Amalgamation, Absorption and External Reconstruction of Joint Stock Companies

 Amalgamation, Absorption & External Reonstruction

 Amalgamation : Amalgamation is a business combination. It means formation  of  a new company to take over the existing business of  two  or more  companies. Sections 391, 394, 394A, 395 & 396A of the Companies Act 1956 deal with amalgamation of the companies.

In  amalgamation,  old existing companies will close  down  their business  &  their  assets & liabilities are transferred  to  the  new company's account as per the agreement.

Absorption : When one company buys another and integrates its operations, assets, and liabilities with those of the acquired company, a limited company is absorbed. This can be achieved through a merger or acquisition procedure.

When two or more businesses merge, a new firm is created. The shareholders of the merging firms become shareholders in the new company, and the assets and liabilities of the merging companies are transferred to it.

A company buys the assets and liabilities of another company in an acquisition. The purchased company's shareholders may be compensated in cash, shares, or a combination of both.

A limited business may be absorbed for a number of reasons, which includes :

A bigger market share and more competition

Access to new markets or products

Integration of operations results in efficiency and cost savings.

Increased stability and financial strength

Risk diversification

However, there may be disadvantages to absorption, such as :

Integration costs and difficulties

Cultural distinctions between the two businesses

Employees and other stakeholders opposition

Regulation obstacles and authorization requirements

Possibility of decreasing shareholder value.

Before engaging in an absorption, businesses should do due diligence to evaluate the advantages and risks associated and prepare a thorough integration plan to guarantee a smooth transition.

PURCHASE CONSIDERATION :

1. Lump sum Method : If purchase consideration is more than  the  Net Assets,  the difference between the two is Goodwill & if the  purchase consideration is less than the Net Assets, the difference between  the two is Capital Reserve.

2.      Net Asset Method : Purchase consideration = Assets taken over  less Liabilities taken over.

3.      Net  Payment Method : Calculate the purchase consideration  &  the difference between the purchase consideration and the Net Assets  will be Goodwill or Capital Reserve.

ACCOUNTING TREATMENT

Journal Entries in the books of Vendor / Purchased Company

Journal Entries in the books of Purchasing Company

Ratio Analysis and Financial Statements

Introduction:

Ratio analysis is a potent tool used by financial analysts, investors, and companies to evaluate the performance and health of a company's finances. Analysts can compute and decipher many financial ratios by looking at financial documents, particularly the income statement, balance sheet, and cash flow statement. These ratios offer important information on the profitability, liquidity, solvency, and effectiveness of a company. The importance of ratio analysis, crucial financial statements, and key points to keep in mind when utilizing ratio analysis are all covered in this chapter.

Financial Statements:

1.1. Income Statement: The income statement summarizes the revenues, costs, and net income of a corporation.

Revenues, cost of goods sold (COGS), operational expenses, non-operating items, and taxes are important factors.

It displays the performance and profitability of a business over a specific time frame.

1.2 Balance Sheet

The balance sheet provides a moment in time view of a company's financial situation.

It consists of shareholders' equity, assets, and liabilities.

Liabilities show what a corporation owes, whereas assets show what it has, and shareholders' equity shows the ownership stake.

The liquidity and solvency of a corporation are disclosed on the balance sheet.

1.3 Cash Flow Statement

The cash inflows and outflows within a certain time period are tracked by the cash flow statement.

Operating activities, investing activities, and financing activities make up its three divisions.

The cash flow statement shows how well a business can produce and handle cash.

Liquidity Ratios:

2.1. Ratio Analysis:

Using liquidity measures, you may gauge a company's capacity to pay short-term debts.

The quick ratio and the current ratio are typical liquidity ratios.

These ratios aid in determining if a business has enough cash and assets to pay its short-term obligations.

Ratios of Profitability:

A company's capacity to make profits in relation to its revenue, assets, and equity is gauged by profitability ratios.

The gross profit margin, operating margin, and return on equity (ROE) are examples of common profitability ratios.

These ratios can be used to evaluate a company's productivity and profitability.

2.4 Efficiency Ratios:

Efficiency ratios assess how well a business uses its resources and assets.

Inventory turnover, accounts receivable turnover, and asset turnover are important efficiency ratios.

