Accountancy Theory

1.Define accounting and explain its objective? A: Introduction: Accounting is the concerned with recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the FINANCIAL STATEMENTS. Formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims.

Text: The committee on terminology set up by American Institute of Certified Public Accountants(AICPA) has been defined the term accounting in 1961 as follows: “Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the result thereof”. The analysis of above definition brings out the functions of accouting: 1.Recording: This is the basic function of accounting.It is essentially concerned with not only ensuring that all business transactions of financial character are recorded but also that they are recorded in an orderly manner. Transactions of recording is done in ‘Journal’ or subsidiary books.Depends upon the size and nature of the business the subsidiary books to be maintained.

Classifying: Classification is concerned with the systematic analysis of recorded facts, with a view to group transactions or entries of one nature at one place. This type of process is called ledger. The ledger contains different pages of individual account heads under which all financial transactions of similar nature are collected. For example the expenses may be classified under various heads like Traveling , Communications, Printing, Purchases, Stationary etc. All the entries in the Ledger shall flow based on the entries passed in the Journal. The ledger accounts will help in knowing the total expenditure under various heads for a given period. Summarising: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of financial statements.This process involves preparation of Trail Balance ,Income Statement ,Balance Sheet,Profit & Loss Accounts.

Deals with financial transactions: Accounting records only those transactions and events in terms of money, which are of a financial nature. In other words the transaction which are not of financial nature are not recorded in the books of accounts. For example a company, which has a team of employees with sound technological knowledge, cannot expressed in terms of financial numbers and hence will not be recorded in the books of accounts of the company. Interpretation: This is the final function of the accounting. The recorded financial data is interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plans and framing of policies for executing such plans. The above definition does not clearly reflect the present role performed by accounting. A widely accepted definition of the term accounting is given by American Accounting Association,which is follows: “Accounting is the process of identifying, measuring and communicating information to permit judgment and decision by the users of accounts.” The main components of the above definition are: 1.Transactions and events are measured and relevant data are processed and communicated to the users. 2.Accouting data is relevant for decision-making 3.There are users of accounts who need economic information. The users of accounts are investors, employees, lenders, suppliers and creditors, customers, government and public. Various user groups may have diversified interests either conflicting or complementary, but it is not possible to provide information separately for such users. Therefore a general purpose financial statement is necessary to be provided to all users.

Objective of Accounting: The following are the main objectives of the accouting: 1.To keep systematic records: Accounting is done to keep systematic records of financial transactions. In absence of a scientific method of accounting, there would have been tremendous burden on the human memory, which in most cases would have been impossible to bear. 2.To protect business properties: Accounting provides protection to business properties from unjustified and unwanted use. This is possible by providing information the following information to the management:

1.The amount of owner’s fund invested in the business. 2.How much the business owes to others. 3.How much the business has to recover from others. 4.How much business owns the assets. This information helps the management in ensuring that the assets do not remain idle or under-utilized. 3.To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit or loss upon carrying on the business. This is done by maintaining the proper record of revenues and expenses for a particular period. 4.To ascertain the financial of position of the business: The profit and loss accounts reflects the performance of the business during a particular period. However, it is also necessary to know the financial position i.e. where we stand. What we owe and what we own. The objective is met by Balance Sheet, which shows the state of affairs of assets and liabilities as on a given date.It serves as barometer for ascertaining the financial health of the business. 5.To help rational decision-making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required level of authority in order to facilitate rational decision-making. Conclusion: Accounting information is useful not only for the owners and management but also useful to Creditors, Employees, Governments and prospective investors. The main objective of the accounting is to reflect the true and fair picture of profitability and financial position, which helps management to take corrective actions and future decisions.

2.Explain the meaning & Significance of the following 1)Dual aspect 2)Consistency 3) Materiality 4)Full disclosure 5)Cost concept A) 1)Dual aspect: This is just like Kirchoff’s second law (current flowing towards a node is equal to that flowing away from it). Dual aspect means that if an organisation receives money, someone must have given it to the organisation or entity. Likewise, if you pay out money someone must have received it. This leads to a method of book-keeping called double entry book-keeping. This system is under a simple principle "every debit is having corresponding credit every credit is having corresponding debit". Every financial event can be viewed from two perspectives: the effect on an entity’s resources and on claims against those resources. Thus at any time accounting equation is Assets = Liabilities + Capital or alternatively; Capital = Assets – Liabilities. For example a owner brings Rs.5, 00,000 in cash as Capital to start the company. Then Rs,5,00,000 is the Capital and corresponding amount of Rs.5,00,000 will appear as cash on hand(assets).

