BILL OF EXCHANGE

Under section 5 of Negotiable Instrument Act, 1981,”A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain sum of money only to, or to the order of a certain person or the bearer of the instrument .”

Parties of the Bill : There are three original parties of a bill of exchange – the drawer, the drawee and the payee .

Drawer : A person who draws the bill is called drawer.

Drawee : A person to whom the bill is Drawn or the acceptor of the bill called a Drawee.

Payee : A person to whom the money is ordered to be paid is called the payee. He may be drawer also

Endorser : A person who endorse the bill (or transfer the bill) to the other party is called the endorser.

Endorsee : A person to whom the bill is endorsed or transferred is called the endorsee.

·        Write the word / term / phrase which can substitute each of the following statement.

1.      A person to whom bill is endorsed.

Ans : Endorsee

2.      A person who draws a bill.

Ans : Drawer

3.      A person to whom the bill is payable.

Ans : Payee.

4.      Encashment of bill with the bank at some rebate.

Ans : Discounting of the bill.

5.      A bill drawn in one country and payable in other country.

Ans : Foreign bill

6.      The date on which bill is payable.

Ans : Due Date

7.      Payment of bill before due date.

Ans : Retirement of bill.

8.      Non payment of bill on the due date.

Ans : Dishonour of bill.

9.      A person who notes the dishonour of the bill.

Ans : Notary Public

10.   Payment of bill on due date.

Ans : Honour of bill.

11.   A person who accepts the bill.

Ans : Acceptor / Drawee.

12.   A person who endorses the bill.

Ans : Endorser.

PARTNERSHIP FINAL ACCOUNTS

PARTNERSHIP FINAL ACCOUNTS

In final A/c’s we have to open Trading account, Profit and Loss Account, Partners’ Capital/Current account (not compulsory) and Balance Sheet.

Trading Account : We have to record all direct expenses to the debit side of this account and all direct incomes to the credit side of this account. The credit balance of this account shows gross profit which is to be transferred to the credit side of the profit and loss account. The debit balance shows gross loss which is to be transferred to the debit side of profit and loss account.

Profit and Loss Account : All indirect expenses are to be recorded to the debit side whereas all indirect incomes are to be recorded to the credit side of this account. The credit balance of this account shows net profit which is transferred to profit and loss appropriation credit side. The debit balance of this account shows net loss which is transferred to profit and loss appropriation debit side.

Partners Capital Account : Partners Capital account is credited with the opening balance. All incomes of the partners are credited to this account For eg. Salary, Remuneration to partners, Interest on Capitals. All expenses of the partners such as Drawings, Interest on drawings are debited to this account.

Partners Current Account : If Partners current account is given, then all the above adjustments are passed through Partners Current account instead of the partners capital account. In this case partners capital account is not opened and it directly appears to the Balance Sheet.

Balance Sheet : Balance Sheet is a statement showing financial position of the firm on a particular day. All liabilities are recorded to its left hand side while all assets on its right hand side.

Write the word/term/phrase which can be substitute the following statement :

1. An account to which all adjustments relating to the partners are made, when the capital is fixed.
Ans : Current Account.

2. Two or more persons coming together to do the lawful business to earn profit.
Ans : Partnersship.

3. The partner who takes active part in the management of the firm.
Ans : Active Partner.

4. An agreement among the partners.
Ans : Partnership Deed.

5. An account in which all items of expenses and income relating to the partners are recorded.
Ans : Profit and Loss Appropriation Account.

6. The proportion in which the partners distribute the firm’s profits.
Ans : Profit sharing ratio.

7. A partner who contributes the capital but does not take active part in the conduct of the business.
Ans : Sleeping Partner.

8. The statement of affairs of the firm on a particular date.
Ans : Balance Sheet.

9. Debit balance in trading account.
Ans : Gross Loss.

10. Credit balance in Profit & Loss A/c.
Ans : Net Profit.

11. Such method in which both the Capital account and the Current Account are maintained for each partner.
Ans : Fixed Capital Method.

12. List of Debit and Credit Balance on the ledger accounts.
Ans : Trial Balance.

13. The part of debtors which are definitely not recoverable.
Ans : Bad Debts.

14. Expenses due but not paid.
Ans : Outstanding Expenses.

15. Expenses paid in advance of the period which has not expired.
Ans : Prepaid Expenses.

SPECIMEN FORMAT OF FINAL ACCOUNTS

In a trial balance there are two sides, one is debit and other is credit.

