Category: Accounting

Accounting cycle or accounting process includes the following:

1. Identifying the transactions from source documents like purchase orders, loan agreements, invoices, etc.

2. Recording the transactions in the journal or subsidiary books as and when they take place.

3. Classifying all entries posted in the journal or subsidiary books and posting them to the appropriate ledger accounts.

4. Summarising all the ledger balances and preparing the trial balance and final accounts with a view to ascertain the profit or loss made during a particular period and ascertaining the financial position of the business on that particular date.

MEANING OF JOINT VENTURE

Ajoint venture is an association of two or more than two persons who have combined for the execution ofa specific transaction and divide the profit orloss thereof in the agreed ratio. For example if A and B undertake the job of construction of a school building for a sum of Rs 1,00,000 their coming together for this specific job will be termeci as ajoint venture and each one of them will be termed as a co-venturer. The venture will be over as soon as this transaction is over i.e., the school building is completed. Joint venture agreements can be made for similar other transactions, e.g. joint consignment of goods, underwriting of the shares or debentures issued by a particular company, purchasing and selling of a specific property etc.

The essential features of a joint venture agreement can be put as follows:

(I) There is an agreement between two or more than two persons.

(ii) The agreement is made for the execution of a specific venture.

(ill) The proflt or loss on account of the venture is shared by the venturers in the agreed ratio. However, in the absence of any agreement between the. venturers, the profit. and losses are to he shared equally.

(iv) The agreement regarding the venture is automatically over as soon as the tiansaction is completed.

Consignment Accounting  – LOSS OF STOCK 

In the course of consignment transactions some loss of stock may occur. It may be in the course of transit before or after taking delivery of the goods by the consignee or itmay occur at the godown of the consignee. Such loss of stock may be normal or abnormal. Normal Loss is due to inherent characteristics of goods, e.g., loss due to evaporation, sublimation, drying up of goods etc. If lass occurs on account of reasons which are only accidental or which rarely happen the loss is tenned as Abnormal. The examples of such losses are—theft of goods or destruction of goods by fire.

Normal loss. It is not shown in the consignment account. This is included in the value of goods sold and closing stock by inflating the rate per unit. The value of closing stock will, therefore, be that proportion of total value of goods sent which number of units in hand bear to total number of units as diminished by loss (i.e., the units actually received by the consignee). In short cost of goods sent becomes cost of goods received.

“A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the enterprise.”

Contingent assets are not recognized in financial statements since this may result in the recognition of income that may never be realised. It is usually disclosed in the report of the approving authority where an inflow of economic benefits is probable. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate

“A contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. It is a present obligation that arises from past events but ¡s not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be determined”.
Examples of a contingent liability would be an outstanding lawsuit, bank guarantee etc. Suppose, if a company is sued by a former employee for ₹ 5,OO,OOO for age discrimination, the company will have a liability if it is found guilty. However, if the company is not found guilty, the company will not have an actual liability. Such a liability is known as a contingent liability.

Definition of Accounting   

Accounting is used by business entities for keeping records of their monetary or financial transactions. A businessman who invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period.

A widely accepted definition of accounting has been provided by the American Accounting Association. According to this definition accounting is the process of identifying, measuring and communicating information to permit judgement and decisions by the users of accounts. This definition implies that –

(1) there should be users of accounts who need relevant information,

(2) the information should enable the users to make judgement and decisions, and

(3) transactions and events are measured and the data are processed and then communicated to the users through accounting.

Accounting may be defined as:

• the classification and recording of monetary transactions;

• the presentation and interpretation of the results of those transactions in order to assess performance over a period and the financial position at a given date;

• the monetary projection of future activities arising from the alternative planned courses of action.

Note the three aspects considered in this definition: recording, reporting and forecasting:

Fundamentals of Accounting – Accrual concept: The measurement of accounting income is also subject to the accrual concept. At the end of the accounting period, when the final accounts are prepared there may be many business activities at different stages of progress. Some of the goods might be lying unsold, some work may be slit I in progress, money may have still to be collected from the debtors etc. In accounting, the revenue is generally treated to be realised when the goods or services are furnished to the customers and not when cash or other valuable consideration has been received from them. It may be possible that some of the items fr which the revenue has been treated as realised may not result in any revenue on account of subsequent non-payments. Thus, the income disclosed by the Income Statement may not be the real income of the business.

Single Entry System may be defined as any system which is not exactly the Double Entry System. In other words, Single Entry System may consist of:

(i) double entry in respect of certaintmnsactions such as cashreceivedfromdebtors, cash paid tó,cedit

(ii) Single Entry in respect of certain transactions such as cash purchases,  sales, expenses made fixed assets purchased. etc.,

(iii) No Entry in respect of certain transactions such as depreciation, bad debts; etc. Thus, a business is said to be using Single Entry System if it is not following completely the principles of Double Entry System of Book-keeping. Kohler defines Single Entry System as, “A system of book-keeping in which as a rule only records of cash and of personal accounts are maintained, itis always incomplete double entry varying with the circumstances”.

