Category: Accounting

RETIREMENT OF PARTNER 

Section 32 of the Partnership Act deals with the statutory provisions relating to retirement of a partner from partnership firm. These provisions are summarised below:

(i) A partner may retire from the firm

(a) in accordanc with an express agreement; or

(b) with consent of all other partners; or

(c) where the partnership is at will, by giving a notice in writing to all the other partners of his intention to retire.

(ii) A retiring partner may carry on business competing with that of the (in  and may advertise such business. Btt he has no right to:

(a) use the name of the firm,

(b) represent himself as carrying on the business of the firm,.or

(c) solicit the custom of the old customers of the firm except when he obtains these rights by an agreement with the other partners of the firm.

• A retiring partner will not be liable for liabilities incurred by the firm after his retirement.  However, he must give a public notice to that effect Such a public notice is not necessary in case of a sleeping or dormant partner.
• Retirement of a partner by death or insolvency also does not require, any public notice.

BALANCE SHEET 

Balance Sheet has two sides. On the left hand side, the “liabilities” of the business are shown while on the right hand side the assets of the business appear.

It will be useful here to quote definitions of the Balance Sheet given by some prominent writers. According to Palmer, “The Balance Sheet is a statement at a given date showing on one side the trader’s property and possessions and on the other side his liabilities.” According to Freeman, “A Balance Sheet is an itemised list of the assets, liabilities and proprietorship of the business of an individual at a certain date.” The definition given by the American Institute of Certified Public Accountants makes the meaning of Balance Sheet more clear. According to it, Balance Sheet is ‘a list of balances of the asset and liability accounts. This list depicts the position of assets and liabilities of a specific business at a specific point of time.”

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Proforma of Balance Sheet

There is no prescribed form of Balance Sheet for a sole proprietary and partnerhip concern. However, the assets and liabilities may be shown in any of the following order.

1. Liquidity Order.

2. Permanency Order.

1. Liquidity order. In case a concern adopts liquidity order, the assets which are more readily convertible into cash come first and those which cannot be so readily converted come next and so on. Similarly those liabilities which are payable first come first, and those payable later, come next and so on.

Recognition proportionately over the performance of the contract According to this basis, revenue is recognised even in those cases where the work has not been completed in all respects. This is particularly true in case of long-term contracts which may take few years to complete. In case of such contracts, revenue is recognised on the basis of the work which has becn completed and approved by the contractee (technically known as work certified). This is done on the basis of certain accepted norms which are given below:

(i) When less than one-fourth ofthe contract is completed, no profit should be taken to the Profit and Loss Account,

(ii) When one-fourth or more but less than one-half of the contract is completed. one-third of the profit made to date should be taken to the Profit and Loss Account. This may, further, be reduced on the basis of cash received by the contractor from the coniractee. This is technically known as reducing profit on cash basis.

(iii) If half or more of the contract has been completed, two-third of the profit as reduced on cash basis maybe taken 10 the Profit and Loss account.

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మంగళ హారతులు

Recognition when the production is completed. It is generally recognised that income accrues only at the time of sale and gain should not be anticipated by reflecting assets at their current market prices. However, in case of certain industries where products have an immediate marketability at more or less fixed prices, the revenue may be recognised as soon as the production is completed, The amount of income earned is the excess of the estimated sale prices of the products completed over the costs oftheir production or extraction. However, any expenditure incurred in the disposal of these products should be charged to such income and should be disclosed fully in the financial statements. This is particularly true in case of precious metals such as gold and silver and extractive industries (e.g. oil) and agriculture. In case of these industries, the inventories are staled at sales prices.

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Recognition at the time when sales value is collected. Many concerns use the cash basis for reeognising revenue rather than the accrual basis. In case of accrual basis, as explained above, revenue is taken to be realised when the payment for goods or services becomes due to the business. For example, in case of trading business, revenue will be taken to have been realised when the goods have been sold though the payment might be received later on. This is because as the goods have been sold away, the business becomes entitled to receive payment for thetn. In case, cash basis is followed, the revenue will be taken to have been realised only when payment for goods or services has been actually received. This basis for recognising revenue is generally followed in case of-sale of goods on instalment system (i.e., a system where sales value is to be collected in agreed number of instalments). The basis is not very satisfactory because it fails to match cost with the revenue in those case cases where there is a considerable time Jag between sale of goods or rendering of services and receiving payment for them.

మానవ నేస్తాలు సూక్తులు

The increasing size of the market is making more and more difficult forthe manufacturer or wholesalerto come in direct contact with customers living at far off distances. This has made imperative forhim to enter into an agreementwith areliable local trader who can sell goods on his behalf and athis (Principal) risk for an agreed amount of commission. Such a despatch of goods from one person to another person at a different place for the purpose of warehousing and ultimate sale is termed as consignment. Goods so sent are termed as ‘Goods sent on Consignment’,the sender is called”Consignor” and the recipient ‘Consignee.’

For example if A of Bombay sends 100 radio sets toBof Delhito sell on his (A’s) behalf and at his (A’s) risk, the transaction between A and B is a consignment transaction. A isthe consignor and B is the consignee.

It should be noted that in the above example, A continues to be the owner of the goods. B is simply an agent ofA. He has not purchased the goods. He has agreed to sell the goods ofA to the best of his ability and capacity. He will, therefore, be responsible to A for payment only when he has sold away the goods. Of course, he will be reimbursed by A for any expenses incurred by him in obtaining and selling the goods besides remuneration for selling the goods as per the agreed terms.

The points of distinction between Profit and Loss Accoont and Balance Sheet are:

(i) A profit and loss account shows the profit or loss made by the business during a particular period. While a balance sheet shows the financial position of the business
on a particular date.

(ii) A profit and loss account incorporates those items which are of a revenue nature while a balance sheet incorporates those items which are of a capital nature.

(iii) Of course, both profit and loss account and the balance sheet are prepared from the Trial Balance. However, the accounts transferred to the profit and loss account are  finally closed while the accounts transferred to the balance sheet represent those accounts whose balances are to be carried forward to the next year.

The Trading Account simply tells about the gross profit or loss made by a businessman on purchasing and selling of goods. Jt does not take into account the other operating expenses incurred by him during the course of running the business. For example, he has to maintain   an office for getting orders and executing them, taking policy decision and implementing them. All such expenses are charged to the Profit and Loss Account. Besides this, a businessman may have other sources of income. For example, he may receive rent from some of his business properties. He may have invested surplus funds of the business in some securities. He might be getting interest or dividends from such investments. In order to ascertain the true profit or loss which the business has made during a particular period, it is necessary that all such expenses and incomes should be considered.

Important points regarding Profit and Loss Account 

Gross Profit or Gross Loss. The figure of gross profit or gross loss is brought down from the Tading Account. Of course, there will be only one figure, i.e., either of gross profit or gross loss.

Salaries. Salaries payable to the employees for the services rendered by them in running the business being of indirect nature are charged to the Profit and Loss Account. In case of a partnership firm, salaries may be allowed to the partners. Such salaries will also be charged to the Profit and Loss Account.

Interest: Interest on loans whether short-term or long-term is an expense of an indirect nature and, therefore, is charged to the Profit and Loss Account. However, interest on loans advanced by a firm to third-parties is an item of income and, therefore, will be credited to the Profit and Loss Account.

Commission:  Commission may be both an item of income as well as an item of expense. Commission on business hroughtby agents is an item of expense while commission earned by the business for giving business to others is an item of income, Commission to agents is, therefore, debited to the Profit and Loss Account while commission received is credited to the Profit and Loss Account

Bad debts:  Bad Debts denotes, the amount lost from debtors to whom the goods were sold on credit. It is a loss and therefore, should be debited to the Profit and Loss Account

Importance of the Trading Account

Trading Account provides the following information to a businessman regarding his business:

I. Gross Profit disclosed by the Trailing Account tells him the upper limit within which he should keep the operating expenses of the business besides saving something for himself. The cost of purchasing and the price at which he can sell the goods are governed largely by market factors over which he has no control. He can control only his operating expenses. For example, if the cost of purchasing an article is Rs 10 and it can be sold ii’ the market at Rs 10 per unit, the gross margin available on each article is Ps 5. In case a businessman proposes to sell 1,000 units of that article in a year, his gross profit or gross margin will be Rs 5,000. His other expenses should therefore be less than Rs 5,000 so that he can also save something for himself.

2. He can calculate his Gross Profit Ratio1 and compare his performance year after year. A fall in the Gross Profit Ratio means increase in the cost of purchasing the goods or decrease in the selling price of the goods or both. In order to maintain at least same figure of gross profit in absolute terms, he will have to push up the sales or make all out efforts to obtain goods at cheaper prices. Thus, he can prevent at least fall in the figure of his gross profit if can not bring any increase in it;

3. Comparison of stock figures of one period from another will help him in preventing unnecessary lock-up of funds in inventories.

4. In case of new products, the businessman can easily fix up the selling price of the products by adding to the cost of purchases, the percentage gross profit that he would like to maintain. For example, if the trader has been so far maintaining a mte of gross profit of 20% on sales and he introduces a new product in the market having a cost of Rs 100, he should lix the selling price at Its 125 in order to maintain the same nile of gross profit (i.e., 20% on sales).

Inventory cost The term Inventory includes (I) Stock of raw materials, (ii) Stock of work-in-progress, and (iii) Stock of finished Goods. The computation of the cost of inventory is also a tedious process. The vaftiation of tbe stock of raw materials will depend upon the method of pricing materials issues followed by the business. Materials may be issued to production according to First In First Out ([FIFO) Method, Last In First Out (LIFO) Method, Weighted Average Price Method, etc. In each of these cases, the value of the inventory of raw materials may widuly differ. This will be clear with the help of the following example.

A business buys raw materials in two different lots. In the first lot 1,000 units are purchased @ Rs 10 per unit. In the second lot, 2,000 units are purchased @ Rs 12 per unit. In case the stock of raw materials at the cod of the accounting period is of 1,000 units, the value of the inventory according to each of the methods stated above will be as follows:

FIFO method:

1,000 Units @ Ps 12 per unit = Rs 12,000

(Since materials first purchased will be taken to have been issued to production first of all, the inventory of raw material will, therefore, consist of latest purchases).

LIFO method:

l,000UuiLs@RslOperunit=Rs 10,000

(Since materials purchased in the last will be taken to have been issued to production first of all, the inventory will, therefore, consist of the earliest purchases).

Weighted Average Price Method:

1,000 Units @ Ps 11.333 = Rs 11,333

(The total units purchased are 3,000 for a total cost of Es 34,000. This gives a

weighted average priceRs 11.333 per unit).