Tag: Lucknow University Notes

A single-entry system records each accounting transaction with a single entry to the accounting records, rather than the more common double entry system. The single-entry system is centered on the results of a business that are reported in the income statement. The core information tracked in a single-entry system is cash disbursements and cash receipts. Asset and liability records are usually not tracked in a single-entry system; these items must be tracked separately. The primary form of record keeping in a single-entry system is the cash book, which is essentially an expanded form of a check register, with columns in which to record the particular sources and uses of cash, and room at the top and bottom of each page in which to show beginning and ending balances. An example of a cash book is:

Examples of Double Entry

1. Purchase of machine by cash

2. Payment of utility bills

3. Interest received on bank deposit account

4. Receipt of bank loan principal

5. Issue of ordinary shares for cash

Joint Venture Account:

This account represents the results of the business, that is, profit or loss. It is like a Trading/Profit & Loss Account of a trading concern. This account is debited by the cost of goods, expenses; goods supplied by the venturers etc. and are credited by sale proceeds, unsold stock, stock taken by venturers etc.

If credit side of this account is greater than the debit side, the difference represents profit on joint venture and vice versa in the opposite case. The profit or loss so made is transferred to co-venturer’s account.

It is like an ordinary Cash Book or Bank Account. All incomes including the capital contribution by the ventures appear on the debit side of this account whereas all expenses of the venture appear on the credit side of this account. It is finally closed by payment to the co-venturers, leaving no balance either side.

Co-Venturer’s Account:

This is the capital account of the venturer relating to venture. This account is credited by the capital contributed by the venturers, goods supplied by them from their own stock, expenses made personally by them etc. whereas this account is debited for any withdraw­als or any asset taken from the venture.

The profit or loss so made on venture is transferred to this account in profit sharing ratio and this account is closed by cash payment from joint bank and vice versa in the opposite case.

Under this method, all co-venturers contribute their share of investment and deposit their shares in a Joint Bank account newly opened for the specific purpose of the Joint Venture. They may use this bank account to make any kind of payments and to deposit sale proceeds or any other kind of receipts.

In addition to Bank account, a Joint venture account is also opened in the books to keep records of all transactions routed through this account.

This category of accounts is a personal account of each co-venturer. Thus, following three accounts are opened:

• Joint Bank Account
• Joint Venture Account
• Personal account of co-venturers

When Separate Books of Accounts are not kept for the Joint Venture

It is of two types:

• When all venturers keep separate accounts
• Memorandum joint venture method

When all Venturers keep Separate Accounts:

• Separate Joint venture account and personal accounts of other co-venturers are opened under this method of accounting.
• Joint venture account is debited and bank account or creditor account is credited on the account of goods purchased or expensed.
• Joint venture account is credited and a bank account or debtor account is debited in case of either cash sale or credit sale.
• Each co-venturer debits joint venture account and credits personal accounts of other co-venturer on the account of either goods purchased or expensed by other co-venturers.
• Joint venture account is credited and personal account of others co-venturer account is debited in case of sale made by other co-venturers.
• Joint venture account is debited and commission account is credited if, commission is receivable, but if commission is receivable by other co-venturer, then the concerned co-venturer account will be credited instead of the commission account.
• If unsold stock is taken, then goods account will be debited by crediting Joint venture account. On the other hand, if unsold stock is taken by any other co-venturer, then personal account of the co-venturer will be debited.
• Balance in the joint venture accounts represents profit or loss and later that amount of profit or loss will be transferred to the personal accounts of co-venturers.

Note: Above transactions are possible only when all the co-venturers exchange information’s on regular basis.

Memorandum Joint Venture Method

Important features of memorandum method are given as hereunder:

• Only one personal account is opened by each co-venturer in his book named Joint Venture account with…………… (Name of other co-venturer). Same process will be followed by other co-venturer in his books of accounts.
• Only one personal account will be opened by each co-venturer irrespective of the fact, how many other co-venturers are exists. For example, there is a joint venture of 4 person A,B,C, & D; now, A in his books will open only one personal account named as Joint venture with B,C, & D account.
• Each party will record only those transactions in his book, which are done by him; the transactions done by other co-venturers will be ignored.
• In addition to above said personal account, a combined account named as “memorandum joint venture account” will also be opened.
• Memorandum account is merely a combined account of personal accounts opened by each co-venturer. Debit side of personal account will be transferred to the memorandum account and the credit side of personal account will be transferred to the credit side of memorandum account.
• Transactions done by co-venturers among themselves including cash received or paid by one co-venturer to other will be ignored at the time of preparation of a memorandum account.
• Balance of memorandum joint venture account will represent profit or loss of the particular business. Further, the profit or loss will be transferred to the individual co-venturer account in their profit sharing ratio.