On the debit side of the trial balance we record the direct expenses indirect expenses losses and assets.

On the credit side of the trial balance we record the direct incomes indirect incomes gains and liabilities.

While recording in the final accounts from the trial balance

1. All the direct expenses will appear to the debit side of trading account.

2. All the indirect expenses and losses will appear to the debit side of profit and loss account.

3. All the assets will appear on the right hand side of the balance sheet.

4. All the direct incomes will appear to the credit side of trading account.

5. All the indirect incomes and gains will appear on the credit side of profit and loss account.

6. All the liabilities will appear on the left hand side off the balance sheet.

Adjustments

1. When there is any outstanding expense.

Add in the respective expense.

Record in the liability side.

2. When there is any outstanding income.

 Add in the respective income.

 Record in the asset side.

3. When there is any decrease in asset.

Less from respective asset.

Record in the profit and loss account debit side.

4. When there is any increase in asset.

Add in the respective asset.

Record in the profit and loss account credit side.

5. When there is any decrease in liability.

Less from respective liability.

Record in the profit and loss account credit side.

6. When there is any increase in liability.

Add in the respective liability.

Record in the profit and loss account debit side.

7. When there is any prepaid expense.

Less from the respective expense.

Record in the asset side of the balance sheet.

8. When there is any pre-received income.

List from the respective income.

Record in the liability side off the balance sheet.

Dissolution of partnership firm

Dissolution of a Partnership Firm

When any business goes in heavy losses for consecutive many years the partners decide to put an end to the business. Such ending of a business is called dissolution.

There may be any reason for dissolution of partnership firm.

• The deed might force the business to end the partnership.
• If the firm is of three partners and two of them retire or die then also the partnership may end.
• There may be disputes between the partners which may end the partnership. 

Thus there may be any reason for dissolution of partnership firm but the main reason is losses for consecutive two three years.

Sometimes all the partners become insolvent. In such case third party liabilities are not transferred to Realisation Account. We have to prepare separate account for each third party liability.

Next we have to distribute the balance cash to the third parties in their proportion.

for eg : If the creditors are Rs.20,000, Bills Payable are Rs.10,000 and Bank Overdraft is Rs.10,000 and the balance cash after all other payments is Rs.5,000. Then this cash will be distributed to Creditors, Bills Payable and Bank Overdraft in the ratio of 2 : 1 : 1 which measns out of Rs.5,000, Creditors will get Rs.2,500, Bills Payable will get Rs.1,250 and Bank Overdraft will get Rs.1,250.

Third Party Liability A/c........ Dr.

        To Cash /Bank Account.

After this we have to close the Third Party Liabilites Account and transfer the balance to Deficiency Account. 

Then close the Realisation Account and transfer the loss to Partners Capital Account in their profit sharing ratio.

Lastly the Partners' Capital Account will be closed and the balance will be transferred to Deficiency Account.

Ultimately Deficiency will get tallied.

ADMISSION OF A PARTNER IN A PARTNERSHIP FIRM

Admission of a Partner in a Partnership Firm

When a new partner is admitted into partnership it is called admission of a partner. The new partner has to bring capital in cash or kind. The new partner also has to bring the goodwill for the business. If the goodwill is not brought in the business by the new partner it is decided by the old partners to raise the goodwill or value the goodwill or fix the goodwill. In such case the goodwill is shown in the balance sheet at its full value.

The accounting treatment for the admission purpose are as below :