2)Consistency: The accounting rules should not be amended unless there is a fundamental change in circumstances. When rules/methods are changed it makes it more difficult to compare historical (previous) accounts with current ones, unless they are re-worked. The law requires consistency in the accounting policies applied in the preparation of profit and loss accounts between,

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any base year in Method A schemes or the 12 months immediately preceding the start of a Method B Scheme,

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the first profit period, and,

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all subsequent profit periods.

Accounting policies are the specific accounting bases judged by business enterprises as being, in the opinion of their management, appropriate to their circumstances and best suited to present fairly their results and financial position. The notes to the accounts must set out the policies the company has adopted to determine the amounts to be included in the accounts. It is not acceptable to use alternative accounting policies for PRP purposes except where specifically allowed by Schedule 8 of ICTA 1988. Accounting bases are methods developed to apply the fundamental accounting concepts to financial transactions and items for the purposes of financial accounts, and in particular to determine, •

The accounting period in which revenues and costs are recognized, and,

•

The amounts at which material items are stated in the balance sheet.

Materiality: The materiality rule applies principally to financial accounting. It states that if the material consequences of not following an accounting rule are insignificant, the rule can be ignored. In management accounting the impact would be the same - you can change your practices as you see fit providing they don't impact on the financial accounting. Many organizations have to provide access to some or all of their management accounts to government bodies or public organizations with whom they have contracts, i.e. some form of internal auditing or reporting on the management accounts is undertaken by these external organizations. Thus, organizations often cannot unilaterally change their internal accounting practices without consultation or notification to major customers. This often is the case on joint projects or a project that is part of a greater project, a frequent occurrence in engineering. The major partner in these circumstances will demand consistency in the accounts as these form the basis of pre- or part payments (milestones) as the project/contract progresses. According to Kohler “Materiality means characteristic to a statement, fact or item whereby its disclosure or method of giving it expression would be likely to influence the judgment of a reasonable person.” Full Disclosure: In your initial contacts with a prospective financial planner, you’re probably focusing on many issues: how much do they charge, what services do they provide, what financial planning credentials do they have, how can they help you? But among the many key questions you should be asking is one that you may not know to ask: is the person a registered investment adviser and, if not, are they a Certfied Financial Planner® professional? This is a key question because all registered investment advisers (RIAs) must provide full disclosure about their business practices. An individual or firm must register with either the federal Securities and Exchange Commission or their state securities agency as an RIA if they provide investment advice as part their business. Financial planners who hold the CFP certification are also required to disclose generally the same information as a registered investment adviser. But financial advisers who work for banks, or who work as insurance agents or stockbrokers, do not have disclosure requirements, unless they are also CFP® professionals. Now the SEC is proposing an exception to this RIA rule that consumers should be aware of. The law currently exempts stockbrokers from registering as advisers if their investment advice is “solely incidental” to their brokerage services and if they are not specifically compensated for that investment advice -- unless they have the power of attorney to buy and sell stocks in a client’s account.

The SEC is proposing that stockbrokers remain exempt even if the client is paying for the investment advice, such as through portfolio management fees. Before the SEC proposed the rule, stockbrokers calling themselves a financial planner and who provided investment advice for a fee would have need to register. What key disclosures must an RIA make when registering, and why are those disclosures helpful to consumers? The RIA must spell out this information on either the federal Form ADV, Part II, or the same information in a customized brochure by the adviser. Any RIA should provide a copy of the form to you upon request. You also can request a copy of Part I, which reveals any disciplinary history. Part II covers numerous items, such as the RIA’s services and fees, types of clients, education background, business activities, and business affiliations that are helpful information to the public. For example, RIAs must disclose whether they buy or sell securities that they recommend to clients (known as self-dealing), how they are compensated for their services, whether they are compensated by a third party for client referrals, or what other business arrangements they have with outside parties. Some of these or other arrangements may suggest potential conflicts of interest that might compromise the objectivity of the advice. Not all conflicts of interest are inherently bad. The key is full disclosure of those potential conflicts, so consumers can judge for themselves whether the conflicts could potentially compromise the planner’s objectivity and undermine the trust that is so vital to an effective financial planning relationship. But unless the planner is a registered investment adviser or a CFP professional, it's difficult to find out whether such conflicts exist. Another key feature of being an RIA is that the adviser must act as a fiduciary -- that is, the adviser must put the interests of his or her client ahead of the adviser’s own interests. "Financial planners" who are not registered as such, or who do not work in a bank or trust department, are not required by law to adhere to this high standard. RIAs also are not permitted to use client testimonials to help attract new clients. Ultimately, the result of full disclosure is that consumers can better discern when they are receiving unbiased advice upon which they can build a deep and trusting financial planning relationship -- or merely something that looks like financial planning but isn't.