Computerized accounting systems are software programs that are stored on a company’s computer, network server, or remotely accessed via the Internet.  A firm prepares various reports with the help of it.

Hence, it also helps to analyze the company’s operations, efficiency, and profitability. Most importantly, firms prepare its reports as per Generally Accepted Accounting Principles (GAAP) under this system.

Features of Computerised Accounting System

1. Very neat and accurate work
2. Need for less clerical work
3. Cost and time efficient
4. Less possibility of errors and omissions
5. Generated real-time comprehensive MIS reports

Requirements of Computerized Accounting System

1. Operating Framework

It is a well-defined operating procedure made according to the operating environment of the organization.

2. Accounting Framework

It consists of Principles, grouping and coding structures of accounting.

Advantages of Computerized Accounting System

1. The accounts prepared with the use of computers are usually uniform, neat, accurate, and more legible than a manual job.
2. Computers bring speed and accuracy in preparing the records and accounts and thus, increases the efficiency of employees. Hence, time is saved.
3. Also, greater control is possible and more information may be available with the use of computers in accounting.
4. Computerized accounting reduces the monotony of doing repetitive accounting jobs, which are tiresome and time-consuming
5. Using accounting software it becomes much easier for different individuals to access accounting data outside of the office, securely. This is particularly true if an online accounting solution is being used.
6. The financial statements prepared by computers are highly reliable because the calculations are so accurate.
7. Using accounting software, the entire process of preparing accounts becomes faster.
8. Also, the data record is secure under this system.

Disadvantages of Computerized Accounting System

1. The effectiveness of the data output completely depends on the information input. Hence, if the input is incomplete or incorrect then it will lose effectiveness.
2. Biased or incompetent employees may affect the data.
3. Virtually every aspect of a computerized accounting system is costly. Hence, the expenses of the company increase.
4. Computerized accounting systems are vulnerable to cybersecurity issues. Hence, Cloud-based systems store your company’s information remotely, where it can be hacked.
5. Excess is anything is dangerous. Similarly, excess use of computers can affect the health of the operator.

Types of Accounting Softwares

1. Ready-to-use Softwares

Firstly, this kind of software is suitable for small businesses in which there are very less accounting transactions. The cost of the software is very low. Hence, the expenses of the firm will not increase.

The user base too is very less. Such software is prone to risks as it is less secure. There is no need for special training for using the software. It may not comply with other information systems.

2. Customized Softwares

Sometimes the software is customized to meet the special requirement of the user. It happens when general software is not helpful. It is suitable for medium and large businesses.

Hence, a firm can use it with many Information Systems. Cost of the software is relatively high. It includes modification and addition to the basic software.

Unlike ready-to-use software, it is more secure. Training cost is relatively high. Hence, the expenses of the firm will increase.

3. Tailored Softwares

This software is suitable for Large organizations having various divisions. It is helpful when the user base is geographically scattered. In contrast, its cost is very high.

Special training is necessary to use this software. Hence, the expenses of the firm will increase. It is highly secure.

Special Features of Computerized Accounting System:

1. It leads to quick preparation of accounts and makes available the accounting statements and records on time.
2. It ensures control over accounting work and records.
3. Errors and mistakes would be at minimum in computerized accounting.
4. Maintenance of uniform accounting statements and records is possible.
5. Easy access and reference of accounting information is possible.
6. Flexibility in maintaining accounts is possible.
7. It involves less clerical work and is very neat and more accurate.
8. It adapts to the current and future needs of the business.
9. It generates real-time comprehensive MIS reports and ensures access to complete and critical information instantly.

