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Risk Management in Banks and Basel Accords – CS Professional Study Material

Chapter 20 Risk Management in Banks and Basel Accords – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Risk Management in Banks and Basel Accords – CS Professional Banking Law and Practice Study Material

Question 1.
As a financial intermediary, what are the prominent risks to which banks are exposed to? (Dec 2008, 5 marks)
Answer:
Banks are in the business of channeling the resources and savings of community towards sections which need the resources. As financial intermediaries, the banks are exposed to a number of risks. Some of the prominent risks can be categorized as under; (a) credit risk (b) liquidity risk (c) forex risk (d) interest rate risk. While credit risk is usually a non fungible risk, the other risks are all fungible.

By fungible we mean that outstanding positions from some other transaction can be offset with the position from a transaction. In forex risk, we only mean the risk due to the total open position of a bank as the positions created due to a sale transaction can be offset by a purchase transaction. Interest rate risk is mainly affected by government decisions, inflation, balance of payments position, exchange rates, demand etc.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 2.
Attempt the following:
How do banks minimise the risk involved in lending funds? (June 2009, 5 marks)
Answer:
Minimisation of risk in lending funds
With a view to minimize the risk involved in lending the banks should follow the following accepted norms:

(a) Ability of the borrower to repay the loan. The borrower should possess capacity and character.
(b) Adequate security of tangible assets or collateral security of strength.
(c) Profit the bank would receive by granting the advance.
(d) Liquidity -the banks would lend most of their funds for short periods only.
(e) Loans for productive purposes.
(f) Concentration of advances to be avoided. The principle of spread / diversification is to be followed.
(g) Borrower should be financed adequately to the extent he really needs.
(h) Post sanction monitoring control and follow-up actions.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 3.
As per the Basel Norms, bank’s risks are broadly classified into credit risk, market risk and operational risk. Write a short overview of the risk management structure of a bank and its important features. (June 2014, 5 marks)
Answer:
Risk Management is a methodology that helps managers makes best use of their available resources. The process consists of important steps like:

  • Identification of risks;
  • Analyzing the risks;
  • Evaluating the risks;
  • Monitor and review;
  • Mitigation of risks.

Important Features of Risk Management

  1. Risk management policies should be approved by the board. It should cover all the required guidelines and directives of the regulators and applicable legal frame work.
  2. There should be a good support from the Information Technology wing for creating an integrated system whereby an effective and efficient MIS would be an integral part of the risk management.
  3. There should be clear demarcation of functions and authority levels to ensure better internal control systems (ex: front office, mid office and back office of an integrated treasury).
  4. An effective communication system coupled with the training programs.
  5. One of the risk mitigation measures is to setup appropriate limits for various aspects like counter party limit, country limit, currency limit, over night and intraday limits, stop loss limit, individual and group exposure limits etc.
  6. Inbuilt checking and balancing systems, such as input and output controls, access control to the computer systems and sensitive areas of the banks.
  7. Apart from review by the ALCO members, a periodical review and evaluation system should be in place.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Risk Management Structure
Banking companies should create an effective risk management structure to handle the risks associated with the bank’s business models and operations. The risk management structure should cover the Credit, Market, Operational and other risks. The structure should be ably supported by the technology in identification and monitoring process of risks.

  • The Risk Management Committee should be formed at the Board level with the overall responsibility to monitor and manage the overall risks of the bank.
  • Asset Liability Management Committee (ALCO) is a strategic decision making body, formulating and overseeing the function of Asset Liability Management (ALM) of a bank.
  • ALCO is headed by the Managing Director or the Chief Executive Officer.
  • The Identified Risk, analysis and evaluation etc. are to be first discussed analyzed at Credit Risk Management Committee (CRMC), Operating Risk Management Committee (ORMC) and Marketing Risk Management Committee (MRMC).
  • Thereafter the proposals emerging from this is to be placed before Audit Committee of the Board. With the orders of Audit Committee of the Board the proposal should place before Risk Management Committee of the Board.
  • The concerned Risk Management Department to monitor the implementation and compliance of the same.

Functions
The Risk Management Committee should also monitor compliance of various risk parameters by operating departments.

The function of Risk Management Committee should essentially be to identify and monitor to measure the risk profile of the Bank. The committee should design stress scenario to measure the impact of unusual market conditions and monitor the variance between actual volatility of portfolio value so that predicted by the risk measures.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Basel I
The Basel Committee on Banking Supervision (BCBS) is a committee which was set up by the Central Bank Governors of a group of ten countries, to address international issues relating to the banking supervision. The Basel Committee on Banking Supervision in 1988 came out with a Capital Accord for banks, covering the areas of risks in respect of banks’ assets and liabilities in the balance sheet and off balance sheet exposures.

Under the Basel I Accord, only the credit risk factor was considered and the minimum requirement of capital funds was fixed at 8 per cent of the total risk weighted assets. In India, banks are required to maintain a minimum of 9 percent (Capital to Risk Weighted Asset Ratio – CRAR) on an ongoing basis.

Basel II
The Second Accord brought in significant changes in risk management in banks. The Basel II accord introduced a new approach based on the three pillars:
Pillar I: Minimum Capital Requirements: The minimum capital requirement should be calculated based on three risks viz.,
(a) Credit Risk:

  1. Standardized Approach
  2. Internal Ratings Based Approach

(b) Operational Risk and
(c) Market Risk.

Pillar II: Supervisory Review Process: This pillar addresses the issues like the key aspects of supervisory review, risk management guidance and transparency and accountability. It also covers the treatment of interest rate risk in the banking book, credit risk (stress testing, credit concentration risk etc.) operational risk, enhanced cross border risks.

Pillar III – Market Discipline: As part of an effective risk management, banks are expected to disclose important information. Such market discipline can contribute to a safe and sound banking environment.

These disclosures would assist various stakeholders to review and understand the status of the banks’ operations and strategies in a competitive business December 31, 2016s environment. These disclosures would assist the investors to make their investment decisions.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 4.
Disaster recovery management plan (DRMP) and business continuity plan (BCP) are two important areas to mitigate the information technology risks in the banks. Explain. (June 2015, 10 marks)
Answer:
(A) Disaster Recovery Management Plan (DRMP): In a fully computerized bank branch, DRMP has acquired high importance. DRMP deals with the emergency action which the branch will take to deal with a situation of disaster. It covers three steps of action when a disaster strikes, viz.
(a) Confronting the disaster by a Emergency Plan.
(b) Procurement of required materials through a Back-up Plan; and
(c) To restore the office normalcy for speeding up commencement of normal business transactions.

(B) Business Continuity Plan (BCP): Business Continuity Plan relates to resuming, maintaining and recovering business activity in the event of disruptions, disasters and calamities. The plan should accomplish the following objectives:
(a) Provide for the safety and well-being of people on the premises at the time of disaster
(b) Continue critical business operations
(c) Minimize the duration of a serious disruption to operations and resources (both information processing and other resources)
(d) Minimize immediate damage and losses
(e) Establish management succession and emergency powers
(f) Facilitate effective co-ordination of recovery tasks
(g) Reduce the complexity of the recovery efforts
(h) Identify critical lines of business and supporting functions

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 5.
Comment on the following:
The BASEL III accord deals in capital adequacy norms to be fulfilled by banks. (Dec 2016, 2 marks)
Answer:
True: The BASEL III regulations based on three-mutually reinforcing Pillars viz. minimum capital requirements, supervisory review of capital adequacy and market discipline of BASEL II.

Question 6.
Explain in brief five risks associated with payment systems. (June 2017, 5 marks)
Answer:
The risks associated with the payment systems can broadly be classified under the following heads, viz.,

  1. Credit Risk;
  2. Liquidity Risk;
  3. Operational Risk;
  4. Legal Risk; and
  5. Systemic Risk.

The circumstances under which these risks arise are as under:

Risk Circumstances
1. Credit Risk Failure by a party to meet the financial obligations
2. Liquidity Risk A party in the system fails to pay on account of insufficient funds
3. Operational Risk A risk which can arise on account of human error, system failure, frauds, etc.
4. Legal Risk Non-compliance of legal or regulatory framework can create a legal risk
5. Systemic Risk It can have a chain effect into the system due to the default of one of the parties.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 7.
Answer the following questions in brief:
‘Cross Border Risk’ and ‘Currency Risk’ in relation to international banking business. (Dec 2017, 3 marks)
Answer:
‘Cross Border Risk’ and ‘Currency Risk’
Cross Border Risk: The Cross border risk arises on account of trade and investment activities between two or more countries. This is one of the major risks the international banks face. This type of risk also called as country risk.

Currency Risk: When an international trade and / or financial transaction take place, it would result in a currency deal. In view of the additional deal (involvement of foreign currency) a new risk arises called currency risk. Two or more than two currencies (in case of cross rates) are involved and due to the market fluctuations the exchange rate (price) of the currencies results in a risk called “foreign exchange risk” as well.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 8.
Narrate the Preventative Controls and Detective Controls to handle IT related issues and risks in Banks. (Dec 2017, 2 marks)
Answer:
Preventative Controls and Detective Controls Preventative Controls: This type of control stops errors or irregularities. Preventative controls are designed to keep errors or irregularities from occurring in the first place. They are built into internal control systems and require a major effort in the initial design and implementation stages. Good design/screen layout reduces or stops the errors at the time of coding data or entering data from source document.

Detective Controls: Detective controls are practices, procedures and tool that are intended to uncover the existence of errors, inaccuracies, fraud that has already occurred. Identification of errors or irregularities happens after they occur. For example: An input validation program identifies data input errors.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 9.
Management of credit risk in a bank will require alertness on the part of staff at all the stages of credit delivery. Explain various steps for efficient management of credit risks. (Dec 2018, 5 marks)
Answer:
Key issue in managing credit risk is to apply a consistent evaluation and rating system of all investment opportunities. Prudential limits need to be laid down on various aspects of credit viz., benchmarking current ratio, debt- equity ratio, profitability ratio, debt service coverage ratio, concentration limits for group/single borrower, maximum exposure limits to industries, and provision for flexibilities to allow variation for very special features. Credit rating may be single point indicator of diverse risk factors. Management of credit risk in a bank will require alertness on the part of staff at all the stages of credit delivery and monitoring process:

Appraisal Stage: In addition to following the prescribed guidelines of the bank, the important point is the appraisal of the man behind the project. For this, no rules can be prescribed or formula can be given.

  1. Whether the branch has its own network for obtaining reliable information about present and prospective borrowers through some well-known sources like local organizations, lead bank offices, other customers etc.
  2. Whether the credit officers keep an eye on local newspapers for keeping track on some developments in some units/industries etc.
  3. Whether marketability of the product is assured beyond reasonable doubt.
  4. Whether while processing the proposals, a list of all the important reference made by the borrowers is kept on record.
  5. Whether a small map of the location of the unit, residence of the borrowers/ guarantors are kept on record.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Disbursement Stage

  1. Whether the branch ensures creation of assets and whether the disbursement is made in stages and checked at every stage, wherever possible.
  2. Whether the payments are directly made to the dealers.
  3. Whether the branch ensures long term availability of the business premises, wherever business premises are on rent.

View / Renewal

  1. Whether the branch considers renewal as a ritual or uses the opportunity to review its credit decision.
  2. Whether proper follow-up for obtaining financial information is started in time and borrowers are properly educated in this regard.

Asset Verification / Inspection / Visits : This is most important aspect of monitoring a borrowers’ account. If done regularly, it gives an opportunity to interact will the borrowers and must be used to ascertain the problems that the unit is facing/like to face. Remedial steps should be initiated at the earliest. If an eye is kept on the activities of the borrower, there is no reason as to why the account can’t be kept healthy.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 10.
(a) State in brief the factors attributing to the increased importance of credit risk modelling in the banks. (June 2019) (4 marks)
(b) Explain the various types of ‘Market Risk’ involved in banking business. Differentiate between ‘Counter Party Risk’ and ‘Country Risk’. (8 marks)
Answer:
(a) The increasing importance of credit risk modeling can be attributed to the following three factors:

  1. Banks are becoming increasingly quantitative in their treatment of credit risk.
  2. New markets are emerging in credit derivatives and the marketability of existing loans is increasing through securitization/loan sales market.
  3. Regulators are concerned to improve the current system of bank capital requirements especially as it relates to credit risk.

Credit Risk Models have assumed importance due to the fact that they provide the decision maker with insight or knowledge that would not otherwise be readily available or that could be obtained at a high cost. In a marketplace where margins are fast disappearing and the pressure to lower pricing the credit risk models give their users a competitive edge.

(b) Types of Market Risk involved in banking business are as under: Interest rate risk : Interest rate risk is the probability that variations in the interest rates will have a negative influence on the quality of a given financial instrument or portfolio, as well as on the institution’s condition as a whole. The risk affects the Net Interest Margin(NIM).

Currency risk: Currency risk is the risk where the fair value or future cash flows of a given financial instrument fluctuate as a result from changes in the currency exchange rates.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Price risk: Price risk occurs when the fair value or future cash flows of capital and debt financial instruments (stock, bonds, indexes and derivatives connected with them) fluctuate as a result from market prices’ changes, no matter whether these changes are caused by factors typical for individual instruments or for their issuer(counterparty), or by factors related to all the instruments traded on the market. It arises if investment is sold prematurely.

Default or Credit Risk: Credit risk is more simply defined as the potential of a bank borrower or counterparty to fail to meet its obligations in accordance with the agreed terms. For most banks, loans are the largest and most obvious source of credit risk. It is the most significant risk, more so in the Indian scenario where the NPA level of the banking system is significantly high. It is prevalent in case of loans.

Operational Risk: It arises due to failed internal processes, people or system or from external events like, frauds, incompetency of staff, faulty documentation, non-compliance etc.

Strategic Risk: This risk arises due to adverse business decisions, improper implementation of decisions.

Counterparty Risk and Country Risk
Counterparty Risk: This is a variant of Credit risk and is related to non-performance of the trading partners due to counterparty’s refusal and or inability to perform. The counterparty risk is generally viewed as a transient financial risk associated with trading rather than standard credit risk.

Country Risk: This is also a type of credit risk where non-performance of a borrower or counterparty arises due to constraints or restrictions imposed by a country. Here, the reason of non-performance is external factors on which the borrower or the counterparty has no control.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 11.
Explain the following features of the Basel-Ill accord :
(i) Minimum Total Regulatory Capital Requirement
(ii) Counter Cyclical Buffer
(iii) Leverage Ratio. (June 2019, 6 marks)
Answer:
(i) Minimum Total Regulatory Capital Requirement: Under revised guidelines (BASEL III) minimum total regulatory capital will consist of the sum of the following categories:
(a) Tier 1 Capital (going-concern capital)

  1. Common Equity Tier 1 capital
  2. Additional Tier 1 capital

(b) Tier 2 Capital (going-concern capital)
As of 2019, under Basel III, a bank’s tier 1 and tier 2 capital must be at least 8% of its risk-weighted assets.

(ii) Counter Cyclical Buffer: As per Basel III norms regulators of banks of the countries are also responsible for regulating credit volume in their national economies. If credit growth is rapidly expanding than GDP growth, bank regulators can increase their capital requirements with the help of the Countercyclical Buffer to curb the excessive credit growth.

The counter cyclical buffer suggested varies between 0% – 2.5% and it is meant to restrict excess credit growth which may turn out to be counter – productive. The aim of the Countercyclical Capital Buffer(CCCB) regime is two fold. Firstly, it requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times.

Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.

Risk Management in Banks and Basel Accords - CS Professional Study Material

(iii) Leverage Ratio: It is defined as Ratio of Tier 1 Capital to Total Assets, According to Basel III this ratio should be a minimum of at least 3% even where there is no risk weighting. According to Basel III rules BCBS agreed to test minimum Tier 1 leverage ratio of 3% during the parallel run period by 2017.

This was also made applicable for banks in India. During the period of parallel run, banks should strive to maintain their existing level of leverage ratio but, in no case the leverage ratio should fall below 4.5%. A bank whose leverage ratio is below 4.5% may endeavour to bring it above 4.5% as early as possible. According to the data released by RBI, most of the banks are maintaining leverage ratio of over 4.5%. (The ratio is calculated on quarterly basis).

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 12.
“For a successful implementation of an effective Credit Risk Management System, in banks, a sound organizational structure is a pre-requisite”. In this regard, briefly explain the recent RBI guidelines to Banks on appointing Chief Risk Officer (CRO). (Dec 2019, 6 marks)
Answer:
As part of Risk Management, banks are required, inter-alia, to have a system of separation of credit risk management function from the credit sanctioning process. As banks follow diverse practices in this regard, to bring uniformity in approach followed by banks and to align the risk management system with the best practices, banks are advised as under:

(a) Each bank to lay down a Board-approved policy clearly defining the role and responsibilities of the Chief Risk Officer (CRO).

(b) Appointment of the CRO shall be for a fixed tenure with the approval of the Board of Directors. The CRO may be transferred / removed from his post before completion of the tenure only with the approval of the Board and such premature transfer/removal shall be reported to the Department of Banking Supervision, Reserve Bank of India (RBI), Mumbai. In case of listed banks, any change in incumbency of CRO shall be reported to the stock exchanges also.

(c) CRO should be a senior official in the banks’ hierarchy and shall have the necessary and adequate professional qualification / experience in the areas of risk management.

(d) The CRO shall have direct reporting lines to the Managing Director (MD) & CEO/ Risk Management Committee (RMC) of the Board. If the CRO reports to the MD & Chief Executive Officer (CEO), the RMC shall meet the CRO on one to-one basis, without the presence of the MD & CEO, at least every quarter.

(e) The CRO not to have any reporting relationship with the business verticals of the bank and not be given any business targets.

Risk Management in Banks and Basel Accords - CS Professional Study Material

(f) In case the CRO is associated with the credit sanction process, it has to be clearly spelt out whether the CRO’s role would be that of an adviser or a decision maker. The policy to include the necessary safeguards to ensure the independence of the CRO.

(g) In banks that follow committee approach in credit sanction process for high value proposals, if the CRO is one of the decision makers in the credit sanction process, he shall have voting power and all members who are part of the credit sanction process, shall individually and severally be liable for all the aspects, including risk perspective related to the credit proposal. If the CRO is not a part of the credit sanction process, his role will be limited to that of an adviser.

(h) In banks which do not follow committee approach for sanction of high value credits, the CRO can only be an adviser in the sanction process and with no sanctioning power.

(i) The CRO in his role as an adviser shall be an invitee to the credit sanction / approval committee without any voting rights in the proceedings of the committee.