Cost Concept: Transactions are entered in the books of account at the amounts actually involved. An asset is ordinarily recorded at the price at which it has been acquired. For example a Plot of land purchased by a business firm for Rs.5, 00,000, would be recorded at this value irrespective of its current market price. Cost concept has the advantage of bringing objectivity in the presentation of the financial statements. In absence of this concept the figures shown in the accounting records would have depend on the subjective view of a person.

3.”Trail Balance is a conclusion proof of accuracy of Accounts”-Comment. A) Introduction: The trial balance is a worksheet on which list of all general ledger accounts and their debit or credit balance. It is a tool that is used to alert you to errors in your books. The total debits(A debit is one of the amounts in an accounting entry. At least one component of every accounting transaction (journal entry) is a debit amount. Debits increase assets and decrease liabilities and equity. For this reason, debits entered on the left-hand side (the asset side of the accounting equation) of a two-column journal or ledger) must equal the total credits(A credit is one of the amounts in a double-entry accounting system entry. At least one component of every accounting transaction (journal entry) is a credit amount. Credits increase liabilities and equity and decrease assets. For this reason, credits entered on the right-hand side (the liability and equity side of the accounting equation) of a two-column journal or ledger). If they don't equal, have an error that must be tracked down. Text : The Trial Balance is a simple listing of the nominal (otherwise called general ledger) accounts with the debit balances posted into a debit column and the credit balances posted into the credit column. Although it looks like an account because it has a debit column and a credit column, it is not an account but merely a list of account balances. Simply put, it ensures that for every debit amount there are equal credit amounts in the nominal or general ledger and vice versa. Looking beyond the mechanics of the Trial Balance to its' purpose, it plays a key part in ensuring that for every recorded movement of value there is an explanation of that value in the nominal or general ledger. When closing out the books at the end of an accounting period, have to prepare three trial balances:

1. A preliminary trial balance is prepared using the general ledger account balances before make adjusting entries.

2. An adjusted trial balance is done after preparing adjusting entries and posting 3.

them to general ledger. This will help ensure that the books used to prepare the financial statements are in balance. A post-closing trial balance is done after preparing and posting closing entries. This trial balance, which should contain only balance sheet accounts, will help guarantee that books are in balance for the beginning of the new accounting period.

Finding Trial Balance Errors: When preparing a trial balance, the total debits must equal the total credits. Don't be discouraged if they don't. Bookkeeping errors happen. Just think of the trial balance as a tool to find the errors. Use the following steps as a guide to track down the error or errors.

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Be sure the numbers on the trial balance are the same numbers shown in the general ledger. Check to see if properly classified amounts as debits or credits on the trial balance. Go back to journals (sales and cash receipts journal, cash disbursements journal, and general journal). Check that the journal totals were properly posted to the general ledger. Were the correct amounts posted? Were they properly classified as debits or credits? Go back to each journal again. Look at the totals that were posted to the general ledger. Do total debits equal total credits in each journal? Go back to each journal again. Did foot each column on each page of the journal? Did it carry forward all column totals to the next page? Did all the items entered in the "miscellaneous" column get posted to the general ledger? Is the difference divisible by nine? If so, it could be a simple transposition error. For example, writing down 540 instead of 450 results in a difference of 90. Writing down 26 instead of 62 results in a difference of 36. Notice that both of these differences are divisible by nine. If the difference between debits and credits is divisible by nine, go back to the journals, looking for the error. Knowing that it may be the result of transposed numbers should help to find it. Is the difference between debits and credits 1, 100, 1,000, 10,000, etc.? If so, it is probably an addition or subtraction error. Divide the difference by two. Is the resulting number shown on your trial balance? If so, check to see if you have incorrectly classified the amount as a debit or credit.