Transaction	Entry
1.     When General Reserve or accumulated profits are transferred to partners	General Reserve A/c…………. Dr. Profit & Losss A/c……………. Dr.       To Old Partners’ Capital A/c
2.     When new partner brings capital in cash	Cash A/c………………………..Dr.        To New Partners’ Capital A/c.
3.     When new partner brings his share of goodwill in cash	a)     Cash A/c……………...... Dr.         To Goodwill A/c. b)     Goodwill A/c……………Dr.          To Old Partners’s Capital A/c.                  (distribute in sacrifice ratio)
4.     When amount of goodwill is withdrawn by old partners.	Old Partners’ Capital A/c……….Dr.        To Cash A/c.
5.     When new partner is unable to bring the goodwill in cash	Goodwill A/c……………………Dr.        To Old Partners’s Capital A/c. (old ratio) here the goodwill a/c will show balance and will appear in balance sheet.
6.     When goodwill is withdrawn	All Partners’ Capital A/c………...Dr.         To Goodwill A/c (new ratio)
7.     When any asset is appreciated	Asset A/c…………………………Dr.         To Revaluation A/c.
8.     When any asset is depreciated	Revaluation A/c………………….Dr.         To Asset A/c
9.     When any liability is increased	Revaluation A/c……………….... Dr.         To Liability A/c.
10.  When any liability is decreased	Liability A/c…………………..… Dr.         To Revaluation A/c.
11.  When there is profit on revaluation	Revaluation A/c…………………. Dr.         To Old Partners’ Capital A/c.
12.  When there is loss on revaluation	Old Partners’ Capital A/c…………Dr.         To Revaluation A/c.
13. When there is excess of capital on capital adjustment	Partners’ Capital A/c………………Dr.         To Cash / Current / Loan A/c.
14. When there is shortage of capital on capital adjustment	Cash /  Current A/c………………...Dr.          To Partner’s Capital A/c.

 

Journal & Ledger

JOURNAL and LEDGER

WHAT IS A JOURNAL ?

When any transaction occurs. It has to be recorded in a book first. This book is called as a journal. Thus we can say that journal is a book in which the entry is done first. In other words we can say that the initial entry passed in a book is called as a journal.

A journal has five columns. The first column is the ‘Date’, Second column is Particulars, Third column is Ledger Folio, Fourth and fifth column are the Amount column, one is Debit and the last one is Credit.

HOW TO PASS JOURNAL ENTRIES  ?

Journal is a book in which the entry of the books is made first. When any transaction occurs it has to be recorded in the Journal first.

Steps to pass any journal entry

Decide the accounts effected in the transaction.

See the types of accounts whether they are Personal, Real or Nominal.

Once the type is decide apply the rules and decide the Debit or Credit to the respective accounts.

In the traditional method of passing journal entries, handwritten ledgers and journals are typically used. Here's how you would do it:

1. Date the Entry: Write down the date of the transaction in the first column of the journal.

2. Write the Account Titles: In the next column, write the titles of the accounts to be debited and credited. Start with the account to be debited, followed by the account to be credited.

3. Enter Debit and Credit Amounts: In the respective debit and credit columns, enter the amounts for each account. Debit amounts are typically listed in the left column, and credit amounts in the right column.

4. Write a Brief Description: In the last column, provide a brief description or explanation of the transaction.

5. Balance the Entry: Ensure that the total debits equal the total credits. If they do not balance, review the entries for errors.

6. Post to Ledger Accounts: Transfer the amounts from the journal entry to the respective ledger accounts. Debit amounts are recorded on the debit side of the ledger account, and credit amounts are rcorded on the credit side.

7. Prepare Trial Balance: Periodically, prepare a trial balance to ensure that the total debits equal the total credits in the ledger accounts.

 Using the same example of a company selling goods for Rs. 1,000 in cash:

Journal

Date	Particulars	L.F.	Debit (Rs.)	Credit(Rs.)
	Cash A/c…….Dr.             To Sales A/c.		1,000 ----	1,000 ----

This journal entry would be recorded in the general journal. Then, the amounts would be posted to the Cash account and Sales account in the ledger. The process ensures that each transaction is accurately recorded and summarized in the company's financial records.

After recording journal entries, the next step in the accounting process is to post these entries to the ledger accounts. Here's how you can do it:

1. Identify Ledger Accounts: Each journal entry affects at least two accounts. Identify the accounts involved in the entry. For example, if a transaction involves cash and sales, you'll need to post to the Cash account and the Sales account.

2. Open Ledger Accounts: If ledger accounts for the identified accounts don't exist already, you need to open them. Write the account title (e.g., Cash, Sales) at the top of a new page in the ledger book.

3. Locate Journal Entry: Find the journal entry you want to post in the general journal.

4. Determine Debit and Credit Amounts: Identify the debit and credit amounts for each account mentioned in the journal entry.

5. Post Debit Amounts: Locate the ledger account that needs to be debited. Enter the date of the transaction in the date column of the ledger account. Write down the debit amount in the debit column. If the ledger account is already debited, write the new amount below the previous entry and calculate the updated balance.