(j) There shall not be any ‘dual hatting’ i.e. the CRO shall not be given the responsibility of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief of the internal audit function or any other function.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 13.
Explain the Composition of Regulatory Capital. What is the minimum regulatory capital requirement for Banks in India as per Basel III Accord ? (Dec 2019, 6 marks)
Answer:
Composition of Regulatory Capital
Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.). The Reserve Bank will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the capital held by a bank is commensurate with the bank’s overall risk profile.

This would include, among others, the effectiveness of the bank’s risk management systems in identifying, assessing / measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Accordingly, the Reserve Bank will consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Further, in terms of the Pillar 2 requirements, banks are expected to operate at a level well above the minimum requirement.
Risk Management in Banks and Basel Accords - CS Professional Study Material 1
*RWA = Risk Weighted Assets
#CRAR = Capital to Risk Weighted Asset Ratio

Risk Management in Banks and Basel Accords - CS Professional Study Material

Components of Capital
Total regulatory capital consists of the sum of the following categories:

  1. Tier 1 Capital (going-concern capital)
    (a) Common Equity Tier-i
    (b) Additional Tier
  2. Tier 2 Capital (gone-concern capital)

Minimum regulatory capital requirement for Banks ¡n India as per Basel III Accord:
With full implementation of capital ratios and Capital Conservation Buffer (CCB) the capital requirements are summarised as follows:

Regulatory Capital As % to RWAs
(i) Minimum Common Equity Tier 1 Ratio 5.5
(ii) Capital Conservation Buffer (comprised of Common Equity) 2.5
(iii) Minimum Common Equity Tier 1 Ratio plus Capital Conservation Buffer [(i) + (ii)] 8.0
(iv) Additional Tier 1 Capital 1.5
(v) Minimum Tier 1 Capital Ratio [(i) + (iv)] 7.0
(vi) Tier 2 Capital 2.0
(vii) Minimum Total Capital Ratio (MTC) [(v) + (vi)] 9.0
(viii) Minimum Total Capital Ratio plus Capital Conservation Buffer [(vii) + (ii)] 11.5

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 14.
What is an Operational Risk? Explain type of Operational Risk which having the potential to result in substantial losses. (Dec 2020, 6 marks)
Answer:
It is the risk of loss resulting from inadequate or failed internal processes of an organisation, in human actions, systems or due to external events. Problems related to operation risks arise because of inadequate attention given to the processes and systems, or because people fail in their performance, or their functions are poorly defined.

Operational risks are difficult to define because of the broad spectrum or potential loss events, it covers. According to the segment where the company acts, this may be subject to various operational risks inherent to the business. Operational risks varies from one business to another depending upon the segment in which it operates.

Operational risk has been defined by the Basel Committee on Banking Supervision as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk, but excludes strategic and reputational risk.

Operational risk identifies why a loss happened and at the broadest level includes the breakdown by four causes i.e. People, Processes, Systems and External factors.

The Basel Committee has identified the following types of operational risk events as having results in substantial losses:

  1. Internal Fraud. Examples: employee theft etc.
  2. External Fraud. Examples: robbery, forgery etc.
  3. Employment practices and workplace safety. Examples: violation of employee health and safety rules.
  4. Clients, products and business practices. Examples: misuse of confidential customer information, Fiduciary breaches etc.
  5. Damage to physical assets. Examples: Vandalism by disgruntled employees, Earthquakes, Fires and floods etc.
  6. Business disruption and system failure. Examples: Computer hardware and software failures etc.
  7. Execution, delivery and process management. Examples: incomplete legal documentation.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 15.
What is Operational Risk? Explain the types of Operational Risk as identified by Basel Committee. (Dec 2021, 3 marks)
Answer:
Operational risk has been defined by the Basel Committee on Banking Supervision as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition is based on the underlying causes of operational risk. It seeks to identify why a loss happened and at the broadest level includes the breakdown by four causes: people, processes, systems and external factors.

The Basel Committee has identified the following types of operational risk events as having the potential to result in substantial losses:

  1. Internal fraud : For example, intentional misreporting of positions, employee theft, and insider trading on an employee’s own account.
  2. External fraud : For example, robbery, forgery, cheque kiting, and damage from computer hacking.
  3. Employment practices and workplace safety : For example, workers compensation claims, violation of employee health and safety rules, organized labour activities, discrimination claims, and general liability.
  4. Clients, products and business practices : For example, fiduciary breaches, misuse of confidential customer information, improper trading activities on the bank’s account, money laundering, and sale of unauthorized products.
  5. Damage to physical assets: For example, terrorism, vandalism, earthquakes, fires and floods.
  6. Business disruption and system failures: For example, hardware and software failures, telecommunication problems, and utility outages.
  7. Execution, delivery and process management: For example: data entry errors, collateral management failures, incomplete legal documentation, and unauthorized access given to client accounts, non-client counterparty mis- performance, and vendor disputes etc.

Risk Management in Banks and Basel Accords - CS Professional Study Material

Question 16.
(a) In what forms the credit risk arises for banks?
(b) Why is there increasing importance of credit risk modelling?
(c) In the measurement of Credit Risk, models may be classified into three different dimensions. What are such dimensions? (June 2022, 4 marks each)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings – CS Professional Study Material

Chapter 3 Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings – CS Professional Drafting, Pleadings and Appearances Notes is designed strictly as per the latest syllabus and exam pattern.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings – Drafting, Pleadings and Appearances Study Material

Question 1.
Write notes on the following:
Secretarial standard on passing of resolution by circulation (Dec 2016, 4 marks) [CSPP -1]
Answer:
1. Authority
The Chairman of the Board or in his absence, the Managing Director or in his absence, the Wholetime Director and where there is none, any Director other than an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors, whether the approval of the Board for a particular business shall be obtained by means of a Resolution by circulation.

2. Where not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting, the Chairman shall put the Resolution for consideration at a Meeting of the Board.

3. Procedure
A Resolution proposed to be passed by circulation shall be sent in draft, together with the necessary papers, individually to all the Directors including Interested Directors on the same day.

The draft of the Resolution to be passed and the necessary papers shall be circulated amongst the Directors by hand, or by speed post or by registered post or by courier, or by e-mail or by any other recognised electronic means.

Each business proposed to be passed by way of Resolution by circulation shall be explained by a note setting out the details of the proposal, relevant material facts that enable the Directors to understand the meaning, scope and implications of the proposal, the nature Of concern or interest, if any, of any Director in the proposal, which the Director had earlier disclosed and the draft of the Resolution proposed. The note shall also indicate how a Director shall signify assent or dissent to the Resolution proposed and the date by which the Director shall respond.

4. Approval
The Resolution is passed when it is approved by a majority of the Directors entitled to vote on the Resolution, unless not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting.

The Resolution, if passed, shall be deemed to have been passed on the last date specified for signifying assent or dissent by the Directors or the date on which assent from more than two-third of the Directors has been received, whichever is earlier, and shall be effective from that date, ii no other effective date is specified in such Resolution.

5. Recording
Resolutions passed by circulation shall be noted at the next Meeting of the Board and the text thereof with dissent or abstention, if any, shall be recorded in the Minutes of such Meeting.

6. Validity
Passing of Resolution by circulation shall be considered valid as if it had been passed at a duly convened Meeting of the Board.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 2.
Write note on the following :
Describe the applicability of Secretarial Standard – 1 under the Companies Act, 2013, issued by The Institute of Company Secretaries of India on Meeting of Board of Directors. (June 2019, 4 marks)
Answer:
In terms of sub-Section (10) of Section 118 of the Companies Act, 2013, every company is required to observe Secretarial Standard-1 except:

  1. One Person Companies (OPC) having only one Director on its Board and
  2. Such other class or class of companies which are exempted by Central Government through Notification.

Exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Financial Statements or Annual Return with the Registrar of Companies. However, such Section 8 companies need to comply with the applicable provisions of the Act relating to Board Meetings. In other words, the Secretarial Standard (SS-1) will be applicable to all companies like private, public, listed or a small company unless, expressly exempted as stated above.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 3.
Distinguish between the following:
(iii) ‘Motion’ and ‘resolution’.
(v) ‘Special resolution’ and ‘resolution requiring special notice’. (June 2012, 4 marks each) (CSEM – II)
Answer:
(iii)
Motion :
The question which generally comes for consideration at the general meeting of a company are presented in the form of proposals called motions. Motion may be proposed by the chairman of the meeting or by any other member of the company. The business of a meeting is transacted through motions or definite proposals and no discussion can take place unless there is a definite proposal or subject for discussion before the meeting. A motion should be in writing and signed by the mover and put to the vote at the meeting by the chairman.

Resolution :
A resolution is the formal expression of the decision of a meeting when a motion has been duly voted upon and passed by the requisite majority, with or without amendment it is called a resolution. A resolution once adopted and recorded in the minutes becomes the official decision of the meeting.

(v) Special Resolution (Sec. 114 of C.A. 2013)
1. Situation when a resolution will be Special Resolution :

  1. The intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting and the notice has been given to the members in accordance with the provisions of this Act, and.
  2. The votes cast in favour of the resolution by members entitled to vote are not less than three times the number of votes cast against the resolution by members so entitled to vote.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Resolutions requiring special notice (Sec. 115 of CA. 2013)
1. Provisions :
Where, by any provision contained in this Actor in the articles of a company, special notice is required of any resolution, notice of the intention to move such resolution shall be given to the company by such number of members holding not less than 1 % of total voting power or holding . shares on which such aggregate sum not exceeding ₹ 5,00,000/- as may be prescribed has been paid-up and the company shall give its members notice of the resolution in the following manner as prescribed in Rules.

2. Matters in respect of which Special Notice is required :
(a) A resolution for appointment of a person as auditor at the annual general meeting other than the retiring auditor for providing expressly that the retiring auditor shall not be re-appointed [Section 140(4)];
(b) A resolution for removing a director before the expiry of the period of his office and appointing someone in the place of the director so removed [Section 169(2)].

3. Procedure for Special Notice :
(A) Signing of special notice : A special notice required to be given to the company shall be signed, either individually or collectively by such number of members holding not less than one percent of total voting power or holding shares on which an aggregate sum of not more than five lakh rupees has been paid up on the date of the notice.

(B) Sending of notice to the company : Such notice shall be sent by members to the company not earlier than three months but at least 14 days before the date of the meeting at which the resolution is to be moved, exclusive of the day on which the notice is given and the day of the meeting.

(C) On receipt of notice by the company : The company shall immediately after receipt of the notice, give its members notice of the resolution at least seven days before the meeting, exclusive of the day of dispatch of notice and day of the meeting, in the same manner as it gives notice of any general meetings.

(D) Publication of Notice : Where it is not practicable to give the notice in the same manner as it gives notice of any general meetings, the notice shall be published in English language in English newspaper and in vernacular language in a vernacular newspaper, both having wide circulation in the State where the registered office of the Company is situated. Such notice shall also be posted on the website, if any, of the Company. Such notice shall be published at least seven days before the meeting, exclusive of the day of publication of the notice and day of the meeting.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 4.
Distinguish between the following:
‘Ordinary resolution’ and special resolution’. (June 2013, 4 marks) (CSEM – II)
Answer:
Kinds of resolutions :
Resolutions under present companies Act, 2013 are of three kinds:
(i) Ordinary
(ii) Special
(iii) Resolution requiring special notice

(i) Ordinary resolution, Sec. 114 of Companies Act, 2013 :
A resolution passed at a general meeting of a company by a simple majority of members entitled to vote and also voting in person or by proxy (where proxies are allowed) is called an ordinary resolution.

(ii) Special resolution :
A special resolution is one passed at a general meeting of a company when:
(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting and the notice has been given to the members in accordance with the provisions of this Act, and
(b) The votes cast in favour of the resolution by members entitled to vote and voting are not less than three times the number of votes cast against the resolution by members so entitled to vote.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 5.
Distinguish between the following:
‘e-voting’ and ‘Voting by show of hands’. (June 2017, 4 marks)
Answer:
e-voting’ and ‘voting by show of hands’
Votes before the general meeting can be cast either by ‘e-voting’ method or by showing hands.

e-voting Voting by show of hands
Governed by the provision of section 108. Governed by the provisions of section 107.
Provisions applicable to every company which has listed its equity shares on a recognised stock exchange and every company having not less than one thousand members. Applicable to all companies at their general meetings, wherein resolution is put to the vote unless a poll is demanded under section 109 or the voting is carried out electronically.
The facility for remote e-voting shall remain open for not less than three days and shall close at 5.00 p.m. on the date preceding the date of the general meeting. The facility of voting by show of hands is available at the time of the meeting.
During the period, when facility for e- voting is provided, the members of the company holding the shares in either physical form or in demat form, as on the cut-off date, may opt for remote e-voting, In general meeting, members who have not voted in e-voting mode can cast their votes by raising their hands.
Number of votes of a member is equal to the number of shares held. Only one vote is counted for each shown hand.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 6.
Distinguish between “Ordinary Resolution and Special Resolution”. (June 2019, 4 marks)
Answer:
Ordinary Resolution :
An ordinary resolution is one which is passed in the company’s general meeting by a simple majority of votes i.e.- 51%.No notice is required to be given for moving an ordinary resolution. All matters relating to the company’s business, except those which need to be settled by a special resolution, are settled by an ordinary resolution.

Special Resolution :
Special resolution means a resolution in which special majority is needed to pass the resolution at the general meeting i.e the votes cast in favor of the resolution, whether in person or by proxy, should not be less than three times the votes cast against the resolution by members so entitled.

A prior notice needs to be given for moving a special resolution in any meeting of the company and the notice should contain the intention to propose the resolution as special resolution should be mentioned specifically. A special resolution is meant to make decisions in important matters and protect the rights of company’s members.

The significant differences between ordinary resolution and special resolution are:
Ordinary Resolution is one wherein simple majority is required to move the resolution at the general meeting. Special Resolution means a resolution in which supermajority is needed to pass the resolution at the general meeting.

In the ordinary resolution, consent of at least 51 % members, is required for the resolution to be passed. On the other hand, the special resolution requires the consent of at least 75% members, in favour of the resolution.

The copy of an ordinary resolution, signed by the officer of the company should be filed with the registrar only in certain cases. As against this, a printed or handwritten copy of a special resolution, containing the signature of the officer of the company must be filed with the Registrar of Companies (ROC) within 30 days.

Ordinary Resolution is passed to transact ordinary business. However, a special business can be transacted via special resolution or ordinary resolution, as per the requirements of the Companies Act, 2013.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 7.
What do you understand by the expression ‘resolution by circulation’? List out four matters which cannot be passed by the directors by resolution by circulation. (June 2013, 4 marks) (CSEM – II)
Answer:

Passing of Resolution by Circulation
1. Mode of circulation of draft resolution to directors etc. A company may pass the resolutions through circulation. The resolution in draft form together with the necessary papers may be circulated to the directors or members of committee at their address registered with the company in India or through electronic means which may include e-mail or fax.
2. Requisite majority The said resolution must be passed by majority of directors or members entitled to vote.
3. When a resolution must be passed at meeting? If more than one third of directors require that the resolution must be decided at the meeting, the chairperson shall put the resolution to be decided at the meeting.
4. Noting of re­solution passed through circulation The resolution passed through circulation be noted at a subsequent meeting and made part of the minutes of such meeting.
5. Matters that can be passed by circulation by Board Some of the matters which cannot be passed by the Board by circulation are:

  1. to fill a casual vacancy occurred in the Board;
  2. to make calls on shareholders in respect of money unpaid on shares;
  3. issue of debentures;
  4. to make any political contribution;
  5. to make declaration of solvency;
  6. to invest the funds of the company.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 8.
A company proposes to hold its Board meeting at a shorter notice through video conferencing. As a Company Secretary, explain the requirements and procedures to all the directors. (Dec 2014, 4 marks) [CSPP -1]
Answer:
Notice of Board Meetings: A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. [Section 173].

A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting. In case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

In the notice of Board Meeting, the following matters are required to be Specific Notice:

  1. Appointment of Managing Director who is already a Managing Director or Manager of another company [Section 203(3)].
  2. Appointment of Manager who is already a Manager or Managing Director of another company [Section 203(3)].

In case of a listed company, notice of the Board Meeting should also be given to the stock exchange(s), where the securities of the company are listed, in accordance with the various clauses of the listing agreement for the items like, unaudited quarterly results, financial statements, issue of securities by way of public/ rights/ bonus or offer for sale, declaration/ recommendation of dividend etc.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 9.
List out the additional items of business which cannot be passed through resolution by circulation and have to be placed before the Board at its meeting in case of a listed company. (Dec 2015, 4 marks) [CSPP -1]
Answer:
Passing of Resolution by Circulation: Section 179(3) of Companies Act, 2013:

  • A company may pass the resolutions through circulation. The resolution in draft form together with the necessary papers may be circulated to the directors or members of committee at their address registered with the company in India or through electronic means which may include e-mail or fax.
  • The said resolution must be passed by majority of directors or members entitled to vote.
  • If more than one third of directors require that the resolution must be decided at the meeting, the chairperson shall put the resolution to be decided at the meeting.
  • The resolution passed through circulation be noted at a subsequent meeting and made part of the minutes of such meeting.

Some of the matters which cannot be passed by the Board by circulation are:

  1. to fill a casual vacancy occurred in the Board;
  2. to make calls on shareholders in respect of money unpaid on shares;
  3. to of issue debentures;
  4. to make any political contribution;
  5. to make declaration of solvency;
  6. to invest the funds of the company,

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 10.
XYZ Ltd. wishes to convey Meeting of Board of Directors through Electronic mode. Draft a suitable Notice for the same. Assume other informations. (June 2019, 5 marks)
Answer:
Date : 01/06/2019 (ideally, should be on or more than 7 days before the meeting date)
Name of the Company: XYZ Ltd.
Reqistered Address: New Delhi –
CIN : _____________
Email: XYZ @gmail.com
Website: XYZ.com

NOTICE OF 4th BOARD MEETING

Mr. ABC Director,
New Delhi.

Dear Sir,

1. NOTICE is hereby given that the 4,h Meeting of the Board of Directors of the company will be held on Monday, the 12th June 2019 gt 4.30 pm at New Delhi.
2. The Agenda of the business to be transacted at the Meeting will follow.

3. You may attend the Meeting through video conference, the details of which are enclosed. In case you desire to participate through such mode, please send a confirmation in this regard to Mr. P, the Company Secretary of the Company at XYZ@ gmail. com within 2 days to enable making necessary arrangements.

Kindly make it convenient to attend the Meeting.

