Financial Accounting book download ЁЯСЗ
Some important questions for exam.
1. What do you mean by accounting. discuss its nature and significance.
2. What are accounting standards? What Procedure adopted for formulating accounting standards? Discuss its objectives.
3. Define accounting concepts and Principles.
4. What do you mean by royalty account.
(Numericals on royalty ).
5. Define hire purchase system. What are its characteristics? Mention its advantages and disadvantages.
6. Define installment purchase system. What are its characteristics? Distinguish between the hire purchase and installment purchase system.
7. Define branch and branch accounting. Mention the objectives of branch accounting. Explain its need and importance.
7. What are various types of branch? Between dependent branch and independent branch.
8. Explain the concept of dissolution of partnership and dissolution of firm. Also distinguish between them.
9. How accounts are settled in case of dissolution of partnership firm?
10. What do you mean by Voyage Account. And it's Numericals.
11. What do you mean by insurance? discuss its characteristics & it's types.
12. What do you mean by Insurance claim ?
Accounting definition:-
."Accounting is the art of recording, classifying and summarizing in a significant manner, and in terms of money transaction and event which are, in part at least, of a financial character and interpreting the result thereof."
"Accounting is a process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of information." - American Accounting Information
"Accounting is nothing but a means of communicating the results of business operations to varies parties, interested in or connected with the business, viz., the owner, creditors, investors, government, financial institutions and other agencies. Accounting is therefore, rightly called the language of business."
Financial Accounting:
The term ‘Accounting’
unless otherwise specifically stated always refers to ‘Financial
Accounting’. It is commonly carrying on in the general offices of a
business. It concerns with revenues, expenses, assets, and liabilities
of a business house. Also, they have the two-fold objective, viz,
- To ascertain the profitability of the business, and
- To know the financial position of the concern.
Nature and Scope of Financial Accounting:
Financial
accounting is a useful tool to manage and to external users such as
shareholders, potential owners, creditors, customers, employees, and
government. It provides information regarding the results of its
operations and the financial status of the business.
The following are the functional areas of financial accounting:-
1] Dealing with financial transactions: Accounting
as a process deals only with those transactions which are measurable in
terms of money. Anything which cannot be expressed in monetary terms
does not form part of financial accounting however significant it is.
2] Recording of information: Accounting
is the art of recording financial transactions of a business concern.
There is a limitation on human memory. It is not possible to remember
all transactions of the business. Therefore, the information is recorded
in a set of books called Journal and other subsidiary books and it is
useful for management in its decision-making process.
3] Classification of Data: The
recorded data arrange in a manner to group the transactions of similar
nature at one place so that full information of these items may collect
under different heads. This is done in the book called ‘Ledger’. For
example, we may have accounts called ‘Salaries’, ‘Rent’, ‘Interest’,
Advertisement’, etc. To verify the arithmetical accuracy of such
accounts, the trial balance prepare.
4] Making Summaries: The classified information of the trial balance uses to prepare a profit and loss account and balance sheet
in a manner useful to the users of accounting information. As well as,
the final accounts prepare to find out the operational efficiency and
financial strength of the business.
5] Analyzing: It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet.
Also, the purpose is to identify the financial strength and weaknesses
of the business. It also provides a basis for interpretation.
6] Interpreting financial information: It
is concerned with explaining the meaning and significance of the
relationships established by the analysis. It should be useful to the
users, to enable them to take correct decisions.
7] Communicating the results: The
profitability and financial position of the business as interpreted
above communicate to the interest parties at regular intervals to assist
them to make their conclusions.
Nature of Financial Accounting:-
Accounting is first step:- Accounting
is start when a financial transaction take place. It records the
financial transaction after that communicates this information to its
users. then the user this information for their decision making.
Accounting is an art and science:- Accounting
is an Art and Science as well. Accounting is an art of recording,
classifying and summarizing of financial transactions. Accounting is
science as well as it requires certain principles (accounting
principle).
Accounting is a process:- Accounting
is a process recording of financial transaction, summarizing,
analyzing, and reporting to the user of accounting information.
Accounting deals with financial transactions only:- Financial
accounting is considering only monetary transactions. It does not take
into account various non-financial aspects such as market competition,
economic conditions, government rules, and regulations, etc.
Historic In Nature:- Financial
accounting considers only those transactions which are of historic
nature. day-to-day activities transactions are recorded and the
information is provided after a period of time. All financial decisions
of the future are taken on the basis of this past information
Records Actual Cost:- Financial
accounting records the actual cost of the transaction and does not
consider the price fluctuations taking place from time to time. It
records the historical cost or the actual cost of the assets or
liability.
Advantages Financial Accounting.
Maintenance of business records: All financial transactions are recorded in a systematic manner in the books of accounts so that there is no need to rely on memory. Human memory is limited by its very nature. Accounting helps to overcome this limitation.
Preparation of financial statements: Systematic records enables the accountants to prepare the financial statements trading and profit & loss account to ascertain profit or loss during a particular accounting period and balance sheet to state the financial position of the business on a particular slate.
Comparison of results: Systematic maintenance of business records enables the accountant to compare profit of one year with those of earlier years to know the significant facts about the change.
Acts as Legal Evidence: Proper books of accounts maintained in systematic. manner act as legal evidence in case of disputes.
Facilitates Raising loans: Accounting facilitates raising loans from lenders by providing them required financial information.
Facilitates the Ascertainment of value of Business: Accounting facilitates the ascertainment of value of business’in case of transfer of business to another entity.
Assist the Management: Accounting assists the management in taking managerial decisions. For example, Projected Cash Flow Statement facilitates the management to know future receipts and payment and to take decision regarding anticipated surplus or shortage of funds.
Helps in taxation matters: Accounting facilitates the settlement of tax liability with the authorities by maintaining, proper books of accounts in systematic manner.
Facilitates control over Assets: Accounting facilitates control over assets by providing information regarding Cash Balance, Bank Balance, Stock Debtors, Fixed Assets, etc.
Limitation of Financial Accounting
Records only monetary transactions: Financial Accounting records only those transactions which can be measured in monetary terms. It has no place for recording non-monetary or non-financial transactions, though these matters also have a significant Tole in affecting the soundness of the business. For example, efficiency of the management, political situation, Government Policy, market competition etc. do affect the financial results and financial position of a business, but these are not at all recorded in accounting.
No consideration of price level changes: Accounting accepts the cost concept and hence does not consider the change in the price level from time to This is a very serious limitation of Financial Accounting.
No realistic information: Accounting information may not be realistic as accounting statements are prepared by following basic concepts. For example, Going Concern Concept gives us as idea that the business will continue and assets are to be recorded at cost but the book value, which the asset is showing, may not be actually realizable.
Personal bias of accounting affects the accounting statements: Accounting statements are influenced by the personal judgement of the account. He may select any method of depreciation, valuation of stock, and treatment of deferred revenue expenditure. Such judgement is based on integrity and competence of the accountant, and will affect the preparation of accounting statements.
Window dressing in Balance Sheet: When an accountant resorts to ‘window dressing’ in the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of affairs of the business.
ACCOUNTING PRINCIPLES
Accounting principles may be defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transaction.
They are a body of doctrines commonly associated with the theory and procedure of accounting , serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternative exits.
Accounting Concept
The term ‘Concepts’ includes those basic assumptions or conditions upon which the science of accounting is based.
(1) Separate Entity Concept :- According to this assumption, business is treated a s a unit separate and distinct from its owners, creditors , manager and others. In other words, the owner of a business is always considered as distinct and separate from the business he owns.
( (2) Going Concern Concept :- As per this assumption it is assumed that the business will continue to exist for a long period in the future. The transactions are recorded in the books of the business on the continuing enterprise.
(3) Money Measurement Concept :- Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money. Measurement business event in the money helps in understanding the state of affairs of the business in a much better way.
(4) Cost Concept :- The resources (Land, building, machinery, property rights etc.) that a business owns are called assets. The money values assigned to assets derived from the cost concept. This concept states that an assets is worth the price paid for or cost incurred to acquire it.
(5)Dual Aspect Concept :- This is the basic concept of accounting. According to this concept every business transaction has a dual effect. If A starts a business with a capital of Rs. 10,000. There are two aspects on the transaction. The business has assets of Rs. 10,000 while on the other hand the business has to pay to the proprietor a sum of Rs. 10,000 which is taken as proprietor’s Capital.
Capital (Equities) = Cash (Assets)
10,000 = 10,000
(6) Accounting Period Concept :- According to this concept the life of the business is divided into appropriate segments for studying the results shown by the business after each segments. At the end of each segment of business or time interval is called “accounting period”.
(7) Revenue Concept :- This is based on the accounting period concept. The paramount objective of running a business is to earn. In order to ascertain the profit made by the business during a period, it is necessary that ‘revenue’ of the period. The term ‘Matching means appropriate association of relation revenue and expenses.
In other words income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue.(8) Realisation Concept :- According to this concept revenue is recognised when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.
(B) Accounting Conventions :-
(i) Conservatism :- In the initial stages of accounting certain anticipated profits which were recorded , did not materialise. In encourages the accountant to create secrete reserves (eg., by creating excess provision for bad and doubtful debts ,depreciation etc.) and the financial statement do not depict a true and fair view of state of affair of the business.
(ii) Full disclosure :- According to this convention accounting reports should disclose fully and fairly the information they represent. They should be honestly prepared and sufficiently
disclose information which is of material interest to proprietor, present and potential creditors and investors.
(iii) Consistency :- According to this convention accounting practices should remain unchanged from one period to another. For example , if stock is valued at “Cost or market price
whichever is less, this principle should be followed year after year. Similarly if depreciation is charged on fixed assets according to diminishing balance method, It should be done year after year.
(iv) Materiality :- According to this convention the accountant should attach importance to material details and ignore insignificant details. This is because otherwise accounting will be unnecessarily overburden with minute details.
International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.
International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.
International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.International
International Accounting Standards:-
International Accounting Standards:-
|
|
Name
|
Issued
|
|
IAS 1
|
Presentation of financial statement
|
2007*
|
|
IAS 2
|
Inventories
|
2005*
|
|
IAS 3
|
Consolidated financial statement
|
1976
|
|
IAS 4
|
Depreciation accounting
|
|
|
IAS 5
|
information to be disclosed in financial statement
|
1976
|
|
IAS 6
|
Accounting responses to changing prices
|
|
|
IAS 7
|
Statement of cash flows
|
1992
|
|
IAS 8
|
Accounting policies, Changes in estimates and errors.
|
2003
|
|
IAS 9
|
Accounting for research and development activities
|
|
|
IAS 10
|
Events after the reporting period
|
2003
|
|
IAS 11
|
Construction contracts
|
1993
|
|
IAS 12
|
Income taxes
|
1996*
|
|
IAS 13
|
Presentation of current assets and current liabilities
|
|
|
IAS 14
|
Segment reporting
|
1997
|
|
IAS 15
|
Information reflecting the effect of changing prices
|
2003
|
|
IAS 16
|
Property, plant and equipment
|
2003*
|
|
IAS 17
|
Leases
|
2003*
|
|
IAS 18
|
Revenue
|
1998
|
|
IAS 19
|
Employee Benefits
|
2011
|
|
IAS 20
|
Accounting for government grants and disclosure of government
assistance
|
1983
|
|
IAS 21
|
The effect of changes in foreign exchange rates
|
2003*
|
|
IAS 22
|
business combinations
|
1998*
|
|
IAS 23
|
Borrowing costs
|
2007*
|
|
IAS 24
|
Related party disclosures
|
2009*
|
|
IAS 25
|
Accounting for Investments
|
|
|
IAS 26
|
Accounting and reporting by retirement benefit plans
|
1987
|
|
IAS 27
|
Separate financial statement
|
2011
|
|
IAS 28
|
Investment in Associates and joint ventures
|
2003
|
|
IAS 29
|
Financial reporting in hyperinflationary economies
|
1989
|
|
IAS 30
|
Disclosures in financial statements of banks and similar
financial institution
|
1990
|
|
IAS 31
|
Interest in joint ventures
|
2003*
|
|
IAS 32
|
Financial instruments presentation
|
2003*
|
|
IAS 33
|
Earnings per share
|
2003*
|
|
IAS 34
|
Interim financial reporting
|
1998
|
|
IAS 35
|
Discontinuing operations
|
1998
|
|
IAE 36
|
Impairment of assets
|
2004*
|
|
IAS 37
|
Provisions contingent liabilities and contingent assets
|
1998
|
|
IAS 38
|
Intangible assets
|
2004*
|
|
IAS 39
|
Financial instruments recognition and Measurement
|
2003*
|
|
IAE 40
|
Investment property
|
2003*
|
|
IAS 41
|
Agriculture
|
2001
|
International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropriate.International Accounting Standards (IASs) were issued by the antecedent International Accounting Standards Council (IASC), and endorsed and amended by the International Accounting Standards Board (IASB). The IASB will also reissue standards in this series where it considers it appropria
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UNIT
II
Royalty
Accounts
Royalty is payable by a user to the owner of the
property or something on which an owner has some special rights. A royalty
agreement is prepared between the owner and the user of such property or
rights. If payment is made to purchase the right or property that will be
treated as capital expenditure instead of a Royalty.
Payment made by the lessee on account of a royalty
is normal business expenditure and will be debited to the Royalty account. It
is a nominal account and at the end of the accounting year, balance of Royalty
account need to be transferred to the normal Trading and Profit & Loss
account. Royalty, based on the production or output, will strictly go to the
Manufacturing or Production account. In case, where the Royalty is payable on
sale basis, it will be part of the selling expenses.
Types
of Royalties:- There are following types of Royalties
Copyright −
Copyright provides a legal right to the author (of
his book/s), the photographer (on his photographs), or any such kind of
intellectual works. Copyright royalty is payable by the publisher (lessee) of a
book to the author (lessor) of that book or to the photographer, based on the
sale made by the publisher.
Mining
Royalty − Lessee of a mine or quarry pays royalty to lessor
of the mine or quarry, which is generally based on the output basis.
Patent
Royalty − Patent royalty is paid by the lessee to lessor on
the basis of output or production of the respective goods
Basis
of Royalty - In case of the patent, publisher of the book pays royalty
to the author of the book on the basis of number of books sold. So, holder of
patent gets royalty on the basis of output and the mine owner gets royalty on
the basis of production
Important
Terms:- Following are the important terms, which are used in
Royalty agreements
Royalty:- A periodic payment, which may be based on a sale or
output is called Royalty. Royalty is payable by the lessee of a mine to the
lessor, by publisher of the book to the author of the book, by the manufacturer
to the patentee, etc
Landlord:- Landlords are the persons who have the legal rights
on mine or quarry or patent right or copybook rights
Tenet:- An Author or publisher; lessee or patentor who takes
out rights (usually commercial or personal rights) from the owner on lease
against the consideration is called tenet.
Minimum
Rent:- According to the lease agreement, minimum rent,
fixed rent, or dead rent is a type of guarantee made by the lessee to the
lessor, in case of shortage of output or production or sale. It means, lessor
will receive a minimum fix rent irrespective of the reason/s of the shortage of
production.
Royalty and Related Terminologies
Lease
It is an agreement where a person acquires a right to use an asset for a
certain period of time from another person or the owner of the asset in return
for a payment. The owner is known as the Lessor. The user is the Lessee. The
amount paid is Royalties
For Example, A has developed a machine that uses less material for production.
He also got it patented. Now, B wants to use it. B will have to pay a royalty
to A for using the machine. Here, A is the lessor and B is the Lessor.
Accounting Treatment of Royalties
For the
lessee, royalties are an ordinary business expenditure. Royalty paid on the
basis of output is debited to Trading or Manufacturing A/c. Whereas, the
royalty paid on the basis of sales is debited to Profit & Loss A/c.
Minimum Rent or Fixed Rent
It is the
amount that has to be paid by the lessee to the lessor whether or not he has
derived benefit from the asset. Hence, it is also called Dead Rent or Rock
Rent. Minimum rent can be a fixed sum for every year or may change every year
as per the terms of the agreement.
- When the actual royalty for
a year is less than the minimum rent, the lessee will pay the minimum rent
to the Lessor.
- When the actual royalty for
a year is more than the minimum rent, the lessee will pay the actual
royalty to the lessor.
Short-workings
It is the
excess of Minimum Rent over the Actual Royalty payable. It is calculated only
when it is allowed to be adjusted against the future royalties by the lessor.
Short-workings = Minimum Rent – Actual Royalty
Recoupment of Short-workings
The right
of Recoupment means the right given to the lessee by the lessor to
carry-forward and set-off the short-workings from the surplus of royalties over
the Minimum Rent. It can be of two types:
- Fixed Right of Recoupment:
When the lessor allows the lessee to adjust the short-workings only for a
fixed period of time, it is known as Fixed Right of Recoupment.
- Floating Right of
Recoupment: When the lessor allows the lessee to adjust the short-working
of any year in the next two or three years, it is known as the Floating
Right of Recoupment.
Numerical :-
Hire Purchase:- Hire purchase is an
arrangement for buying expensive consumer goods, where the buyer makes an
initial down payment and pays the balance plus interest in installments. The
term hire purchase is commonly used in the United Kingdom and it's more
commonly known as an installment plan in the United States. However, there can
be a difference between the two: With some installment plans, the buyer gets
the ownership rights as soon as the contract is signed with the seller. With
hire purchase agreements, the ownership of the merchandise is not officially
transferred to the buyer until all the payments have been made.
- Hire purchase agreements are not seen as an
extension of credit.
- In a hire purchase agreement, ownership is not
transferred to the purchaser until all payments are made.
- Hire purchase agreements usually
prove to be more expensive in the long run than purchasing an item
outright.
Hire
purchase agreements are similar to rent-to-own transactions that give the
lessee the option to buy at any time during the agreement, such
as rent-to-own cars. Like rent-to-own, hire purchase can benefit consumers
with poor credit by spreading the cost of expensive items that they would
otherwise not be able to afford over an extended time period. It's not the same
as an extension of credit, though, because the purchaser technically doesn't own
the item until all of the payments are made.
Because ownership is not
transferred until the end of the agreement, hire purchase plans offer more
protection to the vendor than other sales or leasing methods for unsecured
items. That's because the items can be repossessed more easily should the buyer
be unable to keep up with the repayments.
Advantages of Hire
Purchase Agreements:- Like leasing, hire
purchase agreements allow companies with inefficient working
capital to deploy assets. It can also be more tax efficient than standard
loans because the payments are booked as expenses—though any savings will be
offset by any tax benefits from depreciation.
Businesses that require
expensive machinery—such as construction, manufacturing, plant hire, printing,
road freight, transport and engineering—may use hire purchase agreements, as
could startups that have little collateral to establish lines of credit.
A hire purchase agreement
can flatter a company's return on capital employed (ROCE)
and return on assets (ROA). This is because the company doesn't need
to use as much debt to pay for assets.
Disadvantages of Hire
Purchase Agreements:-
Hire purchase agreements
usually prove to be more expensive in the long run than making a full payment
on an asset purchase. That's because they can have much higher interest
costs. For businesses, they can also mean more administrative complexity.
In addition, hire
purchase and installment systems may tempt individuals and companies to buy
goods that are beyond their means. They may also end up paying a very high
interest rate, which does not have to be explicitly stated.
Rent-to-own arrangements
are also exempt from the Truth in Lending Act because they are seen
as rental agreements instead of an extension of credit.
Hire purchase buyers can
return the goods, rendering the original agreement void as long as they have
made the required minimum payments. However, purchasers suffer a huge loss on
returned or repossessed goods, because they lose the amount they have paid
towards the purchase up to that point.
Hire Purchase System ppt download
Inventory Valuation:- Inventory is tangible property to be consumed in production of goods or services or held for sale in the ordinary course of business. Inventories are unconsumed or unsold goods purchased or manufactured Inventories generally constitute the largest current assets of manufacturing firms.
According to Accounting Standard (AS) – 2 (Revised) Inventories are “assets: a) held for sale in the ordinary course of business; b) in the process of production for such sale; or c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.”
Inventories
1. Finished goods:
- Purchased or
- Produced completely but remaining unsold
2. Work-in-progress (work-in-process):
- Units introduced into the production process but are yet to be completed.
3. Raw Materials, Components, Stores and Spares: –
- Raw materials -goods that are yet to be introduced into the production process.
- Stores and spares - factory supplies such as coolants, cleaning material, and machinery spares.
• Manufacturing concern - inventory consists of all of the above 3 components
• Trading concern -inventory consists of finished goods
Objective of Inventory Valuation:- Inventory has to be valued because of the following reasons-
(i) Determination of Income:- The valuation of inventory is necessary for determining the true income earned by the business during a particular period. Gross profit is the excess of sale over cost of goods sold. Cost of goods sold is ascertained by adding opening inventory to and deducting closing inventory from purchases.
(ii) Determination of Financial position:- Inventory at the end of a period is to be shown as a current assets in the balance sheet of the business. In the case of inventory is not properly valued, the balance sheet will not disclose the correct initial position of the business.
1. FIFO Method
This method of inventory valuation is the most appropriate method, as suggested by Accounting Standard – 2 (Revised). It is based on the approach of first in first out, i.e., the inventory which is purchased first should be used first, and the further purchased goods should be used, at last, i.e., the inventories used at last should be the most recent purchased goods. However, this method gets criticism as it leads to improper cost and revenue match as this method gives the cost of remaining inventories on the recent prices whereas the cost of goods sold is calculated on the basis of old prices.
2. LIFO Method:-
LIFO Method works on the principle of last in first out, which means the stock purchased at last will be used first for the valuation of the stock. In this method, the recent cost of goods sold is matched with the recent sales revenue, which helps in determining correct income, and there will be no unrealized profit/loss as it is the cost-based method. However, this method is not suggested by Accounting Standard – 2 (Revised).
Significance of Inventory Valuation:-
Inventory valuation plays a prominent role in evaluating the profitability of a business. Let us understand it with some more points:
- Inventory acts as a backbone for any business enterprise as the enterprise’s current assets involve more than 75% of inventories. Thus inventory valuation plays a significant role in measuring the assets of the business.
- Inventory valuation is mandatory to find out the liquidity position of an enterprise as creditors always have an eye on the liquidity position of the business.
- Inventory valuation also plays a vital role in evaluating the gross profit of any business as without proper valuation of stock; true profit cannot be ascertained.
Inventory System:-
Perpetual Inventory System:- Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software. Perpetual inventory provides a highly detailed view of changes in inventory with immediate reporting of the amount of inventory in stock, and accurately reflects the level of goods on hand. Within this system, a company makes no effort at keeping detailed inventory records of products on hand; rather, purchases of goods are recorded as a debit to the inventory database. Effectively, the cost of goods sold includes such elements as direct labor and materials costs and direct factory overhead costs.
Periodic Inventory System:-The periodic system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS). Merchandise purchases are recorded in the purchases account. The inventory account and the cost of goods sold account are updated at the end of a set period—this could be once a month, once a quarter, or once a year. Cost of goods sold is an important accounting metric, which, when subtracted from revenue, shows a company's gross margin.
LIFO METHOD
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Unit - III
Format of Trading & Profit & Loss Accounts
Departmental Accounts
Meaning of Departmental Accounts: Where a big business with diverse trading
activities is conducted under the same roof the same is usually divided into
several departments and each department deals with a particular kind of goods
or service. For example, a textile merchant may trade in cotton, woolen and
jute fabrics. The overall performance for this type of business depends,
however, on departmental efficiency.
This system of accounting actually helps the proprietors to:
(i) Compare
the results among the different departments together with the previous results
thereof,
(ii) Formulate
policy in order to extend or to develop the enterprise in the proper line; and
(iii) Reward
the departmental managers on the basis of departmental results.
ЁЯСЙ Advantages of Departmental Accounts: The most significant advantages of
departmental accounts are:
(a) Individual result of each department can be
known which helps to compare the performances among all the departments, i.e.,
the trading results can be compared.
(b) Departmental accounts help to understand or
locate the success, failure, rates of profit, etc.
(c) It helps the management to make proper plan
of action, policies in order to increase profit after analysing the results of
operation of various departments.
ЁЯСЙ Methods and Techniques of Departmental Accounts: Departmental accounts are prepared in such a
manner that all desired information are available and departmental profit can
correctly be made. However, two methods are advocated
(a) Where individual set of books are
maintained;
(b) Where all departmental accounts are
maintained columnar- wise collectively.
(a) Where Individual Set of Books are Maintained:
Under this method,
accounts of each individual department are independently maintained. The
departmental results of all the department are collected and taken into
consideration to find out the net result of the organisation.
(b)Where All Departmental Accounts are Maintained
Columnar-Wise Collectively: A Departmental Trading and Profit and Loss Account is opened
for each individual department in a columnar form together with a separate
column for ‘Total’ in order to ascertain the individual result of the different
departments and also as a whole. But the Balance Sheet is prepared in a
combined form.
Branch Accounting
Meaning of branch accounting :- Branch
accounting is a specialized accounting methods adopted by an organization which
has branches in different location. A branch is a subordinate division of an
organization. A branch is any establishment carrying on either the same or
substantially the same activity as that carried on by the head office of an
organization.
Advantages of branches:- When
an organization operates branches in different location, the following
advantages are achieved by the head office: The head office is able to extend
its operations in different locations in order to exploit the business
opportunities available in the places; Branch operations are considered to be an
effective tool to face the competition from the rival organizations;
Branch
operations facilitate effective marketing network for the overall objectives of
the organizations:
1. The expansion programmes of an organization can
be carried out through opening different branches;
2.Branch operations
facilitate more employment opportunities;
3. Branch operations
increases the turnover of the organization and thereby the profit of the
organization;
4. Branch operations
facilitate the organization to achieve economies of large scale operations.
