mba i accounting for management [12mba14] notes

Accounting for Management 12MBA14

Department of MBA/SJBIT

Module I

Introduction to Accounting: Need and Types of Accounting, Users

of Accounting, concepts and conventions of Accounting,

Accounting Equations

Module II

Preparation of Books of Accounts: Journals, Subsidiary books,

three column cash book, ledgers and trial balance

Module III

Preparation of Financial Statement: Preparation of final accounts

of sole traders and companies (excluding partnership) in horizontal

format (students are to be introduced to vertical formats also)

Module IV

Analysis of Financial Statements: Comparative, common size and

trend analysis, Ratio Analysis, Preparation of financial statements

using ratios, Cash flow Statement.

Module V

Accounting Standards and IFRS: IFRS and proposed changes in

Indian Accounting Standards

Module VI Audit Report:

Audit Report, Directors’ Report and basics of MAOCARO 1998

(Amended 2003)

Module VII

Corporate Governance, Human Resource Accounting, Forensic

Accounting Window Dressing

Module VIII

Income Tax: Income Tax – Heads of Income, Salary, Profit in lieu

of salary, Perquisites, deductions u/s 80C, Income Tax Rates (Only

Theory)



Index

Module-1 Page No. 3-10










MODULE I

Accounting Meaning • Accounting, as an information system is the process of identifying, measuring and

communicating the economic information of an organization to its users who need

the information for decision-making.

• Accounting provides information that is useful in making business and

Economic decisions for making reasoned choices among alternative uses of scarce

resources in the conduct of business and economic activities.

Objectives of Accounting

• To maintain Accounting records

• To calculate the results of operations

• To ascertain the financial position

• To communicate the information to others

• To maintain Accounting records

Written records can be used by different persons for different

Decision-making purposes and serve as evidence of transactions. Accounting is done

to keep a systematic record of (i) financial transactions, (ii) assets and (iii) liabilities.

• To calculate the results of operations

To measure the financial performance of an enterprise, the results of operations are

ascertained by preparing income statement i.e. Profit & Loss A/c. and shows the

matching of current costs with current revenues during a particular accounting period.

• To ascertain the financial position To evaluate the financial strength & weakness of an enterprise, the financial position is ascertained by preparing a ‗Position Statement‘i.e. also called as Balance Sheet which shows resources (assets) owned by an enterprise and the sources of financing those resources.

• To communicate the information to others



Accounting communicates information to internal users and external users.

Internal users: Top level Mgt. Information for planning, Middle level mgt. requires information for controlling the operations

External users: Creditors, Banks and Investors need the information relating to final

results of operation and financial position of a firm.

Importance or Uses of Accounting 1 Facilitate to replace memory

Accounting facilitates replace human memory by maintaining complete record of financial transactions.

2 Facilitates to comply with legal requirements Accounting facilitates to comply with legal requirements which require an Enterprise to maintain books of accounts. For e.g. Sec 209 of the Companies Act 1956, requires a company to maintain proper books of accounts on accrual

basis.

3 Facilitate to ascertain net results of operations Accounting facilitates to ascertain net result of operations by preparing Income Statement or P&L A/c.

4. Facilitates to ascertain financial position Accounting facilitates to ascertain financial position by preparing Balance Sheet.

5. Facilitates the users to take decisions Accounting facilitates the users to take decisions by communicating accounting information to them.

6. Facilitates to comparative study Accounting facilitates a comparative study in the following four ways:

(i) Comparison of actual figures with standard or budgeted figures for the same period

and the same firm.

(ii) Comparison of actual figures of one period with those of another period for the

same firm

(iii) Comparison of actual figures of one firm with those of another standard firm

belonging to the same industry.

(iv) Comparison of actual figures of one firm with those of industry to industry to

whom the firm belong.

7. Assists the management

Accounting assists the management in planning and controlling business activities and in taking decision.

8. Facilitates control over assets Accounting facilitates control over assets by providing information regarding

Cash balance, Bank balance, Debtors, Fixed Assets, Stock etc.

9. Facilitates the settlement of tax liability



Accounting facilitates the settlement of tax liability with the authorities by

maintaining proper books of accounts in systematic manner.

10. Acts as a legal evidence Proper books of accounts maintained in systematic manner act as a legal evidence

in case of disputes.

Scope of Accounting Accounting covers the following activities:

• Identifying the transactions and events

Accounting identifies transactions and events of a specific firm. A

transaction is an exchange in which each participant receives or gives

value. An event is a happening of consequence to a firm. E.g. use of raw materials for production.

• Measuring the identified transactions and events

Accounting measures the transaction and events in terms of a common

measurement unit, that is the ruling currency of a country.

3. Recording

It is concerned with the recording of identified and measured financial transactions in an orderly manner.

4. Classifying It is concerned with the classification of the recorded transactions so as to group

the transactions of similar type at one place.

E.g. maintaining ledger for each type of Account.

5. Summarizing It is concerned with the summarization of the classified transactions in a manner

useful to the users.

E.g. Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements.

• Analyzing

It is concerned with the establishment of relationship between the various items or group of items taken from P&L A/c & B/S or both.

7. Interpreting It is concerned with the explaining the meaning and significance of the

relationship so established by the analysis. The accountants should interpret the

statements in a manner useful to the users, so as to enable the users to make

reasoned decisions out of alternative course of action.

8. Communicating It is concerned with the transmission of summarized, analyzed and interpreted

information to the users to enable them to make reasoned decisions.



Accounting Conventions & Concepts • Accounting Entity Concept

According to this assumption, a business is treated as a separate entity that is

distinct from its owner(s), and all other economic proprietors. This concept requires

that for accounting purposes a distinction should be made between (i) personal

transactions and business transactions, and (ii) transactions of one business entity

and those of another business entity.

2. Money measurement Concept According to this concept, only those transactions which are capable of being

expressed in term of money are included in the accounting records. Non-monetary

transactions should be ignored. E.g. Guarantee given by bank, Strikes, Lockouts, Layoff etc.

3. Accounting Period Concept According to this concept, the economic life of an enterprise is

artificially split into periodic intervals which are known as accounting

periods at the end of which an income statement and position statement

are prepared to show the performance and financial position.

4. Going Concern Concept According to this concept, the enterprise is normally viewed as a

going concern, that is, continuing in operation for the foreseeable future.

Generally Accepted Accounting Principles (GAAPs) GAAPs my be defined as those rules of action or conduct which are derived from

experience and practice and when they prove useful, they become accepted as

principles of accounting.

Criteria for acceptance of the Accounting Principles: • Relevance: A principle is relevant to the extent it results in information that is

meaningful and useful to the user of the accounting information.

• Objectivity: Objectivity connotes reliability and trustworthiness. A principle is

objective to the extent the accounting information is not influenced by personal bias

or judgment of those who provide it.

• Feasibility: A principle is feasible to the extent it can be implemented without much

complexity or costs.

Basic Principles of Accounting • Duality Principle

• Revenue Recognition Principle



• Historical Cost Principle

• Matching Principle

• Full Disclosure Principle

• Objectivity Principle

• Consistency Principle

• Duality Principle

The duality aspects of transaction is the basis of double entry records. The entry made for each transaction is composed of two parts-one for debit and another for

credit. Every debit has equal amount of credit.

2. Revenue Recognition Principle This principle is mainly concerned with the revenue being recognized in the

Income Statement (P&L A/c) of an enterprise. Revenue is the gross inflow of cash.

It includes receivable from sale of goods, rendering of services and use of enterprise

resources, interests, royalties and dividends. Revenue is recognized in the period in

which it is earned irrespective of the fact whether it is received or not during that

period.

3. Historical Cost Principle

According to this principle, an asset is ordinarily

recorded in the accounting records at the price paid to

acquire it at the time of its acquisition and the cost becomes the basis for the accounts

during the period of acquisition and subsequent accounting periods. The cost of an

asset is systematically reduced from year to year by charging depreciation and the

asset is shown in the balance sheet at book value.

4. Matching Principle According to this principle, the expenses incurred in an accounting period should

be matched with the revenues recognized on all goods sold during a period, cost of

those goods sold should also be charged to that period. In Trial balance all debits

should be matched with all credits. In B/S, assets side should be matched with

liabilities side.

5. Full Disclosure Principle

According to this principle, the financial statements should act as means of conveying and not concealing.

The financial statements must disclosure all the relevant and reliable information. It

should be full, fair and adequate so that the users can take correct assessment about the

financial performance and position of the enterprise.

6. Objectivity Principle According to this principle, the accounting data should be definite, verifiable and

free from bias of the accountant. This principle requires that each recorded transaction

in the books of accounts should have an adequate evidence to support it. (E.g.

vouchers, receipts, invoices etc.)



7. Consistency Principle

According to this principle, whatever accounting practices are selected for a

given category of transactions, they should be followed continuously from one

accounting year to another.

Meaning

Accounting Standard



An accounting standard is a selected set of accounting policies or broad

guidelines regarding the principles and methods to be chosen out of several

alternatives. Standards conform to applicable laws, customs, usage and

business environment.

Objective The main objective of accounting standards is to harmonize the

diverse accounting polices and practices at present in use in India.

Importance or Advantages of setting Accounting standards • Reduction in variations:

Standards reduce to a reasonable extent or eliminate altogether confusing

variances in the accounting treatment used to prepare financial statements.

2. Disclosure beyond that required by law; There are certain areas where important information is not statutorily required to

be disclosed. Standards may call for disclosure beyond that required by law.

3. Facilitates comparison: The application of accounting standards would to a limited extent, facilitate

comparison of financial statements of companies situated in different parts of the

world and also of different companies situated in the same industry.

Accounting Equation • The accounting equation shows the relationship between the

economic resources belonging to a business and the claims against those resources.

• Economic resources are termed as assets. Claims are termed as

liabilities and owners‘ claims or owners‘ equity.

Assets = Liabilities + Owners’ equity

Users of Accounting Information • Investors

Investors are the owners of the firm. So, they need information to decide which investments to buy, retain or sell as well as the timing of the purchases or sales of

those investments. They also need information to assess mgt. performance and the

ability of the firm to pay dividends.

2. Lenders Lenders, such as banks and debenture-holders, need to know about the financial

stability of a business who approach them for funds. They are interested in information that enables them to determine whether their loans, and the related interest, will be paid when due.

3. Security Analysis and Advisers Investors and creditors seek the assistance of information specialists in assessing prospective returns. Equity and bond analysts, stock holders and credit rating agencies offer a wide array of information services. Information specialists serve the need of investors by providing them with skilled analyses and interpretation of financial reports.



4. Management Mgt.needs information for planning and controlling operations, for making

special decisions, and for formulating major plans and policies.

5. Employees and Trade Unions Employees are interested in information about the enterprise as well as its general

operations, stability and profitability. Employees have an interest in the financial

affairs of ; the enterprise since it is the main source of their income. Trade unions

are required for wage negotiations.

6. Suppliers and Other Trade Creditors They are keen to obtain information that enables them to determine whether

amounts owed to them will be paid when due.

7. Customer They are interested in the financial affairs of an enterprise to decide how much

business to do with it, and to assess its ability to service the product or to honor

warranty agreements.

8. Govt. & Regulatory Agencies They also require information in order to regulate the business practices of

enterprises, determine taxation policies and provide a basis for national income.

A number of regulatory agencies like SEBI, Insurance Regulatory Authority and

Stock Exchanges have a legitimate interest in financial reports of publicly held

enterprises to ensure efficient operation of capital markets.

9. General Public

Financial statements assist the public by providing information about

the trends and recent developments in the prosperity of an enterprise and the range of

its activities.

Module II

• Preparation of books of original records

• Meaning & Classification of Accounts

Meaning

It is a statement of the various dealings which occur between a customer

and the firm. It can also be expressed as a clear and concise record of the transactions

relating to a person or a firm or a property (asset) or a liability or an expense or an

income.

Classification of Accounts

1. Personal Accounts

2. Impersonal Accounts



a. Real Accounts

b. Nominal Accounts

1. Personal Accounts

Accounts related to an individual person, firm, company and bank is

called personal accounts. The proprietor being an individual his Capital A/c and his

Drawing A/c are also known as ‗Personal Accounts‘.

2. Real Accounts

Assets or properties or trading goods related to a firm is called Real

Accounts.

E.g. Furniture A/c, Purchase A/c, Sales A/c. etc.,

3. Nominal Accounts Any expenses incurred or incomes received other than real accounts is

called Nominal Accounts.

E.g. Salary for the staff, Rent paid, Commission received etc.

Debit & Credit Aspects One aspect will be either the ‗Receiving Aspect‘ or ‗Incoming Aspect‘. This is

termed as Debit Aspect. Another aspect will be ‗Giving Aspect‘ or Outgoing Aspect‘ or

‗Income Aspect‘. This is termed as Credit Aspect.

Golden Rules of Accounts:

1. Personal A/c – Debit the Receiver

-- Credit the Giver

2. Real A/c -- Debit what Comes in

-- Credit what Goes out

3. Nominal A/c -- Debit all expenses & losses

Journal

-- Credit all incomes & gains

recorded.