Yours faithfully,
For XYZ Limited
(Signature)

(Name)
(Designation)
(Email)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 11.
A Company is an artificial judicial person created by Law”. Comment. (June 2019, 5 marks)
Answer:
A company is an artificial judicial person created by law having its own distinct entity form, has perpetual succession and capable of entering into contracts. Perpetual succession implies that upon death or disqualification of its owners or shareholders, the company continues to exist.

Though company is bestowed with the characteristic of separate legal entity but it cannot take decision on its own. It is capable of acting in its own name, entering into contracts. It is capable of owning and holding property in its own name, sue others and to be sued by others in its name. Despite all these powers, since it is not a natural person, it expresses its will or takes its decisions through natural persons (i.e. directors or members) collectively which is known as “resolutions.”

In Solomon vs. Solomon and Company Limited for the first time, the principle of the separate legal entity or separate legal existence of a company was recognized by the House of Lords. It was held that once the company is incorporated, it becomes a separate entity in the eyes of law independent of a company from Mr. Solomon.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 12.
What are the provisions regarding quorum for the meeting of Board of Directors under Companies Act, 2013. Can article provide for the different quorum than the Companies Act, 2013? (June 2019, 4 marks)
Answer:
As per Section 174 of the Companies Act 2013:
The quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum under this sub-section.

The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose.

Where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.

Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

The Companies Act 2013 does not provide clarity on higher number of quorum. As per Secretarial Standard-1, Articles of Association may provide for higher number of directors for quorum.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 13.
(c) ‘Corporate decision making process has to be collective as per law’. Comment. (Dec 2019, 5 marks)
(d) Write down the required important practical aspects, while drafting agenda and notes thereon. (5 marks)
Answer:
(c) A company is an artificial judicial person created by law having its own distinct entity form and capable of entering into contracts. Though company is bestowed with the characteristic of separate legal entity but it cannot take decision on its own. It is capable of acting in its own name, entering into contracts. It is capable of owning and holding property in its own name, sue others and to be sued by others in its name.

Despite all these powers, since it is not a natural person, it expresses its will or takes its decisions through natural persons (i.e. directors or members) collectively which is known as “resolutions” at validly held meetings.

In case of Re Associated Colour Laboratories Ltd (1970) 12 D.L.R, a meeting has been defined as ‘Coming together of two or more persons face to face, so as to be in each other presence or company.

There are two collective bodies in the company which take decision through resolutions:

  1. Board of Directors – Who manage, control and direct the business of the company
  2. General body of members – Who ultimately own the company. Such decisions pertain to the various corporate activities and management of the company.

Thus corporate decision making process has to be collective as laid down in the Law.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(d) Following are the important practical aspects while drafting agenda and notes thereon:-
1. While preparing the Agenda and notes thereon, good drafting is of the essence. Important or non routine items of the Agenda have to be written with special care, employing not only good drafting skills but also an understanding of commercial considerations and the business environment. The following points needs to be focused for drafting agenda and notes thereon:
(a) Divide the Agenda into two parts: The first part containing usual or routine items and the second part containing other items which can further be bifurcated as (i) items for approval; and (ii) items for information/noting.

(b) For each item of the Agenda an explanatory note should be provided. The explanatory note should give sufficient details of the proposal, including the proposed Resolution, if any, references to the provisions of the Companies Act and other applicable laws, the Memorandum and Articles of Association, other relevant documents, decisions of previous Board or General Meetings, as necessary. The explanatory note may be drafted under the following heads :

  1. Background (or Introduction);
  2. Proposal, with recommendations of the management;
  3. Provisions of Law;
  4. Decision(s) to be taken ; and
  5. Interest, if any, of any Directors.

2. As a good governance practice, the agenda item should be initiated by the concerned Department (Head of Department or other authorised person) and approved by the competent authority as may be decided by the Board.

3. The Company Secretary should refer to the Agenda of previous Meetings, to see whether any items had been deferred and should consider whether such items are to be included for discussion at the ensuing Meeting.

4. The Company Secretary should also refer to the Minutes of the Meeting held during the corresponding period of the previous year to see whether there are any recurring periodic items (e.g. interim/final dividend, quarterly results). The Company Secretary should finalise the Agenda in consultation with the Chairman or in his absence the Managing Director or in his absence the Whole-time Director.

5. Notes on policy matters should present clear-cut issues in order to facilitate due deliberations and precise decisions at the Meeting.

6. The Company Secretary should keep, in addition to a record of matters to be discussed, a separate folder of all such correspondence, notes and documents which need to be dealt with at the Meeting. In preparing the Agenda, the Company Secretary should refer to this folder to ensure that all items which require the decision of the Board are included in the Agenda.

7. A separate Agenda item number should be given for items which are brought forward for discussion from a previous Meeting rather than placing them under the omnibus Agenda items.

A few extra copies of the Agenda should always be kept available at the Meeting.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 14.
(a) Draft a specimen notice by Requisitionists convening an Extra-ordinary General Meeting as per annexure VII in this regard under the Companies Act, 2013. (Dec 2019, 8 marks)
(b) ‘Promoter of a company is a person who does the necessary preliminary work in connection with the formation and the establishing of the company’. Comment. (4 marks)
(c) When an urgent resolution by circulation can be initiated? (4 marks)
Answer:
(a) NOTICE is hereby given that the persons named below, who are Members of ……………… (Name of the Company), having its Registered Office at ………………, and who have requisitioned the convening of an Extra-Ordinary General Meeting of the Company, hereby, in exercise of the powers and rights conferred by Section 100 of the Companies Act, 2013, give Notice that the said requisitioned meetings shall be held on ……………………….. day, the …………………. 20 ……………, at ………………… a.m./p.m. at …………………. (address) to consider the following proposal:

State the proposal
{OR
for considering and, if thought fit, passing the following Ordinary/ Special Resolution:
Reproduce the Resolution}
Names of requisitionists:
1. ………………………
2. ………………………
3. ………………………
4. ……………………….
Note:
A Member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and, on a poll, to vote instead of himself and the Proxy need not be a Member of the Company. Proxies, in order to be effective, should be duly completed, stamped (if applicable) and signed and must be received at the Registered Office of the Company not less than forty-eight hours before the time fixed for the Meeting.

By Order of the Board of Directors
For …………………….
……………………. (Signature)

Place …………………..
Date : …………………. 20

…………………… (Name)
Company Secretary
(ACS/FCS No ……………)

Further Notes:
1. A Member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and, on a poll, to vote instead of himself and the Proxy need not be a Member of the Company. Proxies, in order to be effective, should be duly completed, stamped (if applicable) and signed and must be received at the Registered Office of the Company not less than forty-eight hours before the time fixed for the Meeting.

2. The requisition dated …………….. referred to above, signed by the requisite number of Members in terms of Section 100 of the Companies Act, 2013, and all documents referred to in the Notice are available for inspection by any Member at the Registered Office of the Company on any working day of the Company between the hours of 11:00 a.m. and 1:00 p.m. upto the date of this Extra-Ordinary General Meeting and at the venue of the Meeting for the duration of the Meeting.

3. Route-map to the venue of the Meeting is enclosed.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(b) Generally Promoter of a company is a person who does the necessary preliminary work in connection with the formation and the establishment of the company. It is promoters only who conceives an idea, develops it, formulates a scheme or project and takes all the necessary steps for the formation of a company to implement the project or the scheme.

Before the company is registered by the Registrar promoters continue to be known as promoters. They gather funds for meeting the expenses in connection with the formation of the company and spend them, which are known and designated as “preliminary expenses” and a provision is made in the articles of association of the company authorising the company and its directors to reimburse promoters the preliminary expenses incurred by them, and also a provision for the formalisation of the contracts which the promoters of the company had entered into with third parties prior to the birth of the company.

Promoters usually enter into contracts with the prospective directors, solicitors, bankers, brokers, underwriters, auditors, secretary, manager and with those who offer to sell and, plant, machinery equipment etc. for implementing the proposed project.

Such contracts are known as “promoters’ contracts” which are not binding on the company because the company had not come into existence when they were entered into with third parties by the company’s promoters, However, as a matter of practice, the company, on its incorporation enters into fresh contracts with the third parties on the lines of the promoters’ contracts, which then become binding on the company.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(c) The Companies Act, 2013 requires certain business to be approved only at Meetings of the Board. However, other business that requires urgent decisions can be approved by means of Resolutions passed by circulation. Resolutions passed by circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.

As per the secretarial standard 1 on ‘Meetings of the Board of Directors’:
1. The Chairman of the Board or in his absence, the Managing Director or in their absence, any Director other than an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors, whether the approval of the Board for a particular business shall be obtained by means of a Resolution by circulation.

2. Where not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting, the Chairman shall put the Resolution for consideration at a Meeting of the Board.

Interested Directors shall not be excluded for the purpose of determining the above one-third of the total number of Directors.

Secretarial Standard 1 on ‘Meetings of the Board of Directors’ lists certain items of business which shall not be passed by circulation and shall be placed before the Board at its Meeting.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 15.
What are the powers of Board of Directors of a Company that can be exercised only in a full fledged Board Meeting under the provisions of the Companies Act, 2013. (Dec 2020, 4 marks)
Answer:
Powers of the Board to be exercised at Board Meetings as prescribed under the Companies Act, 2013

According to section 179(3) of the Companies Act, 2013 the Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:

(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed:

  1. To make political contributions
  2. To appoint or remove key managerial personnel (KMP)
  3. To appoint internal auditors and Secretarial Auditor.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 16.
Describe the specific contents that minutes of a meeting must contain under the provisions of the Companies Act, 2013. (Dec 2020, 4 marks)
Answer:
According to Section 118(10) of the Companies Act, 2013 provides that every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India (ICSI) constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.

As per Secretarial Standard-1 on ‘Meetings of the Board of Directors’ Minutes shall inter-alia contain:
(a) The name(s) of Directors present and their mode of attendance, if through Electronic Mode.
(b) In case of a Director participating through Electronic Mode, his particulars, the location from where he participated and wherever required, his consent to sign the statutory registers placed at the Meeting.
(c) The name of Company Secretary who is in attendance and Invitees, if any, for specific items and mode of their attendance if through Electronic Mode.
(d) Record of election, if any, of the Chairman of the Meeting.
(e) Record of presence of Quorum.
(f) The names of Directors who sought and were granted leave of absence.
(g) Noting of the Minutes of the preceding Meeting.
(h) Noting the Minutes of the Meetings of the Committees.
(i) The text of the Resolution(s) passed by circulation since the last Meeting, including dissent or abstention, if any.

(j) The fact that an Interested Director did not participate in the discussions and did not vote on item of business in which he was interested and in case of a related party transaction such director was not present in the meeting during discussions and voting on such item.

(k) If any Director has participated only for a part of the Meeting, the Agenda items in which he did not participate.

(l) The fact of the dissent and the name of the Director who dissented from the Resolution or abstained from voting thereon.

(m) Ratification by Independent Director or majority of Directors, as the case may be, in case of Meetings held at a shorter Notice.

(n) Consideration of any item other than those included in the Agenda with the consent of majority of the Directors present at the Meeting and ratification of the decision taken in respect of such item by a majority of Directors of the company.

(o) The time of commencement and conclusion of the Meeting.

Apart from the Resolution or the decision, Minutes shall mention the brief background of all proposals and summarise the deliberations thereof. In case of major decisions, the rationale thereof shall also be mentioned.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 17.
What is a Resolution by Circulation as per Section 175 of the Companies Act, 2013? (Dec 2020, 4 marks)

Question 18.
Draft a specimen Board Resolution of appointment of Ripudaman Singh as an Independent Director of M/s. Rudraksh Ltd. (Dec 2020, 4 marks)
Answer:
Proposed by: Mr ……………..
Seconded by: Mr ………………
The following Resolution having been proposed and seconded respectively by the aforementioned Members was put to vote as an Ordinary Resolution: “RESOLVED that pursuant to the provisions of Sections 149, 150(2), 152 and any other applicable provisions of the Companies Acts 2013 and the rules made there under read with Schedule IV to the Companies Act, 2013, approval of the Company be and is hereby accorded for appointment of Mr. Ripudaman Singh (DIN No ……………….), as an Independent Director of the Company to hold the office for a period of 3 years i.e. up to …………………… AND THAT by virtue of sub-section (13) of Section 149 of the Companies Act, 2013 he shall not be liable to retire by rotation.”

The Chairman enquired from the members present if there were any clarifications required on the same. Since none of the Members required any clarification, the Ordinary Resolution was put to vote and on a show of hands declared carried by the requisite majority.

VOTE OF THANKS
There being no other business to transact the Meeting closed with a vote of thanks to the Chair.
Date : ………………….
Place: ………………..

CHAIRMAN
(DIN ……………)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 19.
Draft a specimen notice of a board meeting. Assufne facts. (Aug 2021, 4 marks)
Answer:
Name of the Company ………………………
Registered Address ………………………….
CIN – ………………….. Email- …………………… Telephone : ……………………..
Website: …………………..
NOTICE OF ……………………….. (SERIAL NUMBER OF MEETING) BOARD MEETING
Mr. ………………….
Director,
New Delhi.

Dear Sir,

1. NOTICE is hereby given that the (serial number ……………………….. of Meeting) Meeting of the Board of Directors of the company will be held on …………………….. (day of the week), the ………………………… (date) ……………………. (month) …………………… (year) at (a.m./p.m.) at …………………. (Venue)

2. The Agenda of the business to be transacted at the Meeting is enclosed/will follow.

3. You may attend the Meeting through Electronic Mode, the details of which are enclosed. In case you desire to participate through such mode, please send a confirmation in this regard to …………………… (Name of Company Secretary/ Chairman/other Authorised Person), email ……………., Tel No. ………………… within ……………………. days (time frame) to enable making of necessary arrangements.

Kindly make it convenient to attend the Meeting.

Yours faithfully,
For ………………….. Limited/Pvt Limited
(Signature)
(Name)
(Designation)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 20.
(ii) Mention the practical aspects while drafting resolutions both for board and general meeting. (Aug 2021, 4 marks)
(iii) Draft a specimen notice in newspaper for postponement of AGM. (4 marks)
(iv) Comment on applicability of Secretarial Standard (SS) under the following circumstances:
(a) One Person Company (OPC) default in filing financial statements u/s 137 and annual return u/s 92 of the Companies Act, 2013.
(b) Private Company having two directors, default in submitting financial statements u/s 137 and annual return u/s 92 of the said Act.
(c) Entity u/s 8 of the Companies Act, 2013, default in filing financial statement u/s 137 of the said Act.
(d) Entity u/s 8 of the Companies Act, 2013, default in filing annual return u/s 92 of the said Act. (1 mark each)
Answer:
(ii) The following points should be kept in mind while drafting resolutions both for Board and General meeting:

  1. All essential facts are included in the resolutions.
  2. Surplus and meaningless words or phrases should not be included.
  3. Reference to documents approved at a meeting should be clearly identified.
  4. Resolutions must indicate the relevant provisions of the Act and the Rules.
  5. If a resolution is one which requires approval the Central Government or confirmation of NCLT/Court, this must be stated in the resolution.
  6. A resolution must indicate when it will be effective.
  7. A resolution must confine itself to one subject matter and two distinct matters should not be covered in one resolution.
  8. A resolution must be concise, precise and flexible enough to take care of eventuality.
  9. ” Lengthy resolutions should be divided into paragraphs and arranged in a logical manner.
  10. Anybody not present at the meeting will know clearly what decision was taken.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(iii) Specimen Notice in Newspapers of postponement of Annual General Meeting
Name of the Company …………………………
Registered Address ……………………………
CIN : ………………….. Email : …………………….. Telephone: ……………………..
Website: …………………..

NOTICE: POSTPONEMENT OF ANNUAL GENERAL MEETING

Members are hereby informed that, due to the unforeseen circumstances, it is not possible for the Company to convene the ………………. Annual General Meeting of the Company, which was scheduled to be held on ………………. 20 …………………

Accordingly, the Board of Directors of the Company has decided to postpone the said Annual General Meeting, which now will be
convened on ………………20…. Notice and other documents, if any, relevant to the re-convened Meeting will be dispatched to the Members shortly.

A Member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and, on a poll, to vote instead of himself and the Proxy need not be a Member of the Company. Proxies, in order to be effective, should be duly completed, stamped, signed and must be received at the Registered Office of the Company not less than fortyeight hours before the time fixed for the Meeting.

By Order of the Board of Directors
For ……………………….
……………………. (Signature)

Place: ………………………
Date : ………………. 20 ……….
(ACS/FCS No …………………)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(iv) Secretarial Standard (SS) is applicable to every company except companies as provided under section 118(10) of the Companies Act, 2013:
(a) Secretarial Standard does not apply to One Person Company, it is irrelevant whether there is default in filing financial statement or annual return.

(b) Secretarial Standard applies to a private company, it is irrelevant whether there is default in filing financial statement or annual return.

(c) Secretarial Standard does not apply to section 8 company generally, but if it is in default in filing financial statements u/s 137 of the Companies Act, 2013, then Secretarial Standard will be applicable to such company.

(d) Secretarial Standard does not apply to section 8 company generally, but if it is default in filing annual return u/s 92 of the Companies Act, 2013, then Secretarial Standard will be applicable to such company.

Question 21.
Notice of Annual General Meeting for XYZ Ltd. in which only ordinary businesses are to be transacted. Assume other facts, if required. (Dec 2021, 5 marks)
Answer:
Name of the company: XYZ Ltd.
Registered Address: ……………………..
CIN: ……………………..
Email: ……………………..
Telephone: ……………………..
Website: ……………………..

NOTICE

NOTICE is hereby given that the …………………….. (Meeting Number) Annual General Meeting (AGM) of XYZ Ltd. (CIN: ……………………..) will be held on …………………….. (day), the ……………………..(date), 20…. at …………………….. am/pm at ….(address) to transact the following business:

Ordinary Business:

  1. To receive, consider and adopt the Audited Financial Statement of the Company for the financial year ended on 31 st March … and the Report of the Board of Directors and Auditors.
  2. To declare dividend for the financial year ended on 31 st March…
  3. To appoint Director in place of Mr …………………….. (DIN ……………………..), who retire by rotation and being eligible, offer himself for reappointment.
  4. To appoint Statutory Auditors and to determine their remuneration. For this grants, to consider and if deemed fit, to pass, with or without modification, the following resolution as an Ordinary Resolution:

“RESOLVED THAT pursuant to the provisions of Section 139 and other applicable provisions if any, of the Companies Act, 2013 and the Rules framed thereunder, as amended from time to time, M/s , ……………………..
Chartered Accountants, (Firm Registration No ……………………..) be and are hereby appointed as Auditors of the Company to hold office from the conclusion of this Annual General Meeting till the conclusion of the ………………… Annual General Meeting of the Company, at a remuneration of ₹ ………………….. / for the year …………………… and ₹ ……………… / – per year for the subsequent ……………….. years plus reimbursement of out of pocket expenses and service tax, as applicable.”

