are influenced like; either increased or decreased
stock price are known as price sensitive information. Like;

1. Announcing the financial result

 2. Declaration of dividend
3. Changing the management
4. Market rumors
5. Mergers and take over
6. Political data.

LISTING:

If public ltd company to taking a admission recognized stock exchange for the purpose of trading
the security from one investor to another investor are known as listing. The main objective of listing is
to provide liquidity to the investors.

De- listing: If any public ltd company security are removed from recognized stock exchange are known
as de – listing. The main reasons for de – listing is

1. To follow unethical activities

2. To follow insider trading
3. To provide false financial data to the public.

Participants in financial markets:

➢ Under writers
➢ Stock broker
➢ Investment banking companies etc…

Components of secondary market:

1) Cash market
2) Derivative market

1) Cash market: It is also known as spot market or original market. In cash market which are traded in
financial securities in between 9:15 am and 3:30 pm. before ended in cash market the trading number
must be pay initial margin to the client.

➢ In cash market will possible to sale single share also

➢ In cash market to provide delivery facility within the 3:30 pm
➢ In cash market the profits are losses are booked within the 3:30 pm
➢ In cash market to participate long term investor and original investor.

Cash market chart:

High 120

2:00pm 3:28 – 3:30pm

 109

Opening price 100 108 last trading price

Tcs 9:15 am 2:45 pm

Low 90

2) Derivative market: Financial derivative is a secondary market product it reface the value which is
derived from two or more underline asset like; equity stock, commodities, stock indices, foreign currency
rates. The main objective of introducing financial derivatives is to minimize the risk.

All the derivative contract are settled last Thursday particular month. If last Thursday is holiday
the derivatives are settled before Thursday.

➢ In India total 197 stocks which are traded in derivative market.

➢ In India the derivatives which are traded in NSE, BSE, MCX & SX

Classifications of derivative products:

F.D MARKETS

Over the counter market stock exchange

Forward swaps futures options

American European call put

Forward contract: It is a derivative product. The customized contract between two counter parties for
sell and buy underline asset with specified time and specified price.

All the contracts which are traded in over the counter market. Before entered in forward market
the trading number no need to pay initial margin to the claims (stock brokers).

Swaps: The private agreement between two counter parties for exchange of future cash flows based on
free agreed formula are known as swaps. The swaps which are treaded in over the counter market.

Future contract: Future contract is a important derivative product which is traded in stock exchanges.
It reface the standardized contract between two counter parties are buy under line assets which future
price and future time.
 In future market all the stocks which are traded in lot system. Here; 1 lot is equal to 100 shares.
The lot value not less than 2 lakes.

In future market MTM profit and NPM losses are involved.

Future contract is less risk contract why because which are traded in stock exchange.
The trading number before entered in future market must be pay initial margin.

Initial margin:

In cash market or derivative market the trading number before entered in stock market operations
he will pay 15% of amount to the client (stock broker) are known as initial margin.

15
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛𝑒 = 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑡𝑜𝑐𝑘 ×
100
(OR)

15
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛𝑒 = 𝑙𝑜𝑡 𝑣𝑎𝑙𝑢𝑒 ×
100
MTM (Market Trade Market Margin): If closing future contract value is more than opening future
contract value is known as MTM profit.

Ex: The closing price of future contract (3:30 pm) is 15,00,000 and opening price of future contract is
14,00,000. Than MTM profit is?

Sol: MTM profit = 1500000 – 1400000

= 100000

MTM loss (Mark Trade Market loss): If closing future contract value is less than opening future
contract value is known as MTM loss.

Ex: The closing price of the future contract 10,00,000 and opening price of future contract is 12,00,000
than MTM loss is?

Sol: MTM loss = 1000000 – 1200000

= - 200000

Option contract:

It is a important derivative product the standardized contract between option seller and option
buyer is known as option contract. The option contract is to give right to the holder but not obligation to
sell or buy underline asset. With a specified price and specified time.
 In option contract the option buyer must be pay option premium to option seller.

Note: the option premium which is calculated based on demand and supply and time value of money.

Classifications of options:

1) Call option ( ASK price)

2) Put option (BID price)
3) American option
4) European option

1) Call option (ASK price): Which is related to call buyer. It will give right to the buyer but not
obligation to buy an underline asset with specified price and specified time.

2) Put option (BID price): It is a type of option contract. It will give right to the seller. But not obligation
to sell an underline asset with specified price and specified time.

3) American option: The option contracts which are settled before settlement date is known as American
option.

4) European option: The option contracts which are settled only on settlement date is known as
European options.

PORTFOLIO MANAGEMENT
Portfolio: In general meaning the combination of elements are known as portfolio. In financial
terminology the total amount which are invested in group of financial securities are known as portfolio.

Port folio management: It is a professional management which deals with

1. Security analysis
2. Portfolio selection
3. Portfolio revision
4. Portfolio evaluation
 The main objective of portfolio management is to minimize risk and maximize returns. The risk
and returns are calculated by using following tools.
1. β
2. standard deviation
3. Correlation etc….

MUTUAL FUNDS
Mutual fund is a method of investment. It means to collecting pool of investment (small
investment) from different small inventors. The total collected investment is invested in different
financial securities like; equity shares, bonds, money market instruments and commodities. The main
objective of introducing mutual fund is encouraged small inventory and provides liquidity of the
investment.

NAV (Net Asset Value)

 It is applicable to mutual fund industry. The present market value of 1 unit is known as NAV.
NVA is not constant it will flxuated based on value of investment.

𝑉𝐴𝐿𝑈𝐸 𝑂𝐹 𝐼𝑁𝑉𝐸𝑆𝑇𝑀𝐸𝑁𝑇
𝑁𝐴𝑉 =
𝑁𝑂. 𝑂𝐹 𝑈𝑁𝐼𝑇𝑆
Classifications of mutual funds:

1) Open ended fund: It is a important mutual fund scheme. Under this scheme the mutual fund units are
traded in stock market any time based on net asset value.

2) Closed ended fund: Under this scheme the mutual fund units are not traded in regular basis, But units
are traded after completing the maturity period of the scheme.

3) Equity fund: The fund amount which are invested in equity shares are known as equity fund.

4) Debt fund: It is also known as fixed income fund. The fund amount which are invested in fixed income
securities. Like; bonds and debentures is known as debt fund.

5) Balanced fund: The fund amounts which are invested in both equity securities and debt securities are
known as balanced fund.

6) Index fund: The fund amount which are invested in index based securities like; NEFT – 50, SENSEX
– 30.

7) Gilt fund: The fund amount which are invested in government securities are known as gilt fund.

8) Sector fund: The fund amounts which are invested in specific sectors. Like; software, banking,
insurance, pharmacy etc…is known as sector fund.

9) Money market fund: The fund amount which are invested in money market instruments, like; treasury
bills, commercial papers, certificates of deposits are known as money market fund.

10) Commodity fund: The fund amounts are invested in commodities, like; gold and silver are known
as commodity fund.

Advantages of mutual funds:

➢ Professional fund
➢ Encourage small investors
➢ Diversification of investment
➢ Low risk or sharing risk
➢ High liquidity
➢ Safety return.
 FINANCIAL SERVICE
If banks financial institutions provide any services to the corporate like; loans and cash credit
etc…are known as financial service.