Examples: After paying the cash out of the safe to the window cleaner credit the Petty Cash Account in nominal ledger which records the reduction in money in safe but also need to record the event as an expense for later management information so debit Cleaning account in the nominal ledger for the same amount. Pay a cheque (check) to purchase a new computer. Make a record on the credit side of the Bank Account in nominal ledger to record the reduction of the balance of the bank account but you also need to make a debit entry for the same value in the Office Equipment Account to record that the value has now been moved into the computer (an asset). Make a sale and get paid by cheque (check) which you bank. You need to record the amount of the cheque as a debit in the Bank Account in the nominal ledger (because the Whatever Bank is now more of a debtor) but also need to record the sale for management information purposes so credit the Sales Account in the nominal ledger for the same amount.

Conclusion: Each account in the nominal or general ledger has a debit column and a credit column (like the bank account). (A ledger is simply a number of accounts collected together for a specific purpose - other ledgers include the Purchase and Sales Ledgers.) In the nominal (or general) ledger individual accounts are kept for each item of expenditure or income, asset or liability that needs to be monitored eg. electricity account, sales account, premises account, bank account. Whenever something happens, it affects an asset account to increase or reduce the assets and that needs to be explained with another entry in an income or expenditure account. One is recorded as a debit and the other is recorded as a credit. The Trial Balance summarizes the end result of all these debit and credit entries to ensure no single sided entries have been made in the nominal or general ledger.

5)What are the causes of difference in the bank balance as shown by the cash book & the pass book. A) Introduction: Depositing of cash or cheques in the bank and withdrawing of cash or issuing of cheques are the main operations, which are done through a bank account. When the money is deposited in the Bank,the firm debits the bank account , the firm debits the bank account(bank account being personal account) and money is withdrawn from the bank, the firms credits bank account. Thus, balance shown by the firm’s books in the bank account should tally with the balance as shown by the bank’s book in the account of the firm. Of course , if the balance as per books of account is debit, the balance as per bank’s book shall be credit and vice-versa. However, the balances rarely tally. The difference in two balances would arise if the all or some of the entries are not recorded. Bank reconciliation statement aims at locating the discrepancies in the entries passed between the bank statement or pass book and the bank account maintained by the firm. Usually following are the reasons for the differences between two balances: 1.Cheques received are entered in the bank book as soon as they are received. While such cheques may be deposited in the bank on the same or the next working day, the bank credit the bank account only upon realization of the proceeds. Thus during the period from receipt of the cheque till realization of the proceeds in to our accounts, there exists the differences in the bank balances to the extent of cheques pending for realization. 2.Similarly the bank account in the books of account is credited no sooner the cheque is issued. Till such cheques are presented for payment and paid by the bank the balance as per bank statement is not affected. 3.Bank often debit some amount to the account for the various services rendered by them. The entry for such charges is charged in the books of account based on the advice received from the bank. Till such time that the entries are passed in the books of account based on the advice received from the bank. Till such time that the entries are passed in the books of accounts, there exists a difference between two balances. 4.Similarly where bank is collecting interest / dividend on securities on behalf of the company, bank directly credits such amount is the account and issues a credit advice. Till such time that the corresponding entries are passed in the books account, there will be a difference between two balances.

5.Any error committed by the Bank. A bank rarely commits an error but, if does , the balance shown as per bank statement will naturally difference from the balance as per books. No entries in the books are to be passed for such errors. When the necessary rectification of entries are passed bye the bank the balances automatically agree. 6.Where a bank debits the account for dishonor of a cheque deposited in the bank, the entry will be passed in the ledger only upon receipt of the dishonored instrument(cheque) form the bank. Till such time that the entry is passed that the entry is passed, both the balances do not agree. While all the above examples show that the differences between two balances arise mainly on account of time differences in accounting either in the books of account or by the bank. All such items over a period should get accounted and should not remain pending for long time. Since through bank account all receipt and payments are routed, it is absolutely essential to prepare the bank reconciliation statement on a month to month basis to know that timely entries are passed and no items remain pending for a long time. Bank Reconciliation: Prepare a bank reconciliation after receive the bank statement every month. This is a very important part of the cash control procedures. It verifies the amount of cash have in checking account. The cash balance in the books will never agree with the balance shown on the bank statement because of the delay in checks and deposits clearing the bank, automatic bank charges and credits haven't recorded, and errors may have made in books. After preparing the bank reconciliation, can be comfortable that the account balance shown on the books is up-to-date. Another important reason to do a bank reconciliation is that it may uncover irregularities such as employee theft of funds. Here are step-by-step instructions for preparing a bank reconciliation.