“RESOLVED FURTHER THAT the Board of Directors of the Company be and is hereby authorised to do all such acts, deeds, matters and things as may be considered necessary, desirable or expedient to give effect to this Resolution.”

By Order of the Board of Directors (BO.D)
For ……………………
(Signature)
(Name)

Place
Date : ………………. 20 ……………..

Director/Company Secretary
DIN/ACS/FCS No :

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 22.
Delegation of powers by Board of Directors. (Dec 2021, 4 marks)
Answer:
Powers of Board
According to Section 179(3) of the Companies Act, 2013 provides that the Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely: —
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed:

Note Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of Directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 23.
Describe Secretarial Standard – 2 as stipulated under the Companies Act, 2013 on the mode of delivery of Notice. (June 2022, 5 marks)

Question 24.
Draft the following as per the instructions (Assume facts, if required): (June 2022)
(iii) Specimen of attendance slip and proxy form under the Companies Act, 2013 . (4 marks)
(iv) Minutes of the third Annual General Meeting of CJV Ltd. with agenda of adoption of accounts and declaration of dividend featured for consideration and decision. (4 marks)

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 25.
Draft the following (a) in case of a resolution, the body to consider the same and the type of resolution; and (b) in other cases person authorised to issue the same. In all cases, the basis which gives rise to drafting should also be mentioned: (June 2012)
Notice of adjourned Board meeting. (5 marks) [CSPP -1]
Answer:
Authorised person : The Board of Director
Basis: Regulation 73 of Table F of Schedule I to the Companies Act, 2013.

J.K.L. Co. Ltd.
Registered Office : Address
Notice of Adjourned Board Meeting.

Notice is hereby given that the meeting of the Board of Directors of the company convened and held on…. at ………… a.m./p.m. at the Registered Office of the company and adjourned to a date to be fixed by the Chairman has been decided to be convened and to be held on…. at … a.m./p.m. at the Registered Office of the company to transact the following business left incomplete at the said meeting of the Board held on ……….

You are requested to make it convenient to attend meeting.

Signature
Mr ………………..
Company Secretary

Place – Allahabad
Date : 1st May 2011

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 26.
Draft the following. In case of a resolution, state the type of meeting to consider such resolution and the nature of the resolution together with any special requirement attached to it. In respect of the rest, mention (a) who can issue the same; and (b) the basis for the issuance:

Notice from an unlisted public company for holding an extra-ordinary General Meeting for consideration of the Board’s proposal to buy-back 15% of the paid-up equity share capital (no explanatory statement is required). (Dec 2012, 5 marks) [CSPP -1]
Answer:
Who can issue – The notice can be issued by the Secretary of the Company, if so authorized by the Board or by a Director authorized by the Board. Basis – Section 68 of the Companies Act, 2013.

SPECIMEN OF NOTICE OF GENERAL MEETING
NOTICE

Notice is hereby given that the Extraordinary General Meeting of the XYZ Limited will be held on ___________, 2013 at 11.00 a.m. at the registered office of the Company at Mumbai to consider and if thought fit, to pass fhe following resolution as a SPECIAL RESOLUTION, with or without modification.

“RESOLVED THAT pursuant to the provision of Sections 68, 69,70 and all other applicable provisions, if any, of the Companies Act, 2013, and the provisions contained in the Private Limited Company and Unlisted public Limited Company (Buy-Back of Securities) Rules, 2014, prescribed by the Ministry of Corporate Affairs including such modifications or re-enactment of the Act or the Rules and subject to such other approvals, permissions and sanctions as may be necessary and subject to such conditions and modifications as may be prescribed while granting such approvals, permissions and sanctions which may be agreed by the Board of Directors of the Company, the consent of the Company be and is hereby accorded to the Board to purchase its own equity fully paid-up equity shares of ₹ 100/-each upto a maximum of 20,082 equity shares of ₹ 100/- each being 15% of the paid-up equity share capital of the Company to be bought back from the existing shareholders of the Company at a price of ₹ 625/- per share payable in cash.

RESOLVED FURTHER that the Directors of the Company be and are hereby authorized to carry out the aforesaid buying back of securities and to take every step that may be necessary in connection therewith or incidental thereto give effect to the above resolution or to accept any change or modification as may be suggested by the appropriate authorities or advisors.

Mumbai
2013

By Order of the Board
Mr. A
Director

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 27.
A public limited company held its annual general meeting at its registered office and transacted all proposals of ordinary business. As the Company Secretary, draft minutes of the meeting and advise the Chairman regarding legal provisions for recording the minutes.   (Dec 2014, 8 marks) [CSPP -1]
Answer:
Minutes of the Proceedings of the Second Annual General Meeting of XYZ Limited

Held on Tuesday, 24th September 2014 at 3:30 p.m. at ___________ (Address)
The following were present:

  1. Mr. W (in the Chair)
  2. Mr. B (Director and Member)
  3. Mr. C (Director)
  4. Mr. D (Director and Member)
  5. Mr. E (Director, Chairman of Audit Committee)
  6. Mr. F (Company Secretary)
  7.  _________ (Members present in person) [state number]
  8. ___________ (Members present by Proxy) [state number]

Mr. G, Partner of M/s _________, Chartered Accountants, Auditors of the Company, was present. Mr. H, Practicing Company Secretary, was also present.

Chairman: In accordance with Article ___________ of the Articles of Association, Mr. W, Chairman of the Board of Directors, took the Chair.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

OR

{Mr. B was elected Chairman of the Meeting, in terms of Article ________ of the Articles of Association of the Company}.

The Chairman welcomed the Members and introduced the Directors seated on the dais.

The Chairman declared that the requisite Quorum was present and called the Meeting to order. The Register of contracts or arrangements in which directors are interested was placed at the Meeting and was available for inspection.

With the consent of the Members present, the Notice convening the Annual General Meeting of the Company was taken as read. The Chairman requested the Company Secretary to read the Auditors’ Report.

After the Auditor’s Report had been read, the Chairman delivered his speech.

The business of the Meeting as per the Notice thereof was thereafter taken up item wise.
1. Adoption of Accounts ‘
The Chairman requested Mr. __________ to read the Ordinary Resolution for the adoption of the Accounts for the year ended 31st March, 2014 and Mr. __________ read out the Ordinary Resolution as follows:

“RESOLVED THAT the audited financial statement (including consolidated financial statement) of the Company for the financial year ended on that date, together with the Schedules and Notes attached thereto, along with the Reports thereon of the Directors and the Auditors, as circulated to the Members and laid before the Meeting, be and are hereby approved and adopted.”

After the above Resolution was proposed and seconded, but before it was put to the vote, the Chairman invited Members (other than those present by Proxy) to make observations and comments, if any, on the Report and Accounts, as well as on the other Resolutions set out in the Notice convening the Meeting.

Some Members made their observations and comments and raised queries on the Annual Report and Financial Statement and other items set out in the Notice and the Chairman answered their queries.

Before putting the Resolution to vote, the Chairman reminded the Meeting that Proxies were not eligible to vote on a show of hands. Thereafter, the Chairman put the Resolution for the adoption of the Accounts and the Reports thereon to the vote as an Ordinary Resolution.

On a show of hands, the Chairman declared the aforesaid Ordinary Resolution carried by the requisite majority.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

2. Declaration of Dividend
Mr. __________ read the following Resolution as an Ordinary
Resolution:
“RESOLVED THAT the dividend @ ₹ 2 on the equity shares of ₹ 10 each, fully paid-up, be and is hereby declared for payment, after deduction of tax at source, if any, to those Members whose names appear on the Company’s Register of Members on Tuesday, 24th September, 2014″.

The Resolution was proposed by Mr. __________ and seconded by Mr. ____________ and was put to the vote as an Ordinary Resolution.

On a show of hands, the Chairman declared the aforesaid Ordinary Resolution carried unanimously.

3. Appointment of Director
Proposed by : Mr. _____________
Seconded by : Mr. _____________
The following Resolution having been proposed and seconded by the aforementioned two Members, was put to the vote as an Ordinary Resolution:

“RESOLVED THAT, pursuant to Section 152(6)(a) of the Companies Act, 2013, Mr. A, who retires by rotation and being eligible for re-appointment, offers himself for re-appointment, be and is hereby re-appointed as a Director of the Company and that his period of office be liable to determination by retirement of Directors by rotation.”

On a show of hands, the Chairman declared the aforesaid Ordinary Resolution carried unanimously.

4. Appointment of Director
Proposed by : Mr. _____________
Seconded by : Mr. _____________
The following Resolution having been proposed and seconded by the aforementioned two Members, was put to the vote as an Ordinary Resolution:

“RESOLVED THAT, pursuant to Section 152(6)(a) of the Companies Act, 2013, Mr. B, who retires by rotation and being eligible for re-appointment, offers himself for re-appointment, be and is hereby re-appointed as a Director of the Company and that his period of office be liable to determination by retirement of Directors by rotation.”

On a show of hands, the Chairman declared the aforesaid Ordinary Resolution carried unanimously.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

5. Appointment of Auditors
Proposed by : Mr. _____________
Seconded by : Mr. _____________
The following Resolution having been proposed and seconded by the aforementioned two Members, was put to the vote as an Ordinary Resolution:

“RESOLVED THAT M/s. _____________, Chartered, Accountants, _____________, be and are hereby re-appointed as Auditors of the
Company to hold office from the conclusion of this Meeting until the conclusion of the 6th Annual General Meeting of the Company on a remuneration of ₹ _____________, plus applicable GST and other out of pocket expenses incurred for the purposes of the audit”.

On a show of hands, the Chairman declared the aforesaid Ordinary Resolution carried unanimously.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 28.
Draft general notice to the members of the company in respect of the following:
(i) Central Government’s approval for the appointment of Joe as the Managing Director of Shine Ltd.
(ii) Central Government’s approval to increase remuneration of Yash as the Managing Director by Johnson Ltd. (Dec 2016, 4 marks) [CSPP -1]
Answer:
(i) Notice Pursuant to the provisions of Section 201 of the Companies Act,, 2013, notice is hereby given that the Company intends to apply to the Central Government for its approval under section 200 of the Companies Act, 2013 for the appointment of Shri Joe as Managing Director of the Company, for a period of five years effective from …………………… on the terms and conditions as contained in the Draft

Agreement approved by the Board of Directors on ……………………
Registered Office:

For Shine Limited
………………. Secretary

Dated …………………….

(ii) JOHNSON LIMITED
Notice in respect of Central Government’s approval to increase remuneration of Yash as Managing Director of Johnson Limited. Notice is hereby given pursuant to Section 201 of the Companies Act, 2013 (the Act) that the company intends to make an application to the Central Government for its approval under section 200 of the Act to the increase in the remuneration payable to Shri Yash Managing Director of the Company.

Registered Office:

For JOHNSON LIMITED
……………………….. Secretary

Dated …………………….

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 29.
Ria Technologies Ltd. was incorporated 10 years back. The Board of directors now wants to change its name to Ria Systems Ltd. Draft a notice and the explanatory statement for calling an extraordinary general meeting of the company for change of its name, assuming relevant data. (Dec 2016, 4 marks)
Answer:
NOTICE

Notice is hereby given to the members of the Company that the Extra Ordinary General Meeting of RIA TECHNOLOGIES LIMITED will be held on Friday the ___________ day of ___________ at 11:00 A.M. at its registered office

To consider, and if thought fit, to pass with or without modification(s), the following resolution as Special Resolution:
“RESOLVED THAT pursuant to the provision of Section 21 and all other applicable provisions, if any, of the Companies Act, 2013 and the Cos. (Incorporation) Rules, 2014 name of the company be hereby changed from RIA TECHNOLOGIES LIMITED to RIA SYSTEMS LIMITED and accordingly the name “RIA TECHNOLOGIES LIMITED” wherever it appears in the Memorandum and Article of Association of the Company be substituted by the name “RIA SYSTEMS LIMITED” in due course.

Date: ___________
Place: ___________

By the Order of the Board
RIA TECHNOLOGIES LIMITED
Director

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

NOTES (forming part of the Notice):
A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE INSTEAD OF HIMSELF AND SUCH PROXY NEED NOT BE A MEMBER OF THE COMPANY.

The instrument(s) appointing the proxy, if any, shall be delivered at the Registered Office of the Company, not less than 48 hours before the commencement of the meeting and in default, the instrument of proxy shall be treated as invalid. Proxy shall have no right to speak at the meeting.

All Statutory Records including Register of Members are open for inspection at the Registered Office of the Company during office hours on all working days except Saturday between 10.00 A.M. & 1.00 P.M. up to the date of Extra Ordinary General Meeting.

Compliance with Section 101 (1) of the said Act for seeking consent of the shareholders for convening EGM at a shorter notice is annexed herewith this notice calling EGM. Members are requested to kindly fill up and submit the same at the Regd. Office of the company by ********.

ANNEXURE TO NOTICE :
EXPLANATORY STATEMENT pursuant to Section 102(1) of the Companies Act, 2013.
Item No. 1:
As per the desire of Board it’s been proposed to change the name of the company in order to revamp the company’s business and support the new venture. The new name proposed is “RIA SYSTEMS LIMITED”. Your Directors trust that this change of name will have the members support and approval. The Registrar of Companies has confirmed that the new name is available for registration under section 13 of the Companies Act, 2013 read with Cos. (Incorporation) Rules, 2014 vide their Name Availability letter dated ___________, and subject to the resolution being passed; an application will be made to the Central Government for approval to the change of name under section 13(2) of the Act.

If the change of name is approved, share certificates already issued will not be called in only for the purpose of exchange into certificates bearing the new name, but will be so exchanged as and when the existing certificates come into the possession of the Company and in the meantime the existing certificates will continue to be accepted for all purposes, as indicating entitlement to shares of the Company. The Board recommends the adoption of the resolution.

None of the directors of the Company or their relatives, Associate company(s) are concerned or interested in the Resolution.

By the Order of the Board
RIA TECHNOLOGIES LIMITED
Director

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 30.
Beard of Directors of Day Night Prakashani Limited decide to shift its registered office of the company from Mumbai to National Capital Region (NCR). The Board has approved the change. The Board has to seek the approval of the members of the company for going ahead with the legal formalities as required under the Companies Act, 2013, for which the extra-ordinary general meeting of the members is scheduled to be held on 17th June, 2017. In this connection you are required to draft notice of the EGM for shifting of office outside the state and give explanatory statement in this regard. (June 2017, 8 marks)
Answer:
DAY NIGHT PRAKASHANI LIMITED
CIN: ___________
REG. OFFICE: ___________
EMAIL ID: ___________

Notice
Notice is hereby given that the Extra ordinary General Meeting of the Member of M/s. Day Night Prakashani Limited will be held on Thursday, the 08 day of June, 2017 at 11:00 a.m. at the registered office of the company:

SPECIAL BUSINESS:
Item I: To consider and if thought fit, with or without modification, the following resolution as special Resolution:

“RESOLVED THAT pursuant to provision of Section 12 and Section 13(7), of the Companies Act, 2013, read with Companies (Incorporation) Rules, 2014 and other applicable provision, if any, the consent of the members be and is hereby accorded to make an application to the Central Government for shifting of registered office of the company from Mumbai to National Capital Region (NCR).

RESOLVED FURTHER THAT, Board of the Directors of the company, be and is hereby authorised to execute, sign, issue such papers which are necessary to bring the above mentioned resolution in force.

By and on behalf of BOD for DAY NIGHT PRAKASHANI LTD.
Director
(DIN: _________)

Date : 10.05.2017
Place : Mumbai

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Notes: (forming part)

  1. The members entitled to attend the meeting is entitled to appoint a proxy and vote instead of himself.
  2. Explanatory statement pursuant to Section 102(1) of the Companies Act, 2013, in respect of Special Business is annexed hereto.

Explanatory Statement
(Pursuant to Section 102(1) of the Companies (Act, 2013)
Your board at their meeting held on 10.05.2017 has decided to shift the registered office of the company from the State of Maharashtra to the State of Uttar Pradesh, for which the approval of shareholders and Central Government is required. At present the registered office of the company is situated at Mumbai, and the current location is not advantageous for the business purpose of the company so the Board decided to shift it to the State of Uttar Pradesh where their corporate office is also situated.

None, of the directors of the company are interested in the above mentioned resolution.

By and on behalf of BOD for DAY NIGHT PRAKASHANI LTD.

Date: 10.05.2017
Place: Mumbai

DIRECTOR
DIN: ___________

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 31.
Assuming that you are appointed as Scrutinizer for conducting Postal Ballot and for furnishing details of Result of the Postal Ballot to the Chairman of the Company, prepare Scrutinizer’s Report for the Chairman of the company to declare result of the ballot. Assume facts and figures. (Dec 2017, 4 marks) [CSPP -1]
Answer:
SCRUTINIZER’S REPORT TO THE CHAIRMAN ON POSTAL BALLOT FORM NO. MGT. 13

Report of Scrutinizer(s)
[Pursuant to rule section 109 of the Companies Act, 2013 and rule 21 (2) of the Companies (Management and Administration) Rules, 2014]

To,
The Chairman
XYZ Limited
C-XXX, ABC Road
MNO-OOOOOO

Scrutinizers Report on postal ballot in respect of passing of resolutions contained in Notice dated 19th February, 2017 through postal ballot.

Dear Sir,
I, DKY have been appointed as Scrutinizer(s) by the Board of directors of XYZ Limited for scrutinizing postal ballot voting in respect of passing of resolution contained in Notice dated 19th February, 2017 through postal ballot.
I, submit my report as under:
1. After the time fixed for closing of the poll by the Chairman, i.e. 5 p.m. on 18th March, 2017 ballot boxes kept for polling were locked in my presence with due identification marks placed by me.

2. The locked ballot boxes were subsequently opened in my presence and poll papers were diligently scrutinized. The poll papers were reconciled with the records maintained by the Company/Registrar and Transfer Agents of the Company and the authorizations/proxies lodged with the Company.

3. The poll papers, which were incomplete and/or which were otherwise found defective have been treated as invalid and kept separately.
OR
I did not find any poll papers invalid.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

4. The result of the Poll is as under:
(a) Ordinary Resolution – Item No. 1 – To appoint Shri DFG (DIN 55555555) as an Independent Director
(i) Voted in favour of the resolution:

Number of members present and voting (in person or by proxy) Number of votes cast by them % of total number of valid votes case
21071 5115186 0.2272

(ii) Voted against the resolution:

Number of members present and voting (in person or by proxy) Number of votes cast by them % of total number of valid votes case
795 3178437 0.1411

(iii) Invalid votes:

Total number of members (in person or by proxy) whose votes were declared invalid Total number of votes cast by them
99 231821

5. A Compact Disc (CD) containing a list of equity shareholders who voted “FOR”, “AGAINST” and those whose votes were declared invalid for each resolution is enclosed.