The important financial services are;

1) Bank over draft

2) Cash credit
3) Bridge finance
4) Later of credit
 5) Factoring
6) Secured loans
7) Unsecured loans
8) Venture capital
9) Investment banking
10) Under writing
11) Lease finance

Bank over draft: It is a financial service. It is provided by the financial institutions to needed customers.
Under this service the customers have a right to withdraw more than is account balance from his account.

Cash credit: It is a financial service. It is provided by the financial institutions. Under this service the
interest will be charge only withdrawal amount but not charged on sanctioned amount.

Bridge finance: When join stock companies to taking short term loans from financial institutions give
to pending of long term loans are known as bridge finance.

Later of credit: It is a financial service. It is provided to the customer by financial institutions. Under
this service the financial institutions to issue written document to his customer to taking goods and
services from suppliers on credit.

After supplying goods and services the supplier can claim total amount from the bank.

The banker will collect total amount including service charge from specified customer.

Factoring: It is a financial service. The financial arrangement among three parties; seller, buyer and
factor (financial institution).

Factoring procedure:

1. A customer to approach a company with a request to supply goods on credit.

2. The company to approach the factor for fix in the credit limit.
3. After fixing the credit limit the company selling goods and services to customer with invoice copy
and one copy invoice send to the bank (factor).
4. Based on invoice the banker when provide 80% amount to the company.
5. The factor collecting the total amount from customer by using different installments.
6. After collecting total amount the remaining 20% amount will send to the company.

Secured loans: It is a financial service. It is provided by the financial institution to his customer. Under
this service the financial institution to provide any loan after taking some security like; land document
and building documents this type of loan is called secured loans.

Unsecured loans: Under this method the banker provides loan to the customer without taking any
security from the customer.
Venture capital: It is a method of financing. The term venture capital reface institutional investors to
provide equity finance to the qualified entrepreneurs are known as venture capital. Venture capital is a
high risk financing compare to other financial services.

Features of venture capital:

➢ Equity participation
➢ Long term investment
➢ Participation in the management.

Modes of financing by venture capital units

➢ Equity
➢ Conditional loans
➢ Convertible loans

Investment banking: It is also known as merchant banking. It provide financial advisor in terms of
mergers and investment to the investors.

Hire purchase: This is type of financing. Under this system the buyers acquire the asset the posse ion of
the goods immediately transfer to the buyer and he agree to pay total hire purchase price in different
installment. Under this process each installment will be treated as hire charge.

Under this system the total ownership right will transfer to buyer after settlement of last
installment.

Lease finance: The agreement between two parties for the purpose of usage of assets without ownership
is known as lease finance. (Or) the agreement between lesser and lessee for the purpose of usage of asset
without ownership is known as lease finance.

Features of lease finance:

➢ Agreement between lease finance

➢ Lease rental
➢ Usage of asset without ownership.

Classifications of lease finance:

1. Operating lease
2. Finance lease

Operating lease: It is also known as short term lease or cancelled lease. Under this the leaser is
responsible for maintenance expanses of the asset. Like; insurance expenses, repairs etc…
Under this lease both the lesser and lessee possible to discharge in the middle of the contract.

Ex: computer lease office equipment etc..

Finance lease: It is also known as capital lease or long term lease. Under this lease lesser or lessee is not
possible to discharge in the middle of the contract. That’s why it is also known as finance lease. Under
this lease the lessee is responsible for total maintained expenses.

Ex: land lease, building lease etc..

Note: Here; lesser --- owner of the asset

Lessee ----- user of the asset.

Note: Limitation of payback period is not giving the priority to time value of money.

FINANCIAL MANAGEMENT
Finance: Money or money worth things are known as finance. The finance for his play and important
role in any business. Without finance not possible to during the business operations.

Financial management: Financial management is a part of business management. It deals with

procurement of funds and their effective utilization of funds. The main objective of financial management
is to maximization of profit and minimizes of losses and maximizes wealth of the share holders.

Wealth maximization: It refaces to increase wealth of the share holders. It means to increase market
value of the share.

Functions of financial management:

 1. Collecting funds from public
2. Investment decision
3. Financing decision
4. Liquidity decisions.

Investment decision: It is also known as capital budgeting decisions. It reface before investing in long
term projects to select best alternative from available alternatives.

(Or)

Capital budgeting is financial management function. It reface investing in long term projects to
take best decisions from among the decisions by using different techniques is known as capital budgeting.

Capital budgeting

Traditional method Modern method

Pay back period Accounting rate of return Net present internal rate of return

(PBP) (ARR) Value (NPV) (IRR)

Profitability index

Traditional method:

These method also known as non discounted cash flow method. All the traditional methods are
not giving importance to time value of money .important traditional methods are;

1. Payback period method (PBP)

2. Accounting rate of return (ARR)

1) Payback period method: It is a important traditional method. Under this method the projects are
evaluated by using the time factor. Here; PBO reface how much time which is required for to return back
investor investment by using cash flow of the project.

Case – 1: If cash inflows are equals to when

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝐵𝑃 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤
Ex: calculate PBP from following information

The investment of the project (cash out flow) 10,00,000

Annual cash in flows 50,000.

1000000
Sol: 𝑃𝐵𝑃 = = 20 𝑦𝑟𝑠
50000

Case -2: If cash inflows unequal

Ex: Calculate PBP by using following information

The investment of the project 1,00,000

The cash inflows are given below

Years Cash inflows

1 10000
2 20000
3 25000
4 25000
5 15000
6 25000
7 30000

Sol: Total investment of the project – 100000

years Cash inflows Cumulative cash

inflows
1 10000 10000
2 20000 30000
3 25000 55000
4 25000 80000
5 15000 95000
6 25000 5000 (100000)
7 30000

5000
𝑃𝐵𝑃 = 5 +
25000
 = 5 + 0.2
= 5.2 yrs.

Project selection criteria for PBP:

Under this method which project adding less payback period, that project will be selected
remaining projects are rejected.

Ex: The total investments are ABC projects is 1000000. Its pay back periods are given below.

A–5y

B – 7y

C – 9y

Based on above statement which project will be select by using PBP method.

Sol: Project A. Why because it having less pay back period.

2) Accounting rate of return (ARR): It is also known as average rate of return. It shows rate of returns
(percentage of the profit) by using average profits and average investment. Under this method the project
are evaluated by using rate of return on investment.

𝐴𝑣𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝐴𝑅𝑅 = × 100
𝐴𝑣𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠

𝐴𝑣𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 =
𝑁𝑜. 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡𝑠

𝑜𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝐴𝑣𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 =
2
Ex: Calculate ARR Avg investment – 250000

Profits are given below

year profits
1 50000
2 50000
3 75000
4 25000
5 80000
6 120000
400000
Sol: 𝐴𝑣𝑔 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 = = 66667
6
 66667
𝐴𝑅𝑅 = × 100
250000
=26.66%

Project selection criteria for ARR

Under this method which project having more ARR. That project will be selected, remaining are
rejected.

Modern method:

Under this method both cash inflows and cash out flow are considered with time values all the
modern methods. They are giving the priority to time value of money that’s why modern methods are
also known as discounted cash flows method.

Important modern methods:

1. Net Present value (NPV)

2. Interest rate of return (IRR)
3. Profitability index

Net present value: It is a important method. It will give priority to time vavlue of money. It means the
difference between present value of cash inflows and present value of cash out flows.