Requirements of the Computerized Accounting System:

Accounting Framework:

A good accounting framework in terms of accounting principles, coding and grouping structure is a pre-condition. It is the application environment of the computer­ized accounting system.

Operating Procedure:

A well-conceived and designed operating procedure blended with suitable operating environment is necessary to work with the computerized accounting system. The computer accounting is one of the database-oriented applications, wherein the transaction data is stored in well-organized database.

The user operates on such database using the required interface. And he takes the required reports by suitable transformations of stored data into information. Hence, it includes all the basic requirements of any database-oriented application in computers.

Problems Faced in Computerized Accounting System:

1. User Training:

The user, for using computer accounting software, needs to understand the concepts of the software. Hence, he should undergo proper training. A computer operator must learn the basics of computer, concepts of software, working with the operating system software [such as Windows/DOS] and the accounting software.

2. System Dependency:

Using a computer solution makes the user to depend fully on the com­puter system and necessitates the availability of computer at all times. If the system is not available [due to hardware failure or power cut], it would be difficult to verify the accounts.

3. Hardware Requirements:

A full-fledged computer system with a printer is required to operate the computerized accounting system. Most small organizations may not afford to have such facility with necessary software.

4. System Failure:

When there is a system crash [hard disk crash], there is high risk of losing the data available on the hard disk drive at any point of time. It would be highly painful, if the problem occurs at end of the financial year, when the financial statements should be ready.

5. Backups and Prints:

Backups of the data should be done regularly so that, when the data is lost, it can be restored from floppies [backups]. Regular print outs of the system information would be useful as manual records.

6. Voucher Management:

Accounting software allows easy alteration of data. If a voucher is wrongly placed in a wrong head, it would be very difficult to sort out and bring back the voucher. A good voucher management is very essential.

7. Security:

Additional security has to be provided because improper handling of the system [hardware/software] could be dangerous. Passwords, locks, etc., have to be set so that no unauthor­ized person can handle the system.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter.

A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.

Salvage

There is difference between salvage value and scrap value. Suppose your car damaged from front. Damage occur to Bonnet, radiator and bumper. your insurer will pay for replacement of these items with new. Now these damage items have some value in market. Say a damaged radiator will fetch 400 in market and can be used for resale. So, this is salvage value of Radiator. But If Radiator is fully damaged by crushing it, it will lose its usability and fetch value of say 100. This is scrap value.

Same occur with fully damage cars. When cars damage occurs beyond repair. Settlement is done on net of salvage basis. These cars sold to salvage buyers with good value as they sell saved parts of car at value. But when these cars crushed so make it unusable then sold on scrap basis. Then value is as per old metal prices in market.

This is concept in India, where old things are recirculated and not might fit for insurance industry in developed countries.

Abandonment and salvage is a term that can surface fairly frequently in insurance contracts. When such a clause is present, it indicates that the insurer has the ability to rightfully claim an insured asset or piece of property that has been destroyed and subsequently abandoned by its owners.

For the insurer to salvage the item, the owner must first express an intent of abandonment in writing. Once that process is complete, the insurance company could choose to take full possession of the damaged property after paying out its insured value to the policyholder.

The selling value of the property can surpass the amount paid out on the claim, so salvage rights are sometimes legally contested by several parties.

Insurance Policy

In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language.

Insurance contracts are designed to meet specific needs and thus have many features not found in many other types of contracts. Since insurance policies are standard forms, they feature boilerplate language which is similar across a wide variety of different types of insurance policies

Sum Assured

The sum assured is the guaranteed amount that the beneficiary of your life insurance policy will receive in case of your death. The sum assured is also known as the coverage or the cover of your insurance policy.

There are many different ways to calculate the sum assured for your life insurance policy. One of the most popular methods is Human Life Value or HLV. This method calculates sum assured based on your current and future expenses, present and future earnings, and age.

It helps you calculate your capitalized value based on current inflation. You can now find Human Life Value calculators online to know your HLV and select the right sum assured.

Sum insured, on the other hand, refers to the payable amount in case of an unforeseen event such as a medical emergency. It is a monetary benefit, unlike sum assured which is a maturity benefit.

Non-life insurance policies like motor insurance or health insurance provide protection as the sum insured. In short, it is the compensation payable to the policyholder in case of an injury/hospitalization or damage based on the concept of indemnity.