6. The poll papers and all other relevant records were sealed and handed over to the Company Secretary/Director authorized by the Board for safe keeping.

Thanking you,

Yours faithfully,

Place : MNO
Dated : 24th March, 2017

[The scrutinizer shall submit his report as soon as possible after the last date of receipt of postal ballots but not later than seven days thereof]
Name/s and Signature/s of the Scrutinizer/s

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 32.
(b) ABC Ltd. called an Annual General Meeting on 28th December, 1998. As the quorum was not present on that day, the meeting was adjourned to 4th January, 1999 on which date the meeting was duly held. No other AGM was held in 1999. Can the company be prosecuted for not holding AGM every year?

(c) Two shareholders sued the Directors of a Company, alleging various fraudulent and illegal transactions, whereby the Company’s property was misapplied. The transactions were, however, of such nature as the -majority of shareholders had the power to confirm. Will such suit succeed? Why? (June 2019, 4 marks each)
Answer:
(b) Every type of company, must once in a year hold an annual general meeting as per Section 166 of the Companies Act, 1956. Not more than 15 months must elapse between the date of one annual general meeting and that of the next. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation.

In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year. In the case there is any difficulty in holding any annual general meeting (except the first annual meeting), the Registrar may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting.

Case example :
Meenakshi Mill Company Ltd. Vs. Assistant Registrar of Joint Stock Companies AIR 1938, in this case, the company failed to call an annual general meeting. The Company had called general meeting in December, 1934 which was adjourned and held on March 1935. It was pleaded by the company that since the general meeting called on 30th December. 1934 was adjourned to 31st March, 1935, and was held on that date.

It follows that general meeting was held in 1934 and in 1935, and the general meeting held on the 28lh January, 1936, was within 15 months of 31st March, 1935. It was held by the Court that the annual general meeting held in March 1935 was the adjourned meeting of 1934. There shall be a general meeting held once at least in every year, that is, one meeting per year, and as many meetings as there are years. 1935 is a separate year and distinct meeting should be held. The Company was convicted.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

In this case ABC Ltd. called an AGM on 28th December, 1998 and because of want of quorum, the meeting was adjourned and the meeting was held on 4th January 1999. The meeting held on 4th January, 1999 was the adjourned meeting of 1998. Thus, the company must held meeting for the financial year 1999. If it is not doing so, company can be prosecuted for not holding AGM every year.

Alternate Answer as per Companies Act 2013:
As per Section 96 of the Companies Act 2013, every company other than a One Person Company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next:

  • Provided that in case of the first annual general meeting, it shall be held within a period of nine months from the date of closing of the first financial year of the company and in any other case, within a period of six months, from the date of closing of the financial year
  • Provided further that if a company holds its first annual general meeting as aforesaid, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation
  • Provided also that the Registrar may, for any special reason, extend the time within which any annual general meeting, other than the first annual general meeting, shall be held, by a period not exceeding three months.

In this case ABC Ltd. called an AGM on 28th December, 1998 and because of want of quorum, the meeting was adjourned and the meeting was held on 4th January 1999. The meeting held on 4th January, 1999 was the adjourned meeting of 1998. Thus, the company must held meeting for the financial year 1999. If it is not doing so, company can be prosecuted for not holding AGM every year.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

(c) The suit filed by two shareholders against the directors of a company for. alleged fraudulent act causing losses to the company will not succeed because if the majority of shareholders had the power to confirm the act of the directors, in such case any suit against the directors will not survive.

In Foss v. Harbottle (1842), two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property. The Court rejected the two shareholders’ claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders.

This rule is derived from two general legal principles of company law. Firstly, a company is a legal entity separate from its shareholders. Secondly, the Court will not interfere with the internal management of companies acting within their powers. Where an ordinary majority of members can ratify the act, the Court will not interfere. This simply means, if the majority can ratify an act, the minority cannot sue.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Question 33.
XYZ Ltd. wishes to shift its registered office from Maharashtra to Rajasthan. Draft a notice to convene Extraordinary General Meeting for this purpose along with Note and Explanatory Statement. Assume other facts, if required. (Dec 2021, 8 marks)
Answer:
Notice of Extra – Ordinary General Meeting (EGM)
Name of the Company ……………………….
Registered Address ………………….
CIN : ………………………
Website : …………………….
Email: …………………..
Telephone: ………………………

Notice NOTICE is hereby given that an Extra-Ordinary General Meeting (EGM) of the Members of XYZ Ltd. will be held on …………… (day), ………………… (date) at …………………. am/pm at ………………..(address) to transact the following Special Business:

Shifting of Registered Office:
To consider and, if thought fit, to pass with or without modification the following Resolution as a Special Resolution:

“RESOLVED that pursuant to Section 13 and other applicable provisions, if any, of the Companies Act, 2013 and subject to the approval of the Regional Director, (RD)the Registered Office of the Company be shifted from Maharashtra to Rajasthan.

RESOLVED FURTHER that clause-ll of the Memorandum of Association (MOA) of the Company be altered by substitution of the words ……………………. in place of the words ……………………..

RESOLVED FURTHER that the poard of Directors (BOD) of the Company be and is hereby authorized to file the necessary petition(s) before the Regional Director ……………………. Region for confirmation of the alteration of Clause-ll of the Memorandum of Association (MOA) of the Company as aforesaid and to carry out all other acts and deeds as are necessary in connection therewith, including compliance of directions, if any, of the concerned authorities.”

By Order of the Board of Directors
For ……………………..
………………… (Signature)

Director/Company Secretary
DIN/ACS/FCS No.

Place : ………………….
Date : …………………..

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Notes:
1. The explanatory statement setting out the material facts pursuant to Section 102 of the Companies Act, 2013, relating the special business to be transacted at the meeting is annexed.

2. All members are entitled to attend and vote at the meeting is entitled to appoint proxy to attend and, on a poll, to vote instead of himself and the proxy need not be a member of the Company,

3. Proxies, in order to be effective, must be received in the enclosed Proxy form atm the Registered Office of the Company not less than forty-eight hours before the time fixed for the Meeting.

4. In compliance with provisions of section 108 of the Companies Act, 2013 and rule 20 of the Companies (Management and Administration) Rules, 2014, the Company is pleased to provide members the facility of exercising their right to vote electronically on the item mentioned in this Notice. The Company has appointed Mr ……………….. as scrutinizer for conducting the e-voting process in fair and transparent manner.

EXPLANATORY STATEMENT
As required by section 102 of the Companies Act, 2013, the explanatory statement sets out all material facts relating to business mentioned in item no 1 of the accompanying notice dated ………………………..

Item No 1.
The registered office of the Company has been situated in the State of Maharashtra since the incorporation of the Company. The business of the Company has increased manifold since incorporation particularly in the state of Rajasthan. Directors of the Company too are belonging and residing in Rajasthan. It is expected that such growth trend of business in the State of Rajasthan will be maintained in future.

As the growth of Company’s activities are now emerging in the state of Rajasthan, The Board of Directors are of the opinion that it will be more convenient and economical for the Company to manage the activities efficiently by shifting the Registered office in the state of Rajasthan.

A copy of Memorandum of Association is available for inspection at the Registered Office the Company on all working days of the Company between 11.00 a.m. to 1.00 p.m. up to the date of meeting and at the venue of the meeting for the duration of the Meeting.

The Board commends the passing of the resolution as a Special Resolution. None of the Directors and Key Managerial Personnel (KMP) of the Company or their relatives is concerned or interested in the proposed Resolution.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings Notes

Secretarial Standards
Section 118(10) of the Companies Act, 2013, provides that every company shall observe Secretarial Standards with respect to general and board meeting specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved as such by the Central Government. The Ministry of Corporate Affairs on 10th April, 2015 accorded the approval of the Central Government to the Secretarial Standards (SS) namely

  1. SS-1; Meetings of the Board of Directors and
  2. SS-2 General Meetings

In terms of Section 205(1 )(b), it is the function of the Company Secretary to ensure that the company complies with the applicable Secretarial Standards.

Applicability of SS-1
In terms of sub-section (10) of Section 118 of the Act, every company is required to observe SS-1 except

  1. One Person Companies(OPC)having only one Director on its Board and
  2. Such other class or class of companies which are exempted by Central Government through Notification e.g. companies licensed under Section 8 of the Companies Act, 2013

Exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Financial Statements or Annual Return with the Registrar of Companies.

However, Section 8 companies need to comply with the applicable provisions of the Act relating to Board Meetings.

Applicability to Meetings of the Committees
SS-1 is also applicable to the Meetings of Committee(s) of the Board constituted in compliance with the requirements of the Act. At present, the Act provides for the constitution of following committees of the Board:

  • Audit Committee
  • Nomination and Remuneration Committee
  • Corporate Social Responsibility (CSR) Committee
  • Stakeholders Relationship Committee

In case any other committee of the Board is constituted voluntarily or pursuant to any other statute or regulations etc., the company may comply with SS-1 with respect to meetings of such committee(s) as a good governance practice.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Guidance on the Provisions of SS-1
(i) Convening a Meeting
Authority means who can convene meeting i.e. who shall sign notice of board meeting?
Subject to Articles of Association of a company, Board meeting may be convened by

  • Any Director of a company
  • The Company Secretary or where there is np Company Secretary, any person authorized by the Board in this behalf, on the requisition of a Director.
  • The Company Secretary cannot summon a Meeting on his own, unless authorized by the Board of Directors or the Articles to do so.

(ii) Manner of conducting requisitioned Meeting
Where any Meeting of the Board is called and held on the basis of a requisition by a Director, the provisions of the Act and SS-1 relating to Notice, Agenda, Notes on Agenda, length of Notice and manner of service of Notice and all other applicable provisions have to be complied with.

(iii) Day, Time, Place, Mode and Serial Number of Meeting
It is mandatory for every meeting to have a serial number for ease of reference.
Serial number of the original Meeting and the adjourned Meeting should be the same.

(iv) Day of meeting
Now, Board of Director’s meeting can be convened even on Sunday and national holiday too. Even a meeting of Board of Director’s adjourned for want of quorum can be held on national holiday.

Notice of the meeting
Venue of the meeting: Notice of the Meeting shall clearly mention a venue, whether registered office or otherwise, to be the venue of the Meeting and all the recordings of the proceedings of the Meeting, if conducted through Electronic Mode, shall be deemed to be made at such place. Communication by a Director of his intention to participate through Electronic Mode: A Director intending to participate through Electronic Mode should communicate his intention to the Chairman or the Company Secretary of the company.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Meetings through Electronic Mode: There is no restriction on a company to hold all its Meetings through Electronic Mode provided the company ensures presence of physical Quorum during consideration of any of the restricted items of business and comply with the applicable legal provisions.

Delivery of Notice: Notice in writing of every Meeting shall be given to every Director by hand or by speed post or by registered post or by facsimile or by e-mail or by any other electronic means. Where a director specifies a particular means of delivery of notice, the notice shall be given to him by such means. But, in case of a meeting conducted at a shorter notice, the company may choose an expedient mode of sending notice.

Authority to sign Notice: Notice should be signed by the Company Secretary. If there is no Company Secretary, the Notice should be signed by any Director or any other person who is authorised by the Board to issue Notice.

Essentials of Notice:

  1. The Notice shall specify the serial number, day, date, time and full address of the venue of the Meeting.
  2. The Notice should specify the serial number given to the Meeting, as required under paragraph 1.2.1 of SS-1.
  3. Day and date specified in the Notice should be as per the Gregorian calendar. .

Notice of Requisitioned Meeting: In the case of a requisitioned Meeting, it is advisable to mention in the Notice the fact that the Meeting is being convened on the requisition of a Director.

Notice is mandatory: The Notice of a Meeting shall be given even if meetings are held on pre-determined dates or at pre-determined intervals. Time period for giving Notice: Notice convening a Meeting shall be given at least seven days before the date of the Meeting, unless the Articles prescribe a longer period.

Notice period in the Articles: The company may prescribe a longer Notice period through its Articles, in which case the Articles should be complied with. However, the statutory Notice period of seven days cannot be reduced by the company in its Articles.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Frequency of Meetings
Meetings of the Board: The company shall hold at least four Meetings of its Board in each Calendar Year with a maximum interval of one hundred and twenty days between any two consecutive Meetings. Now, the stricter requirement of holding Board Meeting in every quarter has gone away with. Provisions for One Person Company, Small Company and Dormant Company: Further, it shall be sufficient if a One Person Company, Small Company or Dormant Company holds one Meeting of the Board in each half of a calendar year and the gap between the two Meetings of the Board is not less than ninety days.

If a One Person Company, Small Company or Dormant Company holds only two Meetings in a year, then the gap between the two such Meetings should be minimum 90 days. If more than two Meetings are held in a year where the gap between the first and the last Meeting in a year exceeds 90 ’ days then it would be sufficient compliance of the requirement.

Meetings of Committees: Committees shall meet as often as necessary subject to the minimum number and frequency prescribed by any law or any authority or as stipulated by the Board. For example, the Audit Committee of equity listed company should meet at least four times in a year and not more than one hundred and twenty days should elapse between two Meetings.

Meeting of Independent Directors: Where a company is required to appoint Independent Directors under the Act, such Independent Directors shall meet at least once in a Calendar Year.

However, the MCA vide Notification dated 5 th July, 2017 has clarified that the Independent Directors are required to meet at least once in a financial year.

The independent directors of the company shall hold at least one meeting in a financial year without the attendance of non-independent directors and members of management; [Clause Vll(1) of Schedule IV to the Act].

Quorum
Quorum shall be present throughout the Meeting: In order that a meeting may be properly constituted and the business be validly transacted, Quorum should be present.

Interested Director not to participate in Quorum: An Interested Director should neither participate nor vote in respect of an item in which he is interested, nor such Director be counted for Quorum in respect of such item.

However, such Director may be present in the Meeting during discussions on such item.

However, in case of a private company, a Director shall be entitled to participate in respect of such item after disclosure of his interest.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Attendance at Meetings
Attendance register: Every company shall maintain attendance register for the Meetings of the Board and Meetings of the Committee. The pages of the attendance register shall be serially numbered.

Manner of maintaining attendance register: Attendance may be recorded on separate attendance sheets or in a bound book or register. If an attendance register is maintained in loose-leaf form, it shall be bound periodically, at least once in every three years.

Particulars of attendance register: The attendance register shall contain the following particulars:

  • serial number and date of the Meeting;
  • in case of a Committee Meeting name of the Committee;
  • place of the Meeting;
  • time of the Meeting;
  • names and signatures of the Directors,
  • the Company Secretary

Place of maintaining attendance register: The attendance register shall be maintained at the Registered Office of the company or such other place as may be approved by the Board. The attendance register is open for inspection by the Directors. Even after a person ceases to be a Director, he shall be entitled to inspect the attendance register of the Meetings held during the period of his Directorship.

Chairman
Meetings of the Board: The Chairman of the company shall be the Chairman of the Board. If the company does not have a Chairman, the Directors may elect one of themselves to be the Chairman of the Board.

Appointment of Chairman: For a Meeting to be properly constituted, the Chairman of the Board or a validly elected person should be in the chair. The Act does not provide for appointment of a Chairman of the Meeting but the Model Articles provide that the Board may elect a Chairman of its Meetings and determine the period for which he is to hold office [Regulation 70 (i) of Table F of Schedule I to the Act].

Election of Chairman in the absence of elected chairman: The Chairman of the Board shall conduct the Meetings of the Board. If no such Chairman is elected or if the Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of themselves to chair and conduct the Meeting, unless otherwise provided in the Articles.

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Role of Chairman: The Chairman shall ensure that the required Quorum is present throughout the meeting and at the end of discussion on each agenda item, the Chairman shall announce the summary of the decision taken thereon.

Interested Chairman should vacate the Chair: If the Chairman is interested in an item of business, he shall entrust the conduct of the proceedings in respect of such item to any Non-lnterested Director with the consent of the majority of Directors present and resume the Chair after that item of business has been transacted.

Passing of Resolution by Circulation
The Act requires certain business to be approved only at Meetings of the Board. However, other business that requires urgent decisions can be approved by means of Resolutions passed by circulation. Resolutions passed by circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.

Authority for resolution by circulation: The Chairman of the Board or in his absence, the Managing Director or in their absence, any Director other than an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors, whether the approval of the Board for a particular business shall be obtained by means of a Resolution by circulation.

Minutes
Minutes’ are the official recording of the proceedings of the Meeting and the business transacted at the Meeting. Every company shall keep Minutes of all Board and Committee Meetings in a Minutes Book. Minutes kept in accordance with the provisions of the Act evidence the proceedings recorded therein. There is no restriction in law on the lanquaqe of recordinq Minutes.

Maintenance of Minutes: Minutes shall be recorded in books maintained for that purpose.

A distinct Minutes Book shall be maintained for Meetings of the Board and each of its Committees. A company may maintain its Minutes in physical or in electronic form. Minutes may be maintained in electronic form in such manner as prescribed under the Act and as may be decided by the Board. Minutes in electronic form shall be maintained with Timestamp.

Every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders, may maintain its records in electronic form [Rule 27 of the Companies (Management and Administration) Rules, 2014).

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings - CS Professional Study Material

Consistency in the form of maintaining Minutes: A company shall however follow a uniform and consistent form of maintaining the Minutes. Any deviation in such form of maintenance shall be authorised by the Board.

The pages of the Minutes Books shall be consecutively numbered:
This shall be followed irrespective of a break in the Book arising out of periodical binding in case the Minutes are maintained in physical form so as to facilitate easy retrieval of any decision/Resolution and additionally to safeguard the integrity of the Minutes.

Thus, where a Minutes Book is full and a new Minutes Book is prepared, the numbering should continue from the number appearing on the last page of the previous Minutes Book.

No attachment or pasting is allowed in Minutes: Minutes shall not be pasted or attached to the Minutes Book, or tampered with in any manner.

CS Foundation Fundamentals of Accounting and Auditing Notes | CS Foundation Auditing Notes MCQ Study Material

CS Foundation Fundamentals of Accounting and Auditing Notes | CS Foundation Auditing Notes MCQ Study Material

CS Foundation Fundamentals of Accounting and Auditing Notes: Are you the one who applied for the CS foundation Exam and feeling nervous that you didn’t get your study materials from the ICSI through Courier? If yes, you do not need to worry about them as you have came to the right page. Here we are gonna provide you with a soft copy of some study materials for the CS Foundation Fundamentals of Accounting and Auditing that were provided by ICSI with a new syllabus. Even we have the option to download them free of cost.