NPV = PVCI – PVCO

PVCI = cash inflows x present value

PVCO = cash out flows x 1

Ex: Calculate NPV using following information

The investment of project A – 500000

Cash inflows and 10% values are given below

year Cash inflows Present value of 10%

1 100000 0.909
2 300000 .826
3 75000 0.751
4 150000 0.683
5 300000 0.621
6 100000 0.564
Sol:
 year Cash inflows Present value of Present value of
10% cash inflows
1 100000 0.909 90900
2 300000 .826 247800
3 75000 0.751 56325
4 150000 0.683 102450
5 300000 0.621 186300
6 100000 0.564 56400
740175
PVCI = 740175

Present value of cash out flows = investment x 1

= 500000 x 1

= 500000

NPV = PVCI – PVCO

= 740175 – 500000

= 2, 40,175.

Project selection criteria:

• If only one project is available the NPV is ‘0’ or positive it is accepted. Other wise project will
be rejected.
• If two are more projects are available than which project having more NPV that project will be
selected remaining projects are rejected.

Ex: project A NPV – 500000

B NPV – 700000

C NPV- 800000

Based on above statement select best project by suing NPV method?

Sol: Project – c is accepted. Remaining is rejected. Why because project ‘ c’ having more NPV comparing
to remaining projects.

Profitability index: It is a important moern method. It shows relationship between present value of cash
inflows and present value of cash out flows. The profitability index is also giving the priority to time
value of money.
 𝑃𝑉𝐶𝐼
𝑝𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 =
𝑃𝑉𝐶𝑂
Project selection criteria:

• If profitability index 1 or equal to 1. The project will be accepted. The remaining are rejected.

Ex: Find the profitability index

PVCI – 740175

PVCO – 500000
740175
Sol: 𝑃𝐼 = = 1.48, the project is accepted.
500000

Financing decision:
Capital structure: If companies to rising total long term capital by using group of financial securities
are known as capital structure.

Like; if ‘x’Ltd to raising 300000 long term capital by using following financial securities.

Equity share capital – 1000000

Preference share capital – 1000000

Bonds capital – 1000000

Financial structure: The total liability side of company balance sheet is known as financial structure.
Like;

liability Amount
Share holders 1000000
equity 2000000
Noncurrent 1000000
liability
Current
liability
4000000
Cost of capital: The minimum rate of return which is expected by investor on his investment is known
as cost of capital (or) cost of rate. Like;

Equity cost of capital

Preference cost of capital

Debt cost of capital

Retained earnings cost of capital

INVENTORY MANAGEMENT

In general terms the opening ( or) closing stock will be treated inventory. In manufacturing
business point of the inventory it’s consist of raw material, working process and finished goods.

Methods of issue of raw material to the product department

➢ FIFO
➢ LIFO
➢ Weighted average method
➢ Simple average method
➢ HIFO
➢ Base stock method
➢ Standard price method.

Inventory management: It is a part of business management. The inventory management which deals
with inventory related terms (or) activities. Like;

➢ Placing the order to supplies

➢ Issue the raw material to the production department
➢ Checking the levels of stock.

The main objective of inventory management is to effective utilization of inventories and

minimizes the wastage of inventory.

Inventory management techniques:

1. Economic order quantity ( EOQ)

2. All ways better control (ABC Analysis)
3. Inventory turnover ratio.

1) Economic order quantity (EOQ): It is a important management technique. It reface which order of
quantity of raw material will give more benefits to the organization. That much of order must be placing
to the supplier. The main objective of economic order quantity method is to minimize total inventory
cost. Like;
 The total inventory cost = ordering cost + carrying cost

√2𝐴𝐵 √2 𝐴𝑂
𝐸𝑂𝑄 = 𝑜𝑟
2 𝑐
Here; A – Annual consumption

B – Buying cost

C – Carrying cost

O – Ordering cost

COST ACCOUNTING
Cost accounting is a branch of accounting is a process of recording and classifying &
summarizing cost related information. Like;

• Raw material
• Labor charges &
• Over heads
The main objective of cost accounting to known the total cost of production.

Functions:

1. To ascertainment of total cost of goods & services

 2. To know the single cost of product
3. To control the cost
4. To estimate selling price of the product.

Important elements of cost accounting:

1. Material
2. Labor
3. Over heads

Cost sheet:

Cost sheet are also known as statement of cost consist of cost related items. Like; material, labar
and over heads. The main objective of preparation of over heads

→ To know the total cost of the goods & services

→ To know the single cost of product
→ To estimate selling price of the product.

Cost sheet:

Particular Amt
Direct material Xxx
Add: Direct labor Xxx
Prime cost……………………. Xxx
Add: factory over heads Xxx
Factory cost…………………… Xxx
Add: office & administration over heads Xxx
Cost of production…………… Xxx
Add: Selling & distribution over heads Xxx
Total cost…………….
Xxx

Factory over heads: Factory over heads also known as factory expenses.

1. Factory rent
2. Power chares
3. Oil & gas
4. Oil & water etc.

Office & Administration over heads:

1. Salary
2. Rent
3. Stationary
 4. Director fees etc.

Selling & Distribution over heads:

1. Advertisement
2. Promotion charges
3. Travelling expenses
4. Packing expenses etc.

Ex: To prepare cost sheet by using following information

Direct material 5L

Wages 1L

Factory power 1L

Oil & Gas 25000

Factory rent 25000

Rent 75000

Salaries 50000

Stationary 25000

Advertisement 75000

Director fees 1L

Sol:

Particular Amt
Direct material 500000
Add: wages 100000
Prime cost……………………. 600000
Add: factory over heads 150000
Factory cost…………………… 750000
Add: office & administration over heads 250000
Cost of production…………… 100000
Add: Selling & distribution over heads 75000
Total cost…………….
1075000
Classifications of cost:

1. Fixed cost
2. Variable cost
3. Semi variable cost
4. Sunk cost
5. Standard cost
6. Marginal cost
7. Opportunity cost

Fixed cost: Is a type of cost. The cost which having fixed nature. If any cost does not change according
to production or output levels are known as fixed cost.

Ex: Rent, insurance, managerial salaries etc.

Variable cost: It is a not a fixed cost. The cost it should be flxuated based on out put levels are production
levels are known as variable cost.

Ex: material cost, labor cost.

Semi variable cost: If any cost which having nature of fixed & variable cost are known as semi variable
cost.

Ex: Telephone charges, power charges.

Sunk cost: It is also known as past cost. The cost which is incurred but it is not recoverable are known
as sunk cost. This is not helpful to per future decision making.

Ex: Installed machinery exp

Installed software cost etc.

Standard cost: Is a method of costing. The pre estimated or the pre determined costs are known as
standard cost. The standard cost which is helpful to taking economic decision.

Ex: The estimation of particular product before manufacturing.

Note: The difference between actual cost and standard cost are known as variance.

Variance = Actual cost – standard cost.

Marginal cost: The cost which is incurred for to manufacturing additional units of goods & services are
known as marginal cost.

Opportunity cost: Is a method of costing. if you loss any opportunity from available are known as
opportunity cost.
Ex: Mr.’X’ they are invested in (they are deposited in) SBI with interest of 10%, per ICICI to provide
12%, and HDFC to provide 14%, SBH to provide 18%.