Different types of branches:- Basically
branches can be classified into two broad categories: Inland Branches: The
branches which are located within the territory of a country in which the head
office is operating are known as inland branches Foreign Branches: The branches
which are located in any countries other than the home country in which the
head office is operating are known as foreign branches
Types of inland branches :- The inland branches can also be classified in to the following
two types: Dependent branches: The branches which do not maintain a complete
record of its transactions is said to be dependent branches. These branches
depend on the head office for the entire operations wherein all goods are
supplied by the head office and expenses are paid by the head
office. Independent branch: The branches which maintain a complete record of its
transactions is said to be independent branches. These branches are having the
freedom of own purchases and sales according to the marketing situations.
Methods of maintaining the accounts of dependent
branches:- The following are the different methods of maintaining accounts
of dependent branches: Debtors method: This method is usually adopted when the
branch is small. Under this method, the head office maintains separate branch
account for each branch. Such branch account is nominal nature. Its purpose is
to ascertain profit or loss made by each branch
Pro forma Journal entries in the books of head
office (under debtors method):-
1.
To record the opening balances of branch assets: Branch Account Dr. XXXX Brach
Assets account Cr. XXXX (Being the opening balances of assets in the branch)
2.
To record the opening balances of liabilities: Branch liabilities Account Dr.
XXXX Branch account Cr. XXXX (Being the opening balance of liabilities in the
branch)
3.When
goods are supplied to the branch: Branch Account Dr. XXXX Goods sent to branch
A/C Cr. XXXX (Being the goods sent to branch)
4. When the goods are returned by the branch:
Goods sent to branch account Dr. XXXX Branch account Cr. XXXX (Being the goods
returned by the branch)
5. When goods are supplied
by one branch to another branch under the instruction of the head office:
Branch account Cr. XXXX (Being the goods supplied to other branch)
6. When the goods supplied
by the head office but not received by the branch : Goods –in-transit account
Dr. XXXX Branch account Cr. XXXX (Being the goods in transit)
7. When the head office pays for the expenses of
the branch: Branch Account Dr. XXXX Cash/Bank account Cr. XXXX (Being the
expenses paid for the branch)
8. When the remittance is
received from the branch: Cash/Bank account Dr. XXXX Branch Account Cr. XXXX
(Being the cash received from the branch)
9. When the remittance is in-transit: Bank/Cash
in transit account Dr. XXXX Branch account Cr. XXXX (Being the cash in transit)
10. Transfer of goods sent
to branch: Goods sent to account Dr. XXXX Trading account Cr. XXXX (Being the
goods sent to branch account transferred to trading account)
To record the closing balance of branch assets:
Branch Assets Dr
11. To record the closing balance of branch assets: Branch
Assets Dr. XXXX Brach account Cr. XXXX (Being the closing balance of branch
assets)
12.
To record the closing balance of branch liabilities: Brach account Dr. XXXX
Branch liabilities account Cr. XXXX (Being the closing balance of branch
liabilities)
13.
To record profits or loss : If Profit: Brach account Dr. XXXX General Profit
and Loss A/C Cr. XXXX If Loss: General Profit and Loss A/C Dr. XXXX Branch
Account Cr. XXXX
KEY DIFFERENCES
The difference between Departmental and Branch
Accounting is as follows:
|
BASIS OF DIFFERENCE
|
DEPARTMENTAL ACCOUNTING
|
BRANCH ACCOUNTING
|
|
LINKAGE
|
Departments are attached with the main
organization under a single roof.
|
Branches are separate from the main
organization.
|
|
RESULTS OF
|
Departments are the results of fast human
life.
|
Branches are the outcomes of the tough
competition and expansion of the business.
|
|
GEOGRAPGICAL LOCATION
|
Departments are not geographically
separated.
|
Branches are geographically separated.
|
Sole Proprietorship
Sole Proprietorship, as its name suggests, is
a form of business entity in which the business is owned as well as operated by
a single person. The alternate name of this business form is sole
tradership. The person uses his capital, knowledge, skills and expertise to run
a business solely. In addition to this, he has full control over the
activities of the business. As this form of business is not a separate legal
entity, therefore the business and its owner are inseparable. All the profits
earned by the owner go to his pockets and the losses are also borne by him
only.
This form of business organisation is backed
by some advantages, like the creation of sole proprietorship is very simple,
minimal record keeping is sufficient, and it does not require, lots of
legal formalities to be complied with. Moreover, the sole proprietor also gets
the tax benefit, as the tax on his business income is regarded as the personal
income of the owner.
Partnership
The Partnership is
that form of business organisation, in which there are two or more persons
engaged together to carry on business by an agreement and decides to share
profits & losses in the specified ratio. Members are separately known as
partners, but jointly known as firm. The partnership is the unseen legal
relationship between the partners of the firm. The firm is the physical form of
the partnership, and the name under which the business is carried on is
known as Firm name.
The major components
of the partnership are an agreement between partners, sharing of profit &
loss and business to be run by all or any of the partners who will work on
behalf of the other partners. In the third component, you might notice that all
the partners are the principal as well as the agent of the other partners.
Due to this, the mutual agency is regarded as the essence of the
partnership and if this clause is not present there will be no partnership.
The following are the types of partnership:
- General Partnership
- Particular Partnership
- Partnership at will
- Limited Liability Partnership
There can be various
types of partners in a partnership firm like an active partner, sleeping
partner, nominal partner, incoming partner, outgoing partner, sub
partner, partner for profits only.
Some of the features of
partnership are:-
1. Two or More Persons: At least two
persons must pool resources to start a partnership firm. The Partnership Act,
1932 does not specify any maximum limit on the number of partners. However, the
Companies Act, 1956 lays down that any partnership or association of more than
10 persons in case of banking business and 20 persons in other types of
business6 is illegal unless registered as a joint stock company.
2. Agreement: A partnership comes into being through
an agreement between persons who are competent to enter into a contract (e.g.
Minors, lunatics, insolvents etc. not eligible). The agreement may be oral,
written or implied. It is, however, to put everything in black and white and
clear the fog surrounding all knotty issues.
3. Lawful Business: The partners can take up only legally
based activities. Any illegal activity carried out by partners does not enjoy
the legal sanction.
4. Registration: Under the Act, registration of a firm
is not compulsory. (In most states in India, registration is voluntary).
