Tag: Financial Statements

Management Notes

Accounting System, Concepts, Objectives, Features, Components, Types, Advantages and Limitations

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Accounting System refers to a systematic process of identifying, recording, classifying, summarizing, analyzing, and reporting financial transactions of a business organization. It provides a structured framework for maintaining financial records and preparing financial statements. An accounting system includes accounting procedures, rules, principles, documents, software, and internal controls used to manage financial information. It helps organizations determine their financial position, profitability, and cash flow while ensuring accuracy, transparency, and accountability in financial reporting.

Objectives of Accounting System

1. Systematic Recording of Transactions

The primary objective of an Accounting System is to record all financial transactions systematically and chronologically. It provides an organized method for documenting sales, purchases, receipts, payments, expenses, and other business activities. Proper recording creates a reliable financial database for future reference. It reduces the possibility of missing transactions and supports the preparation of accurate accounting records. A systematic recording process also makes financial information easier to retrieve, verify, classify, and summarize whenever required.

2. Determining Profit or Loss

An accounting system helps determine the profit or loss earned by a business during a particular accounting period. It records and classifies revenues, expenses, gains, and losses, allowing the organization to calculate its financial performance accurately. The resulting income statement provides information about operational results and profitability. Management can use this information to evaluate performance, identify unnecessary expenses, and formulate suitable strategies. Thus, determining profit or loss is an important objective of maintaining systematic accounting records.

3. Ascertainment of Financial Position

Another important objective is to determine the financial position of an organization at a specific date. The accounting system records information about assets, liabilities, and capital, which helps in preparing the balance sheet. This enables management and stakeholders to understand the resources owned by the business and its financial obligations. Information about financial position is useful for evaluating solvency, liquidity, and capital structure and for making informed decisions concerning financing, investment, expansion, and other business activities.

4. Providing Information for Decision-Making

An effective accounting system provides relevant financial information for managerial and business decision-making. Management requires information about revenues, costs, profitability, assets, liabilities, and cash flows to make appropriate decisions. Accounting reports assist in decisions related to pricing, investment, financing, budgeting, expansion, and resource allocation. Reliable accounting information reduces uncertainty and supports rational planning. Therefore, the accounting system acts as an important information system that converts financial transactions into useful information for managers and other stakeholders.

5. Maintaining Financial Control

Accounting systems help organizations establish effective financial control over their resources and transactions. Proper records enable management to monitor cash, inventory, receivables, payables, expenses, and assets. Comparing actual results with budgets or planned figures helps identify deviations and unnecessary expenditures. Accounting procedures and internal controls can also reduce the risk of errors, misuse of assets, and unauthorized transactions. Consequently, systematic accounting contributes to better financial discipline, operational control, and efficient utilization of organizational resources.

6. Ensuring Legal and Regulatory Compliance

An accounting system helps businesses meet their legal, taxation, and regulatory requirements. Organizations are generally required to maintain appropriate financial records and prepare prescribed financial statements. Proper accounting facilitates tax calculation, statutory reporting, auditing, and compliance with accounting standards. Accurate records provide supporting evidence during inspections and audits. By maintaining complete and reliable documentation, businesses can fulfill their reporting obligations and reduce compliance-related difficulties. Thus, accounting systems contribute to legal accountability and responsible financial management.

7. Facilitating Communication with Stakeholders

Another objective is to provide financial information to various stakeholders, including owners, investors, creditors, lenders, employees, government authorities, and management. Financial statements communicate information about the organization’s profitability, financial position, cash flows, and performance. Investors may use such information to assess their interests, while creditors may evaluate repayment capacity. Management uses it for planning and control. Therefore, an accounting system creates a common financial information base that improves communication, transparency, and accountability among stakeholders.

8. Supporting Planning and Future Growth

An accounting system supports financial planning, budgeting, forecasting, and business growth by providing historical and current financial information. Management can analyze previous revenues, expenses, profits, cash flows, and financial trends to prepare future plans. Accounting information helps identify areas requiring improvement and assists in estimating financial requirements for expansion or new investments. Accurate records also support performance comparisons across periods. Hence, accounting systems provide the financial foundation necessary for effective planning, resource allocation, and sustainable organizational development.

Features of an Effective Accounting System

1. Accuracy

Accuracy is a fundamental feature of an effective accounting system. Financial transactions should be recorded, classified, calculated, and summarized correctly. Accurate accounting information ensures that revenues, expenses, assets, liabilities, and capital are properly reported. Errors in accounting records can lead to incorrect financial statements and poor decisions. Effective procedures, verification mechanisms, reconciliations, and internal controls help maintain accuracy. Therefore, an accounting system should consistently produce financial information that reflects the organization’s transactions and financial activities correctly.

2. Reliability

An effective accounting system must provide reliable financial information that users can trust for decision-making. Reliability requires transactions to be supported by appropriate source documents, properly authorized, and recorded according to established accounting principles. Reliable information should faithfully represent the organization’s financial activities without significant errors or misleading presentations. Management, investors, creditors, and other stakeholders depend on reliable accounting reports to evaluate performance and financial position. Therefore, reliability strengthens confidence in financial statements and organizational reporting.

3. Completeness

Completeness means that all relevant financial transactions should be properly recorded in the accounting system. No significant income, expense, asset, liability, purchase, sale, receipt, or payment should be unnecessarily omitted. Complete records provide a comprehensive view of business activities and help ensure that financial statements present an appropriate picture of the organization’s performance and position. Effective accounting procedures, source-document controls, transaction reconciliation, and periodic reviews help identify missing information and maintain complete financial records.

4. Timeliness

Timeliness is an important feature because financial information must be available when it is needed. An effective accounting system records transactions promptly and produces financial reports within appropriate reporting periods. Delayed information may become less useful for management decisions, financial planning, or corrective action. Timely accounting enables managers to monitor performance, control expenses, manage cash flows, and respond to changing business conditions. Modern computerized systems improve timeliness by automating transaction processing and report generation.

5. Consistency

An effective accounting system should maintain consistency in accounting methods, procedures, classifications, and reporting practices. Applying accounting policies consistently across accounting periods improves the comparability of financial information. Users can then identify trends and evaluate changes in financial performance more effectively. Consistency does not mean that accounting methods can never change; changes may occur when justified and appropriately disclosed. A consistent system therefore promotes stability, comparability, transparency, and meaningful interpretation of financial statements.