Under Insurance

Condition of average (also called underinsurance in the U.S., or principle of average, subject to average, or pro rata condition of average in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured. In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.

Payout = Claim *(Sum Insured / Current Value)

Average Clause

This means that in case of loss the insured has to bear a part of the loss. The insurer will only bear rateable proportion of the loss. In other words, for the difference between the actual value of subject matter and the amount for which it is insured, the insured has to be his own insurer.

Ex.

Suppose a property worth Rs. 2,00,000 is insured for Rs. 1,50,000 and the fire policy contains the average clause. Now, if half the property is destroyed by fire, the insurer will pay only Rs. 75,000 which is calculated as per the following formula.

Insured amount (Rs.1,50,000) x Actual loss (Rs. 1,00,000) / Actual value of the property (Rs.2,00,000)

If three-fourths of the property is destroyed by fire, the insurer will pay Rs. 1,12,500. The entire amount of policy will become payable only when entire property is destroyed by fire.

Claim

An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim (or denies the claim). If it is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured.

Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In some cases, a third-party is able to file claims on behalf of the insured person. However, in the majority of cases, only the persons listed on the policy is entitled to claim payments.

A paid insurance claim serves to indemnify a policyholder against financial loss. An individual or group pays premiums as consideration for the completion of an insurance contract between the insured party and an insurance carrier. The most common insurance claims involve costs for medical goods and services, physical damage, loss of life, and liability for the ownership of dwellings (homeowners, landlords, and renters) and liability resulting from the operation of automobiles.

For property and causality insurance policies, regardless of the scope of an accident or who was at fault, the number of insurance claims you file has a direct impact on the rate you pay to gain coverage (typically through installment payments called insurance premiums). The greater the number of claims that are filed by a policyholder, the greater the likelihood of a rate hike. In some cases, it’s possible if you file too many claims that the insurance company may decide to deny you coverage.

Types of Insurance Claims

Health Insurance Claims

Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; the majority of medical are adjudicated electronically.

Policyholders must file paper claims when medical providers do not participate in electronic transmittals but charges result from rendered covered services. Ultimately, an insurance claim protects an individual from the prospect of large financial burdens resulting from an accident or illness.

Property and Casualty Claims

A house is typically one of the largest assets an individual will purchase in their lifetime. A claim filed for damage from covered perils is initially routed via the Internet to a representative of an insurer, commonly referred to as an agent or claims adjuster.

Unlike health insurance claims, the onus is on the policyholder to report damage of a deeded property they own. An adjuster, depending on the type of claim, inspects and assesses damage to property for payment to the insured. Upon verification of the damage, the adjuster initiates the process of compensating or reimbursing the insured.

Life Insurance Claims

Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act.

Under departmental form of organisation, a public enterprise is run as a separate full-fledged ministry or as a major sub-division of a department of the Government.

For example, the Indian Railways are managed by the Ministry of Railways. Post and Telegraph services are run as a department, in the Ministry of Communication.

The Delhi Milk Scheme, All India Radio, Doordarshan are other examples of departmental undertakings.

Features of Departmental Undertaking:

The salient features of a departmental undertaking are as follows:

(i) Formation:

A departmental undertaking is established either as a separate full-fledged ministry or as a sub-division of a ministry (i.e. department) of the Government.

(ii) No Separate Entity:

A departmental undertaking does not have an independent entity distinct from the Government.

(iii) Ultimate Responsibility with the Minister:

The ultimate responsibility for the management of a departmental undertaking lies with the minister concerned; who is responsible to the Parliament or State Legislature for the affairs of the departmental undertaking. The minister, in turn, delegates his authority downwards to various other management levels, in the departmental undertaking.

(iv) Governmental Financing:

The departmental undertaking is financed through annual budget appropriations by the Parliament or the State Legislature. The revenues of the undertaking are paid into the treasury.

(v) Accounting and Audit etc. as Applicable to Government Departments:

The departmental undertaking is subject to the normal budgeting, accounting and audit procedures, which are applicable to Government departments.

(vi) Managed by Civil Servants:

The departmental undertaking is managed by civil servants, who are subject to same service conditions as applicable to civil servants of the Government.

