2021

General Accounting
Principle

UPSC EPFO EXAM

NISHANT KUMAR GUPTA

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Contents

1. Accounting introduction & Basics

(Recommend you to watch our part 1 of UPSC EPFO General
Accounting video on YouTube. It will really help you to
understand basics)
2. Basic & Important terminologies of accounting
3. Generally Accepted accounting Principle
4. Single entry & Double entry
5. Basic Concepts of accounting
6. Modifying principles
7. Classification of account
8. Golden rules of accounting
9. Accounting equation & its approaches
10. Source documents
11. Journal
12. Subsidiary Book
13. Discount
14. Cash Book
15. Ledger and its entry
16. Trial Balance
17. Accounting error
18. The financial statement & terms related to
financial statement
19. Trading account
20. Profit and Loss account
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21. Balance sheet
22. Bill of exchange
23. Not for profit Organisation
24. Consignment account
25. Branch account
26. Partnership account
27. The companies act 2013
28. Financial Ratio

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savings
Investor
insurance

rocery Store

Customers

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 ecord
airly

Classify

Day record
urchased milk on lakh summarise
credit

urchased grocery on
credit Analyse
urchased on cash
Sell on cash
Interpret
Online delivery
Travelling fare
Insurance premium Communicate
aid sta

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 An intangible asset is an asset
that lacks physical substance.
xamples are patents copyright
franchises good ill trademarks
and trade names as ell as
so are.

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 quity is the remaining alue of an o ner s interest in a company a er all
liabili es ha e been deducted.
quity Assets Liabili es.

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 Accoun ng Money
n ty Measurement
Assump on Assump on

Accoun ng oing
eriod Concern
Assump on Assump on

Business is treated as unit or en ty apart from its o ner creditors

and others. en the proprietor of the business is considered to be
separate and dis nct from the business hich he controls. e is
treated as a creditor to the extent of his capital.

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In accoun ng only those business
transac ons and e ents hich are
of nancial nature are recorded.

The accounts are closed at regular inter als. sually a

period of days or one year is considered as the
accoun ng period.

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According to this assump on the business ill exist
for a long period and transac ons are recorded from
this point of ie . There is neither the inten on nor
the necessity to ind up the business in the
foreseeable future.

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 ample of single entry

Single entry
It is an incomplete, inaccurate, unscien c and
unsystema c system of book keeping

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Characteris cs of Single entry

Only personal accounts and cash book are maintained.

Does not pro ide the true nancial posi on of a company.
No xed set of rules
Real and Nominal A C are not maintained.
Balance sheet and pro t and loss A C cannot prepared.
Trial balance cannot be prepared.
Not accepted by tax authority.

AC

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Double entry

The basic principle of the system hich says that for

every debit, there must be a corresponding credit of
e ual amount and for every credit, there must be a
corresponding debit of e ual amount.

characters of Double entry system.

Scien c system
Complete record of transac on
Check the accuracy of accounts by Trial Balance
The nancial posi on of the concern can be ascertained through the
prepara on of Balance Sheet.
elps in decision making.
The systema c and scien c recording of business trasac ons on the
basis of this system minimise the chances of fraud.

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Dual aspect concept

It says All business transac ons recorded in accounts

ha e t o aspects debit side and Credit side.

Re enue Realisa on concept Matching

principle
It says Re enue is considered as the income earned on
the date hen It is realised. nearned or unreali ed
income should not be taken into account.

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 istorical cost concept

It says nder this concept assets are recorded at the

price paid to acquire them and this cost is the basis for all
subsequent accoun ng for the asset.

Matching concept

It says Matching the re enue earned during an accoun ng

period ith the cost associated ith the period to ascertain the
result of the business concern is called the matching concept.
Matching concept is the basis for nding accurate pro t for a
period.

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Full Disclosure Concept

It says Account statements should disclose fully and

completely all the signi cant informa on.

eri able and Ob ec e e idence Concept

This principle requires that each recorded business

transac ons in the books of accounts should ha e an
adequate e idence to support it.

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Cost bene t principle A

It says that the Cost of applying a principal should

not be more than the bene t deri ed from it.

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Materiality principle

It requires all rela ely rele ant informa on should be disclosed

in the nancial statements. The immaterial informa on are
either le out or merged ith other items.

Consistency principle

The rules prac ces concepts and principles used in accoun ng

should be con nuously obser ed and applied year a er year. Its
aim is to preser e the compa bility of nancial statement.

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Prudence principle Conser a sm

Prudence principle takes into considera on all prospec e losses

but lea es all perspec e pro ts. The essence of this principle is
an cipate no pro t and pro ide for all possible losses

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 ersonal

Account

Nominal eal

SONAL ACCO NT

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P RSONAL ACCO NT

These accounts types are related to persons. These

persons may be natural persons like a s account,
a esh s account, amesh s account, Suresh s
account, etc.

These persons can also be ar cial persons like

partnership rms, companies, bodies corporate, an
associa on of persons, etc.

or e ample a esh and Suresh trading Co., Charitable

trusts, Y ank Ltd, C company Ltd, etc.

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 List of important personal accounts

ank A c
Dra ing A C
Capital A C
Outstanding salary A C
Outstanding e penses
A C
repaid e panses A C

AL ACCO NT

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R AL ACCO NT
These are the accounts of all the assets and liabili es of the
organi a on. e do not close these accounts at the end of the
accoun ng yearand appear in the alance Sheet. Thus e carry
for ard the balances of these accounts to the next accoun ng
year. Therefore e can also say that these are permanent
accounts.

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 NOMINAL ACCO NT

NOMINAL ACCO NT

Does not ha e any physical existence.

Related to expenses Loses income & gain.

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 SALA Y A C
xamples of
A S A C
Nominal Account
DI ID ND A C
DISCO NT A C

olden ules of Accoun ng

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 Debit the eceiver
ersonal Credit the iver

Account

Nominal eal

rocery
Store
Investor

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 Shareholder e uity

uity Assets Liabili es

Share older uity

Total Assets Total Liabili es

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Accoun ng ua on

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Source Documents

Pay
Cash
In
Memo
Slip

amples
Of Source In oice Receipt
Documents

Debit Credit
Note Note

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ecord ournal,

os ng
airly

Classify Ledger

summarise Trial alance

Analyse

Interpret

Communicate

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 oucher
No.

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repara on of ournal from the given accoun ng year data

repara on of ournal from the given accoun ng year data

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hen Cash Discount Allo ed, enter it as Debit Dr

hen Cash Discount eceived, enter it as Credit Cr

rocery Store

insurance

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eatures of Ledger

Types of Ledger

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repara on of ournal from the given accoun ng year data

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repara on of Ledger from the given accoun ng year data

Date ar culars debit D Credit C

st Apr Cash a c , ,
To Capital a c , ,
nd Apr urchase a c ,
To dairy farm a c ,
nd Apr urchase a c ,
To rocery a c ,
rd Apr urchase a c
To Cash a c
th Apr Cash a c
To Sales a c
th Apr Cash a c ,
To sales a c ,
th Apr ent a c ,
To Cash a c ,
th Apr Sta onary a c
To Cash a c

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 Date ar culars debit D Credit C

th Apr A C shop a c ,
To Sales a c ,
th Apr Cash a c
To Interest a c
th Apr salary a c ,
To cash a c ,
th Apr ages a c
To cash a c
th Apr electricity a c
To cash a c
th Apr Dairy farm a c ,
To Cash a c ,

Cash Account

Dr Cr
ar culars s. ar culars s.