6. Security and Internal Control

A good accounting system should provide strong security and internal controls to protect financial data and organizational assets. Controls may include authorization procedures, segregation of duties, passwords, access restrictions, reconciliations, backups, and audit trails. These mechanisms help prevent fraud, unauthorized transactions, data manipulation, and accidental loss. In computerized systems, cybersecurity and regular data backups are particularly important. Strong controls improve the integrity of accounting information while protecting confidential financial records from unauthorized access or misuse.

7. Flexibility and Scalability

An effective accounting system should be flexible and scalable enough to accommodate changes in business operations. As an organization grows, transaction volumes, products, locations, employees, and reporting requirements may increase. The accounting system should therefore be capable of handling additional accounts, transactions, users, and reporting requirements without major disruption. Flexible systems can also adapt to changes in accounting standards, taxation requirements, and organizational structures. This feature supports continuous business development and long-term accounting efficiency.

8. Ease of Use and Accessibility

An effective accounting system should be user-friendly and accessible to authorized users. Clear procedures, understandable reports, and simple interfaces enable employees to record and retrieve financial information efficiently. Authorized users should be able to access relevant accounting records and reports according to their responsibilities. In modern organizations, cloud-based and computerized systems can improve accessibility while maintaining appropriate security controls. Ease of use reduces training difficulties, improves productivity, and helps users obtain financial information for timely decisions.

Components of Accounting System

1. Source Documents

Source documents are the primary evidence of financial transactions recorded in an accounting system. They include invoices, receipts, bills, vouchers, debit notes, credit notes, bank statements, and purchase orders. These documents provide essential details such as transaction date, amount, parties involved, and nature of the transaction. They support the authenticity and accuracy of accounting entries. Proper maintenance of source documents also facilitates verification, auditing, internal control, and legal compliance.

2. Journal

Journal is the primary book of original entry in which financial transactions are recorded in chronological order. Each transaction is analyzed according to the principles of debit and credit before being entered into the journal. Journal entries generally include the date, accounts affected, amounts, and a brief narration. It provides a systematic record of business transactions and serves as the basis for posting information into individual ledger accounts.

3. Ledger

Ledger is a principal component of the accounting system where transactions are classified and accumulated under individual accounts. Information from the journal is transferred to appropriate personal, real, and nominal accounts in the ledger. It provides the balance of accounts such as cash, sales, purchases, debtors, creditors, expenses, and capital. Ledger balances are essential for preparing the trial balance and subsequently the financial statements of the organization.

4. Trial Balance

Trial Balance is a statement prepared by listing the balances of various ledger accounts on a particular date. Its major purpose is to check the arithmetical accuracy of bookkeeping by comparing total debits with total credits. Agreement of the trial balance provides reasonable evidence that the basic double-entry principle has been followed, although it does not detect every type of accounting error. It also provides a foundation for preparing final accounts.

5. Adjusting Entries

Adjusting Entries are accounting entries made at the end of an accounting period to ensure that revenues and expenses are recognized in the appropriate period. They may relate to outstanding expenses, prepaid expenses, accrued income, depreciation, bad debts, and provisions. Adjustments help present a more accurate measurement of profit or loss and financial position. They ensure compliance with the accrual concept and improve the reliability of financial statements prepared from accounting records.

6. Financial Statements

Financial Statements are important outputs of an accounting system that summarize the financial performance and position of an organization. Major statements include the income statement, balance sheet, and cash flow statement. They provide information about revenues, expenses, assets, liabilities, equity, and cash movements. Financial statements are used by management and external stakeholders for decision-making, financial analysis, investment evaluation, lending decisions, and regulatory reporting.

7. Internal Control System

Internal Control System consists of policies and procedures designed to safeguard organizational assets and ensure the reliability of accounting information. Important controls include authorization, segregation of duties, reconciliation, physical safeguards, access controls, and independent verification. Effective internal controls help prevent and detect errors, fraud, unauthorized transactions, and misuse of resources. They also promote operational efficiency and support compliance with organizational policies and applicable legal requirements.

8. Accounting Software and Technology

Modern accounting systems increasingly use Accounting Software and Technology to record, process, store, and report financial information. Computerized systems can automate journal entries, ledger posting, calculations, reconciliations, invoicing, payroll, and financial reporting. They improve processing speed and reduce repetitive manual work. Technologies such as cloud accounting, databases, automation, and data analytics can further improve accessibility and reporting. Appropriate security measures are necessary to protect computerized accounting information from unauthorized access or loss.

Types of Accounting Systems

1. Single-Entry Accounting System

Single-Entry Accounting System is a simplified method of maintaining accounting records in which transactions are not recorded with complete debit and credit aspects. It generally focuses on cash transactions, personal accounts, and selected business records. This system is relatively simple and requires less accounting knowledge, making it suitable for some small businesses and individual traders. However, it does not provide complete financial information and has limitations in preparing comprehensive financial statements and detecting certain errors.

2. Double-Entry Accounting System

Double-Entry Accounting System is a systematic method in which every financial transaction affects at least two accounts, with one account being debited and another credited. It is based on the fundamental accounting equation:

Assets = Liabilities + Capital

The system provides complete records of business transactions and supports the preparation of the trial balance and financial statements. It improves accuracy, accountability, and financial control and is widely used for maintaining comprehensive business accounting records.

3. Manual Accounting System

Manual Accounting System involves recording and processing transactions using physical accounting books and documents. Accountants maintain journals, ledgers, cash books, registers, and other records manually. Calculations, posting, balancing, and preparation of financial statements are performed by individuals. This system can be appropriate for businesses with limited transactions and simple operations. However, it can be time-consuming, requires considerable clerical effort, and may have a higher possibility of human errors.

4. Computerized Accounting System

Computerized Accounting System uses computers and accounting applications to record, process, classify, store, and report financial transactions. It can automatically perform calculations, ledger posting, trial balance preparation, invoicing, and financial reporting. The system improves speed, accuracy, data storage, and accessibility compared with many manual processes. It can also generate customized reports for management. However, effective use requires appropriate software, hardware, trained personnel, data security, and regular system maintenance.

5. Cloud-Based Accounting System

Cloud-Based Accounting System stores accounting data on remote servers and allows authorized users to access financial information through the internet. It supports real-time access, online collaboration, automatic updates, data synchronization, and remote reporting. Businesses can access records from different locations and devices while reducing dependence on local storage. Cloud accounting can improve flexibility and scalability, although organizations must pay attention to data privacy, cybersecurity, user authentication, and service reliability.

6. Enterprise Accounting System

Enterprise Accounting System is designed to manage accounting and financial activities across larger organizations with complex operations. It is often integrated with Enterprise Resource Planning (ERP) systems that connect accounting with purchasing, sales, inventory, human resources, production, and other functions. Such systems provide centralized financial information and support comprehensive reporting. They improve coordination and control but may require significant investment in implementation, customization, training, maintenance, and system management.

7. Real-Time Accounting System

Real-Time Accounting System processes and updates financial information as transactions occur or shortly after they occur. It provides current information about sales, cash balances, receivables, payables, inventory, and other financial activities. Real-time information allows management to monitor operations and respond quickly to changing financial conditions. Such systems generally depend on computerized infrastructure and integrated databases. Proper controls and data validation are important to ensure that continuously updated information remains accurate and reliable.

Advantages of Accounting System

1. Systematic Record-Keeping

An accounting system provides a systematic method of recording financial transactions. It organizes information relating to sales, purchases, receipts, payments, expenses, assets, and liabilities in an appropriate manner. Proper record-keeping reduces the possibility of missing or duplicating transactions. It also makes financial information easier to locate, verify, and review. Organized accounting records provide a reliable foundation for preparing trial balances, financial statements, tax records, and management reports, thereby improving overall financial administration.

2. Accurate Financial Information

An effective accounting system improves the accuracy of financial information by following established accounting procedures and principles. Transactions are classified, recorded, summarized, and checked systematically. In computerized systems, automatic calculations and posting can further reduce certain types of arithmetic and clerical errors. Accurate information helps businesses determine revenues, expenses, profits, assets, liabilities, and capital correctly. This improves the reliability of financial statements and provides stakeholders with dependable information for evaluating business performance and position.

3. Better Decision-Making

Accounting systems provide relevant financial information for decision-making. Management can obtain information about costs, revenues, profitability, cash flows, assets, and liabilities to make informed business decisions. Accounting reports can support decisions concerning pricing, investment, financing, budgeting, expansion, and resource allocation. Timely financial information reduces uncertainty and helps managers evaluate alternatives. Therefore, an effective accounting system acts as an important source of information for planning and making appropriate operational and strategic business decisions.

4. Effective Financial Control

An accounting system facilitates financial control by helping management monitor business transactions and resources. Records relating to cash, inventory, receivables, payables, expenses, and assets can be regularly reviewed and reconciled. Comparison between actual results and budgets helps identify variances, unnecessary expenditures, and financial irregularities. Internal controls within the accounting system can also restrict unauthorized transactions and protect organizational resources. Consequently, accounting systems contribute to financial discipline, efficient resource utilization, and better organizational control.

5. Preparation of Financial Statements

Accounting systems provide the information required for preparing accurate financial statements. Systematically recorded transactions are classified and summarized to prepare statements such as the income statement, balance sheet, and cash flow statement. These statements communicate information about profitability, financial position, and cash movements. They are useful to management as well as investors, creditors, lenders, government authorities, and other stakeholders. Thus, accounting systems provide the basic financial data required for meaningful financial reporting.

6. Facilitates Legal Compliance

A properly maintained accounting system helps businesses fulfill legal, taxation, and regulatory requirements. Accurate financial records support the calculation of taxable income and preparation of required returns and reports. They also facilitate statutory audits, tax assessments, regulatory inspections, and compliance with accounting standards. Maintaining appropriate documentation provides evidence for financial transactions and reduces difficulties in verification. Therefore, accounting systems help organizations maintain financial records in accordance with applicable laws, regulations, and reporting requirements.

7. Fraud Detection and Prevention

Accounting systems contribute to fraud detection and prevention by establishing procedures for authorization, documentation, reconciliation, and verification. Proper internal controls can identify unusual transactions, unauthorized payments, duplicate entries, or unexplained differences. Segregation of duties, access controls, audit trails, and regular reconciliations strengthen protection against financial misuse. Although an accounting system cannot eliminate all fraud risks, an appropriately designed system can reduce opportunities for manipulation and provide evidence that assists in investigating financial irregularities.

8. Improved Planning and Performance Evaluation

Accounting systems support planning, budgeting, forecasting, and performance evaluation by providing historical and current financial information. Management can compare revenues, expenses, profits, and cash flows across different periods and identify significant trends or deviations. Such information assists in setting financial targets and allocating resources. Accounting reports also help evaluate the performance of departments, products, or business activities. Therefore, accounting systems contribute to continuous improvement, financial planning, and the achievement of organizational objectives.

Limitations of Accounting System

1. Records Only Monetary Transactions

A major limitation of an accounting system is that it primarily records transactions that can be measured in monetary terms. Important qualitative factors such as employee morale, managerial ability, customer satisfaction, brand reputation, and organizational culture are generally not recorded directly. These factors may significantly influence business performance but cannot always be expressed reliably in monetary amounts. Consequently, accounting information provides an important financial perspective but does not represent every aspect of an organization’s overall performance.

2. Dependence on Historical Information

Accounting systems largely rely on historical financial transactions and records. Financial statements generally describe events that have already occurred rather than future conditions. Past information is useful for analyzing trends, but it may not fully reflect current or future economic circumstances. Changes in market conditions, technology, consumer preferences, competition, and regulations can affect future performance. Therefore, accounting information should be combined with current operational data, forecasts, and market information for comprehensive planning.

3. Influence of Accounting Estimates

Financial accounting often requires estimates and judgments for items such as depreciation, provisions, useful lives, bad debts, and asset impairment. Different reasonable assumptions may produce different accounting results. These estimates are necessary because some financial amounts cannot be determined with complete certainty at the reporting date. Consequently, reported profits, assets, liabilities, and other figures may be influenced by management judgments and applicable accounting policies. Users should therefore consider the underlying assumptions when interpreting financial information.

4. Cost of Maintaining the System

Establishing and maintaining an effective accounting system can involve significant costs. Manual systems require accounting personnel and administrative resources, while computerized systems may require expenditure on software, hardware, implementation, training, maintenance, upgrades, and cybersecurity. Larger organizations may also need specialized accounting professionals and sophisticated financial systems. For small businesses, these expenses may represent a considerable burden. Therefore, the benefits of an accounting system should be evaluated in relation to its implementation and operating costs.

5. Possibility of Errors

Although accounting systems are designed to improve accuracy, errors may still occur during recording, classification, calculation, or reporting. Incorrect source documents, wrong account selection, data-entry mistakes, omission of transactions, and incorrect adjustments can affect financial information. Computerized systems can reduce certain manual errors but cannot eliminate errors caused by incorrect data or improper configuration. Effective review procedures, reconciliations, internal controls, and audits are therefore necessary to identify and correct accounting errors.

6. Security and Cybersecurity Risks

Modern computerized and cloud-based accounting systems face risks related to data security and cybersecurity. Unauthorized access, phishing, malware, data theft, system failures, and accidental deletion can affect confidential financial information. Businesses may also face operational disruption if accounting systems become unavailable. Strong passwords, access controls, encryption, backups, software updates, and cybersecurity policies can reduce these risks. Nevertheless, organizations must continuously monitor and protect accounting information because technological dependence creates additional security challenges.

7. Complexity and Skill Requirements

Advanced accounting systems can become complex, particularly in large organizations with multiple branches, business units, currencies, and reporting requirements. Employees may require specialized knowledge of accounting principles, software applications, taxation, internal controls, and reporting standards. Inadequate training can lead to incorrect entries and inefficient system usage. Organizations may therefore need continuous employee training and professional support. The complexity of accounting technology can increase administrative requirements and create difficulties for users who lack appropriate technical or accounting skills.

8. Limited Information for Non-Financial Decisions

Accounting systems mainly provide financial information, which may not be sufficient for every management decision. Decisions concerning product quality, employee development, customer relationships, innovation, sustainability, and operational efficiency may require significant non-financial information. Financial reports may show the monetary results of activities but not always explain the underlying operational reasons. Therefore, management should supplement accounting information with operational, market, customer, and qualitative information to obtain a broader understanding of organizational performance and business conditions.

Management Notes

Petty Cash Book, Functions, Examples

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Petty Cash Book is a financial record used to manage and track small, frequent expenses that do not require issuing a check, such as office supplies, minor repairs, or employee reimbursements. The petty cash book is typically maintained by a petty cashier and operates under the imprest system, where a fixed amount of cash is provided, and once spent, it is replenished. This system ensures that minor expenses are efficiently recorded and controlled without burdening the main cash book. The petty cash book simplifies the process of tracking low-value transactions.

Petty Cash Systems:

  • Imprest System

 This is the most common method used for petty cash management. In the imprest system, a fixed amount of cash is allocated to the petty cash fund, and this amount remains constant. As expenses are incurred, they are recorded, and the total cash is periodically replenished back to the fixed amount.

  • Float System

Petty cash is not replenished to a fixed amount. Instead, a balance is maintained, and when the balance runs low, funds are requested to be topped up. This system is less structured than the imprest system.

Functions of Petty Cash Book:

  1. Records Small-Scale Expenses

The primary function of a petty cash book is to track minor expenses that occur frequently, such as stationery purchases, transportation costs, and small office supplies. These expenses are typically too small to be processed through the main cash book or bank transactions. The petty cash book ensures that such small outlays are accurately recorded and accounted for.

  1. Reduces the Workload on the Main Cash Book

By segregating minor expenses from the main cash book, the petty cash book helps reduce the burden of recording trivial amounts in the primary ledger. This not only simplifies the overall accounting process but also ensures that the main cash book is reserved for larger, more significant transactions. The petty cash book provides an efficient way to handle low-value payments separately.

  1. Facilitates Quick Payments

Petty cash book allows for immediate and quick payments without the need to issue a check or go through the formal approval process of larger transactions. This is particularly useful in situations where small amounts need to be disbursed promptly, such as paying for urgent office supplies or covering transportation fares for staff members.

  1. Works Under the Imprest System

Most petty cash books operate under the imprest system, where a fixed amount is allocated to the petty cashier at the start of a period. As expenses are made, the amount decreases, and at the end of the period, the petty cash is replenished back to the original fixed amount. This system ensures control and accountability, making it easier to manage cash flow and avoid misuse of funds.

  1. Provides Detailed Records of Minor Expenses

Petty cash book ensures that each small expense is thoroughly documented, including the date, the purpose of the expense, the amount spent, and any supporting documentation (like receipts). This detailed record-keeping helps in maintaining transparency and accountability for all small transactions.

  1. Simplifies Audit and Internal Control

Petty cash book serves as an essential tool for audits and internal control. By maintaining accurate records of small transactions, it allows auditors to easily review and verify the expenditures. The imprest system, combined with proper documentation, ensures that funds are not misused and that every expense is justified.

Example of a Petty Cash Book (under the Imprest System)

Date Particulars V.No. L.F. Amount (Debit) Amount (Credit) Balance
2024-10-01 Cash received from head cashier (Opening Balance) – – $500 – $500
2024-10-02 Stationery purchased 101 10 – $50 $450
2024-10-04 Refreshments for staff meeting 102 12 – $30 $420
2024-10-05 Taxi fare for delivery 103 15 – $20 $400
2024-10-07 Postage stamps 104 18 – $10 $390
2024-10-09 Office cleaning supplies 105 20 – $25 $365
2024-10-11 Reimbursement to employee (miscellaneous) 106 22 – $40 $325
2024-10-12 Balance replenished by head cashier – – $175 – $500

Explanation of Columns:

  • Date: The date when the transaction occurred.
  • Particulars: A brief description of the expense or transaction.
  • No.: Voucher number associated with the transaction.
  • F.: Ledger folio reference number.
  • Amount (Debit): The amount added to the petty cash (replenishment).
  • Amount (Credit): The amount of money spent on various expenses.
  • Balance: The remaining petty cash after each transaction.
Osmania University Hyderabad BCOM Notes

Accounting Standards Osmania University B.com 6th Semester Notes

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Unit 1 Introduction: {Book}
Introduction to Accounting, Concept of Accounting Theory VIEW VIEW VIEW
Role of Accounting theory VIEW
Classification of Accounting Theory VIEW
Deductive and inductive approach in theory formulation VIEW
Accounting Principles VIEW
Accounting Concepts and Conventions VIEW
Accounting Standard: Concept, Evolution VIEW VIEW

 

Unit 2 Standards Relating to Financial Reporting & Disclosure {Book}
Ind AS-101: First time adoption of Indian Accounting Standards VIEW
Ind AS-1: Presentation of Financial Statements VIEW
Ind AS-7: Cash Flow Statements VIEW VIEW
Ind AS-8: Accounting Policies, Changes in Accounting Estimates and Errors VIEW
Ind AS-10: Events after the Balance Sheet Date VIEW
Ind AS-24: Related Party Disclosures VIEW
Ind AS- 34: Interim Financial Reporting VIEW
Ind AS-105: Non-Current assets held for sale and discontinued operations VIEW
Ind AS- 108: Operating Segments VIEW

 

Unit 3 Standards Providing Guidance on Financial Statement Items {Book}
Ind AS-2: Inventories VIEW
Ind AS-11: Construction contracts VIEW
Ind AS-12: Income taxes VIEW
Ind AS-16: Property, Plant and Equipment VIEW
Ind AS-17: Leases VIEW
Ind AS-18: Revenue VIEW
Ind AS-20: Accounting for Government Grants and Disclosure of Government Assistance VIEW
Ind AS-23: Borrowing Costs VIEW
Ind AS-38: Intangible Assets VIEW