(vii) Sovereign Immunity:

A departmental undertaking cannot be sued at all, without the consent of the Government.

Advantages of Departmental Undertaking:

Following are the advantages of the departmental undertaking:

(i) Easy Formation:

It is easy to set up a departmental undertaking. The departmental undertaking is created by an administrative decision of the Government, involving no legal formalities for its formation.

(ii) Direct and Control of Parliament or State Legislature:

The departmental undertaking is directly responsible to the Parliament or the State legislature through its overall head i.e. the minister concerned.

(iii) Secrecy Maintained:

The departmental undertaking can maintain secrecy of important policy matters; as the Government can withhold any information, in public interest.

(iv) Lesser Burden of Tax on Public:

Earnings of departmental undertaking are paid into Government treasury, resulting in lesser tax burden on the public.

(v) Instrument of Social Change:

Government can promote economic and social justice through departmental undertakings. Hence, a departmental undertaking can be used by the Government, as an instrument of social change.

(vi) Lesser Risk of Misuse of Public Money:

As the departmental undertaking is subject to budgeting, accounting and audit procedures of the government; the risk of misuse of public money is relatively less.

(vii) Guided by Rules and Regulations of the Ministry:

The officers of the departmental undertaking are under the direct administrative control of the ministry. They are guided by the rules and regulations of the ministry, framed with a focus on public welfare.

Limitations of Departmental Undertaking:

Following are the major limitations of the departmental undertaking:

(i) Read-Tape and Bureaucracy:

Departmental undertaking is run in a way other department of the Government are run. Its management and functioning are subject to excessive red-tap and bureaucracy. (Red-tape means unnecessary and complicated officials rules which prevent things from being done quickly). As a result, the departmental undertaking loses all flexibility desired of a business enterprise.

(ii) Incidence of Additional Taxation:

Losses incurred by a departmental enterprise are met out of the treasury. This very often necessitates additional taxation the burden of which falls on the common man.

(iii) Lack of Competition:

A departmental undertaking often enjoys monopoly in its field. As a result, it tends to become indifferent to the quality and price of its goods and services; and may not hesitate to exploit the society.

(iv) Casual Approach to Work:

As officers of a departmental undertaking are subject to frequent transfers; they develop a sense of casual approach to work. As a result, the operational efficiency of the undertaking suffers a lot.

(v) Political Influence:

A departmental undertaking is subject to excessive political influence. Its fate depends on the balance of power between the ruling party and the opposition. As such, a departmental undertaking becomes a political organisation rather than an economic or business organisation.

(vi) Lack of Professional Management and Fear of Criticism:

A departmental undertaking is managed by civil servants, who do not possess professional management skills. Moreover, these managers could not afford to be innovative, because of a fear of criticism by the minister or the Parliament.

(vii) Financial Dependence:

A departmental undertaking is financially dependent on the Government’s budgetary allocations. As such, it cannot have its own independent long range investment decisions, which may bring enormous prosperity to the undertaking.

Under Section 78 of the Act, Securities Premium Reserve may be used wholly or in part for:

(a) Issuing fully paid bonus shares to the members.

(b) Writing off preliminary expenses.

(c) Writing off the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company.

(d) Providing for the premium payable on the redemption of preference shares or debentures of the company.

(e) In purchasing its own shares i.e. Buy Back u/s 77 A

It is to be noted here that any utilization of the amount of premium except in any of the modes specified above, can only be done by way of reduction of capital and this will require the compliance of the provisions laid down in Section 100 of the Act.

Accounting Treatment:

Securities Premium Reserve may be demanded by company on application, allotment or calls.

In case it is received by the company on application, then the following treatment is followed:

(1) When Premium is received on application:

(i) Bank A/c ….Dr. (With the App. Money & Securities Premium)

To Share Application A/c

(ii) Share Application A/c ….Dr.

To Share Capital A/c

To Securities Premium Reserve A/c

(Being the application money transferred to share capital and securities premium account)

Note:

Students should note that Securities Premium Reserve Account is not credited when the application money is received. It is due to the reason that at the time of receiving the application money it is treated as deposit and the company is not certain whether the amount received would be accepted or rejected.

