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AS6 deals with - Depreciation Accounting
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Objects of company are mentioned in - Memorandum of Association
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Bank reconciliation is done by - Customer / The Company
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Full form of FIFO - First In, First Out
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Petty cash book types - 2 Types - Simple Petty Cash Book, Columnar Petty Cash Book
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KYC is required to be done at least every ...... for high risk customers - 2 Years
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Small ac monthly withdrawal limit - Rs. 10000
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Small ac validity term - 1 Year (12 Months)
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Hundi - A hundi is a financial instrument that developed in Medieval India for use in trade and credit transactions. Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument or IOU to borrow money and as a bill of exchange in trade transactions. An informal system for transferring money, especially in South Asia, in which local agents disperse or collect money or goods on behalf of friends, relatives, or other agents without legal protection or supervision, trusting that all remaining obligations will be settled through future transactions.
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Capital Receipt
Capital receipts are the income received by the company which is non recurring in nature. They are generally part of financing and investing activities rather than operating activities. The capital receipts either reduces an asset or increases a liability. The receipts can be generated from the following sources:
Issue of Shares
Issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.
Revenue Receipts are the receipts which arises through the core business activities. These receipts are a part of normal business operations that is why they occur again and again however its benefit can be enjoyed only in the current accounting year as its effect is short term. The income received from the day to day activities of business includes all the operations that bring cash into the business like:
Revenue generated from the sale of inventory
Services Rendered
Discount Received from the creditors or suppliers
Sale of waste material/scrap.
Interest Received
Receipt in the form of dividend
Rent Received
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Entries in bill of exchange
Accommodation bill and payment of interest
Method suitable for working capital...
Education loan regarding service area
Gold loan
Which is not type of company liability?
profit ratio
Simple interest calc
Balance sheet analysis
Balance sheet asset and liability side
Data- means facts, observation, occurrence
Capital budgeting
Bond valuation
Interest rate and bond price relationship
call money
Meaning of noting charges
Patent rights n goodwill belongs to...
Foreign company means...
Joint stock companies dont have a common...
Sweat equity shares
Reg clearing cheques
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Coupon Rate
The coupon rate of a bond is the amount of interest paid per year as a percentage of the face value or principal.
The coupon rate is the annualized interest also referred to as the coupon, divided by the initial loan amount. The initial loan amount is the par value. In the example given, the coupon rate is the interest rate you requested, 10%. Coupon rates are used in the realm of fixed-income investing, mainly when dealing with bonds.
Coupon Rate Formula
C = i / p
where:
C = coupon rate
i = annualized interest (or coupon)
p = par value of bond
If you own at 1,000 bond with a coupon rate of 4%, you will receive interest payments of 40 a year until the bond reaches maturity.
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Sinking Fund
A fund into which a company sets aside money over time, in order to retire its preferred stock, bonds or debentures. In the case of bonds, incremental payments into the sinking fund can soften the financial impact at maturity. Investors prefer bonds and debentures backed by sinking funds because there is less risk of a default.
How it works
Let's assume Company XYZ issues 10 Lakhs of bonds that mature in 10 years. If the bonds have a sinking fund, Company XYZ might be required to retire, say, 1 lakh of the bonds each year for 10 years. To do so, Company XYZ must deposit 1 lakh each year into a sinking fund, which is separate from its operating funds and is used exclusively to retire this debt. This strategy ensures that Company XYZ will pay off the 10 lakh in 10 years.
Establishing a sinking fund is usually a matter of setting up a custodial account into which the sinking fund payments will go. The issuer then makes payments to the trustee of the custodial account. The sinking fund payments are usually fixed amounts, but some bond indentures allow for variable sinking fund provisions (usually based on earnings levels or other conditions). Sometimes the issuer does not have to begin setting aside sinking funds for several years. Regardless of the ultimate size and timing of the payments, failure to make the payments is usually deemed an act of default in bond indentures (although this is usually not the case for preferred stock issues with sinking funds).
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Cheque Truncation?
Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point by the presenting bank en-route to the paying bank branch. In its place an electronic image of the cheque is transmitted to the paying branch through the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across bank branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.
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Depreciation Accounting
Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. It is a decrease in an asset's value caused by unfavorable market conditions. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time.
Depreciation – Different Methods
• Straight line method;(cost-residual value)/ estimated useful life
• Written Down Value method or declining balance method : %age is fixed
• Accelerated Depreciation
• Sum of years’ digits method; Example, if an asset is to be depreciated over five years, add digits 5,4,3,2,1 .The total is 15.For the 1st year depreciation is 5/15,for 2nd year,4/15 , and so on
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Straight Line Depreciation Method
Depreciation = (Cost - Residual value) / Useful life
On April 1, 2013, Company A purchased an equipment at the cost of 1,40,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be 20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2013, 2014 and 2015 using straight line depreciation method.
Depreciation for 2013
= (1,40,000 - 20,000) x 1/5 = 24,000
=Depreciation for 2014
= (1,40,000 - 20,000) x 1/5 = 24,000
Depreciation for 2015
= (1,40,000 - 20,000) x 1/5 = 24,000
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Declining Balance/Written Down Method of Depreciation
Depreciation = Book value x Depreciation rate
Book value = Cost - Accumulated depreciation
Depreciation rate for double declining balance method
= Straight line depreciation rate x 200%
Cost of asset = 1,00,000
Estimated residual value = 10,000
Estimated useful life of asset = 5 years
Find the book value at the end of 2nd year using double declining balance method.
a. 24000
b. 36000
c. 40000
d. 64000
Ans - b
Explanation
Depreciation rate = (1/useful life) x 200%
= 1/5 x 200% = 20% x 2 = 40%
(*) depreciation stops when book value = residual value
[Year 1]
Depreciation amount for year 1
= beginning book value x depreciation rate
= 1,00,000 x 40% = 40,000
Accumulated depreciation at the end of year 1 = 40,000
Book value at the end of year 1
= 1,00,000 - 40,000 = 60,000
[Year 2]
Depreciation amount for year 2
= beginning book value x depreciation rate
= 60,000 x 40% = 24,000
Accumulated depreciation at the end of year 2
= 40,000 + 24,000 = 64,000
Book value at the end of year 2
= 1,00,000 - 64,000 = 36,000
[Year 3]
Depreciation amount for year 3
= beginning book value x depreciation rate
= 36,000 x 40% = 14,400
Accumulated depreciation at the end of year 3
= 40,000 + 24,000 + 14,400 = 78,400
Book value at the end of year 3
= 1,00,000 - 78,400 = 21,600
[Year 4]
Depreciation amount for year 4
= beginning book value x depreciation rate
= 21,600 x 40% = 8,640
Accumulated depreciation at the end of year 4
= 40,000 + 24,000 + 14,000 + 8,640 = 87,040
Book value at the end of year 4
= 1,00,000 - 87,040 = 12,960
[Year 5]
Depreciation amount for year 5
= beginning book value x depreciation rate
= 12,960 x 40% = 5,184
[NOTE]
For year 5, depreciation amount will not be 5,184.
If 5,184 is depreciated,
--> book value = 12,960 - 5,184 = 7,776
--> book value < residual value
Depreciation stops when book value = residual value
--> depreciation amount for year 5 = 2,960
--> book value = 12,960 - 2,960 = 10,000
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Example for Sum of digits method of Depreciation
An asset cost Rs. 3,30,000/- has residual value of Rs. 30,000/-, and is expected to last 4 years. Calculate the depreciation for 1st year using sum of the digits Method.
D = (nth/E(sigma)n)(cost-Residual Value)
E(sigma)n = 1+2+3+4 = 10
Cost-Residual Value = 330000 - 30000 = 300000
1st year = 4/10(300000) = 120000
2nd year = 3/10(300000) = 90000
3rd year = 2/10(300000) = 60000
4th year = 1/10(300000) = 30000
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An asset cost Rs. 16,00,000/- has residual value of Rs. 1,00,000/-, and is expected to last 5 years. Calculate the depreciation for 5th year using sum of the digits Method.
D = (nth/E(sigma)n)(cost-Residual Value)
E(sigma)n = 1+2+3+4+5 = 15
Cost-Residual Value = 1600000 - 100000 = 1500000
1st year = 5/15(1500000) = 500000
2nd year = 4/15(1500000) = 400000
3rd year = 3/15(1500000) = 300000
4th year = 2/15(1500000) = 200000
5th year = 1/15(1500000) = 100000
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Accounting concepts
a) Business Entity Concept:
According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.
b) Dual Aspect Concept:
According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same.
c) Going Concern Concept:
According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities.
d) Accounting Period Concept:
According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc.
e) Cost Concept:
According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets.
f) Money Measurement Concept:
According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements.
g) Matching Concept:
According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.
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Debt equity ratio
It shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders).
It is calculated by dividing total liabilities by total equity
Debt to Equity Ratio = Total Liabilities / Total Equity
Example :
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A company has 1,00,000 of bank lines of credit and a 5,00,000 mortgage on its property. The shareholders of the company have invested 12,00,000. Calculate the debt to equity ratio.
DER = TL / Total Equity
= (100000+500000) / 1200000
= 600000 / 1200000
= 0.5
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Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability. It is often considered to be one of the most important variables in determining a stock’s value, and it comprises the “E” part of the P/E (price-earnings) valuation ratio. EPS is calculated as:
EPS = net income / average outstanding common shares (or)
EPS = (net income – dividends on preferred stock) / average outstanding common shares
For example, ABC Co. reported first quarter 2015 net income of 2 Crores and had 2 Crore average shares outstanding. EPS will be
EPS = 2 / 2 = 1
Companies may choose to buy back their own shares in the open market. In doing so, a company can improve its EPS (because there are fewer shares outstanding) without actually improving net income.
Note: some companies have a special class of stock called preferred stock. Any dividends paid on preferred stock would be subtracted from net income when calculating EPS.
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If the Current Assets and Current Liabilities of a concern are Rs.4,00,000 and Rs.2,00,000 respectively, Find the Current Ratio.
a. 1:2
b. 1:1.5
c. 2:1
d. 2:1.5
Ans - c
Explanation :
Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is 1.33 : 1
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Cost of the goods - Rs. 99000, Opening Stock - Rs. 13500, Purchases - Rs. 75000, Sales - Rs. 112500. Find other expenses.
a. 10000
b. 10500
c. 13500
d. 24000
Ans - b
Explanation :
Cost of the goods = Opening Stock + Purchases + Other expenses
So, Other expenses = Cost of the goods - Opening Stock - Purchases
= 99000 - 13500 - 75000
= 99000 - 88500
= 10500
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Sales - Rs. 85000, Operating expenses - Rs. 20000, Net Profit - Rs. 15000. Find gross profit.
a. 5000
b. 20000
c. 35000
d. 50000
Ans - c
Gross Profit = Operating expenses + Net Profit
= 20000 + 15000
= 35000
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Rectification of errors
Keeping in view the nature of errors, all the errors can be classified into the following four categories:
Errors of Commission : These are the errors which are committed due to wrong posting of transactions, wrong totalling or wrong balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry, etc. For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier of goods). This transaction was correctly recorded in the cashbook. But while posting to the ledger, Preetpal’s account was debited with Rs. 2,500 only.
Errors of Omission : The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. These can be of two types: (i) error of complete omission (ii) error of partial omission When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission. For example, credit sales to Mohan Rs. 10,000, not entered in the sales book. When the recording of transaction is partly omitted from the books, it is an error of partial omission. If in the above example, credit sales had been duly recorded in the sales book but the posting from sales book to Mohan’s account has not been made, it would be an error of partial omission.
Errors of Principle : Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. For example, amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the asset account. Instead, if this amount is debited to maintenance and repairs account, it has been treated as a revenue expense.
Compensating Errors : When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. For example, if purchases book has been overcast by Rs. 10,000 resulting in excess debit of Rs. 10,000 in purchases account and sales returns book is undercast by Rs. 10,000 resulting in short debit to sales returns account is a case of two errors compensating each other’s effect.
Rectification of Errors
Errors can be classified into two categories for the purpose of rectification of errors-
Rectification of Errors which do not Affect the Trial Balance
The following errors do not affect the equality of the Trial Balance totals:
Errors of Omission: A transaction is omitted completely from the books so that there is no debit and credit entry of the transaction, e.g. Drawings of Rs. 5000 cash by the proprietor was not recorded.
Errors of Commission: An entry is posted to the correct side of the ledger but to the wrong account, i.e. items have been posted to the wrong account of the same class, e.g. Payment of Rs. 1000 cash by a customer A. John was wrongly posted to the account of another customer, B. Johan.
Errors of Principle: An entry is made in the wrong class of account, i.e. when an expense is treated as an asset and vice versa, e.g. Repairs to building Rs. 4000 was debited to the Building Account.
Complete Reversal of Entries: An account that should be debited is credited and vice versa, e.g. A cheque Rs. 2000 received from Sunita was debited to the account of Sunita and credited to the Bank Account.
Compensating Errors: Errors (or error) on one side of the ledger are compensated by an error (or errors), e.g. The Purchases Account and Sales Account were both overcast by Rs. 1500.
Errors of Original Entry: The original figure may be incorrectly entered although the correct double-entry principle has been observed using this incorrect figure, e.g. Credit sales of Rs. 9650 to Ranjit was recorded in the Sales Account and Ranjit's account as Rs. 6950.
Rectification of Errors which Affect the Trial Balance
Errors which are revealed by the Trial Balance are those errors which cause the Trial Balance totals to be in disagreement.
Errors in Calculation: If there is any miscalculation of the Trial Balance totals or the net account balances, the Trial Balance will not balance, e.g. There was an error in the calculation of the cash balance, causing the Trial Balance totals not to balance too.
Errors in Omission of One Entry: Omission of either the debit or credit entry of a transaction will cause the totals of the Trial Balance not to agree, e.g. A cheque Rs. 5000 received for commission was debited to the Bank Account only.
Posting to the Wrong Side of An Account: Entry into the wrong side of an account will cause one side of the ledger to be more than the other, e.g. A cheque of Rs. 8000 paid to creditor, K. Raj was credited instead of debited to his account.
Errors in Amount: If the debit entry of a transaction differs in amount with the credit entry, the Trial Balance will not balance, e.g. Cash Rs. 9650 received from Anand was debited to the Cash Account as Rs. 9650 and credited to the account of Anand as Rs. 6950.
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Capital and revenue expenditure
Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.
The differences between these two types of expenditures are as follows:
Timing - Capital expenditures are charged to expense gradually via depreciation, and over a long period of time. Revenue expenditures are charged to expense in the current period, or shortly thereafter.
Consumption - A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. A revenue expenditure is assumed to be consumed within a very short period of time.
Size - A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures. This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a revenue expenditure. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with sale transactions or are period costs.
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