However, if the firm is not registered, certain legal benefits cannot be
obtained. The effects of non-registration are-
(i) the firm cannot take any action in
a court of law against any other parties for settlement of claims and
(ii) in case of a dispute among
partners, it is not possible to settle the disputes through a court of law.
5. Profit Sharing: The partnership agreement must specify
the manner of sharing profits and losses among partners. A charitable hospital,
educational institution run jointly by like-minded persons is not to be viewed
as partnership since there is no sharing of profits or losses. However, mere
sharing of profits is not a conclusive proof of partnership. In this sense,
employees or creditors who share profits cannot be called partners unless there
is an agreement between the partners.
6. Agency Relationship: Generally speaking, every partner is
considered to be an agent of the firm as well as other partners. Partners have
an agency relationship among themselves. The business can be carried out jointly
run by one nominated partner on behalf of all. Any acts done by a nominated
partner in good faith and on behalf of the firm are binding on other partners
as well as the firm.
7. Unlimited Liability: All partners are jointly and severally responsible for
all activities carried out by the partnership. In other words in all cases
where the assets of the firm are not sufficient to meet the obligations of
creditors of the firm, the private assets of the partners can also be attached.
The creditors can get hold one any one partner —who is financially sound-and
get their claims satisfied.
8. Not a Separate Legal Entity: The firm does not have a personality
of its own. The business gets terminated in case of death, bankruptcy or lunacy
of any one of the partners.
9. Transfer of Interest: A partner cannot transfer his interest in the firm to
outsiders unless all other partners agree unanimously. A partner is an agent of
the firm and is ineligible to transfer his interest unilaterally to outsiders.
10. Mutual Trust and
Confidence: A partnership is built around the principle of mutual trust, confidence
and understanding between partners. Each partner is supposed to act for the
benefit of all. If trust is broken and partners work at cross purposes, the
firm will get crushed under its own weight.
Key Differences Between Sole Proprietorship and Partnership
The following are the major
differences between sole proprietorship and general partnership:
- When the business is owned and
managed by a single person exclusively, it is known as the sole
proprietorship. The partnership is the business form in which the
business is carried on by two or more persons and they share profits and
losses mutually.
- Indian Partnership Act 1932 governs
the Partnership whereas there is no specific statute for Sole
Proprietorship.
- The owner of sole proprietorship business
is known as the proprietor, while the partners are the members and legal
owners of the partnership firm.
- The registration of sole
proprietorship business is not necessary, but it is at the discretion of
the partners that whether they want to register their firm or not.
- In Sole Proprietorship the minimum
and maximum limit of owners are one. Conversely, in Partnership, there
should be at least two partners, and it can exceed up to 100
partners.
- In Sole Proprietorship the
liability is borne by the proprietor only. In contrast to, Partnership
where the liability is shared between partners.
- As there is only one owner, the
quick decisions can be taken which is not in the case of a partnership
because the mutual decision is taken after discussing with all the
partners.
- There is always an uncertainty
regarding the term of the sole proprietorship as it can end up anytime if
the owner dies or if he became incompetent to run a business. On the other
hand, Partnership can be dissolved at any time, if one of the two partners
retires or dies or became insolvent, but if there are more than two
partners, it can continue at the discretion of the remaining partners.
- In sole proprietorship business,
secrecy is maintained, as the secrets are not open to any person other than
the proprietor. On the contrary, in partnership, business, business
secrets are maintained to every partner.
- The scope of raising finance is
high in partnership as compared to sole proprietorship business.
Partnership Deed:- Partnership deed is a partnership agreement between the partners of the firm which outlines the terms and conditions of the partnership between the partners. The purpose of a partnership deed is to provide clear understanding of the roles of each partner, which ensures smooth running of the operations of the firm.
The Partnership comes into the limelight when:
- There is an outcome of agreement among the partners.
- The agreement can be either in written or oral form.
- The Partnership Act does not demand that the agreement has to be in writing. Wherever it is in the form of writing, the document, which comprises terms of the agreement is called ‘Partnership Deed.’
- It usually comprises the attributes about all the characteristics influencing the association between the partners counting the aim of trade, the contribution of capital by each partner, the ratio in which the gains and losses will be divided by the partners and privilege and entitlement of partners to interest on loan, interest on capital, etc.
Partnership Deed Contents:- While making a partnership deed, all the provisions and the legal points of the partnership deed are included. This deed also includes basic guidelines for future projects and can be used as evidence at times of conflict or legal procedures. For a general partnership deed, the below mentioned information should be included.
- Name of the firm as determined by all partners.
- Name and details of all the partners of the firm.
- The date on which business commenced.
- Firm’s existence duration.
- Amount of capital contributed by each partner.
- Profit sharing ratio between the partners.
- Duties, obligations and power of each partner of the firm.
- The salary and commission if applicable that is payable to partners.
- The process of admission or retirement of a partner.
- The method used for calculating goodwill.
- The procedure that must be followed in cases of dispute arising between partners.
- Procedure for cases where a partner becomes insolvent.
- Procedure for settlement of accounts in the event of dissolution of a firm.
A Capital Account is a general ledger account which shows some of the special transactions like proprietor’s investment in his own business, the aggregate amount of earning, expenses of companies, etc. There are many more transactions which affect the Capital. Like: Interest on Capital, Interest on Drawings, Salaries to the Partners, Commission for the Partners, etc. These values are put in Profit and Loss Appropriation Account and at the same time credited or debited to their respective Capital Accounts.
Methods of Capital Account Creation
- Fluctuating Capital Account Method
- Fixed Capital Account Method
Dissolution of Partnership Firm and
Settlement of Accounts:- Dissolution of
partnership firm is a process in which relationship between partners of firm is
dissolved or terminated. If a relationship between all the partners of firm is
dissolved then it is known as dissolution of firm. In case of dissolution of
partnership of firm, the firm ceases to exist. This process includes the
discarding and disposing of all the assets of firm or and settlements of accounts,
assets, and liabilities. Learn more about Dissolution of partnership firm,
legal provisions, and settlement of accounts.
Dissolution of Partnership Firm
As we know that after the
dissolution of partnership firm the existing relationship between the partner’s
changes. But, the firm continues its activities. The dissolution of partnership
takes place in any of the following ways:
- Change in the
existing profit sharing ratio.
- Admission of a new partner
- The retirement of an existing partner
- Death of an existing partner
- Insolvency of a partner as he becomes incompetent to contract.
Thus, he can no longer be a partner in the firm.
- On completion of a specific venture in
case, the partnership was formed specifically for that particular venture.
- On expiry of the period for which the partnership
was formed.
Section 39 of the Indian Partnership Act 1932
states that the dissolution of partnership firm among all the partners of the
partnership firm is the Dissolution of the Partnership Firm. The dissolution of
partnership firm ceases the existence of the organization.
After this, the
partnership firm cannot enter into any transaction with anybody. It can only
sell the assets to realize the amount, pay the liabilities of the
firm and discharge the claims of the partners.
Following are the ways in which dissolution of a
partnership firm takes place:
1. Dissolution by
Agreement
A firm may be dissolved
if all the partners agree to the dissolution. Also, if there exists a contract between the partners regarding the
dissolution, the dissolution may take place in accordance with it.
2. Compulsory Dissolution
In the following cases the dissolution of a firm
takes place compulsorily:
- Insolvency of
all the partners or all but one partner as this makes them incompetent to
enter into a contract.
- When the business of the firm becomes illegal due to some
reason.
- When due to some event it becomes unlawful for the partnership firm
to carry its business. For example, a partnership firm has a partner who
is of another country and India declares
war against that country, then he becomes an enemy. Thus, the business
becomes unlawful.
3. When certain
contingencies happen
The dissolution of the firm takes place subject
to a contract among the partners, if:
- The firm is
formed for a fixed term, on the expiry of that term.
- The firm is
formed to carry out specific venture, on the completion of that venture.
- A partner
dies.
- A partner becomes insolvent.
4. Dissolution by Notice
When the partnership is
at will, the dissolution of a firm may take place if any one of the partners
gives a notice in writing to the other partners stating his
intention to dissolve the firm.
5. Dissolution by Court
When a partner files a
suit in the court, the court may order the dissolution of the firm on the basis
of the following grounds:
- In the case where a partner becomes insane
- In the case where a partner becomes permanently incapable of
performing his duties.
- When a
partner becomes guilty of misconduct and it affects the firm’s business
adversely.
- When a
partner continuously commits a breach of the partnership agreement.
- In a case
where a partner transfers the whole of his interest in the partnership
firm to a third party.
- In a case
where the business cannot be carried on except at a loss.
- When the
court regards the dissolution of the firm to be just and equitable on any
ground.
Unit V
FINAL ACCOUNTS OF GENERAL INSURANCE COMPANIES
All
the insurances other than the life insurance is covered under General
Insurance. It includes fire insurance, marine insurance, cargo insurance,
mobile insurance etc. The General insurance Corporation of India is the apex
general insurance institution of India. The Final Accounts of General Insurance
Companies include Revenue Account, Profit and Loss Account, and Balance Sheet.
FEATURES OF GENERAL INSURANCE
- General Insurance contract are
generally made for one year or 12 months.
- Insurance contracts can be made at
any time during the financial year.
- Premiums in respect of general
insurance are paid in the advance.
- Unexpired amount of premium is
carried forward in the next year as ‘Reserve for Unexpired Risks’.
PRINCIPLES OF GENERAL INSURANCE:- The following are the various
principles of General Insurance:
PRINCIPLES
OF UTMOST GOOD FAITH:- This
is a very basic and primary principle of insurance contracts because the
insurance company has to provide a certain level of security to the insured
person’s life. This principles states that:
- Both
parties involved in an insurance contract—the insured (policy holder) and
the insurer (the company)—should act in good faith towards each other.
- The
insurer and the insured must provide clear and concise information
regarding the terms and conditions of the contract
PRINCIPLES
OF INSURABLE INTEREST:- Insurable interest means
that the insured must have some interest in the subject matter of the insurance
contract. The subject matter of the contract must provide some financial gain
to the policyholder and would lead to a financial loss if damaged, destroyed,
stolen, or lost. This principle states that:
- The
insured must have an insurable interest in the subject matter of the
insurance contract.
- The
owner of the subject is said to have an insurable interest until he or she
is no longer the owner.
PRINCIPLE
OF INDEMNITY:- Indemnity
is a guarantee to restore the insured to the position he or she was in before
the uncertain incident that caused a loss for the insured. The
insurance company i.e. the insurer compensates the insured or policyholder
against the loss arises from the uncertain event.
The insurance company
promises to compensate the policyholder for the amount of the loss up to the
amount agreed upon in the contract.
PRINCIPLE
OF CONTRIBUTION:- Principle
of contribution is an extension of principle of indemnity. Contribution allows
for the insured to claim indemnity to the extent of actual loss from all the
insurance contracts involved in his or her claim. It allows proportional
responsibility for all insurance coverage on the same subject matter
PRINCIPLE
OF SUBROGATION:- The
principle of subrogation states that after the insured has been compensated for
the incurred loss on a piece of property that was insured, the rights of
ownership of this property go to the insurer.
This principle is applicable only when the
damaged property has any value after the event causing the damage. The insurer
can benefits out of the subrogation rights only to the extent of the amount he
has paid to the insured as compensation.
PRINCIPLE
OF PROXIMATE CAUSE:- This
principle is also known as ‘causa proxima.’
As per this principle, the loss of insured property can be caused by
more than one incident even in succession to each other. The property may be
insured against some but not all causes of loss. When a property is not insured
against all causes, the nearest cause is to be found out. If the proximate
cause is one in which the property is insured against, then the insurer must
pay compensation. If it is not a cause the property is insured against, then
the insurer doesn’t have to pay.
PRINCIPLE
OF LOSS MINIMIZATION:- This
principle states that in an uncertain event, it is the insured’s responsibility
to take all precautions to minimize the loss on the insured property. Insurance
contracts shouldn’t be about getting free stuff every time something bad
happens. Therefore, a little responsibility lies with the insured to take all
measures possible to minimize the loss on the property.
Voyage Account
Voyage Account is an
account which is prepared by the shipping companies. This account is prepared
to get a complete record of the profits earned and loss incurred on the
particular voyage undertaken by the shipping company. It records both inward
and outward journey. It is prepared separately for each voyage.
NATURE OF ACCOUNT:
Voyage Account is a nominal account. It is prepared on the basis of rule of
Nominal Account which is as follows:
“Debit all expenses & losses.
Credit all income & gains.”
PREPARATION
OF ACCOUNT: Voyage
Account is prepared by the shipping companies or marine business companies to
record the details of the particular voyage.
EXPENSES
RELATED TO VOYAGE: Voyage
account records all the expenses on the debit side. The expenses related to
voyage are as follows:
Address
commission: This
is the commission which is paid to the agents who book the freight for the
shipping companies. It is calculated as a percentage of freight and primage.
Address Commission= (Freight+ Primage)*
Rate/100
Port
Charges: The charges which
are paid to the port authorities to use the port for loading and unloading the
cargo from the ship.
Insurance: Expenses of premium paid to Insurance
Company for the insurance of ship and freight are also debited to Voyage
Account. But its premium is paid for a year. It should be adjusted according to
the period of voyage.
Depreciation: Depreciation is the decrease in the value of
the ship due to its use during the voyage. It is a non-cash expense and posted
on the debit side of the voyage account.
Stores: Stock of store is purchased during the year
for the use during the period of voyage. Stores consumed is calculated as:
(Opening stock+ Net Purchases- Closing Stock)
Stevedoring: Stevedoring are the charges of loading and
unloading of the cargo on and from the ship. It is calculated usually on the
unit basis. Example: If the stevedoring charges are Rs. 2 and units loaded are
1,000, then stevedoring is 10,000*2= Rs. 20,000.
Lighterage:
The ship usually remains at a distance from
the port in deep water. For loading and unloading the cargo, the big ships take
the help of the small ships known as Lighter. The charges paid for these
lighter is known as Lighterage.
Crew: Crew means staff working on the ship.
INCOMES
RELATED TO VOYAGE: All
the incomes related to voyage are recorded on the credit side of the voyage
account. The incomes are as follows:
Freight: Freight is the amount earned by the shipping
companies on the cargo delievered. Freight is of two types:
Freight
Inward: Earned on return
journey.
Freight
Outward: Earned on outgoing
journey.
Primage: Primage is also known as surcharge. It is
the additional freight collected as a percentage of the amount of the freight.
It is calculated as:
Primage= Freight*Rate/100
Passage
money: The ships also carry
some passengers along with the cargo on every voyage. The amount charged from
the passengers on board is known as passage money.
RESULT: The voyage account shows the profit and loss
on each voyage separately. Excess of incomes over expenses is known as profit
and excess of expenses over income is known as loss.
PREPARATION: The voyage account is prepared separately
for each voyage. It is not prepared on periodical basis rather records all the
incomes and expenses on voyage or shipment basis.
Que : Ramesh Jal Akash commenced a voyage on 1 Oct 2020 to 1 Dec 2020. Prepare voyage account
by information given below-
|
Particulars
|
Amount
|
Particulars
|
Amount
|
|
Primage
|
10%
|
Loading
Expense
|
3,000
|
|
Freight Outward
|
1,00,000
|
Unloading
|
2,000
|
|
Freight Inward
|
80,000
|
Insurance of
Ship
|
6,000
|
|
Passage Money
|
40,000
|
Insurance of
freight
|
10,000
|
|
Opening Stock
|
10,000
|
Depreciation
Annual
|
24,000
|
|
Store Purchase
|
1,00,000
|
Closing Stock
|
20,000
|
|
Capital
Expense
|
6,000
|
Address
Commission
|
12,000
|
|
Other Expenses
|
15,000
|
|
|
Solution
:-
Voyage
Account of Ramesh Jal Akash
From
India to Srilanka
(for
the period 2 Months)
|
Particulars
|
Amount
|
Particulars
|
Amount
|
|
To Opening
Stock
|
10,000
|
By Freight
(Outwards)
1,00 ,000
+ Primage10% 10,000
|
1,10,000
|
|
To Store
Purchase
|
1,00,000
|
|
To Capital
Expense
|
6,000
|
|
To Loading
expense
|
3,000
|
|
To Unloading
expense
|
2,000
|
By Freight (Inwards)
80,000
+ Primage
10% 8,000
|
88,000
|
|
To Insurance
|
6,000
|
|
To Freight
Insurance
|
10,000
|
|
To
Depreciation
|
4,000
|
|
To Address
Commission
|
12,000
|
By Passage
Money
|
40,000
|
|
To Other
Expenses
|
15,000
|
|
|
|
To
Net Profit
|
90,000
|
By Closing
Stock
|
20,000
|
|
|
|
|
|
|
Total
|
2,58,000
|
Total
|
2,58,000
|
Insurance Claim:- An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim (or denies the claim). If it is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured.
Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In some cases, a third-party is able to file claims on behalf of the insured person. However, in the majority of cases, only the person(s) listed on the policy is entitled to claim payments.
- An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.
- The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.
- For property-casualty insurance, such as for your car or home, filing a claim can cause rate hikes to your future premiums.
Types of Insurance Claims
Health Insurance Claims:- Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; the majority of medical are adjudicated electronically.
Property and Casualty Claims:- A house is typically one of the largest assets an individual will purchase in their lifetime. A claim filed for damage from covered perils is initially routed via the Internet to a representative of an insurer, commonly referred to as an agent or Claim Adjuster.
Life Insurance Claims:- Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act.
Accounting for Price Level Changes:- Accounting for price-level changes also referred to as inflation accounting is a financial reporting procedure that records the consequences of inflation on the financial statements that a company prepares and publishes at the end of the financial year, which is based on the assumption of a stable currency.
There are many methods of adjustments for the effects of changes in prices. The generally accepted methods of accounting for price level changes are as under:
1. Current purchasing power method or general purchasing power method (CPP or GPP):- Under this method, any established and approved general price index is used to convert the values of various items in the Balance Sheet and Profit and Loss Account.
This method takes into consideration the changes in the value of items as a result of the general price level, but it does not account for changes in the value of individual items.
In this method, the various items of financial statements, i.e. balance sheet and profit and loss account are adjusted with the help of a recognized general price index.
The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs.
2. Current cost accounting method (CCA method):- The current cost accounting method is an alternative to the current purchasing power method. Price changes may be general or specific. Changes in the general level of prices which occur as a result of a change in the value of the monetary unit are measured by index numbers. Specific price changes occur if prices of a particular asset held change without any general price movements.
In the Replacement Cost Accounting technique the index used is those directly relevant to the company’s particular assets and not the general price index. In this sense, the replacement cost accounting technique is considered to be an improvement over the current purchasing power technique.
3. A hybrid method i.e mixture of CPP and CCA method.:- Three main adjustments to the trading account, calculated on the historical cost basis before interest, are required to arrive at the current cost operating profit. These are called the Depreciation Adjustment, Cost of Sales Adjustment, and Monetary Working Capital Adjustments.
The value of the net assets at the beginning and at the end of the accounting period is ascertained and the difference in the value in the beginning and the end is termed as profit or loss, as the case may be. In this method also, like replacement cost accounting technique, it is very difficult to determine relevant current values and there is an element of subjectivity in this technique.