These statistics show how effectively a business operates and how well it can make money off its assets.

2.5 Market Ratios

Market ratios represent how the market views the worth and prospects of a company.

The price-to-earnings (P/E) ratio and earnings per share (EPS) are examples of common market ratios.

Investors can use these statistics to assess if the shares of a company is overvalued or undervalued.

3.1. Peer and Industry Comparison:

To acquire useful insights, it is essential to contrast a company's ratios with those of its competitors and the industry as a whole.

The success of a company should be assessed in the context of its particular industry because ratios differ throughout industries.

3.2 Historical Analysis

Comparing ratios from different time periods to conduct a trend analysis makes it easier to spot trends and assess a company's performance over time.

A more comprehensive viewpoint is provided by historical analysis, which also identifies any shifts or trends in financial performance.

3.3. Ratio analysis's drawbacks:

Ratio analysis has drawbacks, including its reliance on historical data and disregard for qualitative considerations.

Along with ratio analysis, it is crucial to take into account other elements including market trends, competitive dynamics, and management caliber.

Ratio analysis is an effective method that offers important insights into the health and performance of a company's finances. Analysts can evaluate a company's profitability, liquidity, solvency, and efficiency by scrutinizing financial statements and computing different ratios. 

Ratio analysis is a potent instrument that offers important insights into the financial performance and health of an organization. Analysts can determine a company's profitability, liquidity, solvency, and efficiency by examining financial documents and calculating various ratios. Making well-informed decisions based on ratio analysis requires taking into account historical patterns, industry benchmarks, and qualitative aspects.

DEPRECIATION

DEPRECIATION

Depreciation is assessed to represent the true worth of assets on the balance sheet and to appropriately determine profit or loss.

Depreciation, then, is the continuous, ongoing, and irreversible loss of value resulting from normal wear and tear or any other comparable cause in a fixed asset. Assets can be depreciated in six different ways. As only a few instances, consider the following techniques: fixed installment, straight line, beginning cost, decreasing or reducing balance, written-down value, annuity, revaluation, depreciation, sinking fund, and insurance policy processes. However, this year we will be studying the first two methods.

(i) Fixed Instalment / Straight Line / Original Cost Method: Under this method, depreciation is charged at a fixed rate at the end of every year during the lifetime of an asset. The formula for depreciation :

Depreciation =  Original Cost of asset + Installation Charges – Break-up Value / Scrap Value

Estimated Life Of An Asset

(ii) Diminishing Balance / Reducing Balance/ Written Down Value Method : Under this method, depreciation is charged on the opening balance of the asset each year at a given rate.

An amount received when an asset is sold after its useful life is called Scrap Value / Residual Value / Break up Value.

Charges incurred for the erection of the machinery are called Installation Charges / Erection Charges.

ACCOUNTING TREATMENT
1. When any asset is purchased
                    Asset A/c. Dr.
                        To Cash / Bank A/c.

2. When depreciation is charged
                    Depreciation A/c. Dr.
                        To Asset A/c.

3. When depreciation is transferred to Profit & Loss A/c.
                    Profit & Loss A/c. Dr.
                        To Depreciation A/c.

4. When any is sold
                    Cash / Bank A/c. Dr.
                        To Asset A/c.

5. When there is loss on sale of any asset
                    Profit & Loss A/c. Dr.
                        To Asset A/c.

When there is profit on sale of asset vice-versa

ISSUE OF SHARES

Issue of shares

Every company needs funds to start the business as well as to run the business. This funds a race from various modes. The funds can be raised in the form of loan from banks, money lenders or from investors. But there is an another way to raise funds from the public in the form of shares of the company.

The capital required for the company is divided in the form of shares of the company. Such capital is called as share capital of the company. Interested people invest their amount for purchasing these shares. The investors of such capital are called as shareholders of the company.

These shareholders are the owners of the company. They get a part of profit of the company at the end of the year in the form of dividend. If the company earns huge profits then these shareholders get a good amount of dividend. In case the company goes in heavy losses then these shareholders may not even get their invested amount of capital.

The shareholders being the owner of the company have the right to vote in the Annual General Meeting.

 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.