Absorption cost: It is a method of costing. If the total cost of the product which are included in fixed
cost and variable cost are known as absorption cost.

Absorption = fixed cost + variable cost.

COST VALUE PROFIT ANALYSIS

It is a important of financing planning. It shows relationship between total sales, total profit and
total cost. The important elements of cost value profit analysis;

1. Contribution
2. Profit value ratio ( PV ratio)
3. Breakeven point
4. Margin of safety.

1. Contribution: It refaces the difference between total sales and variable cost are known as contribution.

Contribution = Total sales – variable cost.

Contribution per unit: The difference between selling price per unit and variable cost per unit are known
as contribution per unit.

Contribution per unit = selling price per unit – variable cost per unit

Note: contribution = fixed cost + profit

Profit = contribution – fixed cost

2. Profit value ratio (PV Ratio): It is a important ratio. It explains relationship between contribution &
total sales. It measures profitability of the company.

𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑃. 𝑉 𝑅𝑎𝑡𝑖𝑜 = × 100
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
(Or)

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑓𝑖𝑡
𝑃. 𝑉 𝑅𝑎𝑡𝑖𝑜 = × 100
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠

3. Breakeven point: It is a important tool of cost value profit analysis. It reface total sales equal to total
cost. It means the point it shows no profit and no losses.
The breakeven point which is calculated by using two formulas.

1. Break – even point in units

2. Break – even point in rupees

Break – even point in units:

𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 𝑖𝑛 𝑢𝑖𝑛𝑡𝑠 =
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Contribution per unit = selling price per unit – variable cost per unit

Break – even point in rupees:

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 𝑖𝑛 𝑟𝑢𝑝𝑒𝑒𝑠 =
𝑃𝑟𝑜𝑓𝑖𝑡 𝑣𝑎𝑙𝑢𝑒 𝑟𝑎𝑡𝑖𝑜

𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜
𝑃. 𝑣 𝑅𝑡𝑎𝑖𝑜 = × 100
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
4. Margin of safety: It reface the difference between total sales and BEP sales high margin of safety
reface high profit and low margin of safety reface low profit.

Margin of safety = Total sales – BEP sales

𝑚𝑎𝑟𝑔𝑖𝑛𝑒 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒(%) = × 100
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠

𝑝𝑟𝑜𝑓𝑖𝑡
𝑚𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 =
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Note: 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 =profit / p.v ratio.

FINANCIAL ACCOUNTING
GAAP ( General Accepted Accounting Principle): This are the rule, principles, regulations which are
issued by central government of the country (OR) accounting statuary board of the country ( IASB &
ICICI) GAAP rules are back bone of financial accounting. Without GAAP rules not possible to prepare
accurate financial statements.

Classifications of GAAP rules:

1) Local GAAP
2) IFRS

Local GAAP: These are the GAAP rules which are applicable to particular country. Like; Indian GAAP,
UK GAAP, US GAAP, Canada GAAP etc.
IFRS: It is transfer international financial reporting standards’. Which are applicable to entire globe.

In the year 2002 the first time European countries are adopted IFRS.

IFRS rules which are issued by international accounting standard board.

IFRS countries – Australia, Austria, Belgium, Canada, Denmark, Germany, Japan etc.

Note: As latest information more than 100 countries are adopted IFRS rules.

Important elements in GAAP:

1) Accounting concepts
2) Accounting conventions
3) Accounting assumptions
4) Accounting standards.

1) Accounting concepts: Accounting concepts means rules & principles which are followed by the
accountant while preparation of financial statement.

The important accounting concepts are;

1. Business entity concept

2. Money measurement concept
3. Cost concept
4. Going concern
5. Dual aspect concept
6. Matching concept
7. Accrual concept
8. Object evidence concept.

Cost concept: It is also known as historical cost concept. As per this accounting principle all the assets
must be recorded in books of accounts with cost price only. Based on this accounting principle the market
values of asset are not considered in the books of accounts.

Note: Cost price = purchase price + Transportation cost + installation charges

Ex: The cost price of a land (1/1/2000) Rs 1000000 and the present market value of the land (31/12/2014)
Rs 7500000. As per cost principle how much amount will recorded in balance sheet.

Sol: As per cost concept Rs 1000000 is recorded in balance sheet.

Going concern concept: It is a important accounting principle. As per this accounting principle the
business will running long time but not short time. Based on this accounting principle only the proprietor
to purchase fixed asset like; land & building, plant & machinery etc.
 Based on this accounting principle only all the financial institutions and suppliers and
advertisement agencies are making contract with different companies.

If we are not follow going concern principle

1. The proprietor are not invested in fixed asset

2. The financial institutions & advertisement agencies are not ready to take contract with particular
companies.
3. The prepaid expenses income received in advance, long term advertisement expenditure &
preliminary expenses are not possible to recorded in books of accounts.

Account period concept (or) financial year concept: It is a important accounting principle. As per this
accounting principle the accountant must be prepared financial statement based on certain time. The
specified time is known as financial year or accounting period.

If accountant did not follow accounting period concept than

1. Not possible to prepare financial statement

2. Not possible to annual reports
3. Not possible to conduct AGM
4. Not possible distribute dividend to the share holders
5. Not possible to taking economic decisions. Like;
Expansion of business activities, introducing of new products, closing the business
operations.

Matching concept: It is a important accounting principle. As per this accounting principle the revenues
& expenses must be match. It means the revenues & expenses which are relating to present accounting
year must be recorded in books of accounts.

Ex: the sales revenues which are relating to present accounting year. If value of revenue is received or
not must be recorded in books of accounts.

The expenses which are relating to present accounting year. If it is paid or not must be recorded
in books of accounts.

Note:

1. Based on matching concept only we are calculate profits and losses in the books of accounts
2. Based on matching principle incomes & expanses which are not relating to present accounting
year, are not consider in the books of accounts.

Accrual concept: It is a important concept. As per this accounting principle the incomes & expenses
must be recorded in the books of accounts. (The income & expenses which are relating to present
accounting year)
 If expenses which is relating to present accounting year. If is paid or not must be recorded in
books of accounts.

Ex: out standing expenses.

The income which is relating to present accounting year. If it is receive or not. Must be recorded
in books of accounts.

Ex: Out standing incomes.

2) Accounting conventions: The important accounting conventions are;

1. Convention of consistency
2. Convention of fully discloser
3. Convention of conservatism (prudence)
4. Convention of materiality (feasibility)

Convention of fully disclosure: It is a important accounting principle. As per this accounting convention
the accountant must be disclose truthfully financial information in the financial statement. Why because
after completion of financial year all the companies to sharing the financial data.

1. To the share holders

2. To the financial institutions
3. To the supplies
4. To the customers
5. To the government

Based on fully disclosure principle only the value of contingent liabilities and market value of
investment are disclose in notes of the financial statement.

Convention of conservatism (prudence): It is a important accounting principle. As per this accounting

convention the future expected profits are not consider in books of accounts and future expected losses
must be recorded in the books of accounts.

Ex: Valuation of inventory and provision for bad debts and provision of repairs etc.

Inventory valuation: As per AS2. The inventories which are valuated cost or market price whichever is
lower.