Quickly look into this comprehensive guide to see all the study material links that are related to accounting and auditing with some other relatable information. Go on!!!

CS Foundation Auditing Notes | CS Foundation Fundamentals of Accounting and Auditing Notes MCQ Study Material

Look into the below notes that were provided by us for your CS foundation fundamentals of accounting and auditing which were taken from the ICSI official website. Accounting and Auditing are very important subjects for candidates who are studying CA. Download them and prepare well for the exam.

CS Foundation Fundamentals of Accounting Notes

Below are the notes for every chapter in accounting. And this was the revised/new syllabus that was provided by the ICSI (Institute of company secretaries of India) 2023.

Read More:

CS Foundation Fundamentals of Auditing Notes

Here you gonna look at the complete syllabus that was revised by ICSI is provided. Download the study material if you need it or study online well for exams by clicking on the links below.

Safety Tips Needed To Prepare Fundamentals of Accounting and Auditing

Have a look at the below tips and tricks when you are preparing for CS foundation Fundamentals of accounting and auditing. It may help you the best to score good marks in your exam.

  • Start preparing for the exam in advance, not at the nick of the moment.
  • As we have many principles and practices in accounting, you need to practice more than normal.
  • Once you complete the reading of the syllabus, always revise or recall as many times as possible.
  • Try to solve practice papers or model papers daily after the completion of your preparation.

FAQs on CS Foundation Fundamentals of Accounting and Auditing PDF Free Download

1. Does ICSI provide the study material of CS Foundation Fundamentals of Accounting and Auditing?

Yes, ICSI provides the PDF offline & Online study materials along with a free download option for people who are preparing for CS foundation fundamentals of accounting and auditing.

2. What are the 3 fundamentals of accounting?

The three fundamentals of accounting are consistency, accuracy, and going concerned.

3. What are the concepts that we have in auditing?

The concepts that we have in auditing are the concept of auditing, types of auditing, tools of auditing, and basic provisions.

Final Outcome

Hope that the notes we have shared on CS foundation fundamentals of accounting and auditing are useful for you. If you still have any doubts, you can comment to us in the below comment section. Still, we have many other CS foundation, professional and executive links like CS Foundation Study Material, check them out at gstguntur.com website.

ICSI CS Foundation Study Material Notes Pdf Free Download New Syllabus

ICSI CS Foundation Study Material Notes Pdf Free Download New Syllabus

ICSI CS Foundation Study Material: CS Foundation is the first-level company secretary exam. The Institute of Company Secretaries of India will provide the detailed study material and new syllabus for the Foundation Programme. Interested aspirants who have filled out the CS Foundation Application Form 2023 can download the CS Foundation New Syllabus 2023 here. Along with the Revised ICSI CS Foundation Syllabus, we have also given the books and ICSI CS Foundation Study Material to you.

CS Foundation New Syllabus Study Material | CS Foundation Revision Notes Pdf Free Download

Have you applied for the ICSI CS Foundation Exam 2023? If yes, then here is the revised CS Foundation Study Material 2023. Click on the below links to download chapter wise ICAI CS Foundation Study Material 2022-2023 Pdf. Here given CS Foundation Notes includes CS Foundation MCQ with Answers Pdf, Chapter Wise Important Questions and Answers.

Subjects of CS Foundation – CS Foundation Subjects – CS Foundation Syllabus

The revised/ new syllabus of CS Foundation is provided here. Get the names of the subjects and model papers.

CS Foundation Subjects
Foundation Programme [4 papers]( New Syllabus – w.e.f. 1st April 2017 )
1. BUSINESS ENVIRONMENT AND LAW
2. BUSINESS MANAGEMENT, ETHICS & ENTREPRENEURSHIP
3. BUSINESS ECONOMICS
4. FUNDAMENTALS OF ACCOUNTING AND AUDITING
Executive Programme [8 first 4 pappapers] ( New Syllabus – w.e.f. 1st Mar 2018 )
Module I
(4papers)
1. JURISPRUDENCE, INTERPRETATION & GENERAL LAWS
2. COMPANY LAW
3. SETTING UP OF BUSINESS ENTITIES AND CLOSURE
4. TAX LAWS
Module II
(4 papers)
5. CORPORATE & MANAGEMENT ACCOUNTING
6. SECURITIES LAWS & CAPITAL MARKETS
7. ECONOMIC, BUSINESS AND COMMERCIAL LAWS
8. FINANCIAL AND STRATEGIC MANAGEMENT

CS Foundation Books

ICSI will conduct the CS foundation exam in 12 papers. The first 4 papers are the foundation programme, and the remaining 8 papers are the executive programme. Candidates have to buy these particular books specified by ICSI and prepare for the exams.

Steps to Download CS Foundation Study Plan

Here given are the simple steps to download ICSI CS Foundation Studt Material.

  • Initially, go to The Institute of Company Secretaries of India (ICSI) official portal https://icsi.edu/home/
  • Check for the new syllabus option on the homepage.
  • Open the www.icsi.edu/new-syllabus/ link.
  • Click on the Study Material link.
  • Now press on the “Foundation Programme” link to see the four papers of the exam.
  • Download every paper and prepare.

Ultimate Preparation Tips for CS Foundation Exam 2023

Individuals who want to clear the Compay Secretary Exam on the first attempt can go through these simple preparation tips.

  • As a first step, you have to collect the best and proper books that include CS Foundation Study Material.
  • After gathering the new syllabus, decide whether you want to go for coaching or self-study.
  • Mark the important topics and concentrate more on them. Regularly take the exams.
  • Practice all the topics without fail.
  • Plan a schedule that contains the amount of time you have to spend on your studies daily.
  • Follow the plan and prepare according to it.
  • Revise the topics after the completion of preparation.
  • Do a quick revision before the exams.
  • Try to attempt the exam smartly.

Also, Refer

FAQs on ICSI CS Foundation Study Material

1. What is the CS Foundation exam for?

CS foundation exam is conducted by ICSI for candidates who want to pursue a company secretary course after their 12th class. They have to register for the CSEET exam.

2. Which books are best for CS Foundation?

The list of books that are best for the CS foundation is Business Laws and Management, Mercantile Law, A textbook of Business Law, and Business Studies.

3. Does ICSI provide study material for CS Foundation?

Yes, ICSI provides study material for the CS foundation exam.

4. How to prepare for the CS Foundation exam?

Follow these guidelines to prepare for the CS Foundation exam.

  • Get the study material that includes the syllabus and books.
  • Start preparing each topic individually.
  • Make a proper preparation plan as per your requirements.
  • Follow the plan and complete preparing all topics.
  • Revise the concepts before the exam.

Final Words

We are thinking that the information given here about CS Foundation Study Material and Notes is helpful for the students who are preparing for the CS Foundation 2023 examination. You can check the preparation tricks, syllabus, and books on this page. Bookmark our site to know related information.

Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes

Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes

Go through this Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes

Introduction:

  • Bank A/c is a personal A/c.
  • An institution which deals with money is known as Bank.
  • The main business of bank is to accept deposits and lend money.

Services of Banks:

  • Accept deposits
  • Give loans
  • Discounts promissory notes, etc.
  • Make payment of premium, etc. on behalf of client
  • Allow overdrafts
  • Issues letter of credits and many other functions
  • Collects money and make Payment on behalf of clients.

Bank Account is a personal account of the clients.

Types of Personal Accounts:

  • Current Account
  • Savings Account
  • Fixed Deposit Account
  • Recurring Deposit Account

Current Account:

  • These accounts are opened by business concerns.
  • The deposits and withdrawals from the accounts can be done as many number of times as required and can be withdrawn without notice.
  • Generally, they have very low interest rate on deposits.
  • It provides overdraft facilities to its customers.
  • Bank credits Client’s A/c when collection is made and debits when making payment.

Overdraft:
Overdraft is a facility where by a customer is allowed to draw more than the amount deposited in his account.

Saving Account:

  • These accounts are opened by individuals who wish to save their income.
  • It imposes restrictions on the amount and number of withdrawals that can be made.
  • Not for business concern but for Individual or Institution which do not need withdrawals very often.
  • Number of transactions are less as compared to current account.
  • Bank allows a small rate of interest on such deposits.

Fixed Deposit Account:

  • Here the money is to be deposited for a particular period of time before which it cannot be withdrawn.
  • The bank pays the highest interest rate on such deposits.
  • Fixed deposit is evidenced by a receipt called “Fixed Deposit Receipt”’issued by bank in the name of Depositor.

Recurring Deposit Account:

  • Here, a fixed amount of money is deposited every month for a fixed period time.
  • Bank pays interest on such deposits compounded quarterly at a fixed rate.

Bank Pass Book:

  • Pass book is a copy of the clients account in the bank’s ledger.
  • Pass book is issued to the client.
  • It shows all the transactions entered between the client and the bank.
  • The bank balance as per the bank ledger indicated in the bank pass book is called bank balance as per pass book.

Pass Book and Cash Book:

  • Pass book is maintained by bank whereas cash book is maintained by customer.
  • In pass book, transactions are recorded from the point of view of bank whereas in cash book they are recorded from point of view of client.
  • Entries done in the cash book are exactly opposite to that posted in pass book.

Example:

  • Mr. A deposited ₹ 4,000 in bank.
  • Mr. A withdrew ₹ 2,000.

The above transaction will be shown in cash book and pass book as follows:
1. Debit balance of cash book = Credit balance of pass book
2. Credit balance of cash book = Debit balance of pass bookBank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes 1
Generally, the above is always true but sometimes, there is a difference between them, to trace these differences between balances of pass book and cash book a Bank Reconciliation Statement is prepared.

Bank Reconciliation Statement:

  • A bank reconciliation statement is a statement which is prepared to reconcile the balance as per cash book with the balance as per pass book.
  • It shows the causes of differences between the two.
  • Bank Reconciliation Statement (BRS) is prepared at a particular date.

BRS:

  • BRS is a statement.
  • It is prepared on a particular date to reconcile the bank balance as per cash book with the balance as per pass book by showing the causes of difference between the two.

Causes of difference in Bank Balance of Cash Book and Pass Book:

Reasons Effect on Cash Book / Pass Book
Cash Book Pass Book
1. Cheque issued but not presented for payment lower than PB No effect
2. Cheque Paid / Sent to bank for collection but not collected more than PB No effect
3. Interest & Dividend received by Bank No effect More than CB
4. Direct deposits made by customers No effect More than CB
5. Direct payment made by bank No effect Less than CB
6. Interest credited by bank on account No effect More than CB
7. Interest Debited by bank on overdraft No effect Less than CB
8. Bills collected by bank No effect More than CB
9. Dishonour of bill discounted by bank No effect Less than CB
10. Dishonour of a cheque deposited with bank More than PB No effect
11. Any Error and omission Retrospective effect Retrospective

Significance of BRS:

  • Highlights causes of difference, necessary adjustment can therefore be carried out at early date.
  • Reduce chances of fraud.
  • Act as a moral check.
  • Actual position of bank balance can be found.

Methods for BRS:

  • Bank Reconciliation Statement without adjusting CB
  • Bank Reconciliation Statement after adjusting CB

(i) Proforma of BRS without adjusting Cash Book : BRS (as on../…/….)

Particulars Amount ₹
Balance as per Pass Book / Cash Book (Dr./Cr.)
Add:
(a)
(b)
(c)
(d)
Sub:
(a)
(b)
(c)
(d)
…………………….

Balance as per Cash Book / Pass Book (Cr./Dr.)

(ii) BRS with adjusted Cash Book : under this method we make two things:
1. Adjusted Cash book: In adjusted cash book we record only those transaction which have an impact over cash (i.e. increase or decrease) and are correct. Correctly recorded transaction have no need to be adjusted.

Adjusted Cash book neglect following transactions:

  • Cheque issued but not presented
  • Cheque sent to bank but not collected
  • Any mistake by bank

2. BRS : Items which are not considered in adjusted cash book are considered in BRS.

Preparation of Bank Reconciliation Statement:
Step 1 : Start preparing BRS by taking any one balance (either of cash book or pass book).

Note :
There can be four types of balances :

  • Debit balance of cash book (Favourable)
  • Credit balance of cash book (Unfavourable)
  • Debit balance of pass book (Unfavourable)
  • Credit balance of pass book (Favourable)

Step 2 : Ascertaining and treating the causes of difference
Case – 1 : Starting with favourable balance of cash book (Dr. balance)
(i) Items of differences which have led to decreased cash book balance – Add them
Example : Cheque issued but not presented for payment. This amount would have been deducted from cash book and not from pass book hence it has led to decreased cash book balance. So it will be added.

(ii) Items of differences which have led to increased cash book balance. – Deduct them
Example: Cheques deposited but not collected. When cheque was deposited, entry would have been in cash book but since they are not collected no entry has been made in pass book. This has led to an increased cash book balance so it is deducted, in order to bring it equal to pass book.

Case – 2 : Starting with unfavourable balance or bank overdraft balance of cash book (credit balance)
(i) Items of differences which have led to increased overdraft Cash Book balance – Deduct them.
Example : Cheques issued but not presented for payment – Entry must have been done in cash book and due to this overdraft balance must have been increased. So, it is deducted.

(ii) Items of differences which have led to decreased overdraft cash book balance — Add them.
Example : Cheques deposited but not yet cleared. Entry has been done in cash book but not in pass book. This means credit balance of cash book would have been reduced, so this item is added.

Case – 3 : Starting with favourable balance of pass book (credit balance)
(i) Items of differences that have led to increased pass book balance – Deduct them
Example : Cheques issued but not presented for payment. Entry has been done in cash book so cash book is showing a reduced balance. No entry done in pass book so pass book is showing increased balance. In order to bring pass book balance equal to cash book, deduct this amount.

(ii) Items of differences that have led to reduced pass book balance – Add them
Example : Cheques deposited but not collected by bank. Entry is made in cash book so it shows an increased balance but no entry has been made in pass book, so pass book balance shows a reduced figure. So, add this item to the pass book credit balance.

Case – 4 : When unfavourable balance as per pass book is given (Debit balance)
(i) Items of differences that have led to increased overdraft (unfavourable) pass book balance – deduct them
Example : Interest charged. This entry would have been done by the bank. So, the overdraft balance of the pass book would have been increased but no entry of it has been done in the cash book so deduct this from pass book balance.

(ii) Items of differences that have led to decreased pass book overdraft balance – Add them
Example : Dividend collected by bank. This entry has been done in pass book so it has reduced overdraft balance. But no such entry is in cash book yet, so this item is added to the pass book balance to bring it equal to cash book balance.

Summary of Bank Reconciliation Statement:
1. Preparation of BRS when favourable balance is given:

Transactions if starting with
bal. as per
Pass Book
if starting
with bal. as
per Cash Book
Cheque issued but not presented
Cheque deposited but not yet collected
Cheque received but not deposited
Dishonour of cheques (sent for collection)
Collection of interest, dividend, direct deposits, Bills
Bank charges, interest on overdraft charged
Dishonor of Bill discounted
Balance
Deduct
Add
Add
Add
Deduct
Add
Add
Bank balance
as per Cash
book
Add
Deduct
Deduct
Deduct
Add
Deduct
Deduct
Bank
balance as
per Pass book

Note: In case of overdraft balance the treatment will be reverse.

Bank Reconciliation Statement MCQ Questions

1. A bank reconciliation statement is prepared to :
(a) Establish the causes of the difference between the balance shown by the bank columns of the cash book and that shown by the pass book.
(b) Ascertain the causes for the difference between the cash balance and the pass book balance.
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Establish the causes of the difference between the balance shown by the bank columns of the cash book and that shown by the pass book.

2. Difference in bank balance as per pass book and cash book may arise on account of:
(a) Cheque issued and presented
(b) Cheque issued but dishonoured
(c) Cheque deposited but not cleared
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

3. Pass book is the statement of the account of the customer maintained by the:
(a) Bank
(b) Debtors
(c) Creditors
(d) Any one of the above.
Answer:
(a) Bank

4. Debit balance in the cash book is :
(a) Debit balance as per pass book
(b) Credit balance as per pass book
(c) Debit balance as per cash book
(d) Credit balance as per cash book.
Answer:
(b) Credit balance as per pass book

5. Bank reconciliation statement is a part of:
(a) Cash book
(b) Ledger
(c) Financial statement
(d) None of the above.
Answer:
(d) None of the above.

6. Started with cash book balance, interest charged on overdraft by bank is :
(a) Added
(b) Subtracted
(c) No effect
(d) Added twice.
Answer:
(b) Subtracted

7. An amount of ₹ 5,000 is debited twice in the bank column of cash book. When credit balance as per pass book is taken as starting point, what will be done?
(a) Add ₹ 5,000 to balance as per pass book
(b) Subtract ₹ 5,000 from balance as per pass book
(c) Add 10,000 to balance as per pass book
(d) Subtract ₹ 10,000 from balance as per pass book.
Answer:
(a) Add ₹ 5,000 to balance as per pass book

8. Overdraft bank balance as shown by the cash book is ₹ 6,000. A cheque for ₹ 10,400 was deposited to bank but omitted in the cash book. In the pass book the amount is wrongly entered in the withdrawal column. Overdraft balance as per pass book:
(a) 16,400
(b) 16,000
(c) 15,900
(d) 13,050.
Answer:
(a) 16,400

9. Unfavourable balance as per pass book means :
(a) Debit balance in pass book
(b) Credit balance in pass book
(c) Bank overdraft
(d) (a) and (c).
Answer:
(d) (a) and (c).