(2) When Premium is received on allotment:

Securities Premium Reserve Account is credited with Full Amount at the Time of Making the Allotment Due:

(i) Share Allotment A/c …Dr. (With the amount of allotment and Securities Premium)

To Share Capital A/c

To Securities Premium Reserve A/c

(ii) For Allotment (including premium) Received:

Bank A/c … Dr.

To Share Allotment A/c

It is important to note that surplus application money retained for allotment should first be applied towards the adjustment of nominal value of allotment money and the balance, if any, will be adjusted towards securities premium payable.

Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.

If one company purchases another business as a going concern (that is, the business will continue to operate for eternity), it can pay for it using one or more of the following methods:

• Cash: The entire amount is paid in cash. This is a rare scenario as the following two methods are more common.
• Shares: The limited liability company offers some of its shares to the owners of the business that is being purchased.
• Debentures: The limited liability company may offer some of its debentures to the owners of the business.

The following two things must be kept in mind when the price of the business is being determined:

• The assets bought are stated at different values in the books of the limited company and the books of the selling business. This is because they are revalued to reflect their current worth in the market. This value is known as the fair value of the assets.

The price paid by the limited company for the business is known as the purchase consideration. In many cases, the purchase consideration is not the same as the net assets bought and the difference must be recorded in the books of account.

If the purchase consideration is greater than net assets, the difference is known as positive goodwill. However, if the purchase consideration is lower than the net assets, the difference is known as negative goodwill. The accounting treatment for each of these types of goodwill is different.

Accounting Standard–14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:

1. Lump sum method
2. Net Assets method
3. Net Payment Method

Lump sum Method:

Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies’ valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.

Net Assets Method:

(1) The value of goodwill will be ascertained.

(2) Fixed assets of the company, disclosed or undisclosed in Balance Sheet, are taken at their realisable values.

(3) Floating assets are to be taken at market value.

(4) Remember to exclude fictitious assets, such as Preliminary Expenses, Accumulated Losses etc.

(5) Provision for depreciation, bad debts provision etc. must be considered.

(6) Find out the external liabilities of the company payable to outsiders including contingent liabilities.

Under this method P.C. shall be computed as follows:

Net Payment Method:

Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:

Except for the Assumed Liabilities, the Buyer shall not be responsible for, assume, pay, perform, discharge, or accept any liabilities, debts or obligations of the Seller of any kind whatsoever, whether actual, contingent, accrued, known or unknown, including, without limitation, any relating to accounts payable, interest-bearing debt, notes to Affiliates or other related Persons, interest and termination penalties on indebtedness, taxes, employee compensation, severance, pension, profit-sharing, vacation, health insurance, disability insurance or other employee benefit plans and programs, worker’s compensation, breach or negligent performance of any contract, or breach of warranty relating thereto, liabilities resulting from breach of contract, torts (including, without limitation, product liability claims), illegal activity, unlawful employment or business practice, infringement of intellectual property rights, claim for environmental liability or remediation or any other liability or obligation whatsoever. All such non-assumed liabilities, debts and obligations shall remain the responsibility of the Seller which shall pay and discharge the same when and as due.

Assumption of a liability

In a sale of business transaction, it is common for the purchaser to assume certain existing or future obligations of the vendor to make payments to third parties.  As explained in the Draft Ruling:

The following types of liabilities are commonly assumed by a purchaser:

• Trade creditors/accounts payable;
• Product warranties;
• Long service leave obligations of employees;
• Environmental rehabilitation;
• Rates;
• Land tax;
• Plant and equipment or property leases; and
• Hire purchase obligations.

As the ATO identifies in the Draft Ruling, to determine the GST consequences, it is necessary to focus on the contractual arrangements entered into between the vendor and purchaser.  The focus is on what is agreed by the parties and the GST consequences that flow from this agreement.

Supply and consideration

It is a fundamental requirement of making a taxable supply that an entity makes a “supply” for “consideration”.  The essence of a sale of business transaction is that the vendor supplies certain assets of a business to a purchaser for consideration.  In circumstances where the purchaser assumes certain liabilities of the vendor as part of this transaction, a key issue is whether the purchaser’s assumption of a liability is simply part and parcel of the main transaction, or whether it has any separate GST implications.