 

Unit 4 Standards Relating to Business Acquisitions and Consolidations {Book}
Ind AS-28: Investments in Associate and Joint Ventures VIEW
Ind AS-103: Business Combinations VIEW
Ind AS-110: Consolidated Financial Statements VIEW
Ind AS-111: Joint Arrangements VIEW
Ind AS-112: Disclosure of interest in other entities VIEW

 

Unit 5 Financial Reporting {Book}
Financial reporting Concept VIEW
Development in Financial reporting objectives VIEW
True Blood Report (USA) VIEW
The Corporate Report (UK) VIEW
Stamp Report (Canada) VIEW
Objectives of Financial Reporting VIEW
Qualities of Financial Reporting VIEW
Recent trends in Corporate Reporting in India VIEW

 

Osmania University Hyderabad BCOM Notes

International Financial Reporting-1 Osmania University B.com 5th Semester Notes

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Unit 1 General Purpose of Financial Accounting and Reporting as Per Us GAAP And IFRS: {Book}
GAAP VIEW
IFRS VIEW
Conceptual framework: Standard Setting Bodies & Hierarchy VIEW
Elements of Financial statement VIEW
Primary objectives of financial reporting VIEW
Qualitative Characteristics of Financial statement, Fundamental, Assumptions VIEW
Financial statement Principles VIEW
Accounting Cycle VIEW
Preparation of Financial statement, General-purpose financial statements VIEW
Balance sheet VIEW VIEW
Income Statement VIEW
Statement of Comprehensive income VIEW
Statement of changes in equity VIEW
Statement of changes cash flows VIEW VIEW
Public Company reporting requirements VIEW
SEC Reporting Requirements VIEW
Interim Financial Reporting VIEW
Segment Reporting VIEW
Revenue recognition: 5 Step approach to Revenue Recognition VIEW VIEW
Certain Customer Right’s & Obligations VIEW
Specific Arrangements VIEW
Long Term Construction Contracts VIEW

 

Unit 2 Current Assets and Current Liabilities: {Book}
Monetary Current Assets & Current Liabilities: VIEW
Cash & Cash Equivalents VIEW
Accounts Receivable VIEW
Notes Receivable VIEW
Transfers & Servicing of Financial Assets VIEW
Accounts Payable VIEW
Employee-related Expenses Payable VIEW VIEW
Inventory: Determining Inventory VIEW
Cost of Goods Sold VIEW
Inventory Valuation, Inventory Estimation Methods VIEW VIEW VIEW

 

Unit 3 Financial Investments and Fixed Assets: {Book}
Financial Investments: VIEW
Investments in Equity Securities VIEW VIEW
Investment in Debt Securities VIEW
Financial Instruments VIEW
Tangible Fixed Assets, Acquisition of Fixed Assets VIEW
Capitalization of Interest VIEW
Costs incurred After Acquisition VIEW
Depreciation VIEW VIEW VIEW
Impairment, Asset Retirement Obligation VIEW
Disposal Conversions VIEW VIEW
Involuntary Conversions VIEW
Intangible Assets: VIEW
Knowledge-based intangibles (R&D, Software)
Legal rights-based intangibles (Patent, Copyright, Trademark, Franchise, License, Leasehold improvements)
Goodwill VIEW VIEW

 

Unit 4 Financial Liabilities (As per US GAAP and IFRS): {Book}
Bonds Payable VIEW
Types of Bonds VIEW VIEW
Convertible bonds vs. Bonds with detachable warrants VIEW
Bond Retirement VIEW
Fair Value Option & Fair Value Election VIEW
Debt Restructuring: Settlement, Modification of terms VIEW

 

Unit 5 Select Transactions (As per US GAAP and IFRS): {Book}
Fair value Measurements: Valuation Techniques, Concept VIEW
Fair value hierarchy VIEW
Accounting changes and error correction:
Changes in Accounting estimate VIEW
Changes in Accounting principle VIEW
Changes in Reporting entity VIEW
Correction of an error, Contingencies VIEW
Possibility of occurrence (Remote, reasonably possible or Probable) VIEW
Disclosure vs. Recognition VIEW VIEW
Derivatives and Hedge Accounting: VIEW
Speculation (non-hedge) VIEW
Fair value hedge, Cash flow hedge VIEW
Nonmonetary exchanges: Exchanges with commercial substance, Exchanges without commercial substance VIEW
Leases: Operating lease, Finance lease VIEW
Sale leaseback VIEW

 

Osmania University Hyderabad BCOM Notes

Financial Accounting-2 Osmania University B.com 2nd Semester Notes

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Unit 1 Bills of Exchange {Book}
Bills of Exchange Definition VIEW
Distinction between Promissory note and Bill of exchange VIEW
Accounting Treatment of Trade Bills VIEW
Books of Drawer and Acceptor VIEW
Honor and Dishonor of Bills VIEW
Renewal of Bills VIEW
Retiring of Bills under Rebate VIEW
Accommodation Bills VIEW
Unit 2 Consignment Accounts {Book}
Consignment Meaning, Features VIEW
Proforma invoice, Account sales, Del credere commission VIEW
Accounting treatment in the Books of the Consignor and the Consignee VIEW
Valuation of Consignment stock VIEW
Treatment of Normal and Abnormal Loss VIEW
Invoice of Goods at a Price higher than the cost price VIEW
Unit 3 Joint Venture Accounts {Book}
Joint Venture, Meaning, Features VIEW
Difference between Joint Venture and Consignment VIEW
Accounting Procedure VIEW
Methods of Keeping Records for Joint Venture Accounts VIEW
Method of Recording in co-ventures books VIEW
Separate Set of Books Method VIEW
Joint Bank Account VIEW
Memorandum Joint Venture Account VIEW
Unit 4 Accounts from Incomplete Records {Book}
Single Entry System Meaning, Features, Defects VIEW VIEW
Difference between Single Entry and Double Entry Systems VIEW
Books and Accounts maintained VIEW
Ascertainment of Profit VIEW
Statement of Affairs VIEW
Conversion method VIEW
Unit 5 Accounting for Non-Profit Organizations {Book}
Non-Profit Organization Meaning, Features VIEW
Receipts and Payments Account VIEW
Income and Expenditure Account VIEW
Balance Sheet VIEW

Osmania University Hyderabad BCOM Notes

Financial Accounting-1 Osmania University B.com 1st Semester Notes

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Unit 1 Accounting process {Book}
Financial Accounting: Introduction, Definition, Evolution VIEW
Financial Accounting Scope VIEW
Financial Accounting Functions VIEW
Financial Accounting Advantages and Limitations VIEW
Users of Accounting Information VIEW
Branches of Accounting VIEW
Accounting Principles, Concepts and Conventions VIEW VIEW
Accounting Standards Meaning, Importance VIEW
List of Accounting Standards issued by ASB VIEW
Accounting System, Types of Accounts VIEW
Accounting Cycle VIEW
Journal VIEW VIEW
Ledger VIEW
Trial Balance VIEW VIEW

 

Unit 2 Subsidiary Books {Book}
Subsidiary Books Meaning, Types VIEW
Purchases Book, Purchases Returns Book, Sales Book, Sales Returns Book VIEW
Bills Receivable Book, Bills Payable Book VIEW
Cash Book: Single Column, Two Column, Three Column VIEW
Petty Cash Book VIEW
Journal Proper VIEW

 

Unit 3 Bank Reconciliation Statement {Book}
Bank Reconciliation Statement Meaning, Need VIEW
Reasons for differences between Cash book and Pass book balances VIEW
Favourable and over Draft balances VIEW
Ascertainment of correct cash book balance VIEW
Preparation of Bank Reconciliation Statement VIEW

 

Unit 4 Rectification of Errors and Depreciation {Book}
Capital and Revenue Expenditure VIEW
Capital and Revenue Receipts Meaning and Differences VIEW VIEW
Differed Revenue Expenditure VIEW
Errors and their Rectification VIEW
Types of Errors VIEW
Suspense Account VIEW
Effect of Errors on Profit VIEW
Depreciation (AS-6): Meaning Causes VIEW
Difference between Depreciation, Amortization and Depletion VIEW
Objectives of providing for depreciation VIEW
Factors affecting depreciation VIEW
Accounting Treatment of depreciation VIEW VIEW
Methods of depreciation:
Straight Line Method VEW
Diminishing Balance Method VIEW

 

Unit 5 Final Accounts {Book}
Final Accounts of Sole Trader: Meaning, Uses VIEW
Preparation of Manufacturing Account VIEW
Preparation of Trading Account VIEW
Preparation of Profit & Loss Account VIEW
Balance Sheet Adjustments VIEW VIEW
Closing Entries VIEW
Management Notes

Corporate Directors, CEOs, Expatriates and Executives

indiafreenotesby indiafreenotes0

One of the major issues that gained attention after the 2007 and 2009 financial crisis due to Wall Street movement was the unduly high compensation being paid to executives of financial institutions even when the corporations were in a state of collapse. This movement against the executive remuneration gained momentum throughout the world. In U.S and many other countries there was a lot of hue and cry about excessive compensation being paid to top executives. Even though in India the situation regarding excessive executive remuneration has not reached alarming levels yet this issue needs to be taken seriously at this stage itself. If not given proper attention then it is not long enough when this problem would be quite glaring in India too.

Many recent corporate frauds such as Satyam fraud, Kingfisher’s fraud and many others have brought into light the dark side of Indian corporate governance practices. In almost all these frauds the executives were drawing a huge salary from the company at the expense of other stakeholders of the company be it shareholders or creditors etc.They used tricks to defraud the investors as well as creditors. Thus, this issue needs adequate attention else it would lead to more such frauds.

Various studies on remuneration schemes of executives in Indian Companies have reflected majorly 3 issues:

  1. The remuneration is not strictly based on performance. The highest paid executives are usually not from the best performing companies and many a times even when the value of shares is declining constantly there is no major effect on the remuneration of top executives.
  2. There is a huge gap in the compensation level of executives and median employees. The supports for high remuneration state that this is due to the dearth of talent at the top level but even then such a glaring difference in the basic pay as well as in the % increase in pay as compared to median employees is not justified.
  3. Also, the studies have found that the promoter CEOs are paid much more in comparison to Non promoter CEOs.

In this paper I would basically study the reasons behind the above findings and would majorly focus on efficiency of current regime in curbing the same and also the role of other interested entities which can serve as a control mechanism on executive remuneration.

For this purpose firstly, analyze the context of executive remuneration and the issues associated with it wherein will focus on agency problem and also the role of ownership structure in enhancing the problem. Then would annalyse the efficacy of checks provided by the current regime on Executive remuneration i.e. Shareholders say on pay, Remuneration committee and linking Remuneration to performance. Lastly, examine the role of Institutional investors as a control mechanism against executive remuneration.

Meaning of Remuneration

Remuneration has been described in section 2(78) of the Companies Act 2013.As per this definition any payment in the form of money or its equivalent would be counted as remuneration. Perquisites would also be included in determining total remuneration. Perquisites in this case are those as defined under the Income tax Act, 1961.

Remuneration can be paid in various forms like cash, medical benefits, retirement benefits, share options, shares, sitting fee and perks and allowances like contribution to provident fund, rent free accommodation, travelling expenses, car etc. It is usually a combination of various forms. Certain perquisites and compensations are explicitly exempted from being counted as a part of remuneration

Role of Executive Remuneration

The role of executive remuneration is to attract and retain top talent at executive position and incentivize them in the way that they work for the benefit of the company while furthering the objective of the company and increasing the value of the firm.

Interplay Between Fixed and Variable Component

The role of fixed component is to fulfill the immediate needs of the employees. All types of companies are open to certain sector specific risks and fixed component reduces the effect of this risk by assuring certain determined amount of income.

On the other hand, variable component can be used to align the interest of executives to the interest of company. For example, if the executives are provided with certain number of shares as a part of remuneration then better performance would lead to increase in the share value of the company and would also increase executive’s compensation.

If the executives receive just fixed remuneration with no variable component then instead of working as incentive, it would actually dilute its effect and if the compensation would include only variable component then this would also frustrate the employee.

Thus, there must be combination of fixed as well as variable component wherein the fixed component work as an incentive to work and the variable component makes sure that the work is done in the interest of the company. Also, it is necessary that there must be interaction between various forms of compensation and the remuneration scheme must be arranged in a way that it is incentive based.

Management Notes

Capital Gain (Section. 45, 48, 49, 50 and 54)

indiafreenotesby indiafreenotes1

The income from capital gains is not an income which accrues or arises from day-to-day during a specific period but it arises at fixed point of time, namely, on the date of the transfer of a capital asset. Specifically, the income from capital gains is the amount by which the sale price of a capital asset, net of any expense incurred in connection with the sale of the asset, exceeds the acquisition cost of the capital asset. The taxation of capital gains is justified by the taxation policy and law on the premise that capital gains increases the ‘ability to pay’ capacity of the person receiving such a gain.

The provisions related to taxation of capital gains were first introduced in 1947 and then in 1956 and then said section 12B in Income tax Act, 1922 was retained as such in the relevant provisions in Income tax Act, 1961.

Charging sections – Sections 45, 46 and 46A

The charging section explains the subject matter of taxation. Thus, there is one charging section for each head of income for salaries, income from house property, business income and income from other sources. However, for capital gains, there are three independent and separate charging sections:

(i) Section 45: Capital gains

(ii) Section 46: Capital gains on distribution of assets by companies in liquidation

(iii) Section 46A: Capital gains on purchase by company of its own shares or other securities

Section 45 is the general provision while sections 46 and 46A are special provisions.

Incomes to be taxed under the head, ‘Capital Gains’

Thus, the following incomes are taxable as ‘capital gains’:

Sr. No. Particulars Section
(1) Any profits and gains arising from the transfer of a capital asset effected in the previous year. Section 45(1) to (5)
(2) Any profits and gains arising from the receipt of any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action taken by an enemy or in combating an enemy. 45(1A)
(3) Capital gains in respect of any money or other assets received by shareholder of a company from the company on its liquidation 46(2)
(d) Difference between (i) value of consideration received by shareholder or holder of specified securities from company on buyback of its own shares or other specified securities; and (ii) cost of acquisition 46A

The situs/location of capital asset matters only for non-resident assessees and not to others. In the cases of Non-resident assessees, if capital asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability to capital gains arises in view of section 5 of the Act. Such assessees will be liable to be taxed under section 9(1) (i) in respect of capital gains accruing or arising “through the transfer of any capital asset situate in India”.

Important Definitions in capital gains

Sr. No. Term Definition Exceptions and remarks
1 Capital Asset A capital asset means property of any kind held by an assessee, whether or not connected with his business or profession

Any securities held by an FII

 Assets Listed:

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art

(g) Land other than agricultural land

(h) Rights in a company
2 Exclusions:

(i) any stock in trade

(ii) movable assets for personal use

(iii) agricultural land in India

(iv) Gold bonds issued by GoI

(v) Special bearer bonds

(vi) Gold Deposit Bonds
2 Agricultural land Land not situated within municipal jurisdiction or Cantt. Board and having population of more than 10000

Within 2 kms of municipal limits of jurisdiction with a population 10000>100000 and 6 kms for jurisdiction with population 100000>1000000 and 8kms for population >1000000

 This amendment is applicable from A Y 2014-15 and the distance from municipal limits has to be measured aerially and not on the ground.
3 Transfer Sale, exchange or relinquishment of the asset

Extinguishment of rights in the asset

Compulsory acquisition under the law

Conversion of asset into stock in trade

Maturity or redemption of a zero coupon bond

Part performance of a contract

Enjoyment of a property through acquisition of shares
Indexed Cost of acquisition an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; From A Y 2018-19, the year 1981 shall be replaced by 2000
Indexed Cost of any improvement An amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place
Cost Inflation Index Such Index as the Central Government may, having regard to seventy-five per cent of average rise in the (Consumer Price Index (urban)) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Transactions which are not regarded as transfer [Section 47]

Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:

Section Particulars
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(i) Distribution of capital asset on total or partial partition of HUF
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust
47(iv) Transfer of capital asset by a company to its wholly owned subsidiary company
47(v) Transfer of a capital asset by a wholly owned subsidiary company to its holding company
47(vi) Transfer of capital assets in a scheme of amalgamation
47(via) Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies
47(viab) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation (subject to conditions)
47(viaa) Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution
47(vib) Transfer of capital assets by the demerged company to the resulting company in a demerger
47(vic) Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
47(vica) Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization.
47(vicb) Any transfer of capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization
47(vicc) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company in case of demerger (subject to conditions)
47(vid) Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger
47(vii) Allotment of shares in amalgamated company in lieu of shares held in amalgamating company
47(viia) Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident
47(viiaa) Any transfer made outside India, of a capital asset (being rupee denominated bond of an Indian company issued outside India) by a non-resident to another non-resident
47(viiab) Any transfer of following capital assets by a non-resident on a recognised stock exchange located in any International Financial Services Centre:

a) Bond or GDR

b) Rupee Denominated Bond of an Indian Co.

c) Derivative

d) Such other Securities as may be prescribed.
47(viib) Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident
47(viic) Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015
47(ix) Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc.
47(x) Transfer by way of conversion of bonds or debentures into shares
47(xa) Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company
47(xb) Any transfer by way of conversion of preference shares into equity shares
47(xi) Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company
47(xii) Transfer of land by a sick industrial company which is managed by its workers’ co-operative
47(xiii) Transfer of a capital asset by a firm to a company in the case of conversion of firm into company
47(xiiia) Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India
47(xiiib) Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP
47(xiv) Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company
47(xv) Transfer involved in a scheme of lending of securities
47(xvi) Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government
47(xvii) Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor
47(xviii) Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of equity oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund
47(xix) Transfer of units of a mutual fund from one plan to another pursuant to consolidation of plans within scheme of mutual funds.

Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.

However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:

S. No. Nature of transaction Section Full Value of Consideration
1. Money or other asset received under any insurance from an insurer due to damage or destruction of a capital asset 45(1A) Value of money or the FMV of the asset (on the date of receipt)
2. Conversion of capital asset into stock-in-trade 45(2) FMV of the capital asset on the date of conversion
3. Transfer of capital asset by a partner or member to firm or AOP/BOI, as the case may be, as his capital contribution 45(3) Amount recorded in the books of accounts of the firm or AOP/BOI as the value of the capital asset received as capital contribution
4. Distribution of capital asset by Firm or AOP/BOI to its partners or members, as the case may be, on its dissolution 45(4) FMV of such asset on the date of transfer
5. Money or other assets received by share- holders at the time of liquidation of the company 46(2) Total money plus FMV of assets received on the date of distribution less amount assessed as deemed dividend under section 2(22)(c)
6. Buy-back of shares and other specified securities by a company 46A Consideration paid by company on buyback of shares or other securities would be deemed as full value of consideration. The difference between the cost of acquisition and buy-back price (full value of consideration) would be taxed as capital gain in the hands of the shareholder.