ESSENTIAL CHARACTERISTICS OF PARTNERSHIP

A partnership business must satisfy all the following essential elements. They must exist together. Absence of any one of them may cut the roots of partnership.

1. There must bean association of two or more persons. A person cannot become a partner with himself. Rcduclion in the number of partners to one shall bring about compulsory dissolution of the firm. The term ‘person’ does not include ‘firm’ (since it does not have a sepae legal existence) and as such only the partners of the firms can enter into partnership provided the combined strength of partners does not exceed the statutory limit. The, number of members in a partnership finn shouhl not exceed 10 if it carrying on a banking business, or 20 if it is engaged in any other business. An association or a partnership finn having members more than this statutory limit must be registered as a joint stock company, under the Companies Act or formed in pursuance of some other Indian law, otherwise it shall become an illegal association.’

2. There must be an agreement entered into by all persons concerned. The relation of partnership arises from contract and not from status or by operation of law. Partners must enter into an agreement voluntarily to form a partnership. The agreement may be express or implied. It may be for a fixed period or for a particular venture or at will, i.e., for an uncertain duration. Co-owners of a property or heirs of a sole proprietor who has died will not ipso facto become prtners in the business, unless there is n agreement between them to carry on business as partners.

Partners must enter into the contract with a motive to earn and distribute amongst themselves profits of the business. Agreement to share losses is not essential. Agreement to share profits also implies an agreement to share losses.

3. Business must be carried on by all or any of the persons concerned acting for all. Partners in a firms act in both the capacities of an agent as well as principal. Active partners act as agents and conduct the business for all the partners under an implied authority to do sq by the latter. Partners are mutual agents for each other and principals for themselves. A partner has an authority to bind his co-partners by his acts done io the ordinary course of the business of the firm. Partner’s liability is not limited to his share in the business but itextends to his personal assets too.

FINAL ACCOUNTS 

The method of preparing final accounts for the partnership firm is not different from the one followed for preparation of final accounts of a sole proprietary concern. Some of the important points to be taken carc ofwhile preparing the final accounts are as follows:

1. Capital Accounts 

There will be a separate capital account for each partner. For example, if A, B and C are three partners in a partnership firm, there will be three capital accounts, one each of A, B and C. The capital accounts may be maintained either on fixed or fluctuating capital system.

2. Profit and Loss Appropriation Account 

A separate Profit & Loss Appropriation Account may be prepared to show the distribution of profits among different partners.

3. Guarantee of profit to a partner 

The partnership agreement may provide for a guaranteed amount as profit to a partner (or partners). In such a case, the term of guaranteed profit will be significant only in those years, when the guaranteed amount of profit is more than the share or profit which the partner (or partners) concerned would have got otherwise in the absence of any guarantee. In such an event, the partner (or partners) to whom guarantee has been given will get the guaranteed share of profit while the others will have to share the remaining profits (or bear the losses) as per the terms of the partnership agreement.

Distinction between Capital Expenditure and Revenue Expenditure

The following are the points of distinction between a Capital Expenditure and a Reyenue Expenditure;

(a) Capital expenditure is incurred for acquisition of fixed assets for the business. While revenue expenditure is incurred for day-to-day operation of the business.

(b) Capital expenditure is incurred for increasing the earning capacity of the business x liie :evënue expenditure is incurred for maintaining the earning capacity of the business.

(c) Capital expenditure is of non-recurring nature while revenue expenditure is of a recurring nature.

( The benefit of capital expenditure is received over a number of years and only a small part of it, as depreciation, is charged to the.profit and loss account each year. The rest appears in the balance sheet as an asset. While the benefit of revenue expenditure expires in the year in which the expenditure is incurred and it is entirely charged to the profit and loss account of the relevant year.

Highest in First Out Method (HIFO) According to this method, the inventory of materials or goods should be valued at the lowest possible prices. Materials or goods purchased at the highest prices are treated as being first issued/sold irrespective of the date of purchase. This method is very suitable when the market is constantly fluctuating because cost of heavily priced materials or goods is recovered from the production or sales at the earliest However, the method involves too many calculations as is the case of FIFO or LIFO method. The method has therefore, not been adopted widely. Base Stock Method The method is based on the contention that each enterprise maintains at all times a minimum quantity of materials or finished goods in its stock. This quantity is termed as base stock. The base stock is deemed to have been created out of the first lot purchased and, therefore, it is always valued at this price and is carried forward as a fixed asset. Any quantity over and above the base stock is valued in accordance with any other appropriate method. As this method aims at matching current costs to current sales, the LIFO method will be most suitable for valuing stock of materials or finished goods other than the base stock. The base stock method has the advantage of charging out materials/goods at actual cost Its other merits or demerits will depend on the method which is used for valuing materials other than the base stock.