Capital a c Lakh urchase A c

Sales a c ent A C ,

Sales a c Sta onary a c

Interest a c Dairy farm a c ,

Salary a c ,

ages a c

lectricity a c

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 urchase Account

Dr Cr
ar culars s. ar culars s.

Dairy farm a c ,

rocery a c ,

Cash a c

Dairy farm Account

Dr Cr
ar culars s. ar culars s.

urchase a c ,

Cash a c ,

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 .
It is a statement containing all
balances of ledger account.
The total of the debit side and
credit side must be equal and
thus it pro es that the ledger
accounts are arithme cally
accurate.
It is not recorded in any book of
account. The trial balance is
prepared in a separate sheet or
paper.

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 inancial statements are the statements that are prepared at the
end of the accoun ng period, generally one year and it says about
the current situa on of business and also help us to take rm
decisions for the further gro th of business.

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 Capital e penditure
It refers to the amount spent for acquiring assets that ill use in the business to
earn or to increase income. They are not intended to resale.
xamples
expenditure for xed assets like building plant & Machinery.
xpenditure for the extension or impro ement of xed assets.
xpenditure for the installa on of assets.

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Capital eceipt
It is one hich is in ested in the business for a long period. It includes long
term loan obtained from others and any amount realised on sale of xed
assets. It is generally nonrecurring in nature.
It occurs in the liabili es of Balance sheet.
xamples sale of shares and debentures capital recei ed for o ner sale
of old assets.

evenue eceipt
It is one hich generates re enue in a business like sale of goods rent from
tenants di idend recei ed tax receipts from go ernment perspec es.
These are listed on the credit side of Pro t & Loss account

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Debentures
Debentures are a debt instrument used by companies and go ernment to
issue loan. The loan is issued to corporates based on their reputa on at a
xed rate of interest.

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Dividend
A di idend is a distribu on of pro ts by a corpora on to its shareholders .
hen a corpora on earns a pro t or surplus it is able to pay a propor on
of the pro t as a di idend to shareholders.

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e calculate deprecia on for follo ing reasons

To ascertain correct pro t & Loss.

To kno the true & fair nancial posi on of a company
To ascertain the real cost of produc on
To comply ith legal requirements.

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Opening and Closing Stock
Opening stock is the stock of goods that e ha e to sell in an accoun ng
year.
Closing stock is the stock of goods remaining unsold at the end of the
accoun ng year.

Outstanding e penses
xpense hich is related to the current accoun ng period but not yet paid
is kno n as outstanding expenses. In simple it is called due.
xamples are outstanding salary outstanding rent etc.
It is also sho n on the liabili es side of the balance sheet because it is an
item of liabili es.

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 repaid e penses
Some mes a part of a certain expense paid may relate to the next
accoun ng period. Such expenses is called prepaid expense or expenses
paid in ad ance.
xamples insurance premium prepaid rent prepaid tax etc.
In P & L account it appears on the debit side and in Balance sheet it
appears on asset side.

P&L

Accrued income
Accrued income means income earned but not yet recei ed ll this
accoun ng year.
Accrued income is listed in the current assets sec on of the balance sheet
in an accrued recei ables account.
xamples rent recei able but yet to recei ed is called accrued rent.

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Direct e penses
Direct as the ord suggests are those expenses hich are completely
related and assigned to the core business opera ons of a company. They
are mainly related to purchases and produc on of goods ser ices.
Direct expenses are a part of the prime cost or the cost of goods ser ices
sold by a company.
Direct expenses are directly related to the produc on of the product sold or
ser ice rendered. They may di er for di erent types of companies such as
manufacturing companies construc on companies ser ice companies etc.
xamples ages factory rent cost of ra materials premises ren ng
fuel carriage in ards commission.

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Carriage in ards and Carriage Out ards
The amount of transporta on cost spent by the purchaser of the goods is
termed as carriage In ards and the cost incurred by the seller of goods to
deli er the goods sold to customers is termed as carriage out ards.

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 nearned income
Some mes income is recei ed before it becomes actually due. Such income
is called unearned income or income recei ed in ad ance. Since this
income doesn t relate to the accoun ng year it should be deducted from
the rele ant head of income in the pro t & Loss account. It is a liability and
hence is sho n in the liability side of the Balance Sheet. xample of such
income is the rent that has been recei ed for the months of January and
February of the coming accoun ng year.

Interest on Capital
As per business en ty concept Capital of the proprietor is a liability for the
business. So like other loans interest can be paid on capital also. This is
called Interest on Capital. It comes on the debit side of pro t & loss
account.

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Interest on Dra ings
Interest may also be charged on money ithdra n by the proprietor for
household use. This comes on credit side of pro t and loss account and
Liabili es side of Balance sheet.

Current Assets and Current Liabili es

Current assets are those assets hich are either in the form of cash or can
be con erted into cash ithin a year. xamples are Stock Debaters Bills
recei able etc.
Current Liabili es are those liabili es hose payments ha e to clear ith in
a year. These are paid out of current assets.
xamples are Creditors outstanding Salary outstanding rent Bill payable
Bank o erdra etc.

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 ad Debts
hen the goods are sold to customer on credit and if the amount becomes
irreco erable due to his insol ency or for some other reason the amount
not reco ered is called Bad debts.
In ournal entry Bad Debts account al ays debit to Debtors account.
In Pro t and loss account it comes in Debit side and in Balance sheet it
comes on assets side.

Trading account
Purpose to calculate the gross pro t or gross loss

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ro t & Loss account
Purpose to nd out Net pro t or Net Loss

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alance Sheet

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Bill of exchange
➢ Introduction –
It is a legal agreement between seller and buyer for Payment
of goods. For seller it is an asset and called “Bill Recei able”
and for Buyer it is a liability and called “Bill payable”.

, " "
, " "

➢ Golden explanation of “Bill of exchange” in indi –

o Definition –
It is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of a certain
person or to the bearer of the instrument.

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 , ,
,

o Format of Bill of exchange –

o According to the Negotiable instruments act 1881

a bill of exchange is defined as an instrument in
riting containing an unconditional order signed
by the maker directing a certain person to pay a
certain sum of money only to or to the order of a
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certain person or to the bearer of the instrument.
Important points are

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o ntry Rule in the Book of Seller –
“ hen Bill accepted by buyer” Means no asset ill
come to seller in Bill receivable form) then, "
" (
)

Bill receivable a/c debit

To Buyer a/c

o ntry in the Book of Buyer

Seller a/c debit
To Bill payable a/c

o arties to bill of e change

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 • Dra er: repares the ill
• Dra ee: Accepts to make the payment
• ayee: ho receives the payment third
party or the dra er himself
Days of grace -

3 extra days will be given after due date. If the date of

maturity falls on a holiday, the bill will be due for payment on
the preceding date. In case of emergency holiday, the next
day will be counted as date of Maturity.
3
,
,

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What is Promissory Note
The promissory note is defined as an instrument in writing
(not being a banknote or a currency note), containing an
unconditional undertaking signed by the maker, to pay a
certain sum of money only to or to the order of a certain
person, or to the bearer of the instrument.