6. Post Credit Amounts: Similarly, locate the ledger account that needs to be credited. Enter the date of the transaction in the date column of the ledger account. Write down the credit amount in the credit column. Again, if the ledger account is already credited, write the new amount below the previous entry and calculate the updated balance.

7. Balancing the Ledger Account: After posting all entries related to a particular account, calculate the total debits and credits. The total debit balance should equal the total credit balance. If they don't match, review the entries for errors.

8. Repeat for Other Entries: Repeat this process for all journal entries that need to be posted to ledger accounts.

9. Cross-Referencing: Optionally, you can cross-reference ledger entries with their corresponding journal entries by writing the journal entry number in the ledger account and vice versa. This helps in easy reference and tracing of transactions.

10. Trial Balance: Once all entries are posted, prepare a trial balance to ensure that the total debits equal the total credits in the ledger accounts.

In this way one can post journal entries to the ledger accounts.

ABC ANALYSIS

ABC Analysis: Meaning, Objectives and Limitations | Inventory Control 

For unequivocal stock control, three classes of materials have been found to be useful. This is proposed in general as the ABC Classification. The letters all together A, B and C area the three wonderful classes and it is unavoidably known as Always Better Control. 

ABC appraisal is a fundamental solid affiliation contraption. The best effort for the best results is crazy yield of such appraisal of materials. There are locale in material affiliation which need unequivocal control like stock, criticality of things, old stocks, purchasing interest, receipt of materials, appraisal, store-keeping and check of bills. 

The yearly use assessment subject to cash regard shows that around 10% of the mind boggling worth things address a liberal piece of around 75% of the full scale use regard. There are focal "A" premise; 70 percent of the inflexible number of things are minor; there are base things tending to 10% of the usage regard, and named as "C" things. In the center 'A' and 'C' things—among top and base—the things are known as 'B' class things. 

Right when things are, special, to focus in on everything is next I to staggering. The pointed and zeroed in thought focused in on the materials as displayed by their relative importance, gives gigantic benefit to the coalition everything considered by getting economies and adequacy. 

It is through ABC, a few experts perceive, that genuine costs are diminished. ABC appraisal betters arranging and improved stock turnover is ensured. Express treatment to fundamental things through concentrated alienation under the ABC course of action of assessment of stock is the panacea for the fix of different ills torturing a collusion. 

Central places of ABC Analysis: 

A complete objective of ABC appraisal is to get economy through capable materials the pioneers. It has moreover the object of making procedure rules for unequivocal control. Challenged with countless things when the material affiliation is befuddled to which to give thought, the ABC assessment helps the relationship with detaching things and spotlight on the fundamental things first, then on the second grade things and some time later on the rest — the third grade. 

Types of progress: 

This assessed care concerning the inspected material isn't simply sensible yet likewise particularly valuable for its due weightage to materials subject to their utilization regard. The careful procedure concerning 'A' things ensures better "materials sorting out, figures, referring to, review, record, postings, changes, lead time evaluation, security stock, material use control, purchase monetary strategy, transport plan, regard examination follow-up, endeavors, bona fide stock checks, receipt issue, stores accounting and survey." The objective of getting for the most part appropriateness in materials the heap up is then ensured through ABC assessment. 

Limitations of ABC Analysis: 

ABC evaluation encounters certain requirements. It's surely not totally achievable without standardization and codification. ABC assessment relies on degree, program of the material according to its importance, need and need. 

Definitely, a few things with less cash related worth may be basic for the plant and may require excellent thought. If the stock position is poverty stricken down as displayed by the value I.e., XYZ assessment, the conceded result of ABC and ABC evaluations will be explicit depending upon the opportunity of outdated things. The ABC evaluation needs periodical assessment and reviving. 

Some standard may get fundamental as we find if there ought to emerge an event of diesel oil during power crisis. The cutoff points in a system are extremely arranged to exist; yet what is required is to vanquish them in the wake of being ready for any catch.

Piecemeal Distribution of Cash

PIECEMEAL DISTRIBUTION OF CASH

When any firm, organisation or company goes in heavy losses for many consecutive years , it gets close down. There are a number of factors which result in the close down of the business.

