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NET WORTH METHOD 

According to this method, the profit or loss made by the business is computed by comparing the net worth (or capital) of the business on two different dates. For example, ifthe capital of the business on 1.1.1990 was P.s 80,000 and it is Rs 90,000 on 31st December, 1999, it can be said that the business has made profit of P.s 10,000 during the period.

Adjustments. Following adjustments are required for determination ofthe profit in case of this method.

(i) Adj ustment for drawings. The proprietor may withdraw money from the business for his personal use. In the absence of any such withdrawal, the capital at the end of accounting period would have been more by the amount ofmoney withdrawn by him. Thus, the amount of drawings should be added back to the capital at the end of the accounting period to find out his true capital on that date.

(ii) Adjustment for capital introduced. The proprietor may introduce further capital in the business during the course of the accounting year. This will increase the capital of the proprietor at the end of the accounting year. It is, therefore, necessary to reduce the amount of capital by the amount of capital introduced by the proprietor during the year in order to ascertain the real increase in the capital of the proprietor on account of profit earned by him during the course of the accounting year.

MANUFACTURING ACCOUNT 

In the preceding pages, we have explained the preparation of the Trading and Profit and Loss Account from the point of view of a trader, i.e., a person who purchases and sells goods. However, a person may manufacture goods by himself for selling them at a profit. In case of such a person, i.e., a manufacturer, it will be necessary to ascertain the cost of manufacturing the goods. In his case, therefore, the profit or loss made by him will be ascertained by preparing the following three accounts:

(i) Manufacturing account This account gives the cost of the goods manufactured by a manufacturer during a particular period.

(ii) Trading account This account gives information about the gross profit or loss made by a manufacturer in selling the manufactured goods. In case a manufacturer also functions as a trader, i.e., besides manufacturing and selling goods of his own, he also purchases arid sells goods of others, he will be a manufacturer-curn-tracler. In such a case, his Trading Account will disclose not only the profit made by him on selling his manufactured goods, but also the profit made by him in selling the goods purchased by him from others.

(iii) Profit and loss account This account gives the overall profit or loss made or suffered by the manufacturer of manufacturer—cum—trader during a particular period.

Capital transactions  

Capital expenditure is expenditure on non-current assets, and capital receipts would result from the disposal of those assets. Other transactions that are regarded as capital transactions are the obtaining of and repayment of non-current finance. Capital transactions initially affect the figures in the balance sheet. Capital transactions are those that affect the organisation in the long term, as well as in the current period

Capital expenditure is the expenditure incurred for acquisition of assets the benefits of which are enjoyed over the years. The benefits of revenue expenditures are exhausted in the year of incurrence. Thus it is seen that utilisation of business capital is made for two distinct purposes:

1) Expenses yielding benefits over the years termed – capital expenditure.

2) Expenditures yielding benefits during the current accounting year – termed as revenue expenditure

Suppose a company incurred an expenditure of Rs. 100000 for advertisement before marketing of a new product

Revenue transactions 

Revenue transactions are those that affect the organisation in the current period. Revenue receipts come from sales, and sometimes in the form of income from investments. Revenue expenditure is expenditure on items that are consumed in the period, for example the running expenses of the organisation, cost of sales, etc. Revenue transactions affect the figures in the income statement.

Examples for Capital Expenditure and Revenue Expenditure

Example 1: 

An agricultural land was purchased for a mill was Rs. 1,00,000. Rs. 1 0 000 was paid for land revenue.

Solution : 

Cost of land amounting to Rs. 1 00 000 will be treated as Capital Expenditure and Land revenue of Rs. 10 000 will be treated as Revenue Expenditure.

Example 2: 

Rs. 50,000 was spent on advertising for the introduction of a new product in the market,the benefit of the market which will be divided for four years.

Solution :

Rs. 50,000 spent on advertising is to be treated as deferred revenue expenditure considering the benefit attributable for four years to come Rs. 12,500 is to be written off every year.

Example 3:

Rs. 10,000 spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the plaintiff. The suit was not successful.

Solution : 

Rs. 10,000 incurred for defending the title to the firm’s assets is a revenue expenditure. If, however any expenditure incurred for rectifying the title is a capital expenditure.

ACCOUNTING RECORDS  

There are three vays in which Joint Venture Accounts can be kept. The)’ are as follows:

I. When Separate Set ofBooks for the venture are maintained. This will be necessary when venture is of a large magnitude.

2. When One Venturer keeps the accounts, In this case entire work is entrusted to one of the venturers and the rest simply contribute their share of investment and place it at the disposal of the working venturer.

3. When All Venturers keep accounts, Where venture is not of such magnitude as to warrant a distinct set of books being kept, each venturer will record only such transactions as directly concern him.

In the following pages each of these methods, has been discussed in detail.

WHEN SEPARATE SET OF BOOKS ARE MAINTAINED 

Where a complete set of books are maintained for the Joint Venture, following accounts are opened: (i) Joint Bank Account (II) Joint Venture Account (iii) Personal accounts of each Venturer.

In this method parties first pay their contribution tojoint funds in the Joint Bank Account and their payments on joint account are made out of Joint Bank Account.

Joint Venture Account is of the nature of an ordinary Trading and Profit & Loss Account.

It is debited with goods purchased, and expenses incurred) while credited with the sales made. It’s balance shows the profit or loss incurred on the joint venture.

Personal account of each venturer is also opened. It is credited with the amount of contribution made by him tothejoint funds and his share ofprofit(and debited in case of loss).

Business Entity Concept: According to this concept, business is treated as an entity separate from its owners, creditors, managers and others. All transactions of the business are recorded in the books of the business from the point of view of the business. Transactions are also recorded between the owner and the firm, for instance, when capital is provided by the owner, the accounting record will show the firm as having received so much money and as owing to the proprietor, means the enterprise is liable to the owner for capital investment made by the owner. Since the owner invested capital, which is also called risk capital he has claim on the profit of the enterprise.

The failure to recognize the business as a separate accounting entity would make it extremely difficult to evaluate the performance of the business since the private transactions would get mixed. The overall effect of adopting this concept is:

— Only the business transactions are recorded and reported and not the personal transactions of the owners.

— Income or profit is the property of the business unless distributed among the owners.

— The personal assets of the owners or shareholders are not considered while recording and reporting the assets of the business entity.

Preparing the balance sheet

The Balance Sheet is a statement which sets out the Assets and Liabilities as on a certain date. It is prepared with a view to measure the true financial position at a particular point of time. The Balance Sheet has the following form.

The balance sheet shows the assets, liabilities and capital that exist at the date at which it is drawn up. It will includeallthe ledger accounts that have balances on them.

It should be noted that the balance sheet is not an ‘account’. Its name is not the balance sheet ‘account’ and it is not part of the double-entry bookkeeping system. The balance sheet, as its name implies, is a list of all the balances in the ledger accounts.

A Balance Sheet has the following characteristics:

a) It is prepared at a particular date and not for a period.
b) it is prepared only after preparation of the Trading and Profit & Loss A/c. Without
the Profit & Loss A/c it will not give the financial position of the firm adequately.
c ) Capital is equal to the difference of assets and liabilities. Therefore the two sides of the balance sheet must have the same totals otherwise it is an indication of the presence of errors.
d) It is not an account but only a statement of assets and liabilities..
e) The balance sheet shows the financial position of a business at going concern concept.