(
), ,

Importance of Promissory note in Bill of Exchange

According to the Negotiable Instruments Act 1881, the
meaning of promissory note is ‘an instrument in riting not
being a banknote or a currency note), containing an
unconditional undertaking signed by the maker, to pay a
certain sum of money only to or to the order of a certain
person, or to the bearer of the instrument. However,
according to the Reserve Bank of India Act, a promissory note
payable to bearer is illegal. Therefore, a promissory note
cannot be made payable to the bearer.’
ऑ

ू 1881 , '
( ),

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 ,
, ,
,
, '

Endorsement of Bill-
When Bill of exchange authority or ownership is transferred
from the seller to another person or company then this is
called endorsement of Bill. Here, the seller is called endorser
and the new owner is called endorsee.

Discounting of Bill –
When the holder of a bill needs money before the due date
of a bill, he can convert is into cash by discounting the bill
with his banker. This process is called discounting the bill.
The banker deducts a small amount of the bill which is called
discount and pay the balance in cash immediately to the
holder of the bill.

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 ,

Retirement of a bill –
An acceptor may make the payment of a bill before its due
date and discharges its liability. This is called Retirement of
Bill.

Renewal of a Bill –
When the acceptor of a bill knows in advance that he will not
be able to meet the bill on its due date, he may approach the
drawer with a request for extension of time. The drawer of
the bill may cancel the original bill and draw a new bill for the
amount due and will charge a little interest for the extended
period. This is called renewal.

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Dishonour of a Bill
A bill is said to be dishonoured when the drawee fails to make
the payment on the date of maturity. The bill may
get dishonoured when the drawee does not have sufficient
funds to pay the bill or he becomes insolvent.

Noting and protesting –

o If a bill is dishonoured the dra er may approach

the court a file a case against the dra ee.

o In order to collect documentary e idence that the

bill has really been dishonoured the dra er ill
approach a la yer and explain the fact of
dishonour of Bill.

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 थ्

o the la yer ill take the bill to the dra ee and ask
for the payment.

o If the dra ee does not make the payment the

la yer ill rite the statement of dra er and get
the statement signed by him.

o The La yer ill then put his signature.

o The statement noted by the la yer ill be the

documentary e idence for the dishonour of the
bill.

o riting this statement by the la yer is kno n as

noting of the bill.

o The la yer performing this ork of noting the bill

is called as notary public.

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o After recording a note of dishonour the notary
public issues a certificate hich is called protest.

o A protest is a certificate issued by the notary

public attesting that the Bill has been dishonoured.

o Noting charges is the fee paid to the notary public

for noting and protesting the bill of exchange of its
dishonour.

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 Types of ill of change
.Trade ill a bill of exchange dra n and
accepted for a trade transac on is called trade
Bill.

. Accomoda on ill a bill of exchange

dra n and accepted for mutual help is called
accommoda on Bill. It is generally accepted by
third party like Bank to gi e the payment to
the seller before due date on some discount.

Promissory Note –
A promissory note is an instrument in writing (not being a
bank note or a currency note) containing an unconditional
undertaking signed by the maker to pay a certain sum of
money only to or to the order of a certain person or to the
bearer of the instrument.
( )

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 Not for Profit Organisation

Not-for-Profit Organisations are the establishments that are

for utilised for the welfare of the community and are set up
as charitable associations which operate without any motive
for profit. Their primary objective is to provide service to a
specific class or the public. Usually, they do not produce, buy
or sell commodities and may not have credit transactions.

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Therefore, they need not manage many books of account (as
the trading entities do) and Trading and Profit & Loss
Account. The funds raised by such establishments are
credited to the general fund or capital fund. The major
sources of their income usually are subscriptions member’s
donations, income from investments, grants-in-aids from
government etc.

- - ऑ

, ,

,
( )

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➢ The main ob ecti e of keeping records in such
organisation is to meet the statutory requirement
and help them in exercising control o er utilisation
of their funds.

➢ These organisations ha e to submit their books of

records to registrar of societies for not indulging in
any fraud or error as a proof and to a oid
unlicensing of orking.

➢ The main Characteristics of such organisations are

–
✓ formed for pro iding ser ice such as
education health care recreation sports etc.
its sole aim is to pro ide ser ice either free of
coast or at nominal cost means no profit no
loss and not to earn profit. थ्

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 (
)
✓ These are organised as charitable trusts or
societies and subscriber to such organisation
are called members.

✓ The main sources of income of such

organisations are – 1. Subscriptions for
members 2. Donations 3. Legacies 4. Grant in
aid 5. Income from in estments etc.
- 1.
2. 3. 4. 5.

✓ The funds raised by such organisations

through arious sources are credited to capital
fund or general fund.

✓ The surplus generated in the form of excess of

income o er expenditure is not distributed
amongst the members. It is simply added in
the capital fund.

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 ➢ Accounting records of Not for profit Organisations
– The final accounts of a “Not for Profit
Organisation” consist of the follo ing "Not for
Profit Organisation"
–
✓ Receipt and Payment account Both for cash
and Bank
✓ Income & expenditure account
✓ Balance sheet

1. eceipt and ayment Account –

This account is the summary of cash and Bank
transactions hich helps in the preparation of income
and expenditure account and the Balance sheet.

Salient features of Receipt & Payment account –

o It is a summary of the cash Book. Its form is
identical ith that of simple cash book ithout
discount and Bank columns ith debit & Credit
sides.

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 (
)
o No distinction is made in receipts or payments
made in cash or through bank.

2. Income and e penditure account –

it is akin to profit and loss account. the Non-for-
Profit organisations usually prepare the income
and expenditure account and a Balance sheet
with the help of receipt and payment.
-

3. Balance Sheet –
‘Not-for-profit’ organisation prepare Balance
sheet for ascertaining the financial position of the
organisation. ‘ - -

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Following funds are added to Balance sheet –
1. Capital fund or general fund in place of the
capital.
2. Surplus or deficit as per Income and
expenditure account hich is either added to
or deducted from the capital fund as the case
may be.
-

1.
2. ,
,
Some ‘Not-for-profit’ organisation recei e cash
subsidy from the government or government
agencies. This subsidy is also treated as revenue
income for the year in which it is received.
- -

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Subscriptions –
Subscription is a membership fee paid by the ember on annual
basis. This is the main source of income of such organisations.
Subscription paid by the members is shown as receipt in the
receipt and payment account and as income in the income and
expenditure account.
Subscriptions are recurring in nature so it is revenue and it will
come in income and expenditure account (in Income side). It
will also come in receipt side in receipt and payment account.

(
)

Donations –
It is a sort of gift in cash or property received from some
person or organisation. It appears on the receipts side of the
receipts and payment account. Donation can be for specific
purposes or for general purposes.

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Legacies –
It is the amount received as per the will of a deceased
person. It appears on the receipts side of the receipt and
payment account and is directly added to capital fund/
general fund in the balance sheet, because it is not of
recurring nature. However, legacies of a small amount may
be treated as income and shown on the income side of the
income and expenditure account.

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Life membership fees –
Some members prefer to pay lumpsum amount as life
membership fee instead of paying periodic subscription. Such
amount is treated as capital receipt and credited directly to
the capital or general fund of Balance sheet.
-

Entrance Fees –
Entrance fee also known as admission fee is pad only once by
the member at the time of becoming a member. In case of
organisations like clubs and some charitable institutions, is
limited and the amount of entrance fees is quite high. Hence,
it is treated as non-recurring item and credited directly to
capital/general fund. However, for some organisations like
educational institutions, the entrance fees are a regular
income and the amount involved may also be small. In their
case, it is customary to treat this item as a revenue receipt.

,
,
, -

/ ,
,
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 ,

Sale of Old Asset –

Receipts from the sale of an old asset appear in the receipts
and payments account of the year in which it is sold. But any
gain or loss on the sale of asset is taken to the income and
expenditure account of the year.

Sale of Periodicals: It is an item of recurring nature and

shown as the income side of the Income and
Expenditure Account.

Sale of Sports Materials: Sale of sports materials (used

materials like old balls, bats, nets, etc) is the regular
feature with any Sports Club. ( ,
, )

Payments of Honorarium: It is the amount paid to the

person who is not the regular employee of the
institution. Payment to an artist for giving performance
at the club is an example of honorarium. This payment

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of honorarium is shown on the expenditure side of the
Income and Expenditure Account.

Endowment Fund: It is a fund arising from a bequest or

gift, the income of which is devoted for a specific
purpose. Hence, it is a capital receipt and shown on the
Liabilities side of the Balance Sheet as an item of a
specific purpose fund. ,
,

Government Grant: Schools, colleges, public hospitals,

etc. depend upon government grant for their activities.
The recurring grants in the form of maintenance grant
is treated as revenue receipt (i.e. income of the current
year) and credited to Income and Expenditure account.
However, grants such as building grant are treated as
capital receipt and transferred to the building fund
account. It may be noted that some Not-for-Profit
organisations receive cash subsidy from the
government or government agencies. This subsidy is
also treated as revenue income for the year in which it
is received. , ,

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 ( )

Special Funds
The Not-for-Profit Organisations office create special
funds for certain purposes/ activities such as 'prize
funds', 'match fund' and 'sports fund', etc. Such
fundsare invested in securities and the income earned
on such investments is added to the respective fund,
not credited to Income and Expenditure Account.
Similarly, the expenses incurred on such specific
purposes are also deducted from the special fund. For
example, a club may maintain a special fund for sports
activities. In such a situation, the interest income on
sports fund investments is added to the sports fund
and all expenses on sports deducted therefrom. The
special funds are shown in balance sheet. However, if,
after adjustment of income and expenses the balance
in specific or special fund is negative, it is transferred
to the debit side of the Income and Expenditure
Account or adjusted as per prescribed directions. - -
ऑ / ' ', ' '
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' ' ड्

, ,
,
,

, ,
,

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Nishant eAcademy
Nishant eAcademy
 Consignment Account
Whenever a manufacturer wants to sell his goods in a
place not known (or familiar) to him, he hires an agent to
sell his goods in turn of a commission. In this process, the
manufacturer (proprietor) called consignor or principal
and the agent called consignee & goods that have to be
sold called consignment.
( )

,
, ( )

➢ For any Loss through out the total process only

consignor is accountable for his loss.

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➢ Consignment account is a nominal account as it gives
as profit and loss on consignment.

By consignee
By Consignor
There are some expenditureduring this
There are some expenditureduring this
process But he ill reco er all expenditure
process
. xpenditure on loading and uploading from consignor
. xpenditure on loading & ploading
. xpenditure onfreight fare
. xpenditure on freight
. xpenditure on in transit insurance
. xpenditure onGodo n Rent
insurance hile commute
. . xpenditure onelectricity guard etc
. .
.
.
. .
.
.

➢ Consignment account is a very limited account and

does not consist with formation of journal or ledger.
journal Ledger
➢ Only two accounts will be formed. 1. Consignment
account 2. Consignee account.
➢Consignment account refers to an arrangement where
in goods are sent from one person (owner) to another
person (agent) who further holds and sells the goods
on behalf and at the risk of the owner.
, ( )

( ) ,

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➢The party that sends the goods i.e consignor is called
principal and the party to whom goods re sent is
called agent. ी ( )
ी

➢ The consignor or the principal remains the owner of

the goods, the agent does not become the owner of
the goods even when the goods are in his possession.
,

➢The principal i.e. The consignor does not send an

invoice to the agent. He only sends a proforma invoice
(to convey information relating to the particulars of
the goods sent) to the agent.
(
)

➢ hen the consignee returns the consigned goods to the

consignor the goods are alued at the price at hich
they ere consigned to the consignee.

➢The agent recei es a commission for his ork that is

calculated on the basis of gross sale.

➢ xpenses incurred by the consignee in returning the

goods to the consignor are not included hile aluation
because only those expenses are included in the cost of
goods that help bringing the goods into present location
i.e. In the saleable condition.
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 ➢Periodically the agent sends a statement called account
sales to the principal that contains details regarding the
sales made commission earned expenses incurred on
the behalf of the consignor. -

➢Consignment account is a nominal account because it

deals ith the principles of debit and credit for nominal
account hereas consignee’s account is a personal
account.

➢ The balance of goods that are sent out on consignment

is transferred to general trading account.

Commission –
Commission is the remuneration paid by the consignor
to the consignee for selling the consignor to the
consignee for selling the consigned goods.

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Note: expenses on goods returned by the consignee are debited to
consignment account.

Types of
commission.

1. Ordinary
commission –
It is a commission payable by the consignor to the consignee
irrespective of whether the consignee is making credit sales
or not. It does not give any protection to the consignor from
bad debts and is provided on total sales. T is based on a fixed
percentage of the gross sales proceeds made by the
consignee. ,

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 2. Over riding commission –
It is paid by the consignee to the consignor for making the
sales above specific price. It is an extra commission provided
by the consignor to the consignee to encourage or promote
sales higher than specified. On the basis of the agreement, it
is calculated on total sales or on the difference between
actual sales and sales at invoice price or any specified price.
ऊ

3. Del Credere Commission –

It is a type of commission given to increase the sale and
encourage the consignee to make credit sales. When this
additional commission is provided to the consignee, it gives a
protection to the consignor (principal) against bad debts.

,
( )

Some journal entries in the Book of the consignor –

• hen goods are sent to the consignee – Consignment

account debit to goods sent on consignment account
• For commission payable to the consignee – consignment
account debit to consignee’s personal account.
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 • ntry in case of profit – consignment account debit to
profit & Loss account
• ntry in case of Loss – Profit & loss account debit to
consignment account.
Some journal entries in the books of the consignor –

• For expense incurred by the consignee – consignor’s

personal account debit to cash account
• hen goods are sold – cash or bank account debit to
consignor’s personal account.
• For commission due – consignor’s personal account
debit to commission account.

Normal Loss –
Normal Loss is the loss of essential and unavoidable nature. It is not under the
control of the parties. Since, it is essential and unavoidable, it is spread over
the entire consignment while valuing the closing stock. As a result of this, the
cost of units increases.
, ,
,
We do not make accounts for normal loss and the loss occurred is made up
with remaining goods.

Example- If 600 lit. milk is efficient for 1000 cups of tea but while making tea
some milk is lost because of evaporation so, actual efficiency of 600 lit milk will
be less than 1000 cups (say: 800 cups). So, loss of 200 cups of tea. Now,
suppose 00 lit of milk cost ₹ 000 but 0 lit milk e aporate during process of
tea. So to makeup e ill assume that ₹ 000 is the price of 0 lit. of milk.

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 600 1000
, 600 1000 ( : 800 ) , 200
, 600 ₹ 1000 ,
50 , , ₹ 1000 550

Abnormal Loss –
It is the loss occurred by fire, flood, accident etc. No entry is
passed for the abnormal loss in the books of the consignor.
Abnormal loss will only entry in the final P-L account of the
consignor. , ,

This loss will transfer to the profit & loss account (P& L a/c
debit to loss a/c of consignment account.
Example – loss of furniture by ₹ 0 000
ntry in ournal ill be “Loss by fire a c debit ₹ 0 000 to
Furniture a c ₹ 0 000.

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 Branch Account
Branch accounting is a system where in
separate accounts are maintained for
each branch. It is a nominal account in
nature and is prepared in such a way
that it discloses the profit or loss of the
branch. Goods may be invoiced to
branches at cost, at selling price or in
case of retail branches, at wholesale price. Branch account
under debtor’s system is nominal account. ब् ,
-

, ,

Types of Branches:
There are different types of branches according to their
nature and magnitude of operation, although all the
branches are operated under the instruction of Head Office.
As a result, the system of branch accounting is not the same
in all the cases. ऑ ,
,

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(i) Inland Branch (also known as Domestic Branch or Home
Branch):
These branches are situated within the territory of the
country. These branches do not maintain accounts under
Double Entry System. They simply read out periodical
statements to Head Office relating to goods received, goods
sold, amounts returned, expenses, stock position (both at the
beginning and at the end.)

, , , , ( )

ऑ -

These branches are not allowed to purchase goods from

outside market. As all collections are directly remitted to
Head Office, naturally, expenses of branches are met by Head
Office. In other words, these branches are operated and
controlled by Head Office.

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 , ,
,
Dependent Branch:
Dependent branches are those which do not maintain
separate books of account and wholly depend on Head
Office. The result of the operation, i.e., profit or loss, is
ascertained by Head Office. In other words Head Office
maintains and opens a Branch Account in its book in order to
find out the result of the operation. Branches supply some
related information to the Head Office, i.e., position of cash,
debtors stocks, etc.
- ऑ

ऑ , , , ऑ ,
ऑ ऑ

ऑ , ,
Independent Branch:
Independent branches are those which maintain complete
system of accounting. This particularly happens when their
sizes are very large due to various functional complexities. In
short, they prepare their accounts independently, i.e., they
also purchase and sell goods for cash and credit
independently in addition to the goods that are supplied by
the Head Office.

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, , ऑ

They may supply goods to Head Office, pay expenses and

deposit cash in their own account like an independent unit.
Thus, they maintain their own accounts under Double
Account System. That is why they are called Independent
Branch.
ऑ ,
,

(ii) Foreign Branch:

These branches are located outside the country. They are
operated in the foreign country which has a different
currency and, as such, question of rate of exchange will arise.
These branches may be of: (i) Dependent Branch or (ii)
Independent Branch depending on the method of
accounting.
, , ,
: ( i) ( ii)
OBJECTIVES OF BRANCH ACCOUNTING
TO ASCERTAIN PROFIT OR LOSS AT BRANCH: Every business
house wants to measure the performance of its branches
separately. Hence, separate records for each branch are
necessary. Efficiency or otherwise of a branch can also be
measured with the help of its accounting records.
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TO ASCERTAIN TRUE FINANCIAL POSITION OF
BUSINESS: Branch Accounting helps the business to ascertain
its true financial position. Accounting records of the assets
and liabilities will helps in preparing in the balance sheet
which is a mirror of the financial position.
COMPLIANCE WITH STATUTORY REQUIREMENT: Branch
accounts are necessary to meet large requirements with the
company law, Income tax laws and other such acts.
TO INCREASE EFFICIENCY OF THE BRANCH: Branch accounts
are the indicators of the efficiency of the branch. They will
indicate the loopholes or drawbacks which can be rectified in
time. In this way, branch accounts will be helpful in
increasing the efficiency of the branch.
TO EXERCISE CONTROL OVER BRANCH: Head Office exercises
control only through information supplied by branches to
head office. The main source of information is the accounts
maintained from branch transactions.

ASCERTAIN PROFIT or LOSS AT BRANCH:

- , -

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 :

: ,

ब् : ऑ ऑ

METHODS OF BRANCH ACCOUNTING

Dependent branch is a branch which does not maintain its
own set of books. All records have to be maintained by the
head office. The Head Office will record transactions of
Branch by any of the following methods:

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DEBTORS SYSTEM
Under this system, head office maintains separate branch
account for each branch. It will be prepared to find out profit
or loss of the branch. The branch account is nominal account.
The journal entries passed under this method are as follows:
( ,

)
:

WHEN GOODS ARE SENT TO THE BRANCH

Branch A/c Dr.
To Goods sent to branch A/c

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EXPENSES OF BRANCH PAID BY THE HEAD OFFICE
Branch A/c Dr.
To Cash/ bank A/c

CASH SENT TO BRANCH FOR PURCHASE OF FIXED ASSETS

Branch A/c Dr.
To Bank A/c

CASH BEING SENT FOR PETTY EXPENSES

Branch A/c Dr.
To Cash/ bank A/c

FOR GOODS RETURNED BY BRANCH TO HEAD OFFICE

Goods sent to branch A/c Dr.
To Branch A/c

FOR CASH SALE BY BRANCH

Cash/ Bank A/c Dr.
To Branch A/c

FOR CLOSING BALANCE OF FIXED ASSETS

Branch Fixed Asset A/c Dr.
To Branch A/c

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 FOR PROFIT EARNED BY BRANCH
Branch A/c Dr.
To general Profit and Loss A/c

FOR LOSS EARNED BY BRANCH

General profit and loss A/c Dr.
To Branch A/c

STOCK AND DEBTORS SYSTEM

This method is also adopted to find out the profit or loss
made by the branch. This method is generally adopted when
the goods are dispatched to the branch at the selling price
which the branch is not authorized to vary. Under this

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method, the following accounts are opened: (

, )
BRANCH ASSETS ACCOUNT: Individual assets accounts are
opened for each kind of asset. Example: branch cash account,
branch debtors’ account branch furniture account etc.
: , ,

BRANCH EXPENSES ACCOUNT: This account is debited with

all the expenses of the branch like rent, salaries,
advertisement etc. this account is closed by transferring to
the branch adjustment account. , ,

BRANCH STOCK ACCOUNT: This account is prepared to find

out the surplus or shortage of stock at the branch. This
account is featured as:
:

• This account is prepared at invoice price.

• Opening stock is posted at the debit side of this account.
• Goods sent to branch is also recorded at the debit side
of this account.
• Goods returned to head office and closing stock is
shown at the credit side of this account.
• The excess of debit over credit is shortage.
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 • The excess of credit over debit is surplus.

•
•
•
• ऑ

•
•
BRANCH ADJUSTMENT ACCOUNT: This account has two
parts. The first part is prepared like Trading Account. It is
debited with (
)
• stock reserve account (profit element in closing stock)
• profit element in shortage.
This account is credited with
• stock reserve account (profit element in opening stock)
• profit element in surplus.
• Profit element in goods sent to branch.
The excess of debit over credit is gross loss and excess of
credit over debit is gross profit.

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In the second part, the branch expenses account and the cost
of shortage or surplus is shown- the shortage on the debit
side and the surplus on the credit side. The balance of this
account indicates either profit or loss.
JOURNAL ENTRIES

WHEN GOODS SENT TO BRANCH

Branch Stock A/c Dr.
To Goods sent to branch A/c

WHEN SALES ARE MADE AT THE BRANCH

On cash basis
Cash A/c Dr.
To Branch stock A/c
On credit basis
Branch Debtors A/c Dr.
To Branch Stock A/c

WHEN CASH IS RECEIVED FROM DEBTORS

Cash A/c Dr.
To Branch debtors A/c

FOR BRANCH EXPENSES PAID IN CASH

Branch Expenses A/c Dr.
To Cash A/c

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 FOR TRANSFER OF EXPENSES TO BRANCH ADJUSTMENT ACCOUNT
Branch Adjustment A/c Dr.
To Branch Stock A/c

FOR ADJUSTMENT IN INFLATED PRICE OF OPENING STOCK

Stock Reserve A/c Dr.
To Branch Adjustment A/c

FOR ADJUSTMENT IN INFLATED PRICE OF CLOSING STOCK

Branch Adjustment A/c Dr.
To Stock Reserve A/c

FOR TRANSFER OF PROFIT TO GENERAL PROFIT AND LOSS ACCOUNT

Branch Adjustment A/c Dr.

To General profit and loss account

FOR TRANSFER OF LOSS TO GENERAL PROFIT AND LOSS ACCOUNT

General Profit and Loss A/c Dr.

To Branch Adjustment A/c

FINAL ACCOUNTS SYSTEM

Under this system, Trading and profit and loss account is
prepared to calculate the gross profit or gross loss and net
profit or net loss. The opening stock and goods sent to

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branch is debited in the trading account. The closing stock,
sales, goods returned by branch is credited to the trading
account. ,

, ,
WHOLESALE PRICE SYSTEM
Under this system, the goods are invoiced at the wholesale
price to a retail branch. Opening stock and closing stock of
branch will be shown at the wholesale price and unrealized
profits in closing stock will be debited as stock reserve to
profit and loss account of head office. Similarly, the stock
reserve of opening stock will be credited to profit and loss
account of head office. ,
ब्

ऑ ,
ऑ

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 Partnership Account

A partnership is a business relationship

among two or more persons to share
profits and losses of a firm carried on by all
or any of the acting for all.

The persons who have entered into a partnership with one

another individually are called partners and collectively a
firm. -
,

Nature of Partnership –
Partnership, from the legal view point, is not a separate legal
entity from its partners. It means firm’s debts can be paid
from private assets of the partners, if the firm is not able to
pay its liabilities. However, partnership is a separate business
entity from the accounting view point.
, ,

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 ,

Features of partnership –
1. T o or more persons – There should be at least 2
persons to form a partnership and ith respect to
Indian contract act 1872 e ery person except the
follo ing are competent to contract
2

1872

–
a Minor
b Persons of unsound mind
c Persons disqualified y any la
2. Agreement – partnership comes into existence
ith an agreement either oral or ritten. This
ritten agreement among partners is kno n as
partnership deed.

3. La ful Business – a partnership is established for a

la ful business.

4. rofit – sharing – the agreement among the

partners must be to share profits and losses of the
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 business. If profit sharing ratio is not mentioned in
the partnership deed then it should be shared
equally.

Rights of Partners –
Every partner has the right to –

• Participate in the management of the business.

• e She should be consulted about the affairs of
the business
• e She should inspect the books of account and
ha e a copy of it.
• Recei e interest on loan pro ided by him to the
firm at an agreed rate of interest.
• In case of the rate of interest is not agreed
interest is paid at the rate of 6% per annum
according to the Indian partnership act 1932.
• Not allo the admission of a ne partner.
• Retire from the firm after gi ing proper notice.
-

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•

, 1932 ,

, 6%

• ,

Partnership deed –
Partnership comes into existence with an agreement, either
written or oral. The written agreement between the partners
is known as partnership deed. It is a legal document signed
by all the partners and has clauses on the following (
,

)–

a Description of the partners

b Description of the firms
c Principal place of business
d Nature of business
e Commencement of business

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 f Capital contribution
g Interest on capital
h Interest on dra ings
i Profit sharing ratio
Interest on loan
k Remuneration to partners
l aluation of good ill
m Accounting period
n Right and duties of partners.
It is not essential but desirable to have a partnership deed. In
case, partnership deed doesn’t exist pro isions of the Indian
partnership act, 1932 will apply.
,

, , 1932

Provisions affecting the accounting treatment in the absence

of partnership deed (
) –

In the absence of a partnership deed or where it is silent, i.e.

it does not have a clause in respect of the following matters,
the provisions of the Indian partnership act, 1932 will apply
( , ,

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 ,

, 1932 )-

Matters Provisions of the Indian

partnership act 1932
Sharing of profit/loss Equally by the partners
Interest on capital Not allowed to partners
Interest on drawings Not charged from partners
Interest on loan by a Allowed at the rate of 6%
partner per annum, interest on loan
by a partner is a charge
against profit. It means
interest is paid whether the
firm earns profit or incurs
loss.
Remuneration to partners Not allowed to partners
Admission of a partner New partner cannot e
admitted unless all the
partners agree to it.

Liabilities of Partners –
1. If a partner carries on a business that is similar to
that of the firm in competition ith the firm and
earns profit from it the profit earned from such
business shall be paid to the firm.

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 2. If a partner earns profit for himself from any
transactions of the firm the profit so earned shall
be paid to the firm. For example – a partner gets
commission from the buyer of goods on goods
sold by the firm the commission so earned shall
be paid to the firm. -

Charge against profit-

It means that it is an expense for the firm and is paid whether
the firm earns profit or incurs loss. Interest on loan by
partner ret payable to a partner and manager’s commission
etc, are charge against profit and are payable whether the
firm earns profit or incurs loss.

Appropriation of profit

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It means distributions payable to the partners are allowed, if
the firm earns profit during the year. Salary/commission to
partners’ interest on capitals interest on dra ings and
transfer of profit to reserves are appropriations.
,

Basis Charge against Appropriation of

profit profit
Nature It is an expense It means
hence deducted distribution of net
from revenue to profit for the year
determine net profit among partners
or loss for the year. under different
heads
Recording Debited to profit Debited to profit
and loss account and loss
appropriation
account
Priority It is allowed before It is appropriated
appropriation of after accounting of
profit all charges
Examples Rent paid to a Salary to partners,
partner, interest on interest on capital,
loan by partner etc transfer of profit to
general reserve etc.

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Interest on loan by the firm to partner –
A firm may give loan to a partner it will charge interest on the
loan given at the rate agreed among the partners. If the
partnership deed not provide for charging interest on loan
given or agreement to charge interest does not exist, interest
is not charged on the loan given.

, |

Manager’s commission –
Manager is an employee of the firm. Therefore, the amount
due to him as commission is payable whether the firm earns
profit or incurs loss. Stating differently managers’
commission is a charge against profit and transferred to the
debit of profit and loss account.
,

artners’ capital accounts –

A partnership firm has more than one owner (partners) and
capital accounts is maintained for each partner separately. It
is so because each partner has separate transactions with the
firm. The partners’ capital accounts can be maintained by

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following either ( ( )
-
- -
)–

➢ Fixed capital accounts method

➢ Fluctuating capital accounts method
Fixed capital accounts method –
Fixed capital is the capital invested by each partner in the
firm remains unaltered or fixed, unless a partner introduces
additional capital or withdraws out of his or her capital.
When fixed capital accounts method is followed, two
accounts i.e. a capital account and a current account for each
partner are maintained.
,

A. Capital account – capital account of each

partner continues to sho same balance year
after year and changes only if additional capital
is introduced hich is credited to capital a c
ithdra al is made out of capital hich is
debited to the capital account.
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 - -

B. Current account – current a c is maintained to

record transactions other than transactions of
capital such as dra ing against profit interest
allo ed on capital interest charged on
dra ings salary or commission payable to a
partner share of profit losses.
Current a c of each partner is debited by the
amount of –
1. is dra ings against profit
2. Interest on dra ings
3. Share of loss
4. Transfer of amount to capital account
Current a/c -
, ,

, , /

a/c -

1.

2.

3.

4.

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 The companies Act 2013
Meaning and Features of a Company
With a phenomenal change in the domestic and international
economic landscape, the Government of India decided to
replace the Companies Act, 1956 with a new legislation. The
Companies Act, 2013, endeavours to make the corporate
regulations in India more contemporary. In this article, we
will focus on the meaning and features of a Company.

, 1956

, 2013,

Meaning of a Company
There are many definitions of a Company by various legal
experts. However, Section 2(20) of the Companies Act, 2013,
defines the term ‘Company’ as follo s: “Company means a
company incorporated under this Act or under any previous
company la .”

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Hence, in order to understand the meaning of a Company, it
is important to look at the distinctive features that explain
the realm of a Company.

, 2013 2 (20) ' ' : "

"

, ,

Features of a Company
1. A Company is a Separate Legal Entity
One of the most distinctive features of a Company, as compared to other
organizations, is that it acquires a unique character of being a separate legal
entity. Hence, when you register a company, you give it a legal personality with
similar rights and powers as a human being.

The existence of a company is distinct and separate from that of its members.
It can own property, bank accounts, raise loans, incur liabilities and enter into
contracts. According to Law, it is altogether different from the subscribers to
the Memorandum of Association.

Also, it has a distinct personality which is different from those who compose it.
Member can also contract with the Company and acquire a right against it or
incur a liability to it. However, for any debts, the creditors can sue the
Company but the members cannot.

A Company can own, enjoy, and dispose of a property in its own name. While
the shareholders contribute to the capital and assets, the company is the
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rightful owner of such assets and capital. Further, the shareholders are not
pri ate or oint holders of the company’s property.

, ,

, ,

, ,

2. Perpetual Succession
Another important feature of a Company is that it continues to carry
on its business notwithstanding the death of change of its members
until it is wound up on the grounds specified by the Act. Further, the
shares of the company change hands infinitely, but that does not
affect the existence of the company.

In simple words, the company is an artificial person which is brought

into existence by the law. Hence, it can be ended by law alone and is
unaffected by the death or insolvency of its members.

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 , ,

3. Limited Liability
One of the important features of a company is the limited liability of
its members. The liability of a member depends on the type of
company.

In the case of a limited liability company, the debts of the company

in totality do not become the debts of its shareholders. In such a
case, the liability of its members is limited to the extent of the
nominal value of shares held by them. The shareholders cannot be
asked to pay more than the unpaid value of their shares.

In the case of a company limited by guarantee, members are liable

only to the extent of the amount guaranteed by them. Further, this
liability arises only when the company goes into liquidation.

Finally, if it is an unlimited company, then the liability of its members

is unlimited too. But such instances are very rare.

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4. Artificial Legal Person

Another one of the features of a company is that it is known as an
Artificial Legal Person.

Artificial – because its creation is by a process other than natural

birth.

Legal – because its creation is by law, and

Person – because it has similar rights to a human being.

Further, a company can own property, bank accounts, and do

everything that a natural person can do except go to jail, marry, take
an oath, or practice a learned profession. Hence, it is a legal person
in its own sense.

Since a company is an artificial person, it needs humans to function.

These humans are Directors ho can authenticate the company’s
formal acts either on their own or through the common seal of the
company.

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5. Common Seal
While a company is an artificial person and works through the
agency of human beings, it has an official signature. This is affixed by
the officers and employees of the company on all its documents. This
official signature is the Common Seal.

However, the Companies (Amendment) Act, 2015 has made the

Common Seal optional. Section 9 of the Act does not have the phrase
‘and a common seal’ in it. This pro ides an alternati e mode of
authorization for companies who do not wish to have a common
seal.

According to this amendment, if a company does not have a

common seal, then the authorization shall be done by:

➢ T o Directors or
➢ One Director and the Company Secretary if the company has
appointed a Company Secretary .

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 , ( ) , 2015

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➢ (
)

The Corporate Veil Theory is a legal concept which separates the

identity of the company from its members. Hence, the members are
shielded from the liabilities arising out of the company’s actions.

Therefore, if the company incurs debts or contravenes any laws, then

the members are not liable for those errors and enjoy corporate
insulation. In simpler words, the shareholders are protected from the
acts of the company.

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 , ,

Companies (Amendment) Act, 2019

This Act was passed by the Parliament in July 2019. The changes recommended under the
latest amendment to the Companies Act are as follows:

Companies will have to keep an unspent amount into a special account for the purpose of
CSR.

This amount, if left unspent after a period of 3 years, will be moved into a fund specified in
Schedule II of the Act. This could e en be the Prime Minister’s Relief Fund.

Under this Act, the Registrar of Companies can initiate action for the removal of the
company’s name from the Register of Companies if it is not conducting business or
operation as per the Company Law.

16 minor offences mentioned in the Act have been decriminalised (made civil defaults).

( ) , 2019

2019

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 , 3 ,

VII

16 ( )

Types of Companies
Section 7 of Companies Act,2013 lays down the procedure to
be followed for incorporation of a company and Section 9 of
the Companies Act, 2013 provides for the effect of
registration of a company. , 2013 7

, 2013 9

1. Government Company: As per section 2(45) of the

companies act 0 “Go ernment company” means any
company in which not less than 51% of the paid-up share
capital is held by the central government, or by any state
government or governments, or partly by the central
government and partly by one or more state governments,
and includes a company which is a subsidiary company of
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such a government company. " "
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2. Foreign Company: As per section 2(42) of the companies

act, 2013, Foreign company means any company
incorporated outside India which has (a), a place of business
in India whether by itself or through an agent physically or
through electronic mode and (b) conducts any business
activity in India in any other manner.
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3. Private Company: As per section 2(68) of the companies

act, 2013, A Private company restricts the right to transfer
shares. Minimum number of members that are required in a
private company is 2 and 1 in case the private company is a
One Person Company (OPC). A Private company which is
subsidiary of a Public Company is treated as a Public
Company. Earlier, as per companies act, 2013, the minimum
paid up capital to form a Private Company was Rs.1Lakh but
as per Companies (Amendment) Act, 2015, there is no
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minimum paid up capital requirement in case of private
companies. , 2013 2 (68) ,

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(OPC) |

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4. Public Company: A public company is a company whose

shares are available to be purchased by the general public.
Earlier, as per companies act, 2013, the minimum paid up
capital to form a Private Company was Rs.5Lakh but as per
Companies (Amendment) Act, 2015, there is no minimum
paid up capital requirement in case of private companies.

, , 2013 ,

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2015 ,

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5. One Person Company: OPC is a company which has only
one person as a member.

6. Associate Company: Associate Company [Section 2(6)] is a

company in which some other company has a significant influence
(control of at least 20% of total share capital) but it is not the
subsidiary company of that company (having such influence)
[ 2 (6)]

( 20%

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)

7. Company limited by Guarantee: Guarantee Company is defined in

Section 2(21) of the Companies Act, 2013. It is a company with
liability of the members being limited by the memorandum. The
liability of the member of a Guarantee Company is limited up to a
specified or stipulated sum as mentioned in the memorandum and
members are not allowed to contribute beyond that specified sum.

, 2013 2 (21)

8. Company limited by shares: It means a company having the

liability of its members limited by the memorandum to the amount,
if any, unpaid on the shares respectively held by them. In simple
words, it means that the liability of the shareholders to the creditors
of the company is limited to the capital originally invested.

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 , ,

Preparation of Final Statements:

According to Companies Act 2013, every company shall
prepare their financial statements which shall give a true and
fair view of the state of affairs of the company.
International Financial Reporting Standards are issued by the
International Accounting Standards Board (IASB) to bring
comparability, transparency & consistency in financial
statements around the world.
Section 129 of companies act 2013, provides for the
preparation of financial statements. It is also provided that
the financial statements shall be prepared in the form
provided in new schedule III of Companies Act, 2013.
Financial statements as per section 2(40) of the companies
act 2013 include:
• A balance sheet as at the end of the financial year
• A profit and loss account or in case of NPO an income and
expenditure account for the financial year
• Cash flo statement for the financial year
• A statement of changes in equity if applicable

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 2013 ,

(IASB)
,

129 2013,

, 2013 III

2013 2 (40)

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Some Important points to consider:

• Memorandum of Association MOA is kno n as charter of the company and
states the objects and scope of activities as well as restraints on the power of
the company beyond which it cannot go. It contains all the fundamental
conditions required for the incorporation of a company.

It includes contents such as Name clause, Liability clause, registered office

clause, Object clause, Capital clause, Association clause.

• The Articles of Association contains the regulations for management of the

company. Memorandum of Association defines the activities and scope of the
powers of the company. Section 5 of the act provides the contents as well as
models of articles of association

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• Doctrine of Constructi e Notice states that any person has the right to
inspect any document kept by the registrar, can make a record of it or even get
a copy on payment of prescribed fees.

• The Doctrine of Indoor Management tends to protect the outsiders against

the acts of the company. It is most popularly known as Turquand Rule

• A oint enture is the business here t o or more businesses are carrying

out a business venture. When goods are purchased for the Joint Venture, the
amount is debited to Joint Venture Account.

• Corporate eil is the legal concept hich states that the company is
identified separately from its members and if it (the company) suffers any
debts or violates the law then the members should not be held liable for those
errors.

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Financial Ratio
What are Financial Ratios?
Financial ratios are created with the use of numerical values
taken from financial statements to gain meaningful
information about a company. The numbers found on a
company’s financial statements – balance sheet, income
statement, and cash flow statement – are used to perform
quantitati e analysis and assess a company’s liquidity
leverage, growth, margins, profitability, rates of return,
valuation, and more.
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Liquidity Ratios
Liquidity ratios are financial ratios that measure a company’s
ability to repay both short- and long-term obligations.
Common liquidity ratios include the following:

The current ratio measures a company’s ability to pay off

short-term liabilities with current assets:

Current ratio = Current assets / Current liabilities

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The acid-test ratio measures a company’s ability to pay off
short-term liabilities with quick assets:

Acid-test ratio = Current assets – Inventories / Current

liabilities

The cash ratio measures a company’s ability to pay off short-

term liabilities with cash and cash equivalents:

Cash ratio = Cash and Cash equivalents / Current Liabilities

The operating cash flow ratio is a measure of the number of

times a company can pay off current liabilities with the cash
generated in a given period:

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Operating cash flow ratio = Operating cash flow / Current
liabilities

Leverage Financial Ratios

Leverage ratios measure the amount of capital that comes
from debt. In other words, leverage financial ratios are used
to e aluate a company’s debt le els. Common le erage ratios
include the following:

The debt ratio measures the relati e amount of a company’s

assets that are provided from debt:

Debt ratio = Total liabilities / Total assets

The debt to equity ratio calculates the weight of total debt

and financial liabilities against shareholders’ equity:

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Debt to equity ratio Total liabilities Shareholder’s equity

The interest coverage ratio shows how easily a company can

pay its interest expenses:

Interest coverage ratio = Operating income / Interest

expenses

The debt service coverage ratio reveals how easily a company

can pay its debt obligations:

Debt service coverage ratio = Operating income / Total debt

service

Efficiency Ratios
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Efficiency ratios, also known as activity financial ratios, are
used to measure how well a company is utilizing its assets
and resources. Common efficiency ratios include:

The asset turno er ratio measures a company’s ability to

generate sales from assets:

Asset turnover ratio = Net sales / Average total assets

The inventory turnover ratio measures how many times a

company’s in entory is sold and replaced o er a gi en period:

Inventory turnover ratio = Cost of goods sold / Average

inventory

The accounts receivable turnover ratio measures how many

times a company can turn receivables into cash over a given
period:
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Receivables turnover ratio = Net credit sales / Average
accounts receivable

The days sales in inventory ratio measures the average

number of days that a company holds on to inventory before
selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover

ratio

Profitability Ratios
Profitability ratios measure a company’s ability to generate
income relative to revenue, balance sheet assets, operating
costs, and equity. Common profitability financial ratios
include the following:

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The gross margin ratio compares the gross profit of a
company to its net sales to show how much profit a company
makes after paying its cost of goods sold:

Gross margin ratio = Gross profit / Net sales

The operating margin ratio compares the operating income

of a company to its net sales to determine operating
efficiency:

Operating margin ratio = Operating income / Net sales

The return on assets ratio measures how efficiently a

company is using its assets to generate profit:

Return on assets ratio = Net income / Total assets

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The return on equity ratio measures how efficiently a
company is using its equity to generate profit:

Return on equity ratio Net income Shareholder’s equity

Market Value Ratios

Market value ratios are used to evaluate the share price of a
company’s stock. Common market alue ratios include the
following:

The book value per share ratio calculates the per-share value
of a company based on the equity available to shareholders:

Book alue per share ratio Shareholder’s equity –

Preferred equity) / Total common shares outstanding

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The dividend yield ratio measures the amount of dividends
attributed to shareholders relative to the market value per
share:

Dividend yield ratio = Dividend per share / Share price

The earnings per share ratio measures the amount of net

income earned for each share outstanding:

Earnings per share ratio = Net earnings / Total shares

outstanding

The price-earnings ratio compares a company’s share price to

its earnings per share:

Price-earnings ratio = Share price / Earnings per share

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Bibliography
• NC RT Class 11 & 12
• Accountancy NIOS
• Reference – 2017 PFO PAP R & 2015 APFC PAP R
• Many anonymous sites of accountancy & finance.

We may delay from the Due dates mentioned because we can't

compromise our commitment to Quality.

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Believe in you, because you
are the Super-Hero of your
own kind. Keep working
under all circumstances.
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