It has been a concern of some tax advisers that, in agreeing to assume the vendor’s liability to third parties, the purchaser makes a supply to the vendor for consideration.  The basis for this concern is in the extremely wide definitions of “supply” and “consideration”.  Relevantly:

The definition of supply includes “an entry into, or release from, an obligation” to do anything and

The definition of consideration includes “any payment, or any act or forbearance, in connection with a supply of anything”.

Taken together, on one view, the line of analysis would be as follows:

• In assuming, for example, the liability to pay trade creditors, the purchaser makes a supply constituted by the entry into an obligation the vendor; and
• the vendor provides consideration for that supply equal to the amount required to be paid by the vendor in respect of the entitlements or, more typically, allowed by the vendor as an adjustment to the purchase price.

There are four general case law exceptions to the rule of buyer non-liability in asset transactions:

• The buyer assumes the seller’s liabilities expressly or impliedly.
• The transaction in substance constitutes a merger or consolidation of the buyer and seller (de facto merger).
• The buyer is “a mere continuation” of the seller.
• The intent of the transaction is to defraud the seller’s creditors.

The de facto merger theories are the most commonly cited by courts. Facts which support those theories include:

• Continuity of management.
• Same physical location.
• Same general business operations.
• Common equity ownership.
• Assumption seller’s ordinary course business trade debt.
• Seller’s dissolution following the sale.

Journal is a book of original entry. All day-to-day transactions of business are recorded first in it in a chronological order with the help of vouchers like cash receipts, cash memos, invoices, etc. Journal is also called a ‘Day Book’. The process of recording business transactions in the journal is called ‘Journalising’ and the entries passed in this book are called ‘Journal Entries’.

The ruling of Journal is given below:

Journal: 

The Journal consists of five columns. The first column is used for recording date of the transaction with year. In the second column i.e., ‘Particulars’, the journal entry is made by mentioning the two accounts affected by the transaction. The accounting entry is passed following the ‘Accounting Equation’ or ‘Dual Aspect Concept’.

The two accounts affected by the transaction are debited and credited by the same amount. The third column LP, i.e. Ledger Polio is used for writing the page number of the ledger on which the particular account appears. The fourth and fifth columns of journal are meant for writing respectively ‘Debit’ and ‘Credit’ amounts of the transaction.

The Journal consists of five columns. The first column is used for recording date of the transaction with year. In the second column i.e., ‘Particulars’, the journal entry is made by mentioning the two accounts affected by the transaction. The accounting entry is passed following the ‘Accounting Equation’ or ‘Dual Aspect Concept’.

The two accounts affected by the transaction are debited and credited by the same amount. The third column LP, i.e., Ledger Polio is used for writing the page number of the ledger on which the particular account appears. The fourth and fifth columns of journal are meant for writing respectively ‘Debit’ and ‘Credit’ amounts of the transaction.

Account

In simple words, an account is a summarised record of all transactions relating to a particular person, a thing or an item of income or expense. You will know more about the ruling of an account under the next context titled Ledger 32.6.

An account resembles the shape of the English alphabet ‘T’ as follows:

Classification or Types of Accounts:

All business transactions relate to three accounts, namely, (i) Personal Accounts, (ii) Real Accounts, and (iii) Nominal Accounts. When real and nominal accounts are taken together, these are called ‘Impersonal Accounts.”

(i) Personal Accounts:

Accounts relating to persons and organisations representing to persons are called ‘Personal Accounts.’ Examples are Chinmoy’s Account, Mazumdar’s Account, The State Bank of India Account, Tanmoy & Sons’ Account, Carnal Paper Mills’ Account, Salaries Outstanding Account, etc.

(ii) Real Accounts:

Accounts which are related to properties or assets are called ‘Real Accounts.’ They are called Real Accounts because they represent things of value owned by the business. Cash Account, Furniture Account, Building Account, etc. are the popular examples of Real Accounts.

(iii) Nominal Accounts:

Accounts relating to expenses, losses, incomes, gains, profits are called ‘Nominal Accounts.’ Examples of nominal accounts are Wages Account, Salaries Account, Commission Received Account, Interest Received Account, etc.

Rules for Debit and Credit:

The rules applicable for debiting and crediting the three types of accounts are summarised

Rules for Debit and Credit: