Tag: Bookkeeping

Accounting income is an income resulting from business transactions arising from the cash-to-cash cycle of business operations. It is derived from a periodic matching of revenue (sales) with associated costs. Accounting income is an expost measure that is, measured ‘after the event.’

The accounting income recognises income only when they have been realised. On the other hand, the economic income, because it is based on valuations of all anticipated future benefits, recognises these flows well before they are realised. This means that, at the point of original investment, economic capital will exceed accounting capital by an amount equivalent to the difference between the present value of all the anticipated benefit flows and the value of those resources transacted and accounted for at that time.

The difference represents an unrealized gain which will, over time, be recognised and accounted for in computing income as the previously anticipated benefit flows are realised.

Accounting income and economic income basically differ in terms of the measurement used.

As Boulding observes:

“Accountants measure capital in terms of actualities, as the primary by-product of the accounting income measurement process; and that economist in terms of potentialities, in order to measure economic income.”

The accountant uses market prices (either past or current) in measuring income based upon recorded transactions which may be verified. Current values, if used in accounting income, utilise the historic cost transactions base before updating the data concerned into contemporary value terms.

The economist, on the other hand, uses predictions of future flows stemming from the resources which have the subject of past transactions. The accountant basically adopts a totally backward-looking or expost approach, and consequently ignores potential capital value changes.

The economist, on the other hand, is forward looking in his model and bases his capital value on future events. Under accounting income, the accountant aims to achieve objectivity maximization while measuring income for reporting purposes. The economist is free of such a constraint and is quite content in his model which may have large-scale subjectivity.

As a result, the two income concepts appear to be poles apart in concept and measurement certainly the accountant would find the economic model almost impossible to put into practice in financial reporting, despite its great theoretical qualities. On the other hand, the economist would not find the accounting model relevant as a guide to prudent personal conduct.

Conventional accounting income possess a limited utility for decision-making purposes because of the historical cost and realisation principle which govern the measurement of accounting income. Changes in value are not reported as they occur. Economic concept of income places emphasis on value and value changes rather than historical costs. Economic income stresses the limitations of accounting income for financial reporting and decision-making purposes.

Similarities:

• Both involve measurement and valuation procedures.
• Both use the transactions for income measurement.
• Capital is an essential ingredient in income determination.
• In a world of certainty and with perfect knowledge, accounting income and economic income as measures of better-offness would be readily determinable and would be identical. With such knowledge, earnings for a period would be the change in the present value of the future cash flows, discounted at an appropriate rate for the cost of money.
• Under current cost accounting, the reported income equals economic income in a perfectly competitive market system. During periods of temporary disequilibrium and imperfect market conditions, current cost income may or may not approximate economic income.

Basis of Accounting refers to the method by which financial transactions are recorded and recognized in the accounting system. There are two primary types: Accrual Basis and Cash Basis. Under the accrual basis, revenues and expenses are recognized when they are earned or incurred, regardless of cash flow. The cash basis, on the other hand, records transactions only when cash is received or paid. The choice of accounting basis affects how financial performance and position are reported and can impact decision-making and analysis.

Cash basis

Cash Basis Accounting is a simple method where revenues and expenses are recorded only when cash is actually received or paid. In this system, income is recognized when cash is collected, and expenses are recognized when payments are made, regardless of when the transaction occurred. It is commonly used by small businesses and individuals due to its simplicity and focus on actual cash flow. However, it may not provide a complete picture of a business’s financial health, as it ignores receivables, payables, and other non-cash transactions.

Functions of Cash basis:

• Simple and Easy to Use:

One of the main functions of cash basis accounting is its simplicity. It requires no complex financial tracking or extensive knowledge of accounting principles. Businesses record income when cash is received and expenses when payments are made. This ease of use makes it particularly attractive for small businesses, freelancers, and sole proprietors with limited accounting resources.

• Focuses on Cash Flow:

Cash basis accounting emphasizes actual cash flow, helping businesses closely monitor their available cash. Since it records only when cash is received or spent, businesses can easily see how much cash they have on hand. This is critical for small businesses or startups that rely on maintaining positive cash flow for their day-to-day operations and short-term decision-making.

• Immediate Recognition of Transactions:

In cash basis accounting, transactions are recognized immediately upon receipt or payment of cash. This function simplifies financial record-keeping, as there is no need to track receivables, payables, or adjust for accruals. As a result, business owners can directly link their bank statements to their accounting records, creating a clear and straightforward financial picture.

• Lower Administrative Costs:

Cash basis accounting typically requires less administrative effort and fewer resources than accrual accounting. It eliminates the need for tracking accounts receivable, accounts payable, and making complex adjustments. This function reduces bookkeeping time and costs, making it an affordable option for small businesses without the need for extensive accounting departments.

• Tax Benefits:

In many tax systems, cash basis accounting can offer potential tax benefits. Since income is recognized only when cash is received, businesses may be able to defer income tax liability if payments from customers are delayed until the next tax year. This can help manage tax obligations and smooth out cash flow, especially for businesses with fluctuating income.

• Provides a Clear Picture of Immediate Liquidity:

Cash basis accounting gives an accurate view of a company’s current liquidity. Since it only records cash transactions, it shows exactly how much cash is available at any given time. This function is particularly useful for businesses needing to make short-term decisions based on available resources.

• Reduces Complexity in Financial Reporting:

With cash basis accounting, there are no complex financial reports to prepare. There are no accruals, prepayments, or provisions to account for, reducing the complexity of financial statements. For smaller businesses, this function means less reliance on professional accountants or financial experts, simplifying reporting and compliance.

• Better for Small or Cash-Based Businesses:

Cash basis accounting functions well for businesses that operate primarily on a cash basis, such as retail stores, food service providers, and small service-oriented businesses. Since these businesses receive payments immediately and have minimal credit sales or long-term receivables, cash basis accounting aligns well with their operations, making financial management straightforward and efficient.

Cash basis Book entry:

Date	Transaction	Debit	Credit	Description
YYYY-MM-DD	Cash Sale	Cash	Sales Revenue	Cash received from sales.
YYYY-MM-DD	Cash Purchase	Purchases	Cash	Cash paid for inventory or supplies.
YYYY-MM-DD	Cash Received from Customer	Cash	Accounts Receivable	Cash received for previously sold goods.
YYYY-MM-DD	Cash Payment to Supplier	Accounts Payable	Cash	Payment made to supplier for outstanding bills.
YYYY-MM-DD	Cash Expense Payment	Expenses	Cash	Cash paid for operating expenses (e.g., rent).
YYYY-MM-DD	Owner’s Capital Contribution	Cash	Owner’s Equity	Cash invested into the business by the owner.
YYYY-MM-DD	Cash Withdrawal for Personal Use	Owner’s Equity	Cash	Cash withdrawn by the owner for personal use.
YYYY-MM-DD	Loan Received	Cash	Loan Payable	Cash received from a loan.
YYYY-MM-DD	Loan Payment	Loan Payable	Cash	Cash payment made towards loan repayment.
YYYY-MM-DD	Cash Dividend Distribution	Retained Earnings	Cash	Cash dividends paid to shareholders.

Accrual Basis:

Accrual Basis Accounting is a method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is actually received or paid. Under this system, revenue is recognized when goods or services are delivered, and expenses are recorded when obligations arise. This method provides a more accurate picture of a company’s financial performance by matching revenues with related expenses within the same accounting period. While more complex than cash basis accounting, it is widely used by larger businesses and follows generally accepted accounting principles (GAAP).

Functions of Accrual basis:

• Matching Principle:

One of the primary functions of accrual basis accounting is the matching principle, which states that revenues should be matched with the expenses incurred to generate them within the same accounting period. This function allows businesses to accurately assess profitability by linking income with its associated costs, providing a clearer picture of financial performance.

• Comprehensive Financial Reporting:

Accrual accounting enhances financial reporting by providing a complete view of a company’s financial activities. It includes not only cash transactions but also accounts receivable and payable, ensuring all financial obligations and rights are recognized. This comprehensive reporting is crucial for stakeholders who need to evaluate a company’s performance over time.

• Improved Financial Forecasting:

By recognizing revenue and expenses when they occur, accrual basis accounting allows for better financial forecasting and planning. Businesses can analyze trends and patterns based on actual performance rather than cash flow timing. This function is particularly beneficial for long-term strategic planning and investment decisions.

• Enhanced Creditworthiness:

Companies using accrual accounting can present a more accurate picture of their financial health, improving their creditworthiness. Lenders and investors often prefer accrual basis financial statements because they reflect all obligations and income, not just cash transactions. This transparency can lead to better financing options and terms.

• Facilitates Compliance with Standards:

Accrual basis accounting complies with generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). Many public companies are required to use this method for financial reporting. This function ensures that businesses meet regulatory standards and enhances the reliability and comparability of financial statements.

• Management of Receivables and Payables:

Accrual accounting requires businesses to track accounts receivable and accounts payable, providing insights into outstanding debts and future cash inflows. This function helps businesses manage cash flow more effectively, ensuring they can meet their obligations while maximizing revenue collection.

• Historical Financial Analysis:

Accrual basis accounting enables more effective historical financial analysis by providing a consistent view of revenues and expenses over time. Businesses can analyze trends, assess long-term performance, and make informed decisions based on historical data, leading to more strategic growth initiatives.

• Supports Investment Decisions:

Investors rely on accrual basis financial statements for making informed investment decisions. The recognition of revenue and expenses at the time they are earned or incurred provides a more accurate representation of a company’s operational performance. This function helps investors assess potential risks and returns effectively.

Accrual basis Book entry:

Date	Transaction	Debit	Credit	Description
YYYY-MM-DD	Sale on Credit	Accounts Receivable	Sales Revenue	Revenue recognized when goods/services are delivered.
YYYY-MM-DD	Purchase on Credit	Purchases	Accounts Payable	Expense recognized when goods/services are received.
YYYY-MM-DD	Payment Received for Accounts Receivable	Cash	Accounts Receivable	Cash received for previously recognized revenue.
YYYY-MM-DD	Payment Made to Supplier	Accounts Payable	Cash	Payment for previously recognized expense.
YYYY-MM-DD	Accrued Salaries	Salary Expense	Accrued Salaries Payable	Salary expense recognized before payment.
YYYY-MM-DD	Accrued Interest Expense	Interest Expense	Accrued Interest Payable	Interest expense recognized as incurred.
YYYY-MM-DD	Depreciation Expense	Depreciation Expense	Accumulated Depreciation	Depreciation recognized for the accounting period.
YYYY-MM-DD	Unearned Revenue	Cash	Unearned Revenue	Cash received in advance; revenue recognized later.
YYYY-MM-DD	Expense Prepaid	Prepaid Expense	Cash	Expense paid in advance; recognized over time.
YYYY-MM-DD	Adjusting Entry for Accruals	Various Expenses	Various Payables	Adjustments made for accrued or deferred items.

Key differences between Cash basis and Accrual Basis

Aspect	Cash Basis	Accrual Basis
Revenue Recognition	Cash Received	Earned
Expense Recognition	Cash Paid	Incurred
Complexity	Simple	Complex
Financial Reporting	Limited	Comprehensive
Matching Principle	Not Applicable	Applicable
Cash Flow Focus	Yes	No
Tax Implications	Immediate	Deferred
Usage	Small Businesses	Larger Businesses
Accounts Receivable	Not Recorded	Recorded
Accounts Payable	Not Recorded	Recorded
Timeframe	Current	Future/Current
Regulatory Compliance	Limited	Required
Financial Insights	Short-term	Long-term
Investment Analysis	Limited	Enhanced

 

When accounting for business transactions, there will be times when an estimate must be used. In some cases, those estimates prove to be incorrect, in which case a change in accounting estimate is warranted. A change in estimate is needed when there is a change that:

• Alters the subsequent accounting for existing or future assets or liabilities.
• Affects the carrying amount of an existing asset or liability.

Changes in estimate are a normal and expected part of the ongoing process of reviewing the current status and future benefits and obligations related to assets and liabilities. A change in estimate arises from the appearance of new information that alters the existing situation. Conversely, there can be no change in estimate in the absence of new information.

Applying changes in accounting policies

(i) An entity shall account for a change in accounting policy resulting from the initial application of an Ind AS in accordance with the specific transitional provisions, if any, in that Ind AS; and

(ii) when an entity changes an accounting policy upon initial application of an Ind AS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively.

Examples of Changes in Accounting Estimate

All of the following are situations where there is likely to be a change in accounting estimate:

• Reserve for obsolete inventory
• Allowance for doubtful accounts
• Changes in the useful life of depreciable assets
• Changes in the amount of expected warranty obligations
• Changes in the salvage values of depreciable assets

Changes in accounting estimates

As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required of:

(a) Bad debts

B) Inventory obsolescence

(c) The fair value of financial assets or financial liabilities

(d) The useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets

 (e) Warranty obligations.

When there is a change in estimate, account for it in the period of change. If the change affects future periods, then the change will likely have an accounting impact in those periods, as well. A change in accounting estimate does not require the restatement of earlier financial statements, nor the retrospective adjustment of account balances.

If the effect of a change in estimate is immaterial (as is usually the case for changes in reserves and allowances), do not disclose the alteration. However, disclose the change in estimate if the amount is material. Also, if the change affects several future periods, note the effect on income from continuing operations, net income, and per share amounts.

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.

Accounts receivable refers to the outstanding invoices a company has or the money clients owe the company. The phrase refers to accounts a business has the right to receive because it has delivered a product or service. Accounts receivable, or receivables represent a line of credit extended by a company and normally have terms that require payments due within a relatively short time period. It typically ranges from a few days to a fiscal or calendar year.

Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset. It is one of a series of accounting transactions dealing with the billing of a customer for goods and services that the customer has ordered. These may be distinguished from notes receivable, which are debts created through formal legal instruments called promissory notes

Companies record accounts receivable as assets on their balance sheets since there is a legal obligation for the customer to pay the debt. Furthermore, accounts receivable are current assets, meaning the account balance is due from the debtor in one year or less. If a company has receivables, this means it has made a sale on credit but has yet to collect the money from the purchaser. Essentially, the company has accepted a short-term IOU from its client.

Good accounting requires that an estimate should be made for any amount in Accounts Receivable that is unlikely to be collected. The estimated amount is reported as a credit balance in a contra-receivable account such as Allowance for Doubtful Accounts. This credit balance will cause the amount of accounts receivable reported on the balance sheet to be reduced. Any adjustment to the Allowance account will also affect Uncollectible Accounts Expense, which is reported on the income statement.

Special uses

Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending). They may also sell them through factoring or on an exchange. Pools or portfolios of accounts receivable can be sold to third parties through securitization.

For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments, in order to avoid over-stating debtors in the balance sheet.

Accounts receivables process

While the process of accounts receivables differs from business to business, we have listed common things that you will get to see in accounts’ receivables process followed by most businesses.

• Capturing or recording the credit days or due date.
• Invoicing the customer on credit as per the credit policy.
• Follow-up and collection schedule.
• If there are any cash discount for early payment, the relevant adjustment to receivables account needs to be made.
• Sending reminder letter with the details of bills that are pending.
• Generating the overdue bills and the ones that are pending from the longer time.
• On receiving payment, account the receipt and adjust the receivables accordingly.

Risks of Outstanding Accounts Receivable Balances

Cash flow deficiencies: A business needs cash flow for its operations. Selling on credit may boost revenue and income, but it offers no actual cash inflow. In the short term, it is acceptable, but in the long term, it can cause the company to run short on cash and have to take on other liabilities to fund operations.

Uncollected debt: High A/R that goes uncollected for a long time is written off as bad debt. This situation occurs when customers who purchase on credit go bankrupt or otherwise do not pay the invoice.

Preparing general-purpose financial statements; including the balance sheet, income statement, statement of retained earnings, and statement of cash flows; is the most important step in the accounting cycle because it represents the purpose of financial accounting.

Preparation of your financial statements is one of the last steps in the accounting cycle, using information from the previous statements to develop the current financial statement.

The preparation of financial statements involves the process of aggregating accounting information into a standardized set of financials. The completed financial statements are then distributed to management, lenders, creditors, and investors, who use them to evaluate the performance, liquidity, and cash flows of a business. The preparation of financial statements includes the following steps (the exact order may vary by company).

In other words, the concept financial reporting and the process of the accounting cycle are focused on providing external users with useful information in the form of financial statements. These statements are the end product of the accounting system in any company. Basically, preparing these statements is what financial accounting is all about.

Preparing general-purpose financial statements can be simple or complex depending on the size of the company. Some statements need footnote disclosures while other can be presented without any. Details like this generally depend on the purpose of the financial statements.

For instance, banks often want basic financials to verify a company can pay its debts, while the SEC required audited financial statements from all public companies.

Financial statements are prepared by transferring the account balances on the adjusted trial balance to a set of financial statement templates. We will discuss the financial statement form in the next section of the course.

Step 1: Verify Receipt of Supplier Invoices

Compare the receiving log to accounts payable to ensure that all supplier invoices have been received. Accrue the expense for any invoices that have not been received.

Step 2: Verify Issuance of Customer Invoices

Compare the shipping log to accounts receivable to ensure that all customer invoices have been issued. Issue any invoices that have not yet been prepared.

Step 3: Accrue Unpaid Wages

Accrue an expense for any wages earned but not yet paid as of the end of the reporting period.

Step 4: Calculate Depreciation

Calculate depreciation and amortization expense for all fixed assets in the accounting records.

Step 5: Value Inventory

Conduct an ending physical inventory count, or use an alternative method to estimate the ending inventory balance. Use this information to derive the cost of goods sold, and record the amount in the accounting records.

Step 6: Reconcile Bank Accounts

Conduct a bank reconciliation, and create journal entries to record all adjustments required to match the accounting records to the bank statement.

Step 7: Post Account Balances

Post all subsidiary ledger balances to the general ledger.

Step 8: Review Accounts

Review the balance sheet accounts, and use journal entries to adjust account balances to match the supporting detail.

Step 9: Review Financials

Print a preliminary version of the financial statements and review them for errors. There will likely be several errors, so create journal entries to correct them, and print the financial statements again. Repeat until all errors have been corrected.

Step 10: Accrue Income Taxes

Accrue an income tax expense, based on the corrected income statement.

Step 11: Close Accounts

Close all subsidiary ledgers for the period, and open them for the following reporting period.

Step I2: Issue Financial Statements

Print a final version of the financial statements. Based on this information, write footnotes to accompany the statements. Finally, prepare a cover letter that explains key points in the financial statements. Then assemble this information into packets and distribute them to the standard list of recipients.

Reconciliation of Cost and Financial Accounts is process to find all the reasons behind disagreement in profit which is calculated as per cost accounts and as per financial accounts. There are lots of items which are shown in the profit and loss account only when we make it as per financial accounting rules. There are lots of items which are shown in costing profit and loss account only when we calculate profit as per cost accounting.

Suppose, we have taken the profit or loss as per financial accounts, we adjust it as per cost accounts. In the end of adjustments, we see same profit as per cost accounts. If we have taken profit as per cost account, we have to adjust items as per financial accounts. For this purpose, we make reconciliation Statement.

(a) Items included only in financial accounts

There are number of items which appear only in financial accounts, and not in cost accounts, since they neither do nor relate to the manufacturing activities, such as, Purely financial charges, reducing financial profit

• Losses on capital assets
• Stamp duty and expenses on issue and transfer of stock, shares and bonds
• Loss on investments.
• Discount on debentures, bonds, etc.
• Fines and penalties,
• Interest on bank loans.
• Purely financial income, increasing financial profit
• Rent received
• Profit on sale of assets
• Share transfer fee
• Share premium
• Interest on investment, bank deposits.
• Dividends received.
• Appropriation of profit donations and charities.

(b) Items included only in the cost accounts

There are very few items which appear in cost accounts, but not in financial accounts. Because, all expenditure incurred, whether for cash or credit, passes though the financial accounts, and only relevant expenses are incorporated in cost accounts. Hence, only item which can appear in cost accounts but not in financial accounts is a notional charge, such as:

(i) Interest on capital, which is not paid but included in cost accounts to show the notional cost of employing capital

(ii) Rent i.e. charging a notional rent of premises owned by the proprietor.

In those concerns where there are no separate cost and financial accounts, the problem of reconciliation does not arise. But where cost and financial accounts are maintained independent of each other, it is imperative that periodically two accounts are reconciled. Though both sets of books are concerned with the same basic transactions but the figure of profit disclosed by the former does not agree with that disclosed by the latter.

Thus, reconciliation between the results of the two sets of books is necessary due to the following reasons:

1. To find out the reasons for the difference in the profit or loss in cost and financial accounts and to indicate the position clearly and to be sure that no mistakes pertaining to accounts have been committed.
2. To ensure the mathematical accuracy and reliability of cost accounts in order to have cost ascertainment, cost control and to have a check on the financial accounts.
3. To contribute to the standardisation of policies regarding stock valuation, depreciation and overheads.
4. To facilitate coordination and promote better cooperation between the activities of financial and cost sections of the accounting department.
5. To place management in better position to acquaint itself with the reasons for the variation in profits paving the way to more effective internal control.

Methods of Reconciliation:

Reconciliation of costing and financial profits can be attempted either:

(a) By preparing a Reconciliation Statement or

(b) By preparation a Memorandum Reconciliation Account.

Accounting Treatment in the Books of Transferor/Vendor Company:

So far as the books of the transferor company are concerned, the normal procedures are to be followed for closing the books of account through Realisation Account. It should be noted that the Accounting Standard (AS-14) deals with the accounting procedures only in the books of the transferee company.

In case of amalgamation the transferor company has to wind up its business and hence it will dispose off its assets, pay its liabilities and distribute the surplus if any among its shareholders. It is done through opening a new account known as Realisation Account. In order to close the books of account of the transferor company, the following steps (along with their journal entries) are required:

Step 1:

Open a Realisation Account, transfer all assets and liabilities (excluding fictitious assets) to this account.

Journal Entry:

For transferring different assets to Realisation Account.

1. Realisation A/c Dr. (with total)

  To Sundry assets (individually) (with their individual values)

Points to be noted:

(a) Fictitious assets, such as preliminary expenses, discount on issue of shares and debentures, debit balance of Profit and Loss Account etc. are not transferred to Realisation Account.

(b) In tangible assets such as goodwill, patents, trademarks etc. are also transferred to Realisation Account.

(c) The cash and bank balances should not be transferred to Realisation Account if these are not taken over by the purchasing company.

(d) An asset against which a provision or reserve has been created should be transferred at its gross figure and not at its net figure e.g. debtors.

Step 2:

For transferring different liabilities to Realisation Account.

Sundry Liabilities Dr. [with their individual book values]

  To Realisation A/c [with the total]

Points to be noted:

(i) Items in the nature ‘Provisions’ (e.g. Provision for taxation, Employees provident fund, Pension Fund, Provision for doubtful debts, Provision for Depreciation) should be transferred to Realisation Account.

(ii) Items in the nature of ‘Reserve’ are not to be transferred to Realisation Account. These are directly transferred to sundry shareholders account (e.g. workmen compensation fund, credit balance of profit and loss account).

(iii) A liability against which a provision or reserve has been created should be transferred at its gross figure e.g. creditors.

Step 3:

For realising assets which have not been taken over by the purchasing company.

Cash or Bank Account Dr. (with the amount realised)

  To Realisation account

Step 4:

For discharging liabilities, which have not been taken over by the purchasing company.

Realisation A/c Dr. (with the amount paid)

  To Cash

Step 5:

To record liquidation expenses

(a)	If these expenses are borne by the transferor company	Journal Entry Realisation Account	Dr.
		To Bank

(b)	If these are paid by the purchasing companies directly	No Entry
©	If these expenses are first paid by the transferor company and later reimbursed by the transferee company
	1. On Payment by the transferor company	Transferee company’s account    To Realization account	Dr.
	2. On reimbursement	Bank Account       To Realization account	Dr.

Step 6:

For Receiving Purchase Consideration

Cash/Bank Account	Dr.	With cash received
Preference Shares in Purchasing Company	Dr.	With issue price of preference shares
Equity Shares in Purchasing Company	Dr.	With issue price of equity shares With the total
To Transferee Company

Step 7:

Discharge the claims of preference shareholders and transfer the difference between the amount actually payable and the book figure to Realisation Account

Journal Entries for making the payment due:

Step 8:

Ascertain the profit/loss on realisation and transfer the same to equity shareholders account

In Case of Profit	Realisation Account (With profit)    To Equity Shareholders Account
In case of loss	Equity Shareholders Account             To Realisation Account (With loss)

Step 9:

Transfer Equity share capital, Accumulated profits and Reserves shown in the Balance Sheet (just before date of amalgamation) to Equity Shareholders Account

Equity Share Capital Account	Dr.	With paid up value of Share Capital
Profit and Loss Account	Dr.	With credit balance of profit and loss Account
General Reserve Account	Dr.	If Any

Workmen Compensation fund Account	Dr.	If any
Capital Reserve Account	Dr.	If any
Dividend Equalisation Fund Account	Dr.	If any
Securities Premium Account	Dr.	If any
Debenture Redemption Reserve Account	Dr.	If any
Capital Redemption Reserve Account	Dr.	If any
To Equity Shareholders Account		With total

Step 10:

Transfer Accumulated losses (shown on debit side of Balance Sheet just before amalgamation)

Equity Shareholders Account	Dr.
To Profit and Loss Account		Debit balance
To Preliminary Expenses Account		If Any
To Discount on issue of Shares/Debentures		If Any
To deferred Revenue Expenditure Account		If Any

Step 11:

Make the final payment to equity shareholders

Equity Shareholders Account	Dr.	With total
To Equity shares in transferee company’s Account		No. of Shares issued X Issue price per share
To Cash/Bank Account		With cash paid

Notes:

1. After passing the above-mentioned entries in books of Transferor Company, all the accounts will be closed and not a single account will show any balance.
2. The net amount payable to equity shareholders must be equal to the amount of shares in Transferee Company and cash and bank balance left after the discharge of all outsiders’ liabilities and claims of preference shareholders.

Accounting Treatment in Books of Transferee Company or Purchasing Company:

Accounting treatment in books of Transferee Company depends upon the type of amalgamation.

As per AS-14, there are two methods of accounting for amalgamation:

1. Pooling of Interest Method:

Applicable in case of Amalgamation in the nature of merger.

2. Purchase Method:

Applicable in case of Amalgamation in the nature of Purchase.

Pooling of Interest Method (as per AS-14):

The following are the salient features of pooling of interest method:

1. All assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (book values) except in cases where these are to be adjusted to follow uniform set of accounting policies.
2. The identity of the reserves is preserved as they appear in financial statements of the transferee company. For example, the general reserve of the transferor company becomes the general reserve of the transferee company, the capital reserve of the transferor company becomes the capital reserve of the transferee company and the revaluation reserve of the transferor company becomes the capital reserve of the transferee company.
3. No goodwill account should be accounted for as a result of amalgamation in the books of the transferee company.
4. The difference between the amount of share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves in the financial statements of the transferee company.
5. The balance of profit and loss account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company.
6. Although AS-14 does not specifically state, the purchase consideration under this method is to be valued at par value of shares issued. The logic is that this method considers book values and not the fair values.

A company’s property insurance, liability insurance, business interruption insurance, etc. often covers a one-year period with the cost (insurance premiums) paid in advance. The one-year period for the insurance rarely coincides with the company’s accounting year. Therefore, the insurance payments will likely involve more than one annual financial statement and many interim financial statements.

Prepaid Insurance vs. Insurance Expense

When the insurance premiums are paid in advance, they are referred to as prepaid. At the end of any accounting period, the amount of the insurance premiums that remain prepaid should be reported in the current asset account, Prepaid Insurance. The prepaid amount will be reported on the balance sheet after inventory and could part of an item described as prepaid expenses.

As the prepaid amount expires, the balance in Prepaid Insurance is reduced by a credit to Prepaid Insurance and a debit to Insurance Expense. This is done with an adjusting entry at the end of each accounting period (e.g. monthly). One objective of the adjusting entry is to match the proper amount of insurance expense to the period indicated on the income statement.

When a business suffers a loss that is covered by an insurance policy, it recognizes a gain in the amount of the insurance proceeds received. The most reasonable approach to recording these proceeds is to wait until they have been received by the company. By doing so, there is no risk of recording a gain related to a payment that is never received. An alternative is to record the gain as soon as the payment is probable and the amount of the payment can be determined; however, this constitutes a form of accrued revenue, and so is discouraged unless there is a high degree of certainty regarding the payment. If the gain is recorded prior to cash receipt, the offsetting debit to the gain is a receivable for expected insurance recoveries.

A gain from insurance proceeds should be recorded in a separate account if the amount is material, thereby clearly labeling the gain as being non-operational in nature. For example, the title of such an account could be “Gain from Insurance Claims.” Though a gain is being recorded, the likely total outcome of an insurance claim is a net loss, since the amount of such a claim is offset against the actual loss incurred, net of an insurance deductible.

Applicability of Accounting Standards:

While preparing Receipts and Payments Account, Profit and Loss Account and the Balance Sheet of the Insurance companies, the recommendations of Indian Accounting Standards (A3) framed by the ICAI should strictly be followed as far as practicable, to the General Insurance Company with the exception of

(i) AS 3 (Cash Flow Statement) to be prepared under Direct Method only.

(ii) AS 13 (Accounting for Investment) not to be taken into consideration.

(iii) AS 17 (Segment Reporting) to be applied in general without considering the class of Security.

Financial Statements of General Insurance Companies:

The financial statements of general insurance companies must be in conformity with the regulations of IRDA, Schedule B.

1. Revenue Account (Form B-RA):

The Revenue Account of general insurance companies must be prepared in conformity with the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has already been stated above that separate Revenue Account is to be prepared for each individual unit i.e. for Marine, Fire, and Accident.

These individual revenue accounts will highlight the result of operation of each individual unit for a particular accounting period. It also reveals the incomes and expenditures of each individual unit. Like Revenue Account of a life insurance company, Revenue Account is prepared under Mercantile System of Accounting.

Items appearing in Revenue Account:

Premiums:

It has already been stated above that general insurance policies are issued for a short period, say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore, the entire premium so received cannot be treated as an income for the current year only. A portion of that amount should be carried forward to the next year in order to cover the unexpired risks. This is what is known as Reserve for Unexpired Risks.

As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided for out of net premium so received as:

(a) 50% for Fire Insurance business;

(b) 50% for Miscellaneous Insurance business;

(c) 50% for Marine Insurance business other than Marine Hull business, and

(d) 100% for Marine Hull business.

In addition to the above, if any company wants to maintain more than this level, it can do so. The same is known as Additional Reserve.

2. Profit and Loss Account (Form B-Pl):

In order to find out the overall performance or results of the operating of general insurance business Profit and Loss Account of the General Insurance Companies is prepared. It also takes into account the income from investment by way of interest, dividend, Rent Profit/Loss on sale of investments. Provision for Taxations and Provision for Doubtful Debts, if any, should also be provided for.

Similarly, other expenses related to insurance business and bad debts written-off also will be adjusted to this account. However, appropriation section of Profit and Loss Account will contain payment of interim dividend; proposed dividend; transfer to any reserve i.e. appropriation items.

3. Balance Sheet (Form B-Bs):

The Balance Sheet of a general insurance company as per IRDA format is divided into two parts, viz. Source of Funds and Application of Funds. It is prepared in vertical form.

Sources of Funds:

It consists of:

(i) Share Capital (Schedule 5):

Various classes of Share Capital viz. Authorized Capital, Issued, Subscribed, Called-up and Paid up capital are separately shown.

(ii) Reserves & Surplus- (Schedule 6):

All kinds of reserves will appear under this head, viz. Securities Premium, Balance of Profit and Loss Account, General Reserve, Capital Redemption Reserve, Capital Reserve, etc.

(iii) Borrowings (Schedule 7):

Long term borrowings viz. Bonds, Debentures, Bank Loans, taken from various financial institutes will appear under this head.

Applications of Funds:

It consists of:

(i) Investments (Schedule 8):

All kinds of investments, whether long-term or short-term, will appear under this schedule.

(ii) Loans (Schedule 9):

Different kinds of loans clearly specified, viz. (a) Security-wise, Borrower-wise, performance-wise, and maturity-wise classification.

(iii) Fixed Assets (Schedule 10):

All fixed assets viz. Goodwill, Intangibles, Land and Building, Freehold/Leasehold Property, Furniture & Fixture, etc. will appear in this schedule.

(iv) Current Assets:

This section has two parts:

(a) Cash and Bank Balances (Schedule 11):

All cash and bank balances lying at Deposit Account and Current Account, Money-at-call and short notice etc. will appear in the Schedule.

(b) Advances and Other Assets (Schedule 12):

All advances (short-term) and other assets, if any, will appear in this Schedule.

(v) Current Liabilities (Schedule 14):

All current liabilities viz., Agents’ balances, Premium Received in Advance, Sundry Creditors, Claims Outstanding etc.

(vi) Provisions (Schedule 15):

All kinds of provisions viz., Reserve for Unexpired Risk; Provision for Taxation, Proposed Dividend, Others.

New Format for Financial Statement:

According to Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002, every general insurance company must prepare as per Schedule B of the Regulations the following three statements for preparation and presentation of financial statements:

For General Insurance:

• Revenue Account: Form B-RA
• Profit and Loss Account: Form B-PL
• Balance Sheet: Form B-BS

Thus, in short, every general insurance company is required to prepare a Revenue Account (Form B-RA); Profit and Loss Account (Form B-PL) and Balance Sheet (Form B-BS).

Core banking is a banking service provided by a group of networked bank branches where customers may access their bank account and perform basic transactions from any of the member branch offices.

Core Banking Solution (CBS) is networking of branches, which enables

Customers to operate their accounts, and avail banking services from any branch of the Bank on CBS network, regardless of where he maintains his account. The customer is no more the customer of a Branch. He becomes the Bank’s Customer.

Another interesting fact regarding CBS is that all CBS branches are inter-connected with each other. Therefore, Customers of CBS branches can avail various banking facilities from any other CBS branch located anywhere in the world.

Now a days, most banks use core banking applications to support their operations where ‘CORE’ stands for “Centralized Online Real-time Environment”. This basically means that all the bank’s branches access applications from centralized data centres. It means that the deposits made are reflected immediately on the servers of bank and the customer can withdraw the deposited money from any of the branches of bank throughout the world. These applications now also have the capability to address the needs of corporate customers providing a comprehensive banking solution. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, internet banking and branches.

Core banking is often associated with retail banking and many banks treat the retail customers as their core banking customers. Businesses are usually managed via the corporate banking division of the institution. Core banking covers basic depositing and lending of money.

Core banking functions will include transaction accounts, loans, mortgages and payments. Banks make these services available across multiple channels like automated teller machines, Internet banking, mobile banking and branches.

Banking software and network technology allows a bank to centralise its record keeping and allow access from any location.

Software

Advancements in Internet and information technology reduced manual work in banks and increasing efficiency. Computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, interest calculations on loans and deposits, customer records, balance of payments and withdrawal. This software is installed at different branches of bank and then interconnected by means of computer networks based on telephones, satellite and the Internet.

Gartner defines a core banking system as a back-end system which processes daily banking transactions, and posts updates to accounts and other financial records. Core banking systems typically include deposit, loan and credit-processing capabilities, with interfaces to general ledger systems and reporting tools. Core banking applications are often one of the largest single expense for banks and legacy software are a major issue in terms of allocating resources. Spending on these systems is based on a combination of service-oriented architecture and supporting technologies.

Many banks implement custom applications for core banking. Others implement or customize commercial independent software vendor packages. Systems integrators implement these core banking packages at banks.

Open-source Technology in core banking solution or software can help banks to maintain their productivity and profitability at the same time.

Features

• To make enquiries about the balance or debit or credit entries in the account.
• To obtain cash payment out of his account by tendering a cheque.
• To deposit a cheque for credit into his account.
• To deposit cash into the account.
• To deposit cheques/cash into account of some other person who has account in a CBS branch.
• To get the statement of account.
• To transfer funds from his account to some other account his own or of third party, provided both accounts are in CBS branches.
• To obtain Demand Drafts or Banker’s Cheques from any branch on CBS – amount shall be online debited to his account.

Advantages of Core Banking

• Limited Professional Manpower to be utilized more effectively.
• Customer can have anywhere, more convenient and easier banking.
• ATM, Interest Banking, Mobile Banking, Payment Gateways etc. are available.
• More strong and economical way of management information system.
• Reduction in branch manpower.
• Additional manpower can be available for marketing, recovery and personalized banking.
• Instant information available for decision support.
• Quick and accurate implementation of policies.
• Improved Recovery Process causing reduction on recovery costs, NPA provisions.
• Innovative, redefined or improved processes i.e. Inter Branch Reconciliation causing reduction in manpower at Head Office.
• Reduction in software maintenance at branch and Head office.
• Centralized printing and backup resulting in reduction in capital and revenue expenditure on printing and backup devices and media at branches.
• Electronic Transactions with other Financial Institutions.
• Increased speed in working resulting in more business opportunities and reduction in penalties and legal expenses.

An income statement, also known as a profit and loss statement, is a financial document that summarizes a company’s revenues, expenses, and profits over a specific period, typically a quarter or year. It provides insights into a business’s operational performance, showcasing how much money was earned and spent during that period. The income statement typically includes revenue from sales, cost of goods sold (COGS), operating expenses, and net income. This statement is crucial for stakeholders, including investors and management, to assess profitability and make informed financial decisions.

Features of Income Statement:

1. Revenue Recognition

Income statement begins with the total revenue generated from sales of goods or services. It follows the revenue recognition principle, ensuring that revenue is recorded when earned, regardless of when cash is received. This feature provides a clear picture of a company’s income generation activities.

2. Expense Categorization

Expenses are categorized into various types, including cost of goods sold (COGS), operating expenses, and non-operating expenses. This categorization allows stakeholders to analyze the types of costs incurred in generating revenue, helping identify areas for cost control and operational efficiency.

3. Gross Profit Calculation

Income statement calculates gross profit by subtracting the cost of goods sold from total revenue. This figure reflects the profitability of core business operations before accounting for other expenses. Gross profit helps assess how efficiently a company is producing and selling its products.

4. Operating Income

Operating income is derived from subtracting operating expenses from gross profit. It indicates how much profit a company generates from its regular business operations, excluding non-operating income and expenses. This metric is essential for understanding the performance of the company’s core activities.

5. Net Income or Loss

Income statement concludes with net income or loss, calculated by subtracting total expenses (including taxes and interest) from total revenue. This figure represents the company’s overall profitability for the period and is a critical indicator of financial performance, influencing investor decisions and business strategies.

6. Time Period Specificity

Income statement covers a specific accounting period, such as a month, quarter, or year. This feature allows for comparative analysis over different periods, enabling stakeholders to assess trends in revenue, expenses, and profitability, thus informing future financial planning and decision-making.

Components of Income Statement:

1. Revenue (Sales)

This is the total amount earned from selling goods or services before any expenses are deducted. It includes both cash and credit sales. Revenue is the starting point of the income statement and indicates the effectiveness of a company’s sales strategy.

2. Cost of Goods Sold (COGS)

COGS represents the direct costs attributable to the production of goods sold during the period. This includes costs such as materials, labor, and overhead directly tied to production. It helps determine the gross profit by subtracting COGS from total revenue, indicating how efficiently a company is producing its products.

3. Gross Profit

Gross profit is calculated by subtracting COGS from total revenue. It reflects the profitability of a company’s core business operations. A higher gross profit margin indicates better control over production costs relative to revenue.

4. Operating Expenses

Operating expenses include all costs incurred in running the business that are not directly tied to production. This can include selling, general, and administrative expenses (SG&A), such as salaries, rent, utilities, and marketing costs. Operating expenses are deducted from gross profit to calculate operating income, providing insight into how efficiently a company is managing its overhead.

5. Operating Income

Operating income is derived by subtracting operating expenses from gross profit. It reflects the profit generated from regular business operations. This metric indicates the company’s ability to generate profit from its core activities, excluding non-operating income and expenses.

6. Other Income and Expenses

This section includes non-operating income (e.g., interest income, gains from asset sales) and non-operating expenses (e.g., interest expense, losses from asset sales). These items provide additional context to overall profitability, reflecting the impact of activities not directly related to the core business.

7. Income Tax Expense

This represents the estimated taxes owed on the income generated during the period. It is based on the applicable tax rates and regulations. Accounting for income tax expense allows for a clearer understanding of net income after tax obligations.

8. Net Income (Net Profit or Loss)

Net income is the final figure on the income statement, calculated by subtracting total expenses (including taxes) from total revenue. It represents the overall profitability of the company. Net income is a crucial indicator of a company’s financial health and performance, influencing investor decisions and management strategies.

Example of Income Statement:

Simple Income Statement presented in a table format for a fictional company, ABC Corporation, for the year ended December 31, 2024.

Income Statement	For the Year Ended December 31, 2024
Revenue
Sales Revenue	$500,000
Total Revenue	$500,000
Cost of Goods Sold (COGS)
Opening Inventory	$50,000
Add: Purchases	$200,000
Less: Closing Inventory	($40,000)
Cost of Goods Sold	$210,000
Gross Profit	$290,000
Operating Expenses
Selling Expenses	$50,000
Administrative Expenses	$40,000
Depreciation Expense	$20,000
Total Operating Expenses	$110,000
Operating Income	$180,000
Other Income and Expenses
Interest Income	$5,000
Interest Expense	($10,000)
Total Other Income/Expenses	($5,000)
Income Before Tax	$175,000
Income Tax Expense	($35,000)
Net Income	$140,000

Explanation of Key Figures:

• Total Revenue: The total sales generated by the company.
• Cost of Goods Sold (COGS): Direct costs associated with the production of goods sold during the period.
• Gross Profit: Revenue minus COGS, indicating profitability from core operations.
• Operating Expenses: Costs incurred in running the business that are not directly tied to production.
• Operating Income: Gross profit minus operating expenses, reflecting profit from core operations.
• Other Income and Expenses: Non-operating items that affect overall profitability.
• Net Income: The final profit after all expenses and taxes, representing the company’s overall profitability.