1. Heavy losses for consecutive years.

2. Disputes between the partners.

3. Lack of funds to run the business. 

4. Liabilities are more than the assets.

5. Competition in the market.

6. Natural calamities that affect the productivity.

The above factors may force the organizers to close down the business. 

The close down of any business is called as Dissolution of a business or partnership firm.

After the dissolution of the firm is declared, it becomes mandatory to sell the assets of the business and pay off the business liabilities. This is a huge process.

A person is appointed for the selling of assets and payment of liabilities. He is called as a liquidator. He charges some commission or remuneration is paid to him. Such a payment made to the liquidator is called as Liquidator's Remuneration.

Some important concepts to be taken into account.

Realisation Expenses 

After dissolution of the firm the selling of assets and payment of liabilities is not made immediately or not made on a specified date. There are some assets which have to be repaired to get a good price on it. Such expenses are to be made initially. There are also some expenses which occur unexpectedly, for which an amount has to be kept aside before paying any liability. These type of expenses are called as Realisation Expenses or Dissolution Expenses.

It is a part of Realisation Expense.

Secured Liability

Any liability that has been given a security or pledged or hypothecated by any asset is called as a Secured liability.

When such asset is realised, the amount from this realisation is paid to the secured liability only. If the amount remains after payment of secured liability, then only the amount can be used to pay other liabilities.

Fully secured liability

When the amount realised from the asset provided as security is sufficient to pay the liability is called as fully secured liability. If the amount remains after payment of secured liability, then only the amount can be used to pay other liabilities.

Partially Secured liability

When the amount realised from the asset provided as security is insufficient to pay the liability the the part of liability remains unpaid. It will be then considered as unsecured liability.  Such liability that has some part secured and some unsecured is called Partially Secured Liability.

Government Dues

The amount payable to the Government may be Municipal Corporation, State or Central Government in the form of Taxes or electricity bill, water bill, etc., are called as Government Dues.

Third Party Liability

The liability which does not form a part of Govt. Due or is not payable to any partner is called as Third party liability. For example : Mrs. Partner's Loan, Creditors, Bills Payable, All unsecured liabilities, etc.

Partner's Loan

Sometimes a partner provides loan to the firm other than his capital. Such a loan is considered as Partner's Loan. It has to be paid only after the payment of all the third party liabilities.

Priority for payment of liabilities / Sequence of payment of liabilities.

1. Estimated amount to be kept aside of Realisation Expenses or Dissolution Expenses.

2. Government Dues. 

3. Third Party Liabilities.

4. Partners' loan

5. Partners' Capitals

The partners' capital has to be paid taking into account the loss they may bear should be in profit sharing ratio. For this there are two methods. 

1. SURPLUS CAPITAL METHOD / PROPORTIONATE CAPITAL METHOD. 

Once all the liabilities are paid, the remaining amount is refunded to the partners. The amount is to be paid in such a way that the unpaid capital i.e. their Realisation Loss should come in their profit sharing ratio.

The partners' capital is compared with their profit sharing ratio and whosoever shows excess capital will be paid the excess capital amount first.

Steps to calculate of Surplus Capital

1. Write the Capital Balances given as per the Balance Sheet.

2. Divide these Capitals by their own ratios.

3. Taking the least division as base capital multiply it by all the ratios.

4. Subtract the above amount from the capitals. i.e. first step minus third step.

5. Then we get SURPLUS CAPITALS

6. Again repeat the steps with the help surplus capitals.

7. We get is the Absolute surplus.

2. MAXIMUM LOSS METHOD / NOTIONAL LOSS METHOD. 

Once all the liabilities are paid, the remaining amount is refunded to the partners. The amount is to be paid in such a way that the unpaid capital i.e. their Realisation Loss should come in their profit sharing ratio.

Steps to Pay the Capital of Partners

1. Take the total of partners' capital.

2. Deduct the available cash from the total of the capitals.

3. We get is the maximum loss which is to distributed to all the partners in profit sharing ratio.

4. Subtract the distributed maximum loss from the capitals.

5. If any partner gets negative amount, it is called deficiency which will be borne by the remaining partners.

6. The partner who is unable to bear the loss will not get any amount.

7. Who ever gets postive amount will be the amount to be paid to that partner.

8. Pay this amount from the available cash to the solvent partner / partners.

9. Subtract the paid amount from the original capital of the partner / partners.

10. Follow the same steps when next amoount is realised.