However, in case of buy-back of shares by a domestic company (whether listed* or unlisted), the company shall be liable to pay additional tax at the rate of 20% under section 115QA on the distributed income (i.e., buy-back price as reduced by the amount received by the company for issue of such shares). Consequently, capital gain arising in hands of shareholder shall be exempt by virtue of section 10(34A) in such cases.
*With effect from 05/07/2019, section 115QA has been amended to levy additional tax on buy back of shares by listed companies as well. Consequently, section 10(34A) has also been amended to exempt income arising in hands of shareholder on account of buy back of shares by listed companies. x
7. Shares, debentures, warrants (‘securities’) allotted by an employer to an employee under notified Employees Stock Option Scheme and such securities are gifted by the concerned employee to any person Fourth Proviso to Section 48 Fair Market value of securities at the time of gift
7A. Conversion of capital asset into stock-in-trade 49 FMV of the inventory as on the date of conversion
8. In case of transfer of land or building, if sale consideration declared in the conveyance deed is less than the stamp duty value 50C The value adopted or assessed or assessable by the Stamp Valuation Authority shall be deemed to be the full value of consideration. However, no such adjustment is required to be made if value adopted for stamp duty purposes does not exceed 110% of the sale consideration.

Note: Where the date of agreement (fixing the amount of consideration) and the date of registration for the transfer of property are not the same, the value adopted or assessed or assessable by Stamp Valuation Authority on the date of agreement may be taken as full value of consideration.
8A. Where consideration for transfer of unquoted shares is less than the Fair Market Value 50CA The Fair Market Value (so determined in prescribed manner) shall be deemed to be the full value of consideration

Note: The Board may prescribe transactions undertaken by certain class of persons to which the provisions of Section 50CA shall not be applicable. (w.e.f. Assessment Year 2020-21)
9. If consideration received or accruing as a result of transfer of a capital asset is not ascertainable or cannot be determined 50D FMV of asset on the date of transfer

Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

S. No. Particulars Notional Cost of Acquisition
1. Additional compensation in the case of compulsory acquisition of capital assets Nil
2. Assets received by a shareholder on liquidation of the company FMV of such asset on the date of distribution of assets to the shareholders
3. Stock or shares becomes property of taxpayer on consolidation, conversion, etc. Cost of acquisition of such stock or shares from which such asset is derived
4. Allotment of shares in an amalgamated Indian co. to the shareholders of amalgamating co. in a scheme of amalgamation Cost of acquisition of shares in the amalgamating co.
5. Conversion of debentures into shares That part of the cost of debentures in relation to which such asset is acquired by the assessee
5A. Conversion of preference shares into equity shares The part of the cost of preference shares in relation to which such asset is acquired by the assessee.
6. Allotment of shares/securities by a co. to its employees under ESOP Scheme approved by the Central Government a) If shares are allotted during 1999-2000 or on or after April 1, 2009, FMV of securities on the date of exercise of option

b) If shares are allotted before April 1, 2007 (not being during 1999-2000), the amount actually paid to acquire the securities

c) If shares are allotted on or after April 1, 2007 but before April 1, 2009, FMV of securities on the date of vesting of option (purchase price paid to the employer or FBT paid to employer shall not be considered)
6A. Listed Equity Shares or Units of Equity Oriented Funds or Units of Business Trust as referred to in Section 112A acquired before February 1, 2018. Higher of :

(i) Cost of acquisition of such asset; and

(ii) Lower of:

(A) The fair market value of such asset; and

(B) The full value of consideration received or accruing as a result of transfer of such asset.

Note: For meaning of ‘Fair market Value’ refer Explanation to Section 55(2)(ac).
7. Property covered by section 56(2)(vii) or (viia) or (x) The value which has been considered for the purpose of Section 56(2)(vii) or (viia) or (x)
8. Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger Cost of acquisition of shares in demerged company ? Net book value of assets transferred in demerger ? Net worth of the demerged company immediately before demerger
9. Cost of acquisition of original shares in demerged company after demerger Cost of acquisition of such shares minus amount calculated above in point 8.
10. Cost of acquisition of assets acquired by successor LLP from predecessor private company or unlisted public company at the time of conversion of the company into LLP in compliance with conditions of Section 47(xiiib) Cost of acquisition of the assets to the predecessor private company or unlisted public company
11. Cost of acquisition of rights of a partner in a LLP which became the property of the taxpayer due to conversion of a private company or unlisted public company into the LLP Cost of acquisition of the shares in the co. immediately before conversion
12. Depreciable assets covered under Section 50 Opening WDV of block of assets on the first day of the previous year plus actual cost of assets acquired during the year which fall within the same block of assets
13. Depreciable assets of a power generating unit as covered under Section 50A* WDV of the asset minus terminal depreciation plus balancing charge
14. Undertaking/division acquired by way of slump sale as covered under Section 50B Net worth of such undertaking
15. New asset acquired for claiming exemptions under sections 54,  54B, 54D, 54G or 54GA if it is transferred within three years Actual cost of acquisition  minus exemption claimed under these sections
16. Goodwill of business or trade mark or brand name associated with business or right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy right, stage permits or loom hours a) If these assets were acquired by gift, will, etc., under section 49(1) and the previous owner had purchased these assets: Cost of acquisition to the previous owner

b) If the owner has purchased these assets: Actual cost of acquisition

c) If these assets are self-generated: Nil
17. Right shares Amount actually paid by assessee
18. Right to subscribe to shares (i.e., right entitlement) Nil
19. Bonus shares a) If allotted to the assessee before April 1, 1981: Fair market value on that date

b) In any other case: Nil
20. Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualization or corporatization of stock exchanges as approved by SEBI a) Cost of acquisition of shares: Cost of acquisition of original membership of the stock exchange

b) Cost of acquisition of trading or clearing rights of the stock exchange: Nil
21. Capital asset, being a unit of business trust, acquired in consideration of transfer as referred to in section 47(xvii) Cost of acquisition of shares as referred to in section 47(xvii) [applicable from AY 2015-16]
Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund as referred to in Section 47(xviii) Cost of acquisition of such units shall be the cost of acquisition of units in the consolidating scheme of the mutual fund
Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b) Cost of acquisition of such shares shall be calculated on the basis of the price prevailing on any recognized stock exchange on the date on which a request for such redemption was made.
24. Any other capital asset: a) If it became property of taxpayer before April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner or FMV as on April 1, 2001, whichever is higher.

Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22)

b) If it became property of taxpayer before April 1, 2001 : Cost of acquisition or FMV as on April 1, 2001, whichever is more

Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22)

c) If it became property of taxpayer after April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner

d) If it became property of taxpayer after April 1, 2001 : Actual cost of acquisition

* Terminal Depreciation/Balancing Charge:

  1. a) Balancing Charge = Sales Consideration – WDV of the depreciable asset
  2. b) Terminal Depreciation = WDV – Sales Consideration
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