1. Prepare a list of deposits in transit. 2. Prepare a list of outstanding checks. In your cash disbursements journal, mark each check that cleared the bank statement this month. On the bank reconciliation, list all the checks from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation Prepare a bank reconciliation after receiving the bank statement every month. This is a very important part of the cash control procedures. It verifies the amount of cash having in your checking account. The cash balance in the books will never agree with the balance shown on the bank statement because of the delay in checks and deposits clearing the bank, automatic bank charges and credits haven't recorded, and errors may have made in books. After preparing the bank reconciliation, can be comfortable that the account balance shown on the books is up-to-date.

Another important reason to do a bank reconciliation is that it may uncover irregularities such as employee theft of funds. Here are step-by-step instructions for preparing a bank reconciliation.

1. Prepare a list of deposits in transit. Compare the deposits listed on the

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3.

4. 5. 6. 7. 8.

bank statement with the bank deposits shown in cash receipts journal. On the bank reconciliation, list any deposits that have not yet cleared the bank statement. Also, take a look at the bank reconciliation that prepared last month. Did all of last month's deposits in transit clear on this month's bank statement? If not, should find out what happened to them. Prepare a list of outstanding checks. In cash disbursements journal, mark each check that cleared the bank statement this month. On the bank reconciliation, list all the checks from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation prepared last month. Are there any checks that were outstanding last month that still have not cleared the bank? If so, be sure they are on the list of outstanding checks this month. If a check is several months old and still has not cleared the bank, may want to investigate further. Record any bank charges or credits. Take a close look at the bank statement. Are there any special charges made by the bank that have not recorded in books? If so, record them now just as would have if had written a check for that amount. By the same token, if there are any credits made to your account by the bank, those should be recorded as well. Post the entries to your general ledger. Compute the cash balance per the books. Foot the general ledger cash account to arrive at the ending cash balance. Enter bank balance on the reconciliation. At the top of the bank reconciliation, enter the ending balance from the bank statement. Total the deposits in transit. Add up the deposits in transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a subtotal. Total the outstanding checks. Add up the outstanding checks, and enter the total on the reconciliation. Compute book balance per the reconciliation. Subtract the total outstanding checks from the subtotal in step 6 above. The result should equal the balance shown in the general ledger.

Conclusion: Bank reconciliation is a crucial document to primarily decide the arithmetical accuracy of accounts. Most of the transactions of collection and payments are routed through bank accounts and as such it is essential to prepare bank reconciliation at a periodic interval so as to ensure the all the entries as per bank statement are reconciled with that of the entries in the bank account in the ledge

6)From the following particulars,prepare a bank reconciliation statement as on 31st December ,2000 1)On 31st December,2000 the cash book showed a bank balance of Rs.6000/-(Debit) 2)Cheque had been issued for Rs.5,000, out of which cheques worth Rs.4,000/- only were presented for payment. 3)Cheques worth Rs.1,400/- which were deposited in the bank on 28/12/2000 were not credited by bank. 4)A cheque for Rs.400/- deposited on 26/12/2000 was dishonoured & advice received on 2.1.2001. 5.Pass book showed bank charges of Rs.20/- debited by bank. 6.One customer had deposited Rs.500/- directly in bank account intimation for which was received from bank as 2.1.2001. 7.Bank pass book showed a credit balance of balance of Rs.5,180 as on 31.12.2000. A) Bank Reconcilation Statement as on 31st Dec 2000 Balance as per cash book

6,000

Add

Cheques issued but not presented For payment

1,000

Less

Cheques were deposited but not Credited Cheque deposited but dishonoured Bank Charges

-1,000

Less Less

Balace as per Pass Book

- 400 - 20 5,180

8) Distinguish between (any two) a) Capital Expenditure & Revenue Expenditure b) Capital Receipts & Revenue Receipts a) Capital Expenditure & Revenue Expenditure:

This is expenditure on items which you expect to last for more than one year. There is no legal definition of capital expenditure. It includes not only equipment bought during your accounting year but items which you owned prior to becoming a freelance artist and now use in your business. Difference between Capital Expenditure & Revenue Expenditure: The following are the points, which is distinguishes the expenditure between capital and revenue. 1.The capital expenditure is incurred either for acquiring a new asset or for improving the existing assets, while revenue expenditure is incurred either for maintaining the existing fixed assets or for meeting the routine, expenses of the business. 2.Capital Expenditure increases the earning capacity of the business, while revenue expenditure does not do so, It generally helps in maintaining the existing capacity of the business. 3.The benefits of capital expenditure are available over a period of time, while benefit of revenue expenditure is restricted only to accounting period in question. 4.Capital expenditure is recorded (subject to depreciation) in the balance sheet whereas the revenue expenditure (subject to adjustment for outstanding and prepaid amount) is transferred either to trading account or profit and loss account. The example for showing the difference between capital expenditure and revenue expenditure The difference between these depends in part on the size of your business. If, for example, you make sales of 5000 a year, then capital expenditure would probably be expenditure on items lasting more than one year and costing over £25. If you are making sales of £20,000 a year, then you might treat anything costing under £100 as revenue expenditure to be written off in the year it is purchased - even if it will last for longer. You would then claim capital allowances on anything costing over £100. There are no hard and fast rules. It is recommended that you disclose your chosen policy to the Inland Revenue for approval. Does the difference matter? The reason why it's so important to distinguish between capital and ordinary day-to-day running costs is because of the way in which you obtain tax relief on the expenditure. On revenue expenditure you will usually obtain a deduction of 100% of the cost in your accounts. For capital expenditure you claim capital allowances. In most cases these amount to 25% of the cost of the item in the first year, and in following years 25% of the

remaining balance having deducted previous claims. The capital allowances are deducted from your profit when you work out your tax. What items can I claim? • car, motorbike, bike - but business proportion only • computer, printer and accessories, typewriter • camera and photographic equipment (sometimes business proportion only) • drawing board, desk or table, chair or stool • work lamps ,light box • equipment and tools specific to your trade, eg loom for a weaver, wheel, kilns, buckets for a ceramicist, etc • drawing equipment, stock of brushes, etc • storage, plan chests, filing cabinet, drawers, shelves, etc • portfolio cases, briefcase, Filofax, electronic organiser • stock of slides, projector, epidiascope

• TV and video if used in research - but business proportion only (but note for a video/film/media artist these would count as tools specific to your trade) • stereo or radio if you need music to work - but business proportion only (but note again for some artists these may be tools specific to your trade so the whole cost can be offset for business use • heater other than central heating • drying racks and heaters to dry fabrics • answerphone, fax, telephone and security systems • exhibition equipment, table, stands and display items, frames • fridge, kettle • photocopier • stock of reference books and materials. Capital allowances: This is complicated and there are detailed rules depending on the type of asset involved. If you have an accountant they will deal with this for you. If you don't read your selfassessment forms carefully and check with other artists how they have filled in that part of their tax return.

Capital Receipts & Revenue Receipts: Capital receipts are defined as the proceeds of property sales. However, such sums will be treated as received when they become payable to the authority, rather than, as now, when actually paid. This change is simply part of the general approach of bringing definitions in line with accounting practice and will have no practical implications. There is power to vary this definition by regulations and it is likely that the repayment of certain loans made for capital expenditure will be, as now, defined as capital receipts. Example for capital receipt is Rs.12,000 have been received towards sale of the fixed assets. Thus the entire amount of Rs.12,000 is capital receipts, but the amount of capital profit is only Rs.2000/-.

Long-term borrowing will continue to be available only for capital expenditure purposes. The requirement for authorities to balance their revenue budgets prevents the use of long-term borrowing to fund revenue expenditure, though the new system, like the present one, will confer limited capacity to borrow short-term for revenue needs in the interests of cash-flow management. Example for revenue receipt is goods costing Rs.25000, are sold for Rs.30000/- and the cash of Rs.30000 is received. The revenue receipts is Rs.30000/- but the revenue profit is only Rs.5000/Differences between Capital receipts and Revenue receipts: 1.Capital receipts are normally of non-recurring nature whereas revenue receipts are normally of recurring nature. 2.Revenue receipts are obtained in the course of normal trading operations. The receipts, which are not revenue, are regarded as capital receipts. 3.Revenue receipts are directly credited to the income statement where as capital receipts are not directly credited to the income statement. 4.Capital receipts are normally not available for payment as profit to the owner of the business whereas the revenue receipts net of revenue expenses and expired portions of capital expenditures/deferred revenue expenditure is available for distribution to the owners of the business.

10.Under what headings, followings item will be classified. a. Preliminary Expenses b. Unclaimed dividend c.

Bills receivable

d. Loose tools e. Share premium Account A) Preliminary Expenses:

1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), (i) Before the commencement of his business, or (ii) After the commencement of his business in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :-

(a) Expenditure in connection with (i) Preparation of feasibility report; (ii) Preparation of project report; (iii) Conducting market survey or any other survey necessary for the business of the assessee; (iv) Engineering services relating to the business of the assessee :

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board; (b) Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) Where the assessee is a company, also expenditure - (i) By way of legal charges for drafting the Memorandum and Articles of Association of the company; (ii) On printing of the Memorandum and Articles of Association; (iii) By way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) In connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; (d) Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed. (3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at two and one-half per cent - (a) Of the cost of the project, or (b) Where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1). Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-half per cent, the words "five per cent had been substituted. B) Unclaimed dividend: To file a claim for unclaimed dividends, you must: 1. Send a written request including the bankruptcy case number, the debtor's name and the amount of monies due to you. If you represent a business, your letter should be written on company letterhead. 2. State the reason you are claiming this money and why you believe you are untitled to it. 3. Include legible copies of supporting documentation, such as the original proof of claim, correspondence from the court, a copy of an original, un cashed cheque etc.

If, because of death, you are not the original entitled party, please include a copy of the death certificate and will which states that you are the one and only entitled heir. If your business changed as a result of a merger or buyout, please include supporting documents which show that the assets involved are now due to you. 4. Positive identification (copy of current driver's license or passport and copy of your social security card). If you represent a business, include a copy of a business card which reflects your title. 5. If you have relocated since you initially filed your claim with the court, please list your prior address(es) as well as your current residence and telephone number. 6. Close your request with a statement that the information you are giving is "true and correct under penalty of perjury." 7. Notarize your request. 8. If you are an individual, include a cashier check in the amount of $20.00, made payable to Clerk of the Court. If you represent a business, a company check is acceptable. 9. If you are an agent acting on behalf of the entitled party, you must include a power of attorney. If you are an attorney, please include an appropriate motion and order in pleading format. C: Bills Receivable: According to McElrath bills receivable is the unpaid promissory notes or acceptances held by an individual or firm. Once accounts receivable get too old, they usually become un collectable. Accounts receivable represent sales that have not yet been collected as cash. Have to sell merchandise or services in exchange for a customer's promise to pay at a certain time in the future. If business normally extends credit to its customers, then the payment of accounts receivable is likely to be the single most important source of cash inflows. In the worst case scenario, unpaid accounts receivable will leave the business without the necessary cash to pay its own bills. More commonly, late-paying or slow-paying customers will create cash shortages, leaving the business without the cash necessary to cover its own cash outflow obligations. Accounts receivable also represent an investment. That is, the money tied up in accounts receivable is not available for paying bills, paying back loans, or expanding the business. The payoff from an investment in accounts receivable doesn't occur until customers pay their bills. The idea of accounts receivable as an investment is an important concept to understand is to consider the impact of accounts receivable on cash flow. The following analysis tools can be used to help determine the effect your business's accounts receivable is having on the cash flow: • • • • •

average collection period measurement using the average collection period accounts receivable to sales ratio accounts receivable aging schedule using the accounts receivable aging schedule

D) Loose Tools: Different methods (bases) of calculating depreciation may be used for different classes of fixed assets. For example, a company may use the Straight Line Method of depreciation for buildings, the Reducing Balance Method of depreciation for motor vehicles and a revaluation method for loose tools. There is a significant effect on the final accounts of an organization of using alternative methods of depreciation. E) Share premium account: A company can issue its shares at a premium (i . e for a value higher than the face value of the shares) whether for cash or for consideration other cash. The power to issue shares at a premium need not be given by the articles of association. According to section 78, such premium has to be transferred to share premium a/c, which can be applied only for the following purposes: 1.For issue of fully paid bonus shares to the shareholders; 2.For writing off preliminary expenses of the company; 3.For writing off the expenses of or the commission paid or discount allowed, on issue of shares or debentures of the company and 4.For providing premium payable on the redemption of any redeemable preference shares or debentures of the company.