10. Cash at bank as shown by cash book ₹ 75,000. Cheque drawn but not presented ₹ 5,000. Cheque paid into bank but not yet credited, ₹ 1,900. Bank charges not yet entered in cash book ₹ 100 find balance as per pass book.
(a) 82,000
(b) 78,000
(c) 75,000
(d) 72,000
Answer:
(b) 78,000

11. When balance as per pass book is taken, interest allowed by bank is :
(a) Added
(b) Subtracted
(c) No Effect
(d) None.
Answer:
(b) Subtracted

12. Overdraft as per cash book means :
(a) Credit balance in the pass book
(b) Credit balance in the bank column of the cash book
(c) Debit balance as per pass book
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

13. The bank statement shows an overdraft balance of ₹ 4,000. A cheque for ₹ 1,000 drawn in favour of a creditor has not yet been presented for payment. When the creditor presents the cheque for payment, the bank balance will be :
(a) ₹ 3,000
(b) ₹ 5,000
(c) ₹ 3,000 (overdraft)
(d) ₹ 5,000 (overdraft)
Answer:
(d) ₹ 5,000 (overdraft)

14. Bank pass book is a :
(a) Copy of customer’s account in bank books
(b) Bank column of cash book
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Copy of customer’s account in bank books

15. The bank pass book showed ₹ 5,000 but the cash book shows a different balance. While analysing the cause of difference, it was noticed that total of debit side of cash book was carried forwarded to next page as ₹ 1,901 instead of 190. What would be the balance as per cash book:
(a) r 6,901
(b) ₹ 6,711
(c) ₹ 1,540
(d) ₹ 6,801
Answer:
(b) ₹ 6,711

16. Any wrong entry on debit side of the pass book :
(a) Will differ the balances of pass book and cash book.
(b) Will have no effect in the books
(c) Only cash book will be effected
(d) None of the above.
Answer:
(a) Will differ the balances of pass book and cash book.

17. Bank charges recorded twice in the cash book will be added to the overdraft of in the preparation of the bank reconciliation statement.
(a) Passbook
(b) Cash book
(c) Purchase book
(d) Sales book.
Answer:
(a) Passbook

18. If transaction of different months in the cash book are given, the transactions will appear in BRS.
(a) Common
(b) Uncommon
(c) All
(d) None.
Answer:
(a) Common

19. The cash book showed an overdraft of ₹ 1,500 as cash at bank, but the pass book made up to the same date showed that cheques of ₹ 100, ₹ 50 and ₹ 125 respectively had not been presented for payments; and the cheque of ₹ 400 paid in to account had not been cleared. The balance as per the cash book will be.
(a) ₹ 1,100
(b) ₹ 2,175
(c) ₹ 1,625
(d) ₹ 1,375.
Answer:
(c) ₹ 1,625

20. When drawing up a Bank Reconciliation Statement, if you start with a debit balance as per the Bank Statement, the unpresented cheques should be:
(a) Added;
(b) Deducted;
(c) Not required to be adjusted
(d) None of the above.
Answer:
(a) Added;

21. A debit balance in the depositor’s cash book will be shown as :
(a) A debit balance in the bank statement
(b) A credit balance in the bank statement
(c) An overdraft balance in bank statement
(d) None of the above.
Answer:
(b) A credit balance in the bank statement

22. The difference in the balances of both the cash-book and the pass – book can be because of:
(a) Errors in recording the entries either in the cash-book or pass-book.
(b) Same entry recorded in either of the book earlier and in the other book later.
(c) Debit balance of cash book is the credit balance of pass-book
(d) None of the above.
Answer:
(a) Errors in recording the entries either in the cash-book or pass-book.

23. Payment done by the account holder through issuing a cheque is entered in:
(a) The pass-book at the time of issuing the cheque
(b) The cash-book at the time of presenting the cheque to the bank for payment
(c) The pass-book at the time of presenting the cheque to the bank for payment
(d) The cash-book at the time of issuing the cheque
Answer:
(c) The pass-book at the time of presenting the cheque to the bank for payment

24. Direct payment to third party by the bank on behalf of the account holder is entered in:
(a) The cash – book when the amount is paid by the bank
(b) The cash – book when the entry is posted in the pass – book
(c) The pass – book when the amount is paid by the bank
(d) The pass – book when the entry is posted in the pass – book
(e) (a) and (d)
(f) (b) and (c).
Answer:
(f) (b) and (c).

25. When favourable balance as per cash book is the starting point, wrong debit given by the bank to the firm’s account will be ________.
(a) Added
(b) Deducted
(c) No effect
(d) None of these.
Answer:
(b) Deducted

26. The credit balance of ₹ 1,000 in the bank column of the cash book was carried forward as its debit balance. When overdraft as per pass book is the starting point:-
(a) ₹ 1,000 will be deducted
(b) ₹ 1,000 will be added
(c) ₹ 2,000 will be deducted
(d) ₹ 2,000 will be added.
Answer:
(c) ₹ 2,000 will be deducted

27. When overdraft as per pass book is the starting point, bank charges of ₹ 100 recorded twice in cash book will be:
(a) Added by ₹ 100
(b) Added by ₹ 200
(c) Deducted ₹ 100
(d) Deducted by ₹ 200.
Answer:
(a) Added by ₹ 100

28. When the overdraft as per cash book is the starting point, a cheque of ₹ 500 deposited into bank but not recorded in cash book will be:
(a) Added by ₹ 500
(b) Deducted by ₹ 500
(c) Added by ₹ 1,000
(d) Deducted by ₹ 2,000.
Answer:
(b) Deducted by ₹ 500

29. Debit balance as per cash book is ₹ 2,000, cheques deposited but not cleared amounts to ₹ 100 and cheques issued but not presented of ₹ 150. The bank allowed interest amounting ₹ 50 and collected divided ₹ 50 balance as per pass book should be:
(a) ₹ 2,100
(b) ₹ 1,950
(c) ₹ 2,350
(d) ₹ 2,150.
Answer:
(d) ₹ 2,150.

30. The cash book showed an overdraft of ₹ 2,000 as cash at bank, but the pass book made up the same date showed that cheques of ₹ 150 and ₹ 125 respectively had not been presented for payment; and the cheque of ₹ 400 paid into account had not been cleared. The balance as per pass book will be:
(a) ₹ 1,600
(b) ₹ 2,675
(c) ₹ 2,125
(d) ₹ 1,875.
Answer:
(c) ₹ 2,125

31. The balance shown by bank column of cash book was ₹ 48,000 on 31.1.98. A Cheque issued worth ₹ 24,000 on 16th Jan was not cleared till 31st Jan. Cheque worth ₹ 10,000 received on 20th Jan. and deposited on 21s1 Jan. was cleared on 27-1 -98. The balance as per pass book as on 31st January (assuming opening balance of pass book and cash book are equal) is:
(a) ₹ 14,000
(b) ₹ 24,000
(c) ₹ 72,000
(d) ₹ 82,000.
Answer:
(c) ₹ 72,000

32. On 31st March, 2007 Ram Kumar Gupta’s pass book showed a credit balance of ₹ 10,300. A comparison of the entries with the cash book revealed that he had paid in cheques amounting to ₹ 1,200 on 27th March 2007, which were not credited in his account. He had issued a cheque amounting to ₹ 1,500 before 31s1 March 2007 which were not presented for payment during the month. There was a debit of ₹ 25 in the pass book in respect of bank charges and a credit of ₹ 35 for interest on current account. Prepare bank reconciliation statement (balance as per pass book) as on 31st March, 2007.
(a) ₹ 12,025
(b) ₹ 9,990
(c) ₹ 10,490
(d) ₹ 10,940.
Answer:
(b) ₹ 9,990

33. A bank statement at 31.01.2007 showed a balance of ₹ 1,000 (Dr.) The following did not appear on the statement:
(i) Cheques not presented for payment ₹ 230
(ii) A cheque for ₹ 400 banked on 31.1.2007
(iii) Bank charges of ₹ 200 had not been entered in the cash book What was the original balance in the cash book at 31.1.2007, before it was amended?
(a) ₹ 630 (Cr.)
(b) ₹ 630 (Dr.)
(c) ₹ 970 (Cr.)
(d) ₹ 970 (Dr.)
Answer:
(a) ₹ 630 (Cr.)

34. Your firm’s bank statement on 31.10.2006 shows a balance of ₹ 13,400. You subsequently discover that the bank has dishonoured a customer’s cheque for ₹ 300 and has charged bank charges of ₹ 50, neither of which is recorded in your cash book. There are unpresented cheques totalling ₹ 1,400. You further discover that an automatic receipt from a customer of ₹ 195 has been recorded as credit in your cash book. Your cash book, prior to correcting the errors and omission was:
(a) ₹ 11,455
(b) ₹ 11,960
(c) ₹ 12,000
(d) ₹ 12,155.
Answer:
(b) ₹ 11,960

35. Who said this statement “All the money’s kind of sitting in a bank account”:
(a) Karl Pearson
(b) Alex Tew
(c) Luco Pacoli
(d) Philip Kotler
Answer:
(b) Alex Tew

36. ________ is a tool for such comparison and arriving at the causes and amount of difference between the two, if any.
(a) Fund flow statement
(b) Cash flow statement
(c) Bank reconciliation statement
(d) None of the above
Answer:
(c) Bank reconciliation statement

37. Same pay-in-slips are filled for outstation cheques:
(a) True
(b) False
(c) True, in case of saving account
(d) True, in case of current account
Answer:
(b) False

38. When deposits are made, form is filled ________.
(a) Account opening form
(b) TDS forms
(c) Preparation of draft form
(d) Pay-in-slips
Answer:
(d) Pay-in-slips

39. A Bank Reconciliation statement is:
(a) A part of pass book
(b) A statement prepared by bank
(c) Cash book relating to cash column
(d) A statement prepared by customer
Answer:
(d) A statement prepared by customer

40. Which of these types of errors are not detected during Bank Reconciliation?
(a) Cash embezzlement by cashier
(b) Cheques deposited but not credited by bank
(c) Casting mistakes in bank column of cash book
(d) Interest or commission charged by the bank not accounted in cash book
Answer:
(a) Cash embezzlement by cashier

41. Balance as per cash book is ₹ 5,000. Cheques issued but not presented for payment ₹ 2,000 and cheques sent for collection but not collected ₹ 1,500. The Bank had wrongly debited the account of firm by ₹ 20. Balance as per pass book will be:
(a) ₹ 5,580
(b) ₹ 5,480
(c) ₹ 4,520
(d) ₹ 5,520
Answer:
(b) ₹ 5,480

42. Balance shown by:
Cash Book ₹ 10,000
Cheques issued but not Presented for payment ₹ 4,000
Cheques deposited but not yet collected ₹ 3,000
Balance as per Pass Book will be:
(a) ₹ 9,000
(b) ₹ 10,000
(c) ₹ 11,000
(d) None
Answer:
(c) ₹ 11,000

43. In arriving at adjusted cash balance which of the following is not taken into account?
(a) Amount deposited by our customer directly in our account
(b) Errors in the cash book
(c) Errors in the pass book
(d) All of these
Answer:
(a) Amount deposited by our customer directly in our account

44. If balance as per Pass Book is the starting point, then uncollected cheques are:
(a) Added in BRS
(b) Subtracted in BRS
(c) Ignored while preparing BRS
(d) None of these
Answer:
(a) Added in BRS

45. On 31.03.09, the balance of the cash book is ₹ 7,074 (credit) and Balance as per Bank statement is ₹ 3,159 (debit). On scrutiny, it was found that the difference was due to cheques issued but yet not presented for payment. The Bank Balance as on 31.03.09 to be shown in Balance Sheet is:
(a) As Bank overdraft ₹ 3,159
(b) As Cash at bank ₹ 7,074
(c) As Bank overdraft ₹ 7,074
(d) As Cash at bank ₹ 3,159
Answer:
(c) As Bank overdraft ₹ 7,074

46. A trader issued cheques worth ₹ 7,800 out of which cheques worth ₹ 6,500 only presented into Bank then, on reconciling the Cash Book with the Pass Book, the amount to be added will be:
(a) ₹ 1,300
(b) ₹ 7,800
(c) ₹ 6,500
(d) ₹ 14,300
Answer:
(a) ₹ 1,300

47. When money is withdrawn from bank, the bank:
(a) Credits customer’s a/c
(b) Debits customer’s a/c
(c) Credits and Debits customer’s a/c
(d) None of these
Answer:
(b) Debits customer’s a/c

48. Sunita, a customer of Digvijay deposited ₹ 1,000 directly in his Bank A/c. For this Sunita will debit the a/c of:
(a) Sunita
(b) Digvijay
(c) Cash
(d) None of these
Answer:
(d) None of these

49. The account in which fixed amount is deposited every month is called:
(a) Current Account
(b) Savings Account
(c) Fixed Deposit Account
(d) Recurring Deposit
Answer:
(d) Recurring Deposit

50. The form used for depositing money in bank is called as:
(a) Pay in slip
(b) Deposit form
(c) Credit slip form
(d) Cash deposit papers
Answer:
(a) Pay in slip

51. If the balance as per cash book is ₹ 25,000 and cheques of ₹ 10,000 were issued but were not presented for payment then, the balance as per pass book will be:
(a) ₹ 25,000
(b) ₹ 35,000
(c) ₹ 15,000
(d) ₹ 50,000
Answer:
(b) ₹ 35,000

52. If the cash book shows an overdraft of ₹ 12,000 and cheque of ₹ 2,000 were issued but not presented for payment and a cheque of ₹ 1,000 deposited in bank was not cleared then, the balance as per pass book will be:
(a) ₹ 10,000
(b) ₹ 9,000
(c) ₹ 14,000
(d) ₹ 11,000
Answer:
(d) ₹ 11,000

53. If the overdraft as per cash book is ₹ 2,000 and the bank deducts bank charges of ₹ 100 and also credits ₹ 500 as bank interest, then the balance as per pass book will be:
(a) ₹ 2,600
(b) ₹ 1,400
(c) ₹ 1,900
(d) ₹ 1,600
Answer:
(d) ₹ 1,600

54. Unfavourable bank balance means:
(a) Credit balance in cash book
(b) Credit balance in pass book
(c) Debit balance in cash book
(d) None of the above.
Answer:
(a) Credit balance in cash book

55. Overdraft as per cash book means:
(a) Debit balance in cash book
(b) Credit balance in pass book
(c) Credit balance in cash book
(d) None of the above.
Answer:
(c) Credit balance in cash book

56. Bank Reconciliation Statement is:
(a) Prepared by customers
(b) Prepared by Bank
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Prepared by customers

57. A Bank Reconciliation Statement is prepared to know the causes for difference between:
(a) Balance as per cash column of cash book & pass book
(b) Balance as per bank column of cash book and pass book
(c) Balance as per cash column and bank column of cash book
(d) None of these
Answer:
(b) Balance as per bank column of cash book and pass book

58. Bank Balance shown in Trial Balance is:
(a) Balance as per pass book
(b) Balance as per cash book
(c) Balance as per sales book
(d) Both (a) and (b)
Answer:
(b) Balance as per cash book

59. When money is withdrawn from bank, then the bank will:
(a) Credit customers A/c
(b) Debit customers A/c
(c) Both (a) and (b)
(d) None of the above.
Answer:
(b) Debit customers A/c

60. When the balance as per pass book is the starting point, direct payment made by the bank will be:
(a) Added in bank reconciliation statement
(b) Subtracted in bank reconciliation statement
(c) No adjustment is required
(d) None of the above.
Answer:
(a) Added in bank reconciliation statement

61. When balance as per cash book is the starting point, cheques uncollected by the bank will be:
(a) Added in bank reconciliation statement
(b) Subtracted in bank reconciliation statement
(c) No adjustment will be made
(d) None of these.
Answer:
(b) Subtracted in bank reconciliation statement

62. If the balance as per cash book is ₹ 50,000 and it is undercasted by ₹ 12,000. Also cheques of ₹ 20,000 deposited in bank were dishonoured, then the balance as per pass book will be:
(a) ₹ 32,000
(b) ₹ 58,000
(c) ₹ 82,000
(d) ₹ 42,000
Answer:
(d) ₹ 42,000

63. If the balance as per cash book is 20,000 and cheques of ₹ 3,000 deposited in bank are not yet collected and cheques issued of ₹ 2,000 were not presented for payment then, the balance as per pass book will be:
(a) ₹ 19,000
(b) ₹ 21,000
(c) ₹ 25,000
(d) ₹ 15,000
Answer:
(a) ₹ 19,000

64. Who prepares Bank Reconciliation Statement?
(a) Bank employee
(b) Customer of bank or his representative or his accountant
(c) Both (a) and (b)
(d) None of the above.
Answer:
(b) Customer of bank or his representative or his accountant
Bank Reconciliation Statement is prepared by businessman or customer of bank or his representative or his accountant. Bank Reconciliation Statement is a statement prepared as on a particular date to reconcile. The bank balance as per cash book with balance as per pass book by showing all causes of difference between the two.

65. For the purpose of bank reconciliation statement, only the column of the cash book is to be considered.
(a) Cash
(b) Bank
(c) Cash and Bank
(d) Discount
Answer:
(b) Bank
Bank Reconciliation Statement is a statement prepared as on a particular date to reconcile the bank balance as per cash book with balance as per pass book. Thus, for the purpose of bank reconciliation statement, only the bank column of the cash book is to be considered.

66. Bank balance as per cash book of ABC Enterprises as on 31st March, 2013 is ₹ 1,500. Cheques deposited with bank but not cleared amount to ₹ 100 and cheque issued.but not presented for payment amount to ₹ 150. The bank allowed interest amounting to ₹ 50 and collected dividend ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1,600
(b) ₹ 1,450
(c) ₹ 1,850
(d) ₹ 1,650
Answer:
(d) ₹ 1,650
Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes 2

67. Which of the following is true about bank reconciliation statement ________.
(a) Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches
(b) Bank reconciliation statement is to be prepared necessarily as per the Income tax Act, 1961
(c) Bank reconciliation statement is prepared on yearly basis
(d) Bank reconciliation statement is to be prepared and supplied by bank.
Answer:
(a) Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches.
On a particular date when businessman find that bank balance of cash book and bank balance as per pass-book do not tally, he makes efforts for their reconciliation. The reconciliation is prepared and presented in the form of a statement generally known as Bank Reconciliation Statement. Where the balance of cash book and pass book matches, Bank Reconciliation Statement need not to be prepared.

68. Cash book shows Dr. balance ₹ 10,000, cheque issued ₹ 4,000 and cheques presented ₹ 3,000. Calculate the balance as per pass book.
(a) 13,000
(b) 7,000
(c) 6,000
(d) 10,000.
Answer:
(b) 7,000

Balance as per cash book 10,000
Less : Cheque issued (4,000)
Add : Cheque issued but not presented 1,000
Balance as per pass book 7,000

69. If the cheque is not presented for the payment upto the date of the preparation of the Bank Reconciliation Statement then the balance as per pass book will be:
(a) Higher than the balance shown by the cash book by the amount of unpresented cheque.
(b) Same as shown by the cash book
(c) Twice the balance shown by the cash book
(d) Lower than the balance shown by the cash book by the amount of unpresented cheque
Answer:
(a) Higher than the balance shown by the cash book by the amount of unpresented cheque.
When a cheque is drawn or issued in favour of a third party, it is immediately recorded in the cash book by debiting the party and crediting the bank and this has the effect of reducing the bank balance in the cash book. But the bank will not debit client’s account until that cheque is presented for payment and honoured.