Convention of materiality (feasibility): It is a important accounting convention. As per this accounting

convention the important financial information must be recorded in financial statement, even minor
values also which is relating to business. Must be recorded in financial statement. Why because the minor
values also influence financial status of the organization.
Accounting assumptions:

1. Going concern principle

2. Accrual concept
3. Convention of consistency.

Accounting standards: Accounting standard are written document, policies which are issued by specific
accounting body. Which are deals with preparation and presentation of financial statements?

Important accounting standards:

As1 – Disclosure of accounting policies

As2 – Inventory valuation

As3 – Cash flow statement

As6 – Depreciation

As10 – Accounting for fixed asset As26 – Intangible assets

As13 – Accounting for investment As28 – Impairment of assets

As14 – Accounting for amalgamation As29 – Provisions, contingent asset & liability

As19 – Finance lease As32 – Accounting for financial instruments.

As20 – EPS

As21- Consolidated financial statement

ACCOUNTING CYCLE
Accounting cycles are also known as accounting process or accounting procedure or journey of
accounting. It starts with recording the journal entry and ends with preparation of financial statements.
Like; income statement, balance sheet.

Accounting cycle process:

Source documents

Transaction

Journal entry

Ledger
 Trail balance

Financial statements (income statement, balance sheet)

Accounting principle (or) principle of accounting (or) golden rules of accounting:

In financial accounting the total accounts which are classified in three categories

1. Personal account
2. Real account
3. Nominal account

Personal account: The transaction which are relating to persons.

Like; General persons – ramu, naresh, mohan, lakshuman, somu etc….

Artificial persons – Company names, educational names, banks names etc…

Representative persons – Capital, drawings’, outstanding expenses, outstanding incomes,

prepaid expenses, income received in advance.

Personal account rules:

Debit – the receiver

Credit – the giver

Real account: The transaction which is relating to assets and properties are comes under real account
(all assets).

Real account rule:

Debit – what comes in?

Credit – what goes out?

Nominal account: The transaction which are relating to incomes and gains.

Like; interest received, dividend received, commission received.

To getting any gain on assets and investments and the expenses and losses.

Like; purchases, rent, salaries, depreciation, bad debts are comes under nominal account.

Nominal account rule:

Debit – all expenses & losses

 Credit – all incomes & gains.

Journal:

Journal is a first step of accounting process. That’s why it is also known as books of primary
entry. Under journal all the business transactions recorded in chronological order (day to day).

Date Particular L.F Debit amount Credit amount

Narration: The brief explanations of business transaction are known as narration.

Specified accounting rules:

➢ If increase any value if asset, the asset must be debited.

➢ If decreasing any value of asset, the value of asset must be credited.
➢ If increasing any value of liability, the value of liability must be credited.
➢ If decreasing any value of liability, the value liability must be debited.
➢ If increasing any value of capital, the increasing capital must be credited.
➢ If decreasing the value of capital, the decreasing capital must be debited.
➢ If increasing value of expenses, increasing expenses must be debited.
➢ If decreasing value of expenses, the decreasing expenses must be credited.
➢ If increasing any income, the increasing income must be credited.
➢ If decreasing any income, the value of income must be debited..

Models journal entries:

If proprietors start the business

Cash a/c Dr…………..

To capital a/c…………

When asset are purchase by using cash

Asset a/c Dr………….

To cash a/c……………

When asset are purchase by using cheque

Asset a/c Dr………………..

 To bank a/c…………….

When business to purchase goods for cash

Purchase a/c Dr…………..

To cash a/c……………..

When purchase of goods by using cheque

Purchase a/c Dr……….

To bank a/c…………….

When goods purchase on credit

Purchase a/c Dr……..

To supplier a/c………

Journal entry for purchase returns

Supplier a/c Dr………..

To purchase returns a/c……….

Journal entry for sales returns

Sales returns a/c Dr……

To customer a/c…………

When cash taken by the proprietor from the business for personal use

Drawing a/c Dr……….

To cash a/c…………..

When goods taken by the proprietor from the business for his personal use

Drawings a/c Dr…………

To purchase a/c…………..

When goods stolen by employee

Loss on theft a/c Dr……..

To purchase a/c…………
When cash stolen by employee

Loss on theft a/c Dr………

To cash a/c…………..

When goods given to free sample

Free sample a/c Dr…………..

To purchase a/c…………

When employee to taking a salaries in the firm of goods

Salaries a/c Dr……….

To purchase a/c…………….

Account payables:

Account payable which are relating to credit purchase of goods. It reface the company will be
paid some of the amount to the suppliers for the purpose of to taking the goods on credit from suppliers.

The accounts payables which are settled within one year. That’s why it is recorded in under
current liabilities.

Journal entries:

When credit purchase are arrays

Purchase a/c Dr………..

To account payables a/c………….

When accounts payables are settled

Accounts payables a/c Dr…………..

To bank a/c ………………………

Account receivable:

This is relating to credit sales of the goods. It reface the company will be receive some of the
amount from customer for the purpose of two sale the gods & services for the customer on credit.

The accounts receivables which are received with in the 12 months from customers. That’s why
it is presented in balance sheet under current assets.

Journal entries:
When credit sales are made

Account receivable a/c Dr……….

To sales a/c……………………..

When receivables for account received to debtor

Bank a/c Dr……….

To account receivables a/c……….

When bad debts are arrays

Bad debts a/c Dr………..

To account receivable a/c…………….

When bad debts are recoverable from customers

Bank a/c Dr…………

To bad debts receivable a/c…………..

Ex: To write journal entries by using following information

➢ Purchase of goods for cash 10 L

➢ Purchase goods from ramana on credit 5L
➢ Sold goods to ravi on credit Rs 40L
➢ Cash paid to ramana Rs 5L
➢ Cash received from ravi Rs 3.5L
➢ Bad debts arrays on account receivable Rs 50000.

Sol: purchase a/c Dr…….10L

To cash a/c………..10L

Purchase a/c Dr………5L

To account payable a/c…….5L

Account receivable a/c Dr………..40L

To sales a/c ………………………40L

Account payable a/c Dr……..5L

To cash a/c………………….5L
 Cash a/c Dr………..3.5L

To Ravi a/c…………3.5L

Bad debts a/c Dr……..50000

To account receivable a/c……….50000

Discounts:

If decreasing or redemption of price on the goods & services are known as discount. Give to
encourage the customers and to collecting the dues from customers with in short time.

Classifications of discounts:

1. Trade discount
2. Cash discount

Trade discount: The discounts which is calculated on invoice price or marked price (printed price) are
known as trade discount. The main objective of providing trade discount to encourage the sales.

Note: The trade discount it is not considered in the books of accounts.

Cash discount: The discount which is calculated on original price the goods are known as cash discount.
The main objective of providing the cash discount to collecting the dues from customers with in the short
time.

Note: The cash discount which is considers the books of accounts.

Ex: To write journal entries by using following information

➢ Purchase goods from Raman Rs 1000000, but trade discount is Rs 100000

➢ Purchase goods from raju Rs 1000000 and cash discount 10%
➢ Sold goods to ‘x’ Rs 2000000, but trade discount is 10%
➢ Sold goods to ‘x’ Rs 2000000, but cash discount is 10%

Sol: purchase receivable a/c Dr…………9L

To account payable a/c……………9L

Purchase a/c Dr…………….10L

To bank a/c……………………9L

To discount received a/c ………1L

Account receivable a/c Dr……18L

 To sales a/c ……………….18L

Account receivable a/c Dr……18L

Discount allowed a/c Dr……….2L

To sales a/c…………………..20L

Ex: To journalize the following transactions

➢ Purchase goods from raju 10L, trade discount 10% and cash discount 10%.
➢ Sold goods to Ravi 10L, cash discount 10% and trade discount 10%

Sol: purchase a/c Dr…….9L

To cash discount a/c……….90000

To cash a/c………………810000

Bank a/c Dr…………………810000

Discount allowed a/c Dr……..90000

To sales a/c……………………..900000.

Note: Discount received is also known as purchase discount and discount allowed are also known as sales
discount.

Purchase account income of the organization and sales discount is a loss of the organization.

SUBSIDIARY BOOKS
In large scale business sectors lot of transactions are available. That’s why this all transaction
which is recorded in special journal entries the special journal entries are known as subsidiary books (or)
sub journals etc.

The important subsidiary books given below.

1) Purchase book
2) Purchase returns book
3) Sales book
4) Sales returns books
5) Cash book
6) Bills receivable book
7) Bills payable book
8) Journal proper.
Purchase book: It is also known as purchase journal. It records only credit purchase of goods but
purchase did not record cash purchase of goods & assets.

Purchase returns book: under purchase returns book to record purchase returns of goods & service.

Sales book: is also known as sales journal. It records credit sales of goods.

Sales returns books: Under sales returns books to record only sales returns of the goods.

Bills payable book: The transactions which are relating to bills payable are comes under bills payable
book.

Bills receivable book: The transactions which are relating to bills receivable are comes under bills
receivable book.

Journal props: If any accounting transaction which is not recorded. Above 7 subsidiary books it will
record. In journal props. Like;

• Credit purchase of asset

• Credit sales of assets
• Credit purchase of investment
• Opening entries
• Closing entries
• Adjusted entries.

Accounting documents:

1) Purchase order
2) Invoice
3) Debit note
4) Credit notes

Purchase order: purchase order is a commercial document which is sends by customer to suppliers it
describes details of goods & services qualities of the goods and acceptable price.

Invoice: It is a commercial document. It sends by the sells to the buyer. It describes details of goods &
services details of pricing details of tax & mode of transportable.

Debit note: It is a document it sends by the business to the suppliers. It describes details of purchase
returns.

Credit note: It is a document it sends by the business to the customers. It describes value of sales returns.
Ledger:

It is a second step of accounting process. He as all the economic transactions which are classified
based on the measure of the transactions. Which consist of two operations?

1) Posting
2) Balancing

Posting: it refaces the economical data which is transfer to journal to ledger are known as posting.

Balancing: After posting the all the economical transaction in the ledger to compare debit & credit side’s
amounts are known as balancing.

Performa:

Dr Cr

Date particular L.F Amount Date Particular L.F Amount

Ex: To posting the ledger by using following information

➢ X started business with cash 2000000/-

➢ Purchase of land for cash 500000/-
➢ Purchase of equity investment for cash 100000/-
➢ Purchase of goods for cash 100000/-
➢ Sold goods for cash 200000/-
➢ Loan taken from state bank of India 500000/-
➢ Sold goods to raju on credit 5000000/-
➢ Rent paid 50000/-
➢ Salaries paid 50000/-
➢ Interest received 75000/-
➢ Commission received 25000/-

Sol: cash a/c Dr……… 2000000

To capital a/c……….. 2000000

 Land a/c Dr………….500000

To cash a/c……………. 500000

Equity investment a/c Dr…100000

To cash a/c ……………………100000

Purchase a/c Dr…………..100000

To cash a/c…………………… 100000

Purchase a/c Dr……………200000

To account payable a/c………….200000

Cash a/c Dr…………………700000

To sales a/c………………….…..700000

Cash a/c Dr………………....500000

To bank a/c …………………..…500000

Account receivable a/c Dr….500000

To cash a/c ……………………..500000

Rent a/c Dr……………….….50000

To cash a/c…………………………50000

Salaries a/c Dr…………………50000

To cash a/c…………………………50000

Cash a/c Dr……………………..75000

To interest received a/c……………..75000

Cash a/c Dr……………………..25000

To commission received a/c ………..25000

Ledger posting:

Dr cash a/c Cr
Date Particular L.F Amount Date Particular L. Amount
F
To capital 2000000 By land 500000
TO sales 200000 By equity
To SBI loans 500000 investment 100000
To interest By purchase 100000
received 75000 By rent 50000
To commission By salaries 50000
received 25000
By balance c/d 2000000
2800000 2800000
To balance b/d 2000000

Dr capital a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 2000000 By cash 2000000

2000000 2000000
By balance b/d 2000000

Dr Land a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 500000 By balance c/d 500000

500000 500000
500000
To balance b/d

Dr Equity investment Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 100000 By balance c/d 100000

100000 100000
 To balance b/d 100000

Dr Purchase a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 100000 By balance c/d 300000
To account
payable 200000
300000 300000
To balance b/d 300000

Dr sales a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 700000 By cash 700000

700000 700000
By balance b/d 700000

Dr Bank a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 500000 By cash 500000

500000 500000
By balance b/d 500000

Dr Account receivable a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 500000 By balance c/d 500000

500000 500000
 To balance b/d 500000

Dr Rent a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 50000 By balance c/d 50000

50000 50000
To balance b/d 50000

Dr Salaries a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To cash 50000 By balance c/d 50000

50000 50000
To balance b/d 50000

Dr Interest received a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 75000 By cash 75000

75000 75000
By balance b/d 75000

Dr Commission received a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 25000 By cash 25000
 25000 25000
By balance b/d 25000

Dr Account payable a/c Cr

Date Particular L.F Amount Date Particular L.F Amount

To balance c/d 200000 By purchase 200000

200000 200000
By balance b/d 200000

Trail balance:

Trail balance is a accounting statement. It consists of set of ledger balances. Like; Debit and credit
balances. The main objective of preparation of trail balance to know the arithmetical accuracy of books
of accounts.

The trail balance which is a base of preparation of financial statement. Like; Income statement
and balance sheet.

Preformed trail balance:

Particular Debit amount Credit amount

Opening stock Xxx ---
Purchases Xxx ---
Sales --- xxx
Purchase returns ---- Xxx
Sales returns Xxx ----
All direct expenses Xxx ----
All indirect expenses Xxx ---
Interest received ----- xxx
Depreciation Xxx ---
Bad debts Xxx --
All assets Xxx ---
 Capital ---- Xxx
All liabilities ---- Xxx
Discount received( purchase
returns) ---- Xxx
Discount allowed ( sales discount)
Commission paid Xxx --
Commission received Xxx --
--- xxx

Based on journal posting to ledger & trail balance:

Trail balance:

Particular Debit amount Credit amount

Cash 2000000 -------
Capital ----- 2000000
Land 500000 --------
Equity interest 100000 ------
Purchases 300000 -------
Sales ----- 200000
Bank ---- 500000
a/c receivable 500000
rent 50000
salaries 50000 ----
interest received ---- 75000
commission received ---- 25000
account payables ----- 700000
3500000 3500000

Suspense account:

If trail balance if it is not equal for the purpose of equalizing the trail balance we are opened one
temporary account the temporary account will be treated as suspense account.

Accounting errors:

If any accounting transacting which is recorded in books of accounts by violating rules ( not
follow)or the total accounting transaction which is not recorded in books of account or if accounting
transaction which is recorded in books of accounts by taking wrong values or wrong balancing or wrong
posting are known as accounting error.

Classifications of accounting errors:

 The accounting errors which are classified in the categories

1. Error of principle

2. Error of omission

3. Error of commission

1. Error of principle: The accounting error is which are made by violating accounting principle are
known as error of principle. Like; In the place of capital expenditure in the giving the priority of revenue
expenditure or in the place of revenue expenditure in the giving priority to capital expenditure.

Ex: purchase of land for cash 2000000.

Step;1; wrong journal entry

Purchase a/c Dr……20L

To cash a/c–………20L

Rectification of entry:

Lend a/c Dr ………20L

To purchase a/c……..20L

Original journal entry:

Land a/c Dr …………20L

To Cash a/c………..20L

2. Error of omission: The error which are made the transaction which is recorded in journal but not
posted in ledger or the accounting transaction which is not recorded in books of accounts are known as
error of omission.

Classifications of error of omission:

1. Partial omission
2. Complete omission

Partial omission: If any accounting transaction which is recorded in journal but not posted in ledger are
known as partial omission.

Ex: To prepare purchase book and posting the ledger

 ➢ Purchase goods from Ravi on credit 2000000/-
➢ Purchase goods from raju on credit 3000000/-
➢ Purchase goods from venkat on credit 2000000/-

Sol:

Particular Amount
Ravi 2000000
Raju 3000000
venkat 2000000
7000000
Ledger:

Dr Ravi a/c Cr

date Particular L.F Amt Date Particular L.F Amt

To balance c/d 20 L By purchase 20L

20L 20L
By balance b/d 20L

Dr Raju a/c Cr

date Particular L.F Amt Date Particular L.F Amt

To balance c/d 30 L By purchase 30L

30L 30L
By balance b/d 30L

Dr purchase a/c Cr

date particular L.F Amt Date Particular L.F Amt

To Ravi 20 L By balance c/d 70L
To raju 30L
To venkat 20L 70L
70L
To balance b/d 70L

Complete omission: If any accounting transaction which is not recorded in books of accounts are known
as complete omission.
Note: Based on above problem if venkat transaction which is not recorded in purchase book and it is not
posted in ledger are known as complete omission.

3. Error of commission: If any accounting error which are made by taking wrong values by posting
wrong ledger and by taking wrong balancing are known as error of commission.

FINAL ACCOUNTS
As per accounting period concept at the end of the financial status of the organization we are
finalizing the accounts. If financial accounts to consists of three steps.

1. Adjustment entries
2. Preparation of trading & profit a/c
3. Preparation of balance sheet

Procedure of financial accounts:

Trail balance
 Adjustment entries

Trading & profit accounts

Balance sheet

Trading account: Trading account is a nominal account. It consist of all direct expences and direct
incomes. The main objective of preparation of trading account to know the gross profit or gross loss of
the organization.

Performa:

Particular Amt Particular Amt

To operating stock Xxx By net sales Xxx
To net purchase Xxx By closing stock Xxx
To carriage inwards Xxx By gross loss Xxx
To wages Xxx
To flight charges Xxx
To oil & gas Xxx
To fuel Xxx
To gross profit Xxx
xxx Xxx

Trading a/c:

Particular Amt Particular Amt

To purchase Xxx By net sales Xxx
To gross profit Xxx
xxx Xxx

Profit & loss account: Profit & loss account is a nominal account. It consists of indirect income and
indirect expenses. Like; office & administration expenses and selling & distribution expenses and interest
expenses. The main objective of preparation of profit & loss account to know the net profit or net loss of
the organization.

Performa:

Particular Amt Particular Amt

To office & administration By gross b/d Xxx
exp Xxx By interest received Xxx
To selling & distribution By discount received Xxx
exp Xxx By commission
To interest paid (exp) Xxx received Xxx
 To depreciation & By net loss Xxx
amortization Xxx
To bad debts Xxx
To net profit Xxx
Xxx Xxx
Note:

➢ In office & administration expenses are include rent, salaries, stationary, auditor fee, electricity
bill, telephone bill etc.
➢ In selling & distribution expenses are including advertisement marketing expenses, discount
allowed, commission paid etc.

Ex:

Particular Amt Particular Amt

To rent 50000 By gross b/d 400000

To sales 50000 By interest received 75000
To net profit 400000 By commission received 25000
500000 500000

Balance sheet: It is a important financial statement. It consists of asset & liabilities. The main objective
of preparation of balance sheet to known the financial position of the organization.

Performa:

Liability Amt Assets Amt

I. Capital xxx I. Fixed assets Xxx
+ net profit xxx II. Investment Xxx
-------- III. Current asset Xxx
Xxx
- Drawings xxx
-------
Xxx Xxx
 II. Non current liability Xxx
III. Current liability Xxx
Xxx Xxx

Based on above problem

Sol:

Liability Amt Assets Amt

I. Capital 20L I. Fixed assets
+ net profit 4L Land & building 500000
-------- II. Investment
24L 2400000 Equity investment 100000
II. Non current liability III. Current asset
Bank 500000 Cash 2000000
III. Current liability A/c receivable 500000
Account payable 200000
3100000 3100000

ADJUSTMENTS
Outstanding expenses:

It is also known as accrual expenses. The expenses which is relating to present accounting year
but it is not paid, but it will be paid in next accounting year are known as outstanding expenses.

Case-1: To prepare balance sheet by using following transaction.

Particular Dr. Amt Cr. Amt

Outstanding rent 500000
Sol:
 Liability Amt Asset Amt
C.L
Outstanding rent 500000

Case-2:

Particular Dr. Amt Cr. Amt

Rent 1500000

Adjustment: outstanding rent – 500000

Sol:

Dr P & L a/c Cr

Particular Amt Particular Amt

To rent 15L
+ outstanding rent 5L 2000000
Balance sheet:

Liability Amt Asset Amt

C.L
Outstanding rent 500000

Prepaid expenses:

It is also known as expenses paid in advance. The expenses which is not relating to present
account year but it is paid are known as prepaid expenses. The prepaid expenses which is current assets
of the organization.

Adjusted journal entries:

Prepaid exp a/c Dr………xxx

To exp a/c……………….xxx

Outstanding income (income receivable):

The income which is earned but it is not received are known as outstanding income.

The income which is relating to present accounting year but it is not received are known as
outstanding income.
 Out standing income is a current asset.

Adjusted journal entry:

Out standing income a/c Dr………..xxx

To income a/c……………………….xxx

Income received in advance:

The income which is not relating to present accounting year but it is received are known as income
received in advance.

The income received in advance is a current liability.

Adjusted journal entry:

Name of the income a/c Dr…….xxx

To income received in advance……….xxx

DEPRECIATION ACCOUNTING
As per accounting standard 6. The depreciation which is applicable to tangible fixed asset. It
refaces to decrease value of tangible asset give to usage of asset, changing the technology, time and
accident.

Objectives for providing Depreciation:

- To know the real profit of the organization

- To know the real financial of the organization
- To replacement of old asset to new asset.
Methods of providing Depreciation:

1. Straight line method

2. Return down value method
3. Annuity method
4. Sinking fund method
5. Insurance policy method
6. Sum of the digits method
7. Depletion method
8. Machine hours rate method.

Straight line method: It is also known as fixed installment method. Under this method the depreciation
which is calculated on cost price. That’s why the value of depreciation which is consistent. Up to
estimated life of the asset.

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 – 𝑠𝑐𝑟𝑜𝑝 𝑣𝑎𝑙𝑢𝑒

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡

Cost of the asset = purchase price of the asset + transportation price + instillation price

Scrap value: The end of the asset value are known as scrap value or salvage value or residual value.

Return down value method: It is also known as reducing balance method. Under this method the
depreciation which is calculated by using book value of asset. That’s why the depreciation which is
fluxuated year to year.

𝑠
Rate of Depreciation = 1 − 𝑛√𝑐

Here; n= no. of years

S = scrap value, c= cost of the asset.

Book value of asset: The actual value or the original values which are disclosed in books of accounts
are known as book value of asset.

The difference bet weans original cost of the asset and depreciation are known as book value of
asset.

Book value of asset = Total cost of the asset – Depreciation.

Depletion method: The depletion which is applicable to wasting assets or natural resources like; coal
mains, oil wells, quarries etc. it reface to removal of natural resources on their place of deposits are known
as depletion.
Depreciation calculation procedure under depletion method:
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡−𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
Step-1: 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡 ( 𝑜𝑢𝑡 𝑝𝑢𝑡)

Step-2: The total output which relating to present accounting year multiplied with per unit depreciation.

Ex: to calculate depreciation by using depletion method

The total cost of the coal main – 1100000

Scrap value – 100000

Total output – 2000000 tons

year Out put (tons)

2011 100000
2012 200000
2013 100000
2014 200000
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑎𝑙 𝑚𝑎𝑖𝑛𝑠−𝑠𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
Sol: 𝑝𝑒𝑟 𝑡𝑜𝑛 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡 𝑝𝑢𝑡

1100000−100000
= 2000000

1000000
= 2000000 = 0.50

year Out put Per ton Depreciation per

depreciation annum
2011 100000 0.50 50000
2012 200000 0.50 100000
2013 100000 0.50 50000
2014 200000 0.50 100000
Amortization:

As per accounting standard 26. The amortization which applicable to intangible asset. It reface to
decrease the value if intangible over the period of the time are known as amortization.

Note: The amortization which is calculated by using straight line method.

Ex: The cost of the trade marks – 2000000 and its estimated life 10 years. To calculated for year
amortization.
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡
Sol: 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑠𝑠𝑒𝑡
 2000000
= = 200000
10

Impairment:

As per As28. It suddenly decrease any value of asset or any value of investment give to changing the
technology, accident or changing the market conditions are known as impairment.

Accumulated depreciation: The sum of or group of individual depreciation are known as accumulated
depreciation.

Name of the asset Depreciation

Machinery 100000
Building 75000
Furniture 25000
Other tangible asset 100000
Accumulated depreciation 300000

Accounting treatment of depreciation & Amortization:

Journal entry;

Depreciation a/c Dr…………xxx

To tangible asset a/c………xxx

Amortization a/c Dr……xxx

To intangible asset a/c……xxx

Depletion a/c Dr………xxx

To wasting a/c ……………xxx

Depreciation & Amortization discloser procedure in financial statement:

Step-1: As per nominal account Depreciation & Amortization are losses of the organization. That’s why
Depreciation & Amortization are deducted from EBIT –DA in income statement.

Step-2: If you want calculate or for the purpose of calculation of original value of the depreciation is
dedicated from tangible asset and amortization is dedicated from intangible asset in balance sheet.

Step-3: Under indirect method of cash flow statement the net cash flow from operating activity are depend
on cash profit. If you want calculate real cash profit the depreciation and amortization must adding to net
income.
 EXPENDITURE

The cost which is incurred for two purchase of asset and for manufacturing of goods & services
are known as expenditure. Based on time of benefits the expenditure which are classified in three
categories.

1. Capital expenditure
2. Revenue expenditure
3. Deferred expenditure

Capital expenditure: The expenditure which is incurred to acquiring fixed asset are known as capital
expenditure.

The expenditure which is incurred for to getting long term benefit of the organization.

Ex: Purchase of fixed asset

Installation of asset

Modification dividend

The expenditure which are provided long term benefit of the organization.

All the capital expenditure having real account nature. That’s why all the items which are relating
to capital expenditure are recorded in balance sheet under asset.

Ex: purchase of machinery 1000000/-

Installation expenditure100000/-

Purchase of building 1000000/-

Modifying charges 200000/-

Purchase of land for cash 200000/-

Balance sheet:

Liability Amt Asset Amt

Machinery 1100000
Building 1200000
Land 200000
Revenue expenditure: The expenditure which is incurred for day to day running business operation is
known as revenue expenditure. The revenue expenditure to provide short term benefits of the
organization.

All items of revenue expenditure which having nominal account nature. That’s why all the
revenue expenditure are recorded in trading and P 7 L a/c under debit side.

Ex: Raw material exp, wages, rent, salaries, stationary etc.

Differed revenue expenditure: The expenditure which having nature of capital expenditure and revenue
expenditure are known as differed revenue expenditure.

(Or)

The expenses which is incurred present accounting year but it will give benefits fur ther
accounting year are known as differed revenue expenditure.

Ex: Heavy advertisement expenditure

Developmental charges

Preliminary expenses.

Accounting treatment:

The differed revenue expenditure which having nominal (revenue expenditure) and real
accounting nature (capital expenditure) that’s why the position of expenditure is disclosed in the profit
& loss account and remaining balance will be transfer to balance sheet to miscellaneous expenditure
under the asset.

PROJECT WORK

WORKING CAPITAL
Objectives:

→ To know the concept of working capital

→ To know the working capital cycle
→ To know the credit policy of the organization
→ To know the sources of the working capital
Findings:

→ The ABC Ltd current ratios are flxuated for last 4 years. Like; 5:1, 4:1, 3.8:1, 4.3:1 etc.
→ The ABC Ltd liquidity ratios are flxuated for last 4 years. Like; 1.5:1, 1.8:1, 1.9:1, and 2:1.
→ The ABC Ltd debtors & creditors collection period ratios are not satisfied.
→ The ABC Ltd inventory & working capital turnover ratios are not satisfied.
→ The ABC Ltd company to raising the short term funds by using over draft and short term
barrowings.

Suggestions:

→ The ABC Ltd current & Liquidity ratios are satisfied. That’s why the over all short term solvency
of the organization is satisfactory.
→ The ABC Ltd credit policy is not satisfactory. Why because present credit policy is liberal credit
policy. If company to follow liberal credit policy possible to increase bad debts. That’s why try
to introduce strict credit policy.
→ If company wants improve inventory turn over ratio. The company inventory management try to
maintain optimum level inventory.
→ If company to raising to short term funds by using bank over draft but it is a expensive that’s why
the company try to use cash credit.

Conclusion:

As per my analysis the ABC Ltd over all working capital position is good. But if you want
improve our company working capital position in future. The company financial management try to
implement credit policy & try to reduce current liabilities.