Format

Narration

Journal is the book of original entry wherein transactions are first

Below each journal entry a brief explanation of the transaction is given

within the brackets is called narration

• Procedures to enter Journal Entries

1. First find out, which two accounts belongs to a particular transaction.

2. Then find these two accounts belonging to which category i.e.Personal or Real or

Nominal A/cs.

3. Then see rules of the category and match with accounts.

4. Write the journal entry with date, amount in both sides and narration.



1. 1-11-2006

90,000.

Ravi commenced his business with a

2.

2-11-2006

He bought goods for cash Rs. 4,000

3.

3-11-2006

He deposited in IOB Bank Rs. 3,000

4.

4-11-2006

He gave a loan to Mr.Kumar Rs.2,000

5.

5-11-2006

Paid for Stationary Rs.1,000.

Example:1 Journalize the following transactions:

capital of Rs.



Example: 2 Journalize the following transactions:

3.02.06 Goods purchased for Rs.14,500.

7.02.06 Goods sold to Lakshmi Rs.5,000

9.02.06 Received Commission Rs.300

10.02.06 Goods sold for cash Rs.29,000

12.02.06 Goods purchased from Meenakshi for Rs.6,000

15.02.06 5 Chairs purchased from Saravana Stores Rs.300

each

20.02.06 Paid to Saravana Stores 28.02.06 Salary paid Rs.1000

Rent paid Rs.500

Example:3 (Jan 2005)

Journalize the following transactions:

Jan 2004, 2 Started business with Rs.1,00,000

Paid into bank Rs.50,000

4 Bought furniture for cash Rs.6,000

5 Bought furniture for resale Rs.4,000

6 Sold goods to Mr.X Rs.6,000

7 Sold goods Rs.5,000

8 Purchased from Y for Rs.5,000

9 Charged depreciation on Machinery Rs.1,000

10 Withdrew form bank Rs.3,000 for private use.

14 Deposited a cheque into bank for Rs.6,000

20 Cheque deposited on 14th

Jan was dishonored

25 Paid rent, salaries, postage Rs.5,000, Rs.6,000 and Rs.150 respectively.

Prob:4 (Jan 2006) Journalise the following transactions in the books of Vishwanath.

i. Vishwanath started his business with the following:

Cash in hand 1500

Cash at bank 3500

Goods in hand 3000

Furniture 2000

Buildings 10,000

ii. Gave charity Rs.20.

iii. Loan taken from the bank Rs.5,000 iv. Purchased a motor car in exchange for goods Rs.2,000 and cheque Rs.3,000

v. Paid proprietor‘s life insurance premium Rs.100



vi. Bought goods from Laskshman on account Rs.2,000

vii. Furniture costing Rs.300 was destroyed by fire.

Prob:5(June 2004) Journalise the following transactions in the books Raju and

Company.

2002

Jan 2 Started the business with Rs.80,000

Jan 3 Bought furniture for Rs.12,000

Jan 6 Bought stationary for Rs.500

Feb1 Purchased goods for cash @ Rs.20,000

Feb5 Sold goods for cash worth Rs.4,000

Feb7 Sold to Mohan goods worth Rs.2,000

Feb14 Bought goods from Tilak @ Rs.8,000

Feb18 Paid office cleaning charges of Rs.200

Feb20 Bought goods from Kamalesh worth Rs.4,000

Feb21 Sold to Vishnu & Co goods worth Rs.3,000

Feb 22 Received form Mohan Rs.2,000

Feb 25 Paid to Kamalesh Rs.2,000

• Ledger

Ledger is a secondary book of entry. The journal entries are posted to the

ledger at the end of each period. Ledger is a book containing various account. In this

book, separate account is opened for each and every transactions of different nature.

Format Dr xxx A/c Cr

• Procedures to post entries from Journal book to Ledger book

1. List out the no. of accounts in the journal book.

2. Open separate ledger account for each account.

3. Debit side of the entry in the journal book will come under credit side of the

ledger and vice-versa

4. In debit side of the ledger book while entering the entry, add ‗To‘. In credit side,

add ‗By‘.

5. Balance the amount in both the sides. Prob:1

1995 Mar1 Kannan commenced business with Rs.25,000 3 Purchased goods for Rs.15,000

5 Paid salary Rs.500

8 Received interest Rs.50

10 Cash Sales Rs.2,000

12 Purchased goods for cash Rs.3,000

15 Goods sold to Kumar Rs.1,000



Capital 16,800 Drawings 5,000

Stock 21,000 Purchases 36,000 Sales 72,000 Purchase Ret. 2,000

Sales Ret. 3,000 Debtors 4,500

Creditors 2,500 Furniture 900

Bills receivable 2,300 Bills payable 4,200 Wages 1,200 Advertisement 600

18 Purchased a cycle for Rs.680

• Trial Balance

Trial Balance is a statement of ledger balances. In this statement four

columns are provided for recording the serial number, name of accounts, debit balances

and a credit balances. The total of such balances must be equal.

Rules Debit : All assets, expenses & losses

Credit : All liabilities, incomes & gains

Format

Prob:1 From the following transactions pass necessary journal entries, prepare ledger accounts and trial balance:

2003 Apl1 Started business with a capital of Rs.10,000

2 Purchased goods from Mr.Gopal for Rs.1,500

3 Paid to Mr.Gopal in full in cash Rs.1,450

4 Sold to goods Mr. Kannan for Rs.500

5 Received cash from Kannan in full settlement Rs.450

6 Paid salary Rs.300

7 Purchased furniture for Rs.1000

8 Sold goods for Rs.1,300

9 Received interest Rs.50

10 Deposited cash into bank Rs.1000

11 Paid wages Rs.100

12 Withdraw cash from Bank for personal use Rs.200

Prob:2 (Jan 2006) Prepare a trial balance from the following balances of the year ending

2002

Capital 28,000 Purchases 15,000

Stock of goods 4,000 Plant 15,000

Motor car 8,000 Furniture 5,000

Dis.recd. 400 Wages 8,200

Baddebts 400 Creditors 6,500

Sales 40,000 Salaries 2,800

Cash at bank 4,000 Commission (cr) 600

Return inwards 2,000 Returns outwards 1,000

Cash in hand 600 Debtors 5,600

Rent 3,500 General exp. 300

Dis. Allowed 300 Interest recd. 200

Carriage 1,500 Advertisement 500

Prob:3

Prepare a Trial balance from the following as on 31st

Mar 2002 Rs.

Rs.



A subsidiary book is prepared when the transactions of similar nature are

large. It is prepared as a substitute for journal. By preparing this book, entries are

minimized.

E.g. Sales Book, Purchase Book etc.

Types of Subsidiary Books

1. Purchase book

2. Sales book

3. Purchases Return book

4. Sales Return book

5. Bills Receivable book

6. Bills Payable book

7. Cash book

1. Purchase book

This book is kept with the object of recording credit purchases of goods

for resale. Each inward invoice after it has been entered as to calculations and also to the

quantity, quality and price of the goods received is numbered consecutively and then

entered in the purchase books.

Format Purchase Book Postings: Each personal a/c is credited with its respective amount and the monthly total of this book is debited to purchases a/c in the Ledger.

2. Sales book

The object of this book is to record credit sales. An outward invoice is

made out for credit sale and checked as to quantity, quality and price of the goods before

the letter is sent out to the customer.

Format Sales Book Posting: Each personal a/c debited with its respective amount and the monthly total of the book is credited to sales a/c in the ledger.

3. Purchase Returns Book This book record returns outward, that is, return of goods bought. A debit

note is made out with a carbon duplicate and sent to the party to whom the goods are

returned.

Format Purchase Returns Book Postings: Each individual personal a/c is debited with its respective amount and the monthly total of the book is credited to returns outward a/c in the ledger.

4. Sales Returns Book Return inwards, that is, return of goods sold by us, are recorded in this

book. On receipt of goods, credit notes with carbon duplicates are made out and sent to

those customers who have returned us the goods.

Format Sales Returns Book



Posting: Each personal a/c get the individual credit and the returns inwards account get the debit with the monthly total of the book.

5. Bills Receivable Book The purpose of this book is to keep a detailed record of all the bills

receivable received by a trader.

A bill receivable is one is respect of which the trader is entitled to receive

money at some specific date as shown on the face of the bill. Drawer is a person who is

drawing the bills. He is the supplier of the goods. Acceptor is accepting the bill. He is the

purchaser of the goods.

6. Bills Payable Book

This book is kept to record full details of all bills payable accepted by a trade



A bill payable is one, which has been accepted by a person and the amount of which he is under obligation to pay at some definite future time.

• Cash Book

A cash book is a special journal which is used for recording all cash

receipts and cash payments.

A cash book is a book of original entry since transactions are recorded for

the first time from the source documents. The cash book is a ledger in the sense that it is

designed in the form of a cash a/c and records cash receipts on the debit side and cash

payments on the credit side.

Types of Cash Book

1. Single Column Cash Book

2. Cash Book with Discount Column

3. Cash Book with Bank & Discount Column

4. Petty Cash Book

5. Single Column Cash Book

Single column cash book has one amount column on each side. All cash

receipts are recorded on the debit side and all cash payments are recorded on the credit

side.

Format Single Column Cash Book

Dr Cr Prob:1 Enter the following transactions in Single Column Cash Book. 2001 Jan1 Cash in hand Rs.1,700

5 Paid to Bansal Rs.300 & discount allowed by him Rs.10

8 Purchased goods from Goyal & Co. for cash Rs.400

10 Received from Kansal Rs.980

16 Sold goods to Garg & Co for cash Rs.400

21 Paid to Ansal Rs. 295 & discount received Rs.5

25 Paid wages Rs.50

31 Paid to X & Co in full settlement of his account

(which shows a credit balance of Rs.400.)Rs. 390

31 Purchased Furniture Rs.200

Prob:2 Prepare a simple cash book from the following transactions of Mr. X of Delhi.

2001, Apl 1 Mr.X commenced business with cash Rs.4,800

3 He bought goods for cash Rs.3,000

5 Sold goods for cash Rs.60

6 Received cash from Mr. Manohar Lal Rs.216

9 Paid into bank Rs.1,800

13 Paid cash to Hari Rs.129




17 Paid for stationary Rs.9

Paid for office furniture Rs.1110

Received from Mr. Kailash Chand Rs.408

Paid for advertising Rs.54

Purchased postage stamp Rs.5

Paid rent Rs.60

Paid electricity charges Rs.9

2. Cash Book with Discount Column Cash book with discount column has two columns I.e cash column and

discount column in each side. All cash receipts & discounts allowed are recorded on the

debit side and all cash payments & discounts received are recorded on the credit side.

Format Double column Cash book

Dr Cr Prob:1 Prepare a double column cash book from the following transactions of Mr. R.K. Gupta:

2001 Jan1 Opening Cash balance Rs.4,000

3 Cash sales Rs.6000

5 Sold goods to Suresh for Rs.2,000 & received from him

Rs.1,980.

him Rs.2,470

6 Goods purchased for cash Rs.2,000

10 Wages paid Rs.40

19 Goods purchased from Mr. Manjunath Rs.2,500 and paid to

27 Cash paid to Radha Rs.400

28 Goods purchased for cash Rs.2,070



Prob:2 Prepare a double column cash book from the following transactions of Mr. Y:

2004 Mar 1 Mr. Y commenced business with cash Rs.3,900

3 Bought goods for cash Rs.4,110

4 Paid Mr.Mohanlal cash Rs.57 and discount recd. Rs.3

6 Deposited in Bank Rs.2,400

Paid for office furniture in cash Rs.279

9 Sold goods for cash Rs.1,800

12 Paid wages in cash Rs.72

13 Paid for stationary Rs. 24

15 Sold goods fro cash Rs.1500

17 Paid for miscellaneous exps.Rs.27

19 Received cash from Mr. Jindhal Chand Rs.291 and allowed his discount Rs.9

21 Purchased a radio set Rs.150

22 Paid salary RS.240

25 Paid rent Rs54

28 Paid electricity bill Rs.21

29 Paid advertising Rs.24


3. Three Column Cash Book Three column cash book has three amount columns (one for cash, one for

bank and one for discount) on each side. All cash receipts, deposits into bank and

discount allowed are recorded on debit side and all cash payments, withdrawals from

bank and discount received are recorded on the credit side.

Format Three Column Cash Book

Dr Cr Prob:1 Enter the following transactions in the Three Column Cash Book. 2005 Jan 1 Opened a bank a/c by depositing by Rs.6000 in cash

2 Goods sold to Mohan for cash Rs.250

allowed Rs.25

5 Settled Hari‘s a/c of Rs.200 at a discount of 5%

7 Received from Shyam a cheque for Rs.725. Dicount

10 Purchased a typewriter for Rs.200. Spent Rs.50 on its repairs.

12 Shyam‘s cheque was returned dishonored

15 Received a money order for Rs.25 from Hari

20 Shyam settled his account by means of a cheque for



Rs.755. Rs.5 being for interest charged.

27 Purchased Machinery from Rajiv for Rs.5,000 and paid him by

means of a bank draft purchased from bank for Rs.5,005.

28 Cash withdrawn from the bank Rs.10,000.

Prob:2(June 2004)

From the following information, prepare suitable cash book:

2002, April

1 Cash at hand Rs.2,200

2 Cash at bank Rs.8,700

3 Bought goods from Rahim Rs.7,300

4 Cash sales deposited with the bank Rs.5,500

8 Sold goods to Das Rs.8,200

9 Received cheque in full settlement of Das‘s a/c Rs.8,000

10 Paid to settle Rahim‘s a/c Rs.7,000

12 Purchased office furniture by cheque Rs.3,500

13 Bought goods from Ghosh Rs.10,400

15 Paid carriage Rs.200

18 Bank collected dividend Rs.500

20 Withdrawn from bank Rs.2,000

25 Paid wages Rs.1,500

27 Paid to Ghosh by cheque Rs.10,000

Prob:3 (Jan 2005) Rule the Three column cash book of a merchant and record there in

the following transactions. Balance the cash book on 31st

July 1998.

July 1998 1 Commenced business with Rs.10,000


3 Purchased goods by cheque Rs.3,000

4 Paid rent Rs.150

12 Purchased furniture by cheque Rs.1,800

15 Cash sales Rs.650

16 Gave Gopal a cheque Rs.970 (allowed discount by him Rs.25)

18 Received from Narayan a cheque for Rs.1,500 and he was allowed a

discount of Rs.30


25 Paid wages Rs.60

26 Drew for office use Rs.400 from bank

27 Drew for personal use Rs.100 from bank

28 Issued a cheque to Amar was dishonored

30 Furniture purchased for resale for cash Rs.250.

Prob:4 Prepare a three column cash book from the following transactions:

2004, Oct 1 Cash in hand Rs.1,800

Cash at bank Rs.11,000

5 Discount a bill at 5% through bank Rs.4,000.

7 Bought goods by cheque Rs.7,000

8 Bought goods by cash Rs.500



10 Honoured our own acceptance by cheque Rs.5,000

14 Paid trade exps.

16 Paid into bank

18 Ramesh who owed us Rs.500 became bankrupt and paid us

50p in the rupee

20 Received cash from Mohan Rs.400

Allowed discount Rs.10

23 Withdrew from bank Rs.400

Paid to Ganesh Rs.300

Allowed us discount Rs.10

24 Received Rs.2000 for a bill from Hari and deposited the

same into bank

25 Withdrew from bank for private exps. Rs.300


28 Received cheque for goods sold Rs.9,000

29 Received payment of a loan of Rs.5,000 and deposited Rs.3,000 out of it

into bank.

30 Bank charges as per pass book Rs.5

4. Petty Cash Book Petty cash book is the book which is used for the purposes of recording the

payment of petty cash expenses. E.g.Postage & stationary exps.

Differences between Main cash book and Petty cash book

1. In the main cash book all cash receipts are recorded whereas in the petty cash

book only cash receipts from main cashier are recorded.

2. In the main cash book all cash payments except payments of petty cash exps., are

recorded whereas in the petty cash book only payment of petty cash expenses are

recorded.

Imprest System of Petty Cash Book The amount which the main cashier hands over to the petty cashier in

order to meet the petty cash expenses of a given period is known as ‗imprest‘ or ‗float‘

Advantages of Imprest System of Petty Cash Book

1. Control over mistakes: Chances for mistakes are reduced since the chief cashier

regularly examines petty cash book.

2. Control over petty exps.: Petty expenses are kept within the limits of imprest since

the petty cashier can never spend more than the available petty cash.

3. Control over fraud: Misappropriation if any, is always kept within the limits of

imprest.

4. Saving of chief cashier‘s time: The time of chief cashier is saved when petty

exps.are recorded in petty cash book.



Format Petty Cash Book Prob:1 From the following, prepare petty cash book on imprest system of Laxman & Co. for the month of Jan 2001.

2001 Jan1 Opening balance Rs.100

2 Paid for stamps Rs.12

3 Paid cleaners wages Rs.15

4 Paid for bus fare Rs.16

5 Paid tea etc. Rs.15

6 Paid for repairs of cycle Rs.10

7 Paid for advertisement Rs.30

8 Drew imprest from head cashier

9 Paid for cartage Rs.10

10 Paid for traveling exps. Rs.25 11 Paid for Telegram Rs.15

12 Paid for entertainment to salesman Rs.20

13 Paid for repairs of cycle Rs.10

14 Paid for printing bill Rs.5

15 Paid for stationary Rs.3

16 Drew imprest from head cashier

Preparation of Final Accounts / Statements Module 3

FINAL ACCOUNTS

Final accounts consists of two statements i.e. (I) Income

Statement or Trading, profit & Loss A/c and (ii) Balance Sheet.

Income statement which shows the net results of the firm.

Balance sheet shows the financial position of the business. As

these two statements provide the final result of any business,

they are called final accounts.

Income Statement • Income statement consists of both

• Trading A/c and

• Profit & Loss A/c

(i) Trading A/c The object of this account is to arrive at the results of trading operation.I.e.to find

out that the organization has derived profit or loss out of buying & selling operation.



Gross profit 67,800 Rent 3,000

Salaries 7,000 Insurance 3,150

General exp 500 Discount (Dr.) 3,250 Depn.on furniture 650 Bad debts 1,250

Provision for Provision for

19

• Profit & Loss A/c This account is prepared to ascertain the net profit/loss of the business during an

accounting period. The P&L a/c can be defined as a statement that summarizes the

revenues and expenses of an accounting period so as to reflect the changes in

various critical areas of firm‘s operations.

Prob:1 Prepare a trading a/c for the year ended 31st

Dec,2005, from the following

information

Opening stock 30,000

Debit Credit

Rs. Rs.

Purchases 3,10,000

Purchase Returns 8,000

Sales 4,50,000

Sales Returns 6,000

Closing stock was valued at Rs.40,000

Prob:1 From the following balances extracted at the close of the year ended 31st

Dec,

1998, prepare the Profit & Loss a/c as at that date. Rs.

Rs.

Gross Profit 1,53,000 Carriage outward 7,500

Salaries 27,500 Discount (Dr.) 1,500

Apprentice Rent 3,300

Premium(Cr) 4,500 Traveling exp 600

Fire Insur. Premium 2,700 Rates & taxes 1,050

Printing & Stationary 750 Trade exps. 900

Bad debts 6,300

Prob:2 Prepare P&L a/c as on 31st

Dec, 1999 from the following information: Rs.



Rs. Rs.

Capital 35,000 Purchases 46,850

Building 18,750 Wages 2,500

Machinery 9,250 Electric charges 190

Debtors 7,000 Printing & Stationary 2,000 General exp. 800 Carriage inwards 850 Rent paid 3,710 Cash at bank 3,000 Drawings 650 Return outwards 110 Salaries 1,110 Cash in hand 1,800 Dis. Allowed 200 Sundry creditors 10,000

Stock (1st

Jan) 16,500 Returns inwards 450

Sales 65,900 Bills payable 5,000 Closing stock as Rs.18,210

Doubtful debts 250 Discount on Drs. 420

Discount recd. 1,850 Commission (cr) 1,000

Int. on investment 750 Traveling exp 1,500

Postage 270

Balance Sheet

A Balance Sheet is a statement depicting the financial position of the business on a specific date. Balance sheet is defined as a still-photograph of the state of affairs of

the business at a particular date. The financial position of a business is revealed by its

assets and liabilities on a particular date.

Prob:1 From the following particulars, prepare a balance sheet as at 31st

Dec, 1998

Rs. Rs.

Capital 75,000 Loan to Kumar 7,500

Buildings 82,500 Investments 4,500

Furniture 3,750 Cash in hand 300

Bills receivable 5,250 Cash at bank 5,250

Sundry debtors 30,000 Drawings 4,500

Bills payable 3,750 Net profit 58,350

Sundry creditors 23,700 Stock 10,500

Machinery 6,750

Prob:2 From the following balances, prepare Trading and Profit Loss A/c for the year

ending 31st, Dec 2003 and Balance Sheet on that date.



Prob:3 The following is the Trial Balance of Sri.Balaji on 30th

June 2003

Debit Credit

Rs. Rs.

Capital 1,86,000

Drawings 15,735

Stock (1-7-02) 17,280

Sundry creditors 18,900

Sundry debtors 43,500

Machinery

60,000

Patents 22,500 Freehold land 30,000 Buildings Sales

Purchase

Sales returns

96,000

1,22,025

2,040

2,96,340

Purchase returns Cash in hand

1,620

1,500

Cash at bank 7,890 Insurance 1,800 General exp 9,000 Salaries 45,000 Wages Factory fuel and power

Carriage on purchases

25,440

6,120

14,190

Carriage on sales 9,600

Rent 27,000

5,29,740 5,29,740

The following adjustments are to be effected:

• Stock on 30th

June 2003 Rs.20,400 • 5% on sundry debtors is to be written off as bad

• Salaries for the month of June 2003 amounting to Rs.4,500 were unpaid.

• Insurance include a premium of Rs.510 on a policy expiring on Dec, 31st

2003. • Rent Rs.3,000 is accrued but not received.

• Depreciate Machinery @ 10% and Patents @20%

You are required to prepare Trading, Profit & Loss A/c and the Balance Sheet as

on June 2003.

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Debit Stock 1.1.06

Rs. 6,65,000

Credit Rs. Equity share Capital 20,00,000

Discounts & rebates 30,000 (2,00,000 shares of Rs.10 each)

Carriage inwards 57,500 4% Debentures 5,00,000

Patterns 3,75,000 Bank overdraft 7,57,000

Rates, tax & insurance 55,000 Sundry creditors 2,40,500 Furniture & Fixtures 1,50,000 Sundry Creditors 2,40,500

Materials purchased 12,32,500 Sales 36,17,000

Repairs 46,500 Rent (cr) 30,000

Wages 13,05,000 Transfer fees 6,500

Coal & fuel 63,000 Profit & Loss A/c (cr) 67,000

Freehold land 12,50,000 Plant & Machinery 7,50,000 Engg. Tools 1,50,000 Goodwill 3,75,000 Sundry Debtors 2,66,000

COMPANY ACCOUNTS

Prob:1 The following are the balances of XYZ Ltd. as on 31st

March, 2005:

Debit Rs. Credit Rs. Premises 30,72,000 Share capital 40,00,000

Plant 33,00,000 12% Debentures 30,00,000

Stock 7,50,000 Profit & Loss A/c 2,62,500

Debtors 8,70,000 Bills payable 3,70,000

Goodwill 2,50,000 Creditors 4,00,000

Cash and bank 4,06,500 Sales 4,50,000

Calls in arrear 75,000 General reserve 2,50,000

Interim dividend paid 3,92,500 Bad debts provision on

Purchases 18,50,000 1.4.04 35,000

Preliminary exp 50,000

Wages 9,79,800

General exp 68,350

Salaries 2,02,250

Bad debts 21,100

Debentures Int. paid 1,80,000

1,24,67,500 1,24,67,500

Adjustments • Depreciate plant by 15% • Write off Rs5,000 from Preliminary expenses.

• Half year‘s Debenture Interest due.

• Credit 5% provision on debtors for doubtful debts.

• Provide for Income Tax @ 50%

• Stock on 31st

March, 2005 was Rs.9,50,000 Prepare Final Accounts of the company.

Prob:2 Sherry Engg. Ltd. have authorized capital of Rs.50 lakhs divided into 5,00,000

equity shares of Rs.10 each. Their books show the following balances as on 31st

Dec, 2006.



Bills receivables 1,34,500

Advertisement 15,000

Commission & brokerage 67,500

Business exp. 56,000

Bank Current A/c 45,500

Cash in hand 8,000

Debenture interest

(for half year 31.6.06) 10,000

Interest – banks 91,000

Preliminary exp. 10,000

Calls in arrear 10,000

Additional Information

The stock as on 31st

Dec 2006 was Rs. 7,08,000. Outstanding wages Rs.25,000 and

outstanding business expenses Rs.25,000. Dividend declared @ 10% on paid-up

capital.

Charge Depreciation: Plant & Machinery @5%; Engg. Tools @ 20%; Patterns @ 10%;

Furniture & Fixtures @10%

Provide 2% on debtors as doubtful debts after writing off Rs.21,500 as bad debts.

Write off preliminary expenses Rs.5,000 and create debenture redemption reserve

Rs.50,000. Provide Rs.2,40,000 for income tax. Prepare Final Accounts of this company.

Prob:3 On 31st

March, 2005 the following balances appears in the books of the Alpha

Hotels Ltd.

Debit Rs. Credit Rs. Interest on debentures 60,000 12% Mortgage debentures 5,00,000 Rates & Taxes 18,000 Share capital 40,00,000

Stock of provisions on General reserve 5,00,000

1.4.04 2,50,000 Unclaimed dividends 15,000

Purchase of provisions 25,00,000 Prov. For bad debts 50,000

Salaries and wages 7,50,000 Trade Creditors 2,50,000

Provident fund contbn. 30,000 Expenses owing 80,000

Misellaneous exp. 50,000 Visitors‘ credit balances 10,000

Directors fees 24,000 Staff Provident fund 7,50,000

Managing director‘s P & L A/c 81,000

Salary 2,15,000 Income from boarding & lodging 51,00,000

Land 15,00,000 Misc. receipts 65,000

Buildings 50,00,000 Depreciation A/c:

Furniture & Fittings 15,00,000 Buildings 20,00,000

Linen, Crockery, Glassware

Cutlery and utensils 3,20,000 Furniture 10,00,000

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Sundry debtors 3,50,000 Linen, Crockery etc. 1,80,000

Prepaid exps. 25,000

Advance against 15,00,000

purchase of Buildings

Cash in hand 15,000

Balance at bank 4,74,000

1,45,81,000 1,45,81,000

After taking the following information into account prepare the company‘s

balance sheet as on 31st

March 2005 and its profit & loss a/c for the same period:

• Stock of provisions on 31st

March, 2005 was valued at 3,00,000

• Provide Rs.1,00,000 for depreciation of furniture and fittings; Rs.20,000 for

depreciation of linen, crockery etc.

• Make a provision for taxation @50%

• The directors decide to recommend a dividend @10% on the paid up capital of the

company and transfer the remaining balance in profit & loss a/c to general reserve.

• The entire paid up share capital of the company consists of fully paid equity shares

of Rs.10 each.

Prob:4 (July 2005) X Ltd. was registered with a nominal capital of Rs.10,00,000 divided

into shares of 10 each, of which 40,000 shares had been issued and fully paid. The

following is the trial balance extracted on 31.12.2003.

Stock (1.1.2003) 1,86,420 Manufacturing wages 1,09,740

Manufacturing exp. 19,240

Purchases and sales 8,21,460 11,69,900

Repair to machinery 8,610

Carriage inwards 4,910

Carriage outwards 9,260

Transfer fees 40

Advance income tax 14,290

Bank loan 50,000

Interest on loan 1,250

Debtors and creditors 1,64,400 92,220

P/L A/c (1.1.2003) 8,640

Returns 12,640 9,810

Bank current A/c 6,860

Cash in hand 1,920

Lease hold factory 64,210

Plant & machinery 78,400

Loose tools 12,500

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Share capital 4,00,000

Commission 8,640

Calls in arrears 1,000

Electricity charges 17,610

(factory Rs.14,210, office Rs. 3400)

Directors fees 12,000

Office salaries 13,000

Audit fees 1,250

Office furniture 5,000

Preliminary exp. 6,000

Good will 1,50,000

17,30,610 17,30,610

You are required to prepare trading and P/L A/c for the year ending 31.12.03 and

a balance sheet as at that date after taking in to consideration the following

adjustments.

• Write off 1/3 of preliminary exp.

• Depreciation is to charged at 20% on plant and machinery and 10% on furniture.

• Manufacturing wages Rs.1,890 and offices salaries Rs.1,200 are outstanding.

• Provide for interest on bank loan for 6 months.

• Stock was valued at Rs.1,24,840 and loose tools at Rs.10,000

• Reserve Rs.8,500 on debtors for doubtful debts.

• Reserve further Rs.3,120 for discount on debtors

• The directors recommended dividend at 5% for the year ending 31.12.2003 after

providing for taxes amounting to Rs.23,000.

Module-4

Analysis of Financial Statement

INTRODUCTION TO FINANCIAL ANALYSIS

Analysis means methodical classification of the data given in the financial

statements.

Interpretation means explaining the meaning and significance of the data so



simplified.

Financial Analysis is the process of identifying the financial strengths and

weakness of the firm by properly establishing relationships between the items of

the balance sheet and the profit and loss account.

Different tools of financial Analysis The various tools used for the analysis of the financial statements of a firm are:

1. Comparative Financial Statements

2. Common size Financial Statements

3. Trend Analysis

4. Ratio Analysis.

ILLUSTRATION

The following illustration will be used for explaining the various tools of

financial analysis:

Illustration: From the following profit and loss Account and Balance sheets of

Swadeshi Polytex Ltd. For the year ended 31st

December 1987 and 1988, you are

required to prepare a Comparative Income Statement and a Comparative Balance Sheet.

Profit and Loss Account (in lakhs

of rupees)

Particulars 1987 Rs.

1988 Rs.

Particulars 1987 Rs.

1988 Rs.

To Cost of goods sold To Operating Expenses:

Administrative expenses

Selling expenses

To Net Profit

600

20

30

150

800

750

20

40

190

1000

By Net Sales 800

800

1000

1000

Balance Sheet (in lakhs

of rupees)

Liabilities 1987 Rs.

1988 Rs.

Assets 1987 Rs.

1988 Rs.

Bills Payable Sundry Creditors

Tax Payable

14% Debentures

16% Preference Capital

Equity Capital

Reserves

50 150

100

100

300

400

200

1,300

75 200

150

150

300

400

245

1, 520

Cash Sundry Debtors

Stock

Land

Building

Plant

Furniture

100 200

200

100

300

300

100

1,300

140 300

300

100

270

270

140

1,520



COMPARATIVE FINANCIAL STATEMENTS

A simple method for financial analysis is Comparative Financial

Statements. Comparative financial statements will contain items at least for two

periods. Changes – increases and decreases – in income statement and balance sheet

over period are shown.

Comparative Financial Statements can be prepared for more than two periods or

on more than two dates.

Illustration: From the illustration of M/s Swadeshi Polytex Ltd prepare

comparative income statement comparative balance sheet.

Swadeshi Polytex Ltd.

Comparative Income Statement for the years ended 31st

December 1987 and 1988

(in lakhs of rupees)

Particulars

1987

Rs.

1988

Rs.

Absolute increase(+)

or decrease

(-) in 1988

Rs.

Absolute increase (+)

or

decrease(-)

in 1988

%

Net Sales Less: Cost of goods sold

Gross Profit

Operating Expenses:

Administrative expenses

Selling expenses

Total Operating expenses

Net Profit

800 600

200

20

30

1000 750

250

20

40

+200 +150

+50

--

+10

+25 +25

+25

--

+33.33

50 60 +20 +20

150

190

+40

+26.67



1987

Rs.

1988

Rs.

Absolute increase(+)

or decrease

(-) in 1988

Rs.

Absolute increase (+)

or

decrease(-)

in 1988

%



ASSETS

Current Assets Cash

Debtors

Stock

Total Current Assets

Fixed Assets

Land

Building

Plant

Furniture

Total Fixed Assets

Total Assets

LIABILITIES & CAPITAL Current liabilities Bills Payable

Sundry creditors

Taxes Payable

Total Current Liabilities

Long term Liabilities

14% Debentures

Total Liabilities

Capital and Reserves

16% Preference Capital

Equity Capital

Reserves

Total Share Holders Funds

Total Liabilities and capital

100

200

200

500

100

300

300

100

800

1,300

50

150

100

300

100

400

300

400

200

900

1,300

140

300

300

740

100

270

270

140

780

1,520

75

200

150

425

150

575

300

400

245

945

1,520

+40

+100

+100

+240

--

-30

-30

+40

-20

+220

+25

+50

+50

+125

+50

+175

--

--

+45

+45

220

+40

+50

+50

+50

--

-10

-10

+40

-2.50

+17

+50

+33.33

+50

+41.66

+50

+43.75

--

--

+22.50

+5.00

17.00



Swadeshi Polytex Ltd.

Comparative Balance Sheet for the years ended 31st

December 1987 and 1988

(in lakhs of rupees)

COMMON SIZE FINANCIAL STATEMENTS

Comparative Financial Statements can be prepared for more than two periods or

on more than two dates. However, it becomes very cumbersome to study the trend with

more than two periods data. Trend percentages are more useful in such cases.

Common size financial statements are those in which figures reported are

converted into percentages to some common base. In the income statement, the sale

figure is assumed to be 100 and all figures are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total of assets or liabilities is taken as 100 and all figures are expressed as a percentage of this total.

Illustration: On the basis of the data given in the previous illustration pertaining to

Swadeshi Polytex limited, prepare the common size income statement and common size

balance sheet for the years ended 31st

March 1987 and 1988.

Solution:

Swadeshi Polytex limited

Common Size Income Statement for the years ended 31st

March 1987 and 1988

Particulars 1987 1988

Figures in %

Net sales 100 100

Less: Cost of goods sold

75 75

GROSS PROFIT 25 25

Operating Expenses:

Administrative Expenses 2.50 2.00

Selling Expenses 3.75 4.00

Total Operating Expenses

6.25 6.00

Interpretation



The above statement shows that though in absolute terms, the cost of goods has

gone up, the percentage of its cost to sales remains consistent at 75%. This is the reason

why the gross profit continues at 25% of sales. Similarly, n absolute terms the amount of

administrative remains the same but as percentage to sales it has come down by 0.5%.

Selling expenses have increased by0.25%. These all lead to net increase in net profit by

0.25%.

Swadeshi Polytex limited

Common Size Balance Sheet for the years ended 31st

March 1987 and 1988

Particulars

1987 1988 % %

100 100 CURRENT ASSETS Cash 7.70 9.21 Debtors 15.38 19.74 Stock 15.38 19.74 Total Current Assets 38.46 48.69 FIXED ASSETS Building 23.07 17.76 Plant 23.07 17.76 Furniture 7.70 9.21 Land 7.70 6.68 Total fixed assets 61.54 51.31

TOTAL ASSETS 100.00 100.00

Particulars 1987 1988

% % 100 100

CURRENT LIABILITIES Bills Payable 3.84 4.93 Sundry Creditors 11.54 13.16 Taxes payable 7.69 9.86 Total Current Liabilities 23.07 27.95 LONG TERM LIABILITIES 14% Debentures 7.69 9.86 CAPITAL & RESERVES 16% Preference share capital 23.10 19.72 Equity share capital 30.76 26.32 Reserves 15.38 16.15 Total Shareholders' Funds 76.93 72.05

TOTAL LIABILITIES AND CAPITAL 100 100

Interpretation The percentage of current assets to total assets was 38.46 in 1987. It has gone up

to 48.69 in 1988. Similarly the percentage of current liabilities to total liabilities



(including capital) has gone up from 2307 in 1987 to 27.95 in 1988. Thus the proportion

of current assets has increased by percentage of 10 as compared to increase in the

proportion of current liabilities, which is about 5%. This has improved the working

capital position of the company. There has been a slight deterioration in the debt-equity

ratio though it continues to be sound. The proportion of shareholders‘ funds in the total

liabilities has come down from 69.24% to 61.19% while that of debenture holders has

gone up from 7.69% to 9.86%.

TREND ANALYSIS

Trend percentages are immensely useful in making a comparative study

of financial statements for several years.

The method of calculating trend percentages involves the calculation of

percentage relationship that each item bears to the same item in the base

year.

Any year may be taken as the base year. It is usually the earliest

year. Any intervening year may also be taken as the base year.

Each item of base year is taken as 100 and on that basis the percentage

for each item of the years is calculated.

These percentages can also be taken as Index Numbers showing relative

changes in the financial data resulting with the passage of time.

Illustration: From the following data relating to the assets side of the

balance sheet of Kamadhenu Ltd., for the period 31st

December 1985 to

31st

December 1988 you are required to calculate the trend percentage taking

1985 as the base year.

In lakhs of Rs. As on 31st December Assets 1985 1986 1987 1988

Cash 100 120 80 140 Debtors 200 250 325 400 Stock-in-trade 300 400 350 500 Others current assets 50 75 125 150 Land 400 500 500 500 Building 800 1,000 1,200 1,500 Plant 1,000 1,000 1,200 1,500

TOTAL 2,850 3,345 3,780 4,690

Solution

ASSETS December 31st (Rupees in lakhs) Trend percentages Base year 1985

1985 1986 1987 1988 1985 1986 1987 1988

Current Assets

Cash 100 120 80 140 100 120 80 140



Debtors 200 250 325 400 100 125 163 200 Stock-in-trade 300 400 350 500 100 133 117 167

Other Current Assets 50 75 125 150 100 150 250 300

Total Current Assets 650 845 880 1190 100 129 135 183

Fixed Assets

Land 400 500 500 500 100 125 125 125 Building 800 1000 1200 1500 100 125 150 175

Plant 1000 1000 1200 1500 100 100 100 150

Total Fixed Assets 2200 2500 2900 3500 100 114 132 159

Ratios for Financial Statement Analysis

A ratio gives the mathematical relationship between one variable and another.

Ratios are well known and most widely used tools for financial analysis.

The various types of ratios have been classified into the following categories:

1. Liquidity ratios

2. Turnover ratios

3. Profitability ratios

4. Ownership ratios

Earnings ratio

Dividend ratios

Leverage ratios -- Capital structure ratios

-- Coverage ratios

LIQUIDITY RATIOS

Liquidity implies a firm‟s ability to pay its debts in the short term. This ability

can be measured by the use of liquidity ratios. Short term liquidity involves the

relationship between current assets and current liabilities.

1. Current Ratio

Current Assets



Current Ratio = ----------------------------

Current Liabilities

Current assets include cash, marketable securities, debtors, inventories, loans and

advances and prepaid expenses. Current liabilities include loans and advances taken,

trade creditors, accrued expenses and provisions.

2. Quick Ratio This ratio is also termed as Acid Test Ratio.

Quick Assets

Quick Ratio = -----------------------------

Current Liabilities

Quick Assets = Current Assets – Inventories

TURNOVER RATIOS

3. Accounts Receivable Turnover Ratio

Accounts Receivable Ratio

(Debtors turnover ratio) = Net sales (or) Net Credit sales

Receivables Average Accounts Receivables

The average accounts receivable is obtained by adding the beginning receivables

of the period and the ending receivables and by dividing the sum by 2. The net sales or

net credit sales made by the firm should be taken for analysis.

4. Average Collection Period

The average number of days for which the debtors remain outstanding is

called the average collection period. It is calculated as under:

Average Collection period = 360

Average Accounts Receivables Turnover

(Or)

= Average Accounts Receivables



Average daily sales

5. Inventory turnover ratio

The liquidity of a firm‘s inventory may be calculated by dividing the cost of gods sold, by the firm‘s inventory. The inventory or

stock turnover, measures how fast the inventory is moving through the firm and generating sales. It is calculated by the following formula:

Inventory turnover = Cost of goods sold (or) Net sales

Average inventory Inventory

Where, average inventory is the average of the opening and closing

inventory in any year and inventory means only the closing inventory at the end of a

year.

6. Fixed Assets Turnover ratio

Fixed assets turnover ratio = Net sales (or) _Cost of goods sold

Fixed assets fixed sales

This ratio is supposed to measure the efficiency with which the fixed assets are

employed

7. Total Assets Turnover Ratio

Total Assets Turnover Ratio = Net sales

Total Assets.

Total assets are simply the balance sheet total at the end of the year.

PROFITABILITY RATIOS 8. Gross Profit Margin Ratio

Gross profit is the difference between the net sales and the cost of goods sold



Gross Profit Margin Ratio = Gross profit

Net sales

This ratio shows the margin left after meeting manufacturing costs.

9. Net Profit Margin Ratio

Net Profit Margin Ratio = Net profit

Net sales

It shows the earnings left for the shareholders (both equity and preference) as a

percentage of net sales.

10. Earnings power

Earnings is a measure of the operating profitability and is arrived at by the following

formula:

Earnings Power = Earnings before interest and taxes

Average total assets

EARNINGS RATIO 11. Earnings per share

The shareholders are concerned about the earnings of the firm in two ways. One is the availability of the funds with the firm to pay their dividends and the other is to expand

their interest in the form of retained earnings that the firm can use to improve its

profitability. Earnings are expressed on a per share basis which is in short called EPS.

Earnings Per Share = Net Profit after Tax

Number of outstanding shares

12. P/E Ratio It is calculated as under

Price – Earnings Ratio = Market Value per share

Earnings per share

13. Capitalization Rate

The capitalisation rate is just the inverse of the Price-Earnings Ratio.

Capitalisation Rate = Earnings per share



Market Value per share

LEVERAGE RATIOS

Leverage refers to the use of debt finance. While debt capital is a cheaper source

of finance, it is also riskier source of finance. Leverage ratios help in assessing the risk

arising form the use of debt capital.

14. Debt Ratio

The firm may be interested to know the proportion of interest bearing funded debt in the capital structure. Then this debt ratio will be helpful. It is arrived at by

dividing the total debt (TD) by the capital employed (CE) or Net Assets (NA)

(TD)

Debt Ratio = Total Debt (TD) = Total Debt

(CE)

Total Debt (TD) + Net Worth (NW) Capital Employed



Note: 1. Capital Employed = Net Assets = Net Fixed Assets + Net Current Assets

2. Net Current Assets = Current Assets – Current liabilities excluding

interest

bearing short term debt for working capital.

NFA + CA = NW + TD + CL

NFA + CA – CL = NW + TD

NFA + NCA = NW + TD

NA = CE

Because equality of capital employed and Net assets, the debt ratio can also expressed as

Debt Ratio = Total Debt (TD)

Capital Employed (CE)

15. Debt-Equity Ratio This ratio indicates the relative contributions of creditors and owners

Debt – Equity ratio = Debt

Equity

CASH FLOW STATEMENT MEANING

Cash flow statement is a statement, which describes the inflows and outflows of cash and cash equivalents in an enterprise during a specific period of time. Such

statement takes into account the receipts and disbursements of cash. A cash flow

statement summarises the causes of changes in cash position of a business enterprise

between two dates.

CLASSIFICATION OF CASH FLOWS

The cash flow are classified into three main categories as:

1. Cash flow from operating activities

2. Cash flow from investing activities

3. Cash flow from financing activities

1. CASH FLOW FROM OPERATING ACTIVITIES

Operating activities are the principal revenue – producing activities of the enterprise and other activities that are not investing or financing activities. Cash flow

from operating activities is principally derived from the principal revenue-producing

activities of the enterprise.



The cash inflows from operating activities include receipts from customers for sales

or goods and services (including collection from debtors). Cash outflows from

operating activities include payments to suppliers for purchase of materials and for

services, payments to employees for services and payments to governments for tax duties.

2. CASH FLOW FROM INVESTING ACTIVITIES

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. It involves making and collecting of loans

and acquiring and disposing of debt and equity instruments and fixed assets.

The cash inflows from investing activities are receipts from collection of loans,

receipts from sales of shares, debt or similar instruments of other enterprises, receipts

from sales of fixed assets, and interest and dividends received on loans and investments.

Cash outflows from investing activities are disbursements of loans, payments to acquire

shares, debt or similar instruments of other enterprises, and payments (including advance

and down payments) to acquire fixed assets.

3. CASH FLOW FROM FINANCING ACTIVITIES

Financing activities are the activities that result in change in the size and consumption of the owners capital (including preference share capital in case of a company) and

borrowings of the enterprise.

Cash inflows from financing activities are proceeds from issuing shares or other

similar instruments, debentures, mortgages, bonds and other short or long-term

borrowings. Cash outflows from financing activities are the payments of dividends,

payments to acquire or redeem shares or other similar instruments of the enterprise,

repayments of amounts borrowed, principal payments to creditors who have extended

long-term credit, and interest paid.

Cash flow statement for the year ended

Particulars Rs. Rs.

Cash flows from Operating Activities

Either

Cash receipts from customers

(-) Cash paid to customers

Cash generated from operations

(-) Income tax paid

Cash flow before extra ordinary items

Extraordinary items

Net cash from (used in) operating activities

OR

Net profit before tax and extraordinary items

Adjustments for non-cash and non-operating items

xxxxx

(xxx)

xxxxx

xxxxx

(xxx) xxxxx

xxxxx

xxxxx

xxx



38



[List of individual items such as depreciation, foreign

exchange loss, loss on sale of fixed assets, interest

Income, dividend income, interest expense etc.]

Operating profit before working capital changes

Adjustments for changes in current assets and

Current liabilities ( list of individual items)

Cash generated from (used in) operations before tax

(-) Income tax paid

Cash flow before extra ordinary items

Extraordinary items

Net cash from (used in) operating activities

Cash flow from Investing Activities

Individual items of cash inflows and cash outflows from investing activities

[Such as purchase/sale of fixed assets, purchase or sale of investments,

Interest received, dividend received etc.]

Net cash from (used in) investing activities

Cash flows from Finance Activities

Individual items of cash inflows and cash outflows from financing activities

[Such as proceeds from issue of shares, long-term borrowings, repayments

of long-term borrowings, interest paid, dividend paid etc.

Net cash from (used in) investing activities

Net Increase (Decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

Cash and cash equivalents at the end of the period

xxxxx

xxxx

xxxxx

xxxxx

xxx

xxxx

(xxx) xxxx

xxxx

xxx

xxx

xxx

xxxx

xxxx

xxxx

xxx

xxxxx

xxxxx

CASH INFLOWS ACTIVITIES CASH

OUTFLOWS

Payments to suppliers and

employees for materials

and services

Receipts from customers

for sales of goods and

services activities

OPERATING ACTIVITIES

Receipts from sale of

fixed assets



Payments to

government for

taxes and duties

Payment for

purchase of

fixed assets



Receipts from sales of investments and fro collection of loans

INVESTING ACTIVITIES

Receipts from interest

and dividends on loans

and investments

Payments for purchase

of investments and

making loans

Receipts from

issuance of share

capital

Payments for

dividends on share

capital

Receipts from

issuance of debentures

FINANCING

ACTIVITIES

Payments for principal

on debentures and

other borrowings

Receipts from other

long-term borrowings

Payments for interest

on debentures and

other borrowings



Module-5

ACCOUNTING STANDARDS

The Accounting standards bring uniformity in the preparation and presentation of

financial statements and aids in comparison of different financial statements of

companies in the same or different industries.

Procedure for framing Accounting Standards

The International Accounting Standards are issued by the IASC

These Standards are received by ICAI assigned to ASB

The Accounting standards are issued under the authority of the council of ICAI. So far

the ASB of ICAI has issued 28 Accounting standards as shown below

Accounting Standard

Title

Mandatory for

Accounting period

beginning on or

after



AS-1 Disclosure of Accounting Policies 1.4.1991

AS-2(Revised) Valuation of inventories 1.4.1999

AS-3(Revised) Cash Flow Statements 1.4.2001

AS-4(Revised) Contingencies and Events occurring after Balance Sheet Date

1.4.1995

AS-5(Revised) Net Profit or Loss, prior period items and changes in Accounting policies

1.4.1996

AS-6(Revised) Depreciation Accounting 1.4.1995

AS-7(Revised) Accounting for construction contracts 1.4.2003

AS-8 Accounting for Research and Development 1.4.1991

AS-9 Revenue Recognition 1.4.1991

AS-10 Accounting of Fixed Assets 1.4.1991

AS-11(Revised) Accounting for the effect of changes in foreign exchange rates

1.4.1995

AS-12 Accounting for Government Grants 1.4.1994

AS-13 Accounting for Investments 1.4.1995

AS-14 Accounting for Amalgamations 1.4.1994

AS-15 Accounting for retirement benefits in the financial statements of employers

1.4.1995

AS-16 Borrowing costs 1.4.2000

AS-17 Segment reporting 1.4.2001

AS-18 Related Party Disclosures 1.4.2001

AS-19 Leases 1.4.2001

AS-20 Consolidated Financial Statements 1.4.2001

AS-21 Earnings per share 1.4.2001

AS-22 Accounting for taxes on income 1.4.2001

AS-23 Accounting for investments in consolidated finance statements

1.4.2002

AS-24 Discounting operations 1.4.2004

AS-25 Interim financial reporting 1.4.2002

AS-26 Intangible assets 1.4.2003

AS-27 Financial reporting of interest in joint ventures 1.4.2002

AS-28 Impairment of Assets 1.4.2004

AS-29 Provisions, Contingent Liabilities and Contingent Assets

1-4-2004



IFRS vs. Indian Accounting Standards

The International Financial Reporting Standards refer to the reporting standards of finance as

set by the international accounting standards. Both IFRS and Indian Accounting Standards

have different accounting standards. However, with the growing market trend, the need of a

common set of accounting standards was felt by all. Hence, IFRS is to be followed. However,

with the differences in the standards existing between both the bodies, a careful handling is to

be carried out. Following are few changes that will be made in case IFRS is issued and made

compulsory:

•AS-1: Disclosure of Accounting principles

IFRS-/IAS-1: Adoption of international financial reporting standards/presentation of

financial statements.

•AS-3:cash flow statements

IAS-7: cash flow statements

•AS-4: events after the balance sheet date

IAS-10: events recorded after the balance sheet date

• AS-5: changes in accounting policies and accounting errors

IAS-8: prior period changes and accounting policies and errors changes

•AS-6 and AS-10: Depreciation and fixed assets

IAS-16: plants, property and equipment‘s

• AS-9: revenue recognition

IAS-18: revenue

The above mentioned standards were some of the examples to the changes in accounting standards

of both the bodies. Not only that, IFRS deals with the balance sheet in the reverse manner as ours.

The first emphasis is laid on to the assets in the order of liquidity. The next recorded details are that

of the liabilities starting with the borrowings. Then finally the next recorded details are that of the

equity capital which is completely

opposite according to the Indian Accounting standards



Module-VI

Audit of a company

Audit means a systematic verification of the books of a company to give a true and fair

view about its working and also about the financial results of the company.

In India only a Chartered Accountant who has passed the professional

examination conducted by the Institute of Chartered Accountant can conduct the audit and

certify under his hand about his opinion on the maintenance of the books of accounts.

The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal

auditor or an independent external auditor as a result of an internal or external audit or

evaluation performed on a legal entity or subdivision thereof (called an

―auditee‖). The report is subsequently provided to a ―user‖ (such as an individual, a

group of persons, a company, a government, or even the general public, among others) as an

assurance service in order for the user to make decisions based on the results of the audit.

An auditor‘s report is considered an essential tool when reporting financial information to users,

particularly in business. Since many third-party users prefer, or even require financial information

to be certified by an independent external auditor, many auditees rely on auditor reports to certify

their information in order to attract investors, obtain loans, and improve public appearance. Some

have even stated that financial information without an auditor‘s report is ―essentially worthless‖

for investing purposes

There are four common types of auditor‘s reports, each one presenting a different situation

encountered during the auditor‘s work. The four reports are as follows:

1. Unqualified Opinion

An opinion is said to be unqualified when the Auditor concludes that the Financial Statements give

a true and fair view in accordance with the financial reporting framework used for the preparation

and presentation of the Financial Statements. An Auditor gives a Clean opinion of Unqualified

Opinion when he or she does not have any significant reservation in respect of matters contained in

the Financial Statements. The most frequent type of report is referred to as the Unqualified

Opinion, and is regarded by many as the equivalent of a ―clean bill of health‖ to a patient,[2]

which

has led many to call it the

Clean Opinion, but in reality it is not a clean bill of health, because the Auditor can only

provide reasonable assurance that there are no material misstatements within the Financial

Statements.[3]

This type of report is issued by an auditor when the financial statements presented

are free of material misstatements and are represented fairly in accordance with the Generally

Accepted Accounting Principles (GAAP), which in other words means that the company‘s

financial condition, position, and operations are fairly presented in the financial statements. It is

http://en.wikipedia.org/wiki/Disclaimer

http://en.wikipedia.org/wiki/Internal_auditor

http://en.wikipedia.org/wiki/External_auditor

http://en.wikipedia.org/wiki/Audit

http://en.wikipedia.org/wiki/Evaluation

http://en.wikipedia.org/wiki/Juristic_person

http://en.wikipedia.org/wiki/Company

http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/General_public

http://en.wikipedia.org/wiki/Assurance

http://en.wikipedia.org/wiki/Assurance

http://en.wikipedia.org/wiki/Auditor%27s_report#cite_note-crfonline-1

http://en.wikipedia.org/wiki/Auditor%27s_report#cite_note-2



the best type of report an auditee may receive from an external auditor.

2. Qualified Opinion report A Qualified Opinion report is issued when the auditor encountered one of two types of situations

which do not comply with generally accepted accounting principles, however the rest of the

financial statements are fairly presented. This type of opinion is very similar to an unqualified or

―clean opinion‖, but the report states that the financial statements are fairly presented with a

certain exception which is otherwise misstated. The two types of situations which would cause an

auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP – this type of qualification occurs when one or more areas of

the financial statements do not conform with GAAP (e.g. are misstated), but do not affect

the rest of the financial statements from being fairly presented when taken as a whole.

Examples of this include a company dedicated to a retail business that did not correctly

calculate the depreciation expense of its building. Even if this expense is considered

material, since the rest of the financial statements do conform with GAAP, then the auditor

qualifies the opinion by describing the depreciation misstatement in the report and

continues to issue a clean opinion on the rest of the financial statements.

Limitation of scope - this type of qualification occurs when the auditor could not audit one

or more areas of the financial statements, and although they could not be verified, the rest

of the financial statements were audited and they conform

GAAP. Examples of this include an auditor not being able to observe and test a company‘s

inventory of goods. If the auditor audited the rest of the financial statements and is

reasonably sure that they conform with GAAP, then the auditor simply states that the

financial statements are fairly presented, with the exception of the inventory which could

not be audited.

3. Adverse Opinion report An Adverse Opinion is issued when the auditor determines that the financial statements of an

auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is

considered the opposite of an unqualified or clean opinion, essentially stating that the information

contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee‘s

financial position and results of operations. Investors,

lending institutions, and governments very rarely accept an auditee‘s financial statements if the

auditor issued an adverse opinion, and usually request the auditee to correct the financial

statements and obtain another audit report.



4. Disclaimer of Opinion report A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the

auditor could not form, and consequently refuses to present, an opinion on the financial statements.

This type of report is issued when the auditor tried to audit an entity but could not complete the

work due to various reasons and does not issue an opinion. The disclaimer of opinion report can be

traced back to 1949, when the Statement on Auditing Procedure No. 23: Recommendation Made

To Clarify Accountant’s Representations When Opinion Is Not Expressed was published in order

to provide guidance to auditors in presenting a disclaimer.

Directors‟ report

This is essentially an account of a company‘s performance in the previous year and its

prospects as seen by its board of directors.

The objective is to give the reader a sense of the state of the business. It touches upon both

quantitative and qualitative issues.

Typically, it starts with a summary of the company‘s performance in the previous

year, and the dividends and bonuses declared.

Then, it launches into a discussion of which parts of the business did well and which didn‘t,

what were the conditions in the industry, the enabling factors and the limitations, and

the outlook for the business.

Provisions of Companies Act of 1956 Regarding Financial Statements

Sec 209 - Books of account to be kept by company.

Sec 209A - Inspection of books of account, etc., of companies.

Sec 210 - Annual accounts and balance sheet.

Sec 211 - Form and contents of balance sheet and profit and loss account.

Sec 215 - Authentication of balance sheet and profit and loss account.

Sec 219 - Right of members to copies of Balance Sheet and Auditors' Report.

Sec 220 - Three copies of Balance Sheet, etc., to be filed with Registrar.

Sec 224

Provisions of Companies Act of 1956 Regarding the Auditors

- Appointment and remuneration of Auditors.

Sec 226 - Qualifications and disqualifications of Auditors.

Sec 227 - Powers and duties of auditors.

Sec 229 - Signature of audit report, etc.

Sec 230 - Reading and inspection of auditor's report.



MAOCARO Under the powers conferred by S. 227(4A), the Central Government first issued an order called the manufacturing and other companies (auditor‘s report) order, 1975, (MAOCARO-1975).

This order came into force from 1-1-1976 and applied to all companies engaged in manu-

facturing, service, trading and finance activities. There were in all 22 items on which auditor was

required to give his specific report. With changes in economic environment, the above order was

replaced by another order called MAOCARO-1988 which come into force on 1-11-1988. This

order contained 27 items

on which auditor was required to make specific comments depending on the nature of activities

of the company. It may be noted that the 1988 order replaced 1975 order after

13 years. Now, after 15 years, the Central Government has issued, in consultation with ICAI, a

new order u/s.227(4A) called the Companies (Auditor‘s Report) Order, 2003. This can be called

‗CARO-2003‘ which has come into force from 1st July 2003. There are 33 items in CARO on

which the auditor has to make specific comments. Some of the items in MAOCARO-1988 and

CARO-2003 are common

and some items from MAOCARO are omitted. Since some additional responsibilities are being

placed on the auditor under CARO-2003, the discussion in this article is mainly restricted to the

new items added under this new order.

Back Ground:

With the introduction of CARO, the responsibility of the auditors as well as the

companies to which this report applies has increased.

This article makes an attempt to compare the reporting requirements in MAOCARO with

that prescribed in CARO. This will help the practicing members as well as members in

industry to understand the new requirement and comply with it.

Clause by Clause comparison of MAOCARO with CARO



Sr.

No.

Particulars

MAOCARO

CARO

1. Full name Manufacturing and

Other Companies

(Auditor's Report) Order

1988

Companies (Auditor's Report)

Order 2003

2. With effect from Accounting periods ending

on any day on or after 1st

November 1988

Accounting periods ending on

any day on or after 1st

July 2003

3. Applicability The order does not apply to Banking, Insurance

Company and Company

formed u/s. 25 of

Companies Act

The order does not apply to Banking, Insurance Company,

Company formed u/s. 25 of

Companies Act and private limited

company if:

paid up capital and reserves not

more that Rs. 50 Lacs and has not

accepted any public deposits and

does not have outstanding loan of

Rs. 10 Lacs or more from any

bank or financial institution and

does not have turnover exceeding

Rs. 5 Crs.

4. Clause relating to

Fixed Assets

Maintenance of proper records offixed assets,

physical verification of

fixed assets and

accounting of material

discrepancies on physical

verification

Same as MAOCARO

Whether any fixed assets

have been revalued during

the year and if so the basis

of revaluation should be

indicated

No such reporting is required

47



No such reporting is

required

If substantial part of fixed assets

have been disposed off during

the year whether it has affected

the going concern

5. Clause relating to Inventories

Whether physical verification carried out at

reasonable intervals in

respect of finished goods,

store, spare parts and raw

materials

Same as MAOCARO. However, instead ofmentioning finished

goods, stores, spare parts and raw

materials CARO mentions the

word "inventory". Thus, now WIP

can also be included in the list

which earlier was not there.

Whether procedures

relating to physical

verification of stocks

reasonable and adequate in

relation to the size of and

nature of the business of

the company. If not

inadequacies to be

reported

Same as MAOCARO

Whether material

discrepancies relating to

physical verification

properly accounted for

Same as MAOCARO. However,

one aspect added here is whether

the company is maintaining

proper records of inventory

Whether stock valuation

has been done in

accordance with accepted

accounting principles

Deleted

6. Clause relating to Loans granted and

taken from parties

listed in register

maintained u/s.

301and Companies

under the same

management as

defined u/s. 370 (1B)

No such reporting required The number of parties and amount involved in the transactions has to

be reported only for parties listed

in register maintained u/s. 301. No

reporting for companies under

same management

Whether rate of interest

and other terms and

conditions are prima facei

prejudicial to the interests

of the company


no reporting required for loans

granted to /taken from companies

under the same management



7. Clause relating to other loans or

advances in the nature

of loans granted or

Whether the parties to whom loans or advances in

the nature of loans are

given is regular in

Same as MAOCATO.

taken by the company repayment

No such reporting required Whether the rate of interest and

other terms and conditions of loans

(secured or unsecured) are prima

facei prejudicial to the interest of

the company

If the parties are not

regular in repayment,

whether reasonable steps

have been taken by the

company for

recovery/payment of the

principal and interest.


reporting required only if

overdue amount is more one

lakhs


Internal Control

procedures

Is there adequate internal control procedures

commensurate with the

size of and the nature of

the business of the

company relating to

inventory and fixed assets

and for the sale of goods.

Same as MAOCARO. However, one very important additional thing

to be reported is whether there is

a continuing failure to correct

major weaknesses in internal

control

9. Clause relating to transactions entered

with parties

mentioned in register

mentioned u/s. 301

No such reporting required Whether transactions that need to be entered into a register in

pursuance of section 301 have been

so entered

Whether transactions are

effected at market prices.

Reporting required only

for transactions exceeding

Rs. 50,000/-


the limit of Rs. 50,000/- has been

increased to Rs. 5,00,000/-


unserviceable or

damaged stores, raw

materials or finished

goods.

Whether any unserviceable or damaged stores, raw

materials or finished goods

are determined and

whether provisions for the

loss, if any, have been

made in the accounts

Deleted



Forensic Accounting

Module-VII

Forensic Accounting



A branch of accounting that uses investigative skills to determine the accuracy of a

company's financial statements in a legal dispute. The word forensic means "suitable for

a court of law." Thus, forensic accountants are used in fraud investigations, breach of

contract disputes, and other disagreements that require court action. Forensic accountants

are often retained by one or both parties in such dispute to bolster their cases

Example:

Embezzlement - Government Employees County government employees executed a massive fraud scheme in collusion with members of an outside organization to steal and sell close to $500,000 worth of County

property. We were engaged by County officials to provide forensic accounting services,

assist the police in the investigation and uncover other areas of fraud exposure that

existed in the government operations

NATURE AND INCIDENCE OF WINDOW DRESSING Window Dressing

It is the act or instance of making something appear deceptively attractive or favourable; something used to create a deceptively attractive or favourable impression.

The act or practice of giving something superficial appeal by skilful presentation.

Nature of Window Dressing 1. Inflate the sales from the current year by advancing the sales from the following

year.

2. Alter the ‗other income‘ figure by playing with non-operational figures like sale

of fixed assets.

3. Fiddle with the method and rate of depreciation. (A switch may be effected from

the written down value method to the straight line method or vice versa.)

4. Change the method of stock valuation from, say, direct costing to absorption, to

minimize the cost of goods sold.

5. Capitalise certain expenses like research and development costs and product

promotion cost, that are ordinarily written off in the profit and loss account.

6. Defer certain discretionary expenditures (like repairs, advertising, research and

development) to the following year.

7. Make inadequate provision for certain known liabilities (gratuity etc.,) and treat

certain liabilities as contingent liabilities

8. Make extra provisions during prosperous years and written them back in lean

years.

9. Use totally unacceptable accounting practices. 10. Revalue assets to create the impression of substantial reserves.

Corporate governance

Corporate governance is the set of processes, customs, policies, laws and institutions

affecting the way in which a corporation is directed, administered or controlled.

Corporate governance also includes the relationships among the many players involved

(the stakeholders) and the goals for which the corporation is governed. The principal

players are the shareholders, management and the board of directors. Other stakeholders

http://financial-dictionary.thefreedictionary.com/Accounting

http://financial-dictionary.thefreedictionary.com/Financial

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http://financial-dictionary.thefreedictionary.com/Breach+of+Contract

http://financial-dictionary.thefreedictionary.com/Breach+of+Contract



include employees, suppliers, customers, banks and other lenders, regulators, the

environment and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate

governance deals with issues of accountability and fiduciary duty, essentially advocating

the implementation of guidelines and mechanisms to ensure good behaviour and protect

shareholders. Another key focus is the economic efficiency view, through which the

corporate governance system should aim to optimize economic results, with a strong

emphasis on shareholders welfare. There are yet other aspects to the corporate

governance subject, such as the stakeholder view, which calls for more attention and

accountability to players other than the shareholders (e.g.: the employees or the

environment).

Definition

The term corporate governance has come to mean two things.

* the processes by which companies are directed and controlled.

* a field in economics, which studies the many issues arising from the separation of

ownership and control.

In A Board Culture of Corporate Governance business author Gabrielle O'Donovan

defines corporate governance as 'an internal system encompassing policies, processes and

people, which serves the needs of shareholders and other stakeholders, by directing and

controlling management activities with good business savvy, objectivity and integrity.

Sound corporate governance is reliant on external marketplace commitment and

legislation, plus a healthy board culture which safeguards policies and processes'.

Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief

Executive Officer, the board of directors, management and shareholders). Other

stakeholders who take part include suppliers, employees, creditors, customers and the

community at large.

Issues involving corporate governance principles include:

* oversight of the preparation of the entity's financial statements

* internal controls and the independence of the entity's auditors

* review of the compensation arrangements for the chief executive officer and other

senior executives

* the way in which individuals are nominated for positions on the board

* the resources made available to directors in carrying out their duties

* oversight and management of risk

* dividend policy



Human Resource Accounting

Human Resource Accounting (HRA) means to measure the cost and value of the people

(i.e. of employees and managers) in the organisation. It measures the cost incurred to

recruit, hire, train and develop employees and managers.

HRA also finds out the present economic value of its employees and managers. After

measuring the cost and value of its employees and managers, the organisation prepares a

report. This report is called HRA Report. It is shown to the top level management. It can

also be shown to the employees, managers and outside investors.

What is Human Resource Accounting?

Human Resource Accounting is the process of identifying and measuring data about

Human Resources and communicating this information to the interested parties. It is an

attempt to identify and report the Investments made in Human Resources of an

organisation that are currently not accounted for in the Conventional Accounting

Practices.

Methods of Human Resource Accounting

Quite a few Models have been suggested in the past for the Human Resource

Accounting and these can be classified into 2 parts each having various Models. Some of

the Important ones are:-

A. Cost Based Models

I. Capitalisation of Historical Costs Model

II. Replacement Costs Model

III. Opportunity Cost Model

B. Value Based Models

I. Present Value of Future Earnings Model/ Lev and Schwartz Model

II. Reward Valuation Model/ Flamholtz Model

III. Valuation on Group Basis

A. COST BASED MODELS

I. Capitalisation of Historical Costs

http://kalyan-city.blogspot.com/2011/05/levels-of-management-top-middle-and.html



As per this Method of HR Accounting, the sum of all costs related to Human Resources

(i.e. Recruitment, Acquisition, Formal Training, Informal Training, Informal

Familiarisation, experience and development) is taken together to represent the value of

the human resources.

II. Replacement Costs

The Historical Cost Method was highly criticised as it only takes into account the Sunk

Costs which are irrelevant for Decision Making. Thus, a new model for Human Resource

Accounting was conceptualised which took into the account, the costs that would be

incurred to replace its existing human resources by an identical one.

1. Individual Replacement Costs – which refers to the cost that would have to be

incurred to replace an individual by a substitute who can provide the same set of

services as that of the individual being replaced

2. Positional Replacement Costs – which refers to the cost of replacing the set of

services referred by an incumbent in a defined position

III. Opportunity Cost Model

This model was advocated by Hekimian and Jones in the year 1967 and is also known as

the Market Value Method.

This method of measuring Human Resources under this Model is based on the concept of

opportunity cost i.e. the value of an employee in its alternative best use, as a basis of

estimating the value of human resources. The opportunity cost value may be established

by competitive bidding within the firm, so that in effect, managers bid for any scarce

employee. A human asset therefore, will have a value only if it is a scarce resource, that

is, when its employment in one division denies it to another division.

B. ECONOMIC VALUE MODELS

I. Present Value of Future Earnings Model

This Model of human resource accounting was developed by Lev and Schwartz in the

year 1971 and involves determining the value of human resources as per the present value

of estimated future earnings discounted by the rate of return on Investment (Cost of

Capital).

II. Reward Valuation Model/ Flamholtz Model

Flamholtz advocated that an Individual‘s Value to an organisation is determined by

theservices he is expected to render. This model of Human Resource Accounting is

an improvement to the ―Present Value of Future Earnings Model‖ as it takes into account

the probability that an individual is expected to move through a set of mutually



exclusive organisational roles or service states during a time interval. Such

movement can be estimated probabilistically by using the following model

III. Valuation on Group Basis

While applying the above models, the Accountants realised that proper Valuation as

per Human Resources Accounting is not possible unless the contributions of the

Individuals as a Group are taken into consideration.

Module-VIII

VARIOUS HEADS OF INCOME

All income shall be classified under the following heads of income for the purpose of

charge of income tax and computation of total income.

Income from Salaries

Income from house property

Profits and gains of business or profession

Income from Capital gains

Income from other sources

Income from Salaries:

Under section 15, the following incomes are chargeable under the head „salaries‟

Any salary due from an employer or former employer to an assessee in the

previous year, whether paid or not;

Any salary paid or allowed to him in the previous year by or on behalf of an

employer or a former employer, though not due or before it became due to him.

Any arrears of salary paid or allowed to him in the previous year by or on behalf

of an employer of former employer, if not charged to income tax for any earlier

previous year.

Definitions: Under section 17 of the Act the following have been defined.

Salary

Perquisites



Profits in lieu of salary

Salary [Sec. 17(1)]: Salary includes

Wages

Any annuity or pension

Any gratuity

Any fees, commission, perquisites or profits in lieu of or in addition to any salary

or wages.

Any advance of salary, but not advance for purchasing a car, cycle, scooter or a

house; etc

Any payment received by an employee in respect of any period of leave not

availed of by him.

The annual accretion to RPF to the extent of the following

o Employer‘s contribution in excess of 12% of salary o Interest on the balance in the RPF credited in excess of 9.5%

The accumulated transferred balance from URPF account to a RPF account to the extent of it is chargeable.

The contribution made by the central government or any other employer in the

previous year to the account of an employee under a pension scheme referred to in

sec 80CCD.

Deductions: The income chargeable under the head salaries shall be computed after

making the following deductions from gross salary: -

Deduction for entertainment allowance

Deduction in respect of professional tax

Entertainment Allowance [sec. 16(ii)]

Entertainment allowance is not eligible for exemption but it only qualifies for

deduction. Therefore, entertainment allowance is first included in gross salary and then

deduction is allowed under section 16(ii). This deduction is available only in case of

government employees and not in case of other employees. The deduction allowable in

the case of government employees is to the extent of least of the following: -

Rs. 5,000; or 1/5 of salary; or

Actual entertainment allowance received for the previous year.

Salary for the purpose of entertainment allowance deduction means only basic

salary.



Professional Tax [sec. 16(iii)



Deduction is allowed in respect of any sum paid by the assessee on account of a tax

on employment. In case, if the professional tax is paid by the employer on behalf of

the employee, the amount so paid should be included in gross salary as a perquisite

and then deduction under section 16(iii) can be claimed.

Death-cum-retirement Gratuity: [Sec. 10(10)]

In case of Government employees: Any death cum retirement gratuity received by

government employees is fully exempt from tax.

In case of non-government employees covered by the payment of gratuity Act, 1972: Any gratuity received by a non government employee who is covered by the payment of gratuity act of 1972, is exempt from tax to the extent of least of the

following:

(a) Rs. 3,50,000; or

(b) 15 days salary (last drawn salary *15/26)

based on last drawn salary for each completed year of

service or part of the year in excess of 6 months; or

(c) Gratuity actually received.

Salary for this purpose means basic salary and dearness allowance

In case of non government employees who are not covered by the payment of

gratuity Act of 1972

Any gratuity received by any other employee on retirement, death, termination or

resignation is exempt from tax to the extent of the least of the following;

(a) Rs. 3,50,000; or

(b) Half month‘s salary (on the basis of last 10 months average immediately

preceding the month in which any such event occurs) for each completed year

of service (fraction to be ignored); or

(c) Gratuity actually received.

Salary for this purpose means basic salary, dearness allowance-if provided in terms

of employment and commission as a percentage of turnover achieved by the

employee.



Note:

(a) Gratuity received during the period of service is always taxable

(b) Where gratuity is received by an employee from 2 or more employers in the

same previous year then the aggregate amount of gratuity exempt form tax

cannot exceed the above limits prescribed.

(c) In case where the employee has received gratuity in any earlier year from his

former employer and also receives gratuity from another employer in a later

year, the limit of Rs. 3,50,000 will be reduced by the amount of gratuity

exempt from tax in any earlier year.

Commuted Pension [Sec 10(10A)]

Uncommuted pension refers to the pension periodically received by the employee.

Commuted pension means lump sum amount taken by commuting the pension or part

of the pension. Where an employee commutes, under pension rules, part of pension,

the remaining portion will periodically received.

Uncommuted pension is taxable as salary u/s 15 in the hands of both government

and non-government employees.

Any commuted pension received by a government employee is wholly exempt

from tax. CBDT has clarified by circular number 623-dated 6-1-92 that judges of the

High courts and Supreme courts are also entitled to the exemption.

A non-government employee can avail exemption to the following extent

(1) If the employee is in receipt of gratuity, 1/3 of the full value of the pension.

(2) If the employee is not in receipt of gratuity, ½ of the full value of the pension.

Leave Salary [sec. 10(10AA)]

Government employee: Any amount received as cash equivalent of leave in respect

of period of earned leave to his credit at the time of retirement whether on

superannuation or otherwise, is exempt from tax.

Non-Government Employees: Leave salary is exempt from tax to the extent of least

of the following;

Cash equivalent of the leave (on the basis of average of last 10 months‘

salary) to the credit of the employee at the time of retirement (calculated at 30

days credit for each completed year of service); or

10months‘ salary (on the basis of average of 10 months‘ salary); or

The amount specified by the government --- Rs. 3,00,000

Leave encashment actually received.



Even in the case of voluntary retirement by way of resignation, leave salary received

qualifies for exemption.

Salary for this purpose means basic salary, dearness allowance if provided in terms

of employment and commission as a percentage of turnover achieved by the

employee.

Note:

1. Leave salary received during the period of service is taxable

2. Where leave salary is received by an employee from 2 or more employers in the

same previous year then the aggregate amount of leave salary exempt from tax

cannot exceed the limits prescribed.

3. In case where the employee has received cash equivalent of earned leave in any

earlier year from his former employer and also receives leave salary from another

employer in a later year, the limit of Rs. 3,00,000 will be reduced by the amount

of gratuity exempt from tax in any earlier year.

ALLOWANCES

The various allowances, which are allowed from the employer to the employees, are

classified under three categories

Fully taxable Allowances

Partly taxable allowances or allowances exempted up to specified limit.

Fully exempted allowances.

Fully Taxable Allowances.

(1) Dearness allowance or dearness pay

(2) Medical allowances

(3) Tiffin allowance

(4) Servant allowance

(5) Non-practicing allowance

(6) Warden allowance and proctor allowance

(7) Deputation allowance

(8) Overtime allowances

Partly taxable allowances or allowances exempted up to specified limit:

(1) House Rent Allowance [sec. 10(13A)]

House rent allowance granted to an assessee by his employer is exempt from tax to



the extent of least of the following

(a) Excess of rent paid over 10% of salary, or

(b) If the accommodation is situated in Mumbai, Kolkatta, Chennai and Delhi---

50% of salary

If the accommodation is situated at any other places--- 40% of salary

(c) Actual HRA received for the relevant period

Exemption is not available to an assessee who lives in his own house; or in a house for

which he does not pay any rent.

Salary for this purpose means basic salary, dearness allowance if provided in terms of

employment and commission as a percentage of turnover achieved by the employee

calculated on due basis for the relevant period.

Relevant period means the period during which the said accommodation was occupied by

the assessee during the previous year.

(2) Any allowance granted to an employee working in any transport system to meet his

personal expenses during his duty performed in the course of running of such transport

form one place to another place is exempt from tax to the extent of 70% of such

allowance or Rs. 6,000 per month, whichever is less

(3) Transport allowance: any transport allowance granted to an employee to meet his

expenditure for the purpose of commuting between the place of his residence and place of

his duty to the extent of Rs. 800 per month. The same is exempted from tax up to Rs.

1,600 per month if it is given to an employee who is blind and/or physically handicapped.

(4) Children Education Allowance: It is exempt from tax up to Rs. 100 per month per

child up to a maximum of 2 children.

(5) Children Hostel Allowance: It is exempt from tax up to Rs. 300 per month per child

up to a maximum of 2 children.

Fully Exempted Allowances:

(1) Foreign allowance

(2) Sumptuary allowance to High court and Supreme court judges

(3) Allowances from U.N.O



PERQUISITES

Perquisites mean any casual emoluments fee or profit attached to an office or

position in addition to salary or wages. It is a personal advantage--- something that

benefits a man by going into his own packet. It does not cover a mere reimbursement of

expenditure.

The perquisites may in cash or in kind or in the form of benefits and amenities,

whether they are convertible into money or not. The employer may provide it voluntarily

or under service contract.

For income tax purposes, the perquisites have been divided into three categories.

Tax-free perquisites

Taxable perquisites

Perquisites taxable under specified cases.

Tax-free Perquisites: The value of the following perquisites shall not be included in the

salary income of an employee.

Medical benefits

Tea and snacks or free food or beverages provided in office or factory (work

place) or through paid vouchers where are nor transferable and usable only at

eating joints.

Facility of motor car(s)

Residential accommodation provided at site

Facility of club or health club and similar facilities

Expenses on telephone including mobile phone

Employer‘s contribution to staff group insurance scheme

Scholarship to employees or their children paid by the employer

The facility of conveyance provided by the employer from residence to place of

employment and vice versa

Refreshment courses, etc. If the employer pays fees for an employee taking

refresher course or management course in order to enable to the employee to

perform his services more efficiently. Such expenses are treated as scholarship.

Free rations to armed forces personnel

Facility of guest house or holiday home‘

Welfare expenses

Entertainment expenses

Free or concessional ticket provided by the employer (engaged in the business of



transport) for private journeys of the employee or his family members.

Any perquisites paid or allowed by the government to its employees who are

posted abroad.

The value of rent-free official residence and the value of conveyance facilities

provided to a judge.

The value of rent-free furnished residence (including maintenance thereof)

provided to a minister, an officer of parliament or a leader of the opposition in

parliament.

Gifts in kind laptops and computers provided by the employer for personal use of

employees or any member of his house hold

Interest free or concessional loan, if the amount loan in aggregate does not exceed Rs. 20,000 during the previous year.

Transfer without consideration to an employee of a movable asset (other than

computers, electronic items and car) by the employer after using it for ten years or

more.

Periodicals and journals required for discharge of work

INCOME FROM HOUSE PROPERTY

Basis of Charge: The annual value of property consisting of any building or lands

appurtenant thereto of which the assessee is the owner shall be chargeable to income tax

under this head. However, the said excludes the property used by the assessee for the

purpose of any business or profession carried on by him and profits of which are

chargeable to income tax under the head profits and gains of business or profession.

INCOME FROM OTHER SOURCES

This is a residuary head of income and sweeps all such taxable income, profits and gains

which are not chargeable to income tax under any of the first four heads specified above.

It is important to note that where there is a specified head for the income in question and

a specified section providing for the head, such income cannot be assessed under this

residuary head, ―income from other sources‖.

According to section 56(2), in a particular, the following incomes shall be

chargeable to income tax under the head income from other sources.

Dividend

Lottery, crossword Puzzles, etc.

Interest on securities.

Hire of machinery, plant, etc.

Hire of machinery, plant and buildings nor separately.

Gift. Where any sum of money, the aggregate value of which exceeds Rs.

50,000, is received without consideration, by an individual or a HUF, in any



previous year form any person or persons on or after 01-04-2006, the value of

whole of the aggregate value of such sum.

INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS

OF BUSINESS OR PROFESSION” [Section 28]

(1) Profits and gains of any business or profession carried on by assesses at any time

during previous year.

(2) Compensation or other payment due to or received by any person –

(a) managing whole or substantially whole of affairs of an Indian company or any other

company in India at or in connection with the termination of his management or

modification of the terms and conditions relating thereto;

(b) on termination or modification of contract of his agency in India;

(c) For vesting the management of any property or business in Government or any

corporation owned or controlled by the Government.

(3) Income derived by trade, professional or other similar association from specific

services rendered to its members. This clause is an exception to general rule

that income from mutual activity is not chargeable to tax.

(4) Profits on sale of import licence; or Profits on transfer of Duty Entitlement Pass Book

(DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM Policy;

(5) Cash assistance against exports from Government of India and Duty

Drawback;

(6) Value of any benefit or perquisite, whether convertible into money or not arising from

exercise of business or profession;

(7) Interest, salary, bonus, commission or remuneration due to or received by partner

from the firm. Such income is taxable in hands of partners to the extent it is allowed as

deduction in hands of firm. Any amount not allowed as deduction to firm under Section

40(b), is not taxable in the hands of partner. (8) Any sum received or receivable, in cash or in kind, under an agreement for –

(a) Non-competition i.e. not carrying out any activity in relation to any business; or

(b) Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, license,

franchise or any other business or commercial right of similar nature or information or

technique likely to assist in the manufacture or processing of goods or provision of

services.

Exceptions : However, sum received for transfer of business, or transfer of right to

manufacture, produce or process any article/thing, which is chargeable under ‗Capital

Gains‘ is not taxable under this Section.

(9) Any sum (including bonus) received under Keyman Insurance Policy.



INCOME FROM CAPITAL GAINS

1. Chargeability u/s 45

Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year

in which transfer take place under the head "Capital Gains".

Definitions

Transfer: Sec. 2(47): Transfer in relation to a capital asset includes sale, Exchange, or

relinquishment of the asset or extinguishment of any rights therein or the compulsory

acquisition thereof under any law or conversion of the asset by the owner in stock-in-

trade of a business carried on by him or the maturity or redemption of a zero coupon

bond.

Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating,

movable, immovable, tangible or intangible) whether or not connected with business or

profession.

Exclusions —

a. Stock-in-trade

b. Personal effects of the assessee

c. Agricultural land in a rural area

d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds,

1980 issued by the Central Government

e. Special Bearer Bonds, 1991 issued by the Central Government.

f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999

Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not

more than thirty six months immediately preceding the date of its transfer. However, in

the following cases, an asset, held for not more than twelve months, is treated as short-

term capital asset—

a. Quoted or unquoted equity or preference shares in a company



Circular No. 495 dated 22.9.1987 explaining amendments by Finance Act, 1987

whereby unquoted shares of a private limited company also if held more than 12

months falls in the category of LTCG. Also Refer the Judgment in 120 TTJ 699

for unquoted shares held for less than 36 months.

b. Quoted Securities

c. Quoted or unquoted Units of UTI

d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)

e. Quoted or unquoted zero coupon bonds

Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term

capital asset

2. Year of chargeability to tax

Capital gains are generally charged to tax in the year in which ‗transfer‘ takes place.

Exceptions —

a. Sec. 45(1A) — Insurance Claim — In the year of receipt.

b. Sec. 45(2) — Conversion of capital asset into stock-in-trade — In the year of

actual sale of the stock.

c. Sec. 45(5) — Compulsory acquisition — When consideration or part thereof is

first received.

Exempt Capital Gains under Section 10

10(33) : Transfer of US 64 on or after April 1, 2002

10(37) : Compulsory acquisition of Urban Agriculture Land where

consideration is received after March 31, 2004.

Long-term capital gain arising on transfer on or after

10(38) : October 1, 2004 of equity shares or units of equity oriented

mutual fund and the STT is paid at the time of transfer



Income Tax Deductions u/s 80C

One can get following income tax deductions with qualified investments u/s 80C are

as appended below:

Section Details Quantum of Deduction

80C

Life Insurance Premium, PPF, NSC, EPF, 5-year

Fixed Deposit, Post Office

Senior Citizen Saving

Scheme, ELSS, Tuition

Fees including Admission

fees or college fees paid for

full time education of any

two children‘s, Housing

Loan Principal Repayment

Maximum Rs 100000

Income Tax Deductions u/s 80CCC

One can get following income tax deductions with qualified investments u/s 80CCC

and same are as appended below:

80CCD Notified pension scheme like NPS Max 10% of salary or 10% of

GTI, as case may be

Profit in lieu of

salary

Profit in lieu of salary is a part of salary income and accordingly it is taxable under

the head ―Income from Salary‖. Profit in lieu of salary means any payment made

to an employee on lieu of salary even if the same has no connection with the profits



of the employer. The word ‗profit‘ is used only to convey any ‗advantage‘ or ‗gain‘

by receipt of any payment by the employee. As per the Income Tax Act, 1961

―Profit in lieu of salary‖ includes the following:

1. Any compensation due to or received by an assessee from his employer or

former employer at or in connection with the termination of his employment or the

modification

of the terms & conditions relating thereto is taxable as profit in lieu of salary. The

recipient may however claim exemption u/s 10(10B) or 10(10C), if eligible.

2. Any payment (except to the extent it is specifically exempt u/s 10) due to or received

by an employee from his employer or former employer or from a provident fund, or other

fund (to the extent it does not consist of contributions made by the assessee or interest

thereon) which may otherwise be taxable as income from salary. It may be noted that the

assessee is entitled to exemption to the prescribed extent in respect of the following

payments received by him-

a. Payment of Gratuity u/s 10(10);

b. Payment of commuted pension u/s 10(10A);

c. Payment of retrenchment compensation u/s 10(10B);

d. Payment from statutory provident fund and public provident fund u/s 10(11);

e. Payment from recognized provident fund u/s 10(12);

f. Payment from an approved superannuation fund u/s 10(13);

g. Payment of House Rent Allowance (HRA) u/s 10(13A).

3. Payment from unrecognized provident fund or superannuation fund to the extent it

does not consist of contribution by the employee or interest on employee‘s contribution

(at the time of payment to the employee).

4. Any sum received under a Keyman insurance policy including the sum allocated by

way of bonus on such policy is taxable as ―profit in lieu of

salary‖.

5. Any amount received in lump sum or otherwise from any person prior to his joining

employment or after cessation of employment with that person.



RATES OF INCOME-TAX

A. Normal Rates of

tax:

Where the total income does not exceed Rs. 1,80,000/-.

Nil

Where the total income exceeds Rs. 1,80,000 but

does not exceed Rs.

5,00,000/-

10 per cent of the amount by which the total income exceeds Rs. 1,80,000/-

Where the total income exceeds Rs. 5,00,000/- but

does not exceed Rs.

8,00,000/-.

Rs. 32,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.

Where the total income exceeds Rs. 8,00,000/-.


B. Rates of tax for a woman, resident in India and below sixty years of age at any

time during the financial

year:

Where the total income does not exceed Rs. 1,90,000/-.

Nil


does not exceed Rs.

5,00,000/-.

10 per cent, of the amount by which the total income exceeds Rs. 1,90,000/-


does not exceed Rs.

8,00,000/-.




C. Rates of tax for an individual, resident in India and of the age of sixty



years or more but less than eighty years at any time during the

financial year:

Where the total income does Nil

not exceed Rs. 2,50,000/-.


does not exceed Rs.

5,00,000/-.

10 per cent, of the amount by which the total income exceeds Rs. 2,50,000/-


does not exceed Rs.

8,00,000/-.




D. In case of every individual being a resident in India , who is of the age of eighty

years or more at any time during the financial year:

Where the total income does not exceed Rs. 5,00,000/-

Nil

Where the total income2 exceeds Rs. 5,00,000/- but

does not exceed Rs.

8,00,000/-

0 per cent of the amount by which the total income exceeds Rs. 5,00,000/-

Where the total income exceeds Rs. 8,00,000/-

Rs. 60,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 8,00,000/-

Income Tax rates After Budget 2012-13 is available here

1. Surcharge on Income tax: There will be no surcharge on income tax

payments by individual taxpayers during FY 2011-12 (AY 2012-13).

2. Education Cess on Income tax: The amount of income-tax shall be increased

by

Education Cess on Income Tax at the rate of two percent of the income-tax.

3. Additional surcharge on Income Tax (Secondary and Higher Education

Cess on Income-tax):From Financial Year 2007-08 onwards, an

additional surcharge is chargeable at the rate of one percent of income-

tax (not including the Education Cess on income tax).

4. Education Cess, and Secondary and Higher Education Cess are payable

by both resident and non-resident assessees.

http://www.simpletaxindia.net/2012/03/income-tax-slabs-rates-after-budget.html

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