So long as it is not presented, the balance shown in the pass book is more than the balance shown by the cash book. So, the option (a) is correct. The balance as per pass book will be higher than the balance shown by the cash book by the amount of unpresented cheque.

70. The pass book shows an overdraft of ₹ 2,000. It was discovered that cheques of ₹ 200, ₹ 40 and ₹ 37 respectively has not been presented for payments and a cheque of ₹ 100 paid into account had not been cleared. The balance as per the cash book will be:
(a) ₹ 2,177 (Cr.)
(b) ₹ 1,977 (Cr.)
(c) ₹ 1,977 (Dr.)
(d) ₹ 2,177 (Dr.)
Answer:
(d) ₹ 2,177 (Dr.)
Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes 3

71. Bank Balance as per cash book of ABC Enterprises as on 31st March, 2013 is ₹ 1,500 cheques deposited with bank but not cleared amount to ₹ 100 and cheques issued but not presented for payment amount to ₹ 150. The bank allowed interest amounting ₹ 50 and collected dividend ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1,600
(b) ₹ 1,850
(c) ₹ 1,450
(d) ₹ 1,650
Answer:
(d) ₹ 1,650

(₹)
Dr. Bal as per cash book 1,500
Cheque deposit but not cleared -100
Cheque issued but not presented +150
interest allowed by bank + 50
Dividend collected by bank + 50
1,650

72. A credit balance in the bank statement indicates:
(a) Cash at bank
(b) Cash in hand
(c) Bank overdraft
(d) Over payment to creditors.
Answer:
(a) Cash at bank
Credit balance in bank statement indicates positive balance which means cash balance in account.

73. If cash book balance (Dr.) is given then dividend collected by bank is:
(a) Added on Dr. side of cash book
(b) Added on Cr. side of cash book
(c) Subtracted in cash book
(d) None of the above
Answer:
(a) Added on Dr. side of cash book
A banker may receive amounts due to the customer by way of dividends, rent, interest etc. directly from the persons concerned on account of standing instruction of the customers to such person. The bank credit the account of customer and same will be added in the Dr. side of cash book.

74. Cash Book (Dr.) Balance is ₹ 54,000. If cheque ₹ 5,000 issue but not presented for payment. What will be the effect in cash book:
(a) Added
(b) Subtracted
(c) Add ₹ 5,000
(d) Subtracted ₹ 5,000
Answer:
(d) Subtracted ₹ 5,000
When a cheque is drawn or issued in favour of a third party, it is immediately recorded in the cash book by debiting the party and crediting the bank and this has effect of reducing the bank balance in the cash book. The cash book balance will be substracted by 5,000.

75. Dr. Balance of cash book ₹ 20,000, cheque issued but not presented for payment ₹ 5,000, cheques collected but not yet credited ₹ 4,000. What is the balance as per pass book:
(a) ₹ 21,000
(b) ₹ 15,000
(c) ₹ 25,000
(d) ₹ 5,000
Answer:
(a) ₹ 21,000

Dr. Balance as per cash book 20,000
(i) Cheque issued but not presented for payment + 5,000
(ii) Cheque collected but not yet presented – 4,000
Cr. Balance as per pass book 21.000

Thus, the option (a) i.e. ₹ 21,000 is the answer.

76. Dr. Balance as per Cash Book ₹ 20,000. Cheque collected of ₹ 5,000 but credited only ₹ 4,000. Balance of pass book:
(a) ₹ 13,000
(b) ₹ 17,000
(c) ₹ 19,000
(d) ₹ 10,000
Answer:

Dr. Balance as per cash book 20,000
Cheque collected of ₹ 5,000 but credited
only ₹ 4,000, Pass book will reduce by -1,000
Cr. Balance as per pass book 19,000

Thus, the option (c) is correct.

77. The differences arising between bank statement and cash book is reconciled by the preparation of:
(a) Bank Reconciliation Statement
(b) Cash Flow Statement
(c) Funds Flow Statement
(d) Working Capital Statement.
Answer:
(a) Bank Reconciliation Statement
The differences arising between bank statement and cash book is reconciled by the preparation of Bank Reconciliation Statement by showing all causes of difference between the two.

78. A cash book shows an overdraft of ₹ 2,000 as cash at bank but the pass book made upto the same date shows the cheque of ₹ 200, ₹ 40 and ₹ 37 respectively had not been presented for payment and a cheque of ₹ 100 paid into account had not been cleared. The balance as per the Pass Book will be:
(a) ₹ 1,823 debit
(b) ₹ 1,223 debit
(c) ₹ 1,523 debit
(d) ₹ 1,623 debit
Answer:
(a) ₹ 1,823 debit

Balance as per cash book (Cr.)
Less: Cheque issued but not presented [200+40+37]
Add: Cheque deposited not collected
2,000
277
100
Balance as per Pass book (Dr.) 1,823

79. In which of the following type of accounts, money is generally deposited periodically at a regular interval?
(a) Recurring Deposit Account
(b) Saving Bank Account
(c) Fixed Deposit Account
(d) Current Account
Answer:
(a) Recurring Deposit Account
In the Recurring Deposit Account, A certain fixed sum of money is deposited affixed or regular interval of time in the account.

80. Credit balance as per Cash Book ₹ 10,000, Bank charged Interest of ₹ 150, cheques issued but not presented for payment ₹ 2,500. Overdraft as per Pass Book will be:
(a) ₹ 12,650
(b) ₹ 12,350
(c) ₹ 12,500
(d) ₹ 7,650
Answer:
(d) ₹ 7,650
Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes 4

81. Some of the transaction that is dependent on bank statement are ________.
(a) Collection charges
(b) Dividend received
(c) Rent received
(d) All of above
Answer:
(d) All of above
A Bank Statement or Account Statement is a summary of financial transactions which have occurred over a given period on a bank account held by a person or business with a financial institution. Thus collection charges, dividend received, rent received are all transactions under the bank statement.

82. Bank Reconciliation Statement is prepared by ________.
(a) Accountant of business
(b) Manager of business
(c) Controller of bank
(d) Accountant of the bank.
Answer:
(a) Accountant of business
Bank Reconciliation Statement is generally prepared by the company accountant or the bookkeeper with the purpose to compare the bank’s records with your own company records. It is done on monthly basis whenever bank statement arrives.

This statement is required to find out dmissions and mistakes if any and helps in identifying frauds and embezzlements in company funds. A detailed year-end bank reconciliation statement should be retained so that they are readily accessible when needed during the company annual audit. Thus option A is correct.

83. Balance as per cash book (adjusted) = 1000 unpresented cheques = 2000 uncredited cheques = 500. Compute the balance as per bank statement:
(a) 2,000
(b) Zero
(c) 3,000
(d) 2,500
Answer:
(d) 2,500

Balance as per cash book 1,000
+ Unpresented cheques 2,000
3,000
– Uncredited cheques 500
Balance as per bank statement 2,500

84. Bank Balance as per Cash book of ABC Enterprises as on 31st March, 2016 is ₹ 1500. Cheques deposited with bank but not cleared amount to ₹ 100 and cheques issued but not presented for payment ₹ 150. The Bank allowed interest amounts to ₹ 50 and collect dividend of ₹ 50 on behalf of ABC enterprise Balance as per Pass Book is:
(a) 1850
(b) 1650
(c) 1600
(d) 1450
Answer:
(b) 1650

Bank Balance as per Cash Book 1,500
Add: Cheques issued but not presented 150
Less: Cheques deposited but not cleared (100)
Add: Bank Interest collected 50
Add: Dividend collected 50
Total 1,650

85. If you start with a debit balance as per the Cash Book, cheques that have been issued by a company but have not been shown in pass book are while preparing bank reconciliation statement.
(a) Not to be adjusted
(b) Added twice
(c) Subtracted
(d) Added
Answer:
(d) Added
Cheque issued but not presented are added while preparing Bank Reconciliation statement as per cash book.

86. Bank balance as per cash book at ABC Enterprises as on 31st March, 2013 is ₹ 1,500 Cheques deposited with bank but not cleared amount to ₹ 100 and cheque issued but not presented for payment amount to ₹ 150. The bank allowed interest amounting to ₹ 50 and collected divided ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1.600
(b) ₹ 1,450
(c) ₹ 1,850
(d) ₹ 1,650
Answer:
(d) ₹ 1,650
Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes 5

87. Cheque issued but not presented for payment are in passbook.
(a) Less
(b) Add
(c) Both (a) and (b)
(d) None of the above
Answer:
(d) None of the above
Cheque issued but not presented treatment as per passbook: When a cheque is drawn for third party, it indicates that the bank a/c will be credited in cashbook and debited in passbook. If it is not presented for payment in then it has no effect in passbook and add in cashbook (as such amount is not deducted from bank). Hence, option (d) is correct.

88. Which of the following is true about bank reconciliation statement:
(a) Bank reconciliation statement need to be prepared where the balance of cash book and pass book does not match
(b) Bank reconciliation statement is to be prepared necessarily as per the income-tax Act, 1961
(c) Bank reconciliation Statement is prepared on yearly basis
(d) Bank reconciliation statement is to be prepared and supplied by bank
Answer:
(a) Bank reconciliation statement need to be prepared where the balance of cash book and pass book does not match.
Bank reconciliation statement is a statement which is prepared as on a particular date to reconcile the bank balance as per Cash Book with the balance as per pass book by showing all causes of differences between the two.

Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting Notes

Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

1. Retirement of a partner means when a partner leaves the firm.

2. A partner may retire in any of the following ways:

  • with consent of all the partners.
  • in accordance with an express agreement by the partners.
  • where the partnership is at will, by giving notice in writing to all other partners of his intention to retire.

Note: Partnership at will is a type of partnership which does not have any fixed duration and can come to an end according to the will of the partners.

3. Due to retirement, only the old partnership comes to an end but the firm continues (in case of more than two partners).

A partner after retirement, is entitled to his share in the following:

  • Share in goodwill
  • Share in reserves
  • Share in revaluation of assets/liabilities
  • Share in accumulated profits
  • Share in joint life policy (if any).

Accounting treatment on retirement of a partner involves the following:

  • Calculation of new profit sharing ratio.
  • Treatment of reserves and undistributed profits.
  • Revaluation of assets and liabilities.
  • Treatment of goodwill.
  • Adjustment of capital by remaining partners.
  • Payments to the retiring partner including his interest in the firm.

1. Calculation of New Ratio:

  • When a partner retires, his share of profit is distributed among the remaining partners.
  • As a result, the remaining partner’s share of profit increases.

Note- Gaining Ratio:
The ratio at which the remaining partners’gain the share of retiring partner, it is known as the gaining ratio.
It is calculated as follows:
Gaining Ratio = New Ratio – Old Ratio

Example:
A, B and C are partners sharing profits and losses in the ratio of 4:3:2. B retires and A and C decide to share profit/losses in future in the ratio of 5:4. Calculate gaining ratio.
Solution:
Gaining Ratio = New Ratio – Old Ratio
A’s gaining share = \(\frac { 5 }{ 9 }\) – \(\frac { 4 }{ 9 }\)
= \(\frac { 1 }{ 9 }\)
C’s gaining share = \(\frac { 4 }{ 9 }\) – \(\frac { 2 }{ 9 }\)
= \(\frac { 2 }{ 9 }\)
So gaining ratio between A and C is 1 : 2
This implies that A and C will gain the share of B in the ratio of 1 : 2.

Calculation of new profit sharing ratio:
If the remaining partners purchase the share of retiring partner in some specified proportions, then the fraction of share purchased by them is added to their old share to get the new share.

Example:
A, B and C were partners sharing profits in the ratio of 5:4:3. C retired and his share was taken up by A and B in the ratio of 3:2. Find out the new ratio.
Solution:
C’s share will be divided between A and B in the ratio of 3:2.
A will gain = \(\frac { 3 }{ 5 }\) of \(\frac { 3 }{ 12 }\)
= \(\frac { 9 }{ 60 }\)
Hence, A’s new share = \(\frac { 5 }{ 12 }\) + \(\frac { 9 }{ 60 }\)
= \(\frac { 34 }{ 60 }\)
B will gain = \(\frac { 2 }{ 5 }\) of \(\frac { 3 }{ 12 }\)
= \(\frac { 6 }{ 60 }\)
Hence, B’s new share = \(\frac { 4 }{ 12 }\) of \(\frac { 6 }{ 60 }\)
= \(\frac { 26 }{ 60 }\)
New Ratio = A \(\frac { 34 }{ 60 }\) : B \(\frac { 26 }{ 60 }\) or 17 : 13

Note : If the new profit sharing ratio of remaining partners are not given, it will be assumed that the remaining partners continue to share profits and losses in old ratio.

2. Treatment of undistributed profits and reserves:

  • The retiring partner is entitled to the accumulated profits and reserves appearing in the firm.
  • At the time of retirement these reserves should be transferred to all the old partners in the old profit sharing ratio.
  • Journal Entries:

(i) For distributing reserves and accumulated profits:
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit/Loss (Cr. balance) A/c Dr.
To All Partners Capital A/c (in old ratio)

(ii) For distributing accumulated losses:
All Partners Capital A/c Dr.
To P/L A/c (Dr. balance) (old ratio)

(iii) For transferring specific funds:
Workmen Compensation Fund A/c Dr.
Instrument Fluctuation Fund A/c Dr.
To All Partners Capital A/c

Alternatively, instead of transferring full amount to all the partners, only the share of profit of retiring partner shall be transferred to his capital A/c.

Reserves and Profit A/c Dr.
To Retiring Partners Capital A/c.
(share of retiring partner).

3. Revaluation of Assets and Liabilities:

  • Retirement of a partner is a form of reconstitution of the firm and hence, revaluation of assets and liabilities is required.
  • The purpose of revaluation is that the retiring partner should get the benefits from the change in the value of assets and liabilities.
  • Revaluation of assets and liabilities will be carried out in the same way as in case of admission.
  • If value of assets and liabilities have to be changed – Revaluation A/c will be prepared.
  • If assets and liabilities are to be shown at original figures then Memorandum Revaluation Account is prepared.
  • Profit from revaluation will be transferred to old partners in old ratio.
  • Revaluation A/c Dr. – To All-Partners Capital A/c (old ratio)
  • Loss from revaluation shall be debited to Partners Capital Account.
  • All Partners Capital A/c Dr. To Revaluation A/c (old ratio)

4. Treatment of Goodwill:

  • Goodwill earned by the firm is the result of the efforts of all partners and the goodwill shall be distributed among all the partners at the time of retirement.
  • As already studied in the previous unit, Goodwill A/c cannot be raised in the books of account until it is purchased.
  • Hence in case of retirement, adjustment for goodwill will be made through Partner’s Capital A/c.
    Continuing Partners Capital A/c Dr.
    To Retiring Partners Capital A/c
    (in gaining ratio with the share of goodwill of retiring partner)
  • Goodwill A/c is not opened only Capital A/c of the partners may be debited and credited with the necessary accounts.

5. Capital in Profit Sharing Ratio:
After retirement of a partner, the remaining partners may decide that their capitals be in their new profit sharing ratio. The adjustments in the capital accounts for this purpose may be made either by bringing in or payment of cash or through current accounts.

6. Purchase of retiring partner’s share by remaining partners:
The retiring partner’s share may be purchased by the remaining partners in an agreed ratio. In such case, retiring partner’s capital account is closed by transfer to the remaining partner’s capital accounts in the ratio in which they agree to purchase his share.

7. Computation of retiring partner’s interest in the firm:
(i) Retiring partner’s interest represents the amount due to retiring the partner in the firm.

(ii) It comprises of the following:

  • Balance of the Capital Account of the retiring partner appearing on the date of retirement.
  • Share of undistributable profits and reserves.
  • Share in firm’s goodwill.
  • Share in profit and loss on revaluation of assets and liabilities.
  • Share of profit and loss till date of retirement.
  • Salary and interest on capital or drawing till the date of retirement.

Payment of Retiring Partner’s interest:
The mode of payment of the amount due to the retiring partner is based on the agreement between the partners. However, if agreement is silent on these terms, the payment shall be made based on mutual agreement between the partners.

Methods of Payments:
(a) Lump Sum Payment Method –

  • This method is applied when the firm has adequate funds.
  • The whole amount due shall be paid to the partner at first instance.
  • Retired partner capital A/c will be debited & Bank A/c will be credited.

(b) Installment Payment Method –

  • This method is applied when the firm is not in a position to pay all the amount due to the partner at once.
  • Here, the amount is paid to the partner in installments and till the whole amount is paid, the Capital
  • Account appears as a Loan A/c in the books of the firm.

Installments may be paid in the following ways –
(i) Decreasing payment method:
Here the total amount due is divided in equal installments and amount of installment plus interest on the outstanding balance is paid out.
It is so called because as and when the payment is made the outstanding balance goes on decreasing. Due to this, interest also reduces.

(ii) Equal Payment Method:
Here the total amount to be paid is divided in number of equal installments such that every payment (installment + interest) is equal.
Hence, it is known as equal payment method.

Death of a Partner:
1. When a partner dies, the firm will be reconstituted and hence, it will require various adjustments as done in case of retirement.

2. On the death of a partner, the amount due to him will be paid to his legal representatives.

3. The deceased partner’s capital a/c will be credited with his share of profits.

4. The deceased partner’s legal representative will be entitled to the following:

  • Amount standing to the credit of Capital A/c
  • Share in goodwill
  • Interest on capital (if any)
  • Share in revaluation profit
  • Share in undistributed profits and reserves
  • Share in Joint Life Policy
  • Share in profit upto the date of death.

5. All adjustments will be done in the same manner as in case of retirement.

Joint Life Policy:

  • Partners may take joint life policy for setting the claims of the deceased partner at the time of death of a partner.
  • Premium is paid by the firm and on the death the amount is received from the insurance company.

Treatment of Joint Life Policy:
(a) When premium paid is treated as an expense:
(i) For payment of premium:
Joint Life Insurance Premium A/c Dr.
To Bank A/c

Profit/Loss A/c Dr.
To Joint Life Insurance Premium A/c

(ii) For receipt of policy money:
Bank A/c Dr.
To All Partners Capital A/c

(b) When premium paid is treated as an asset and surrender value is taken into account:
(i) For payment of premium:
Joint Life Policy A/c Dr.
To Bank A/c

(ii) At the year end, the amount in excess of surrendered value is treated as a loss and transferred to P/L A/c:
Profit and Loss A/c Dr.
To Joint Life Policy A/c
The balance in JLP A/c is shown as asset in the Balance Sheet.

(iii) When amount is received from the insurance company:
Bank A/c Dr.
To Joint Life Policy A/c

(iv) Amount received on maturity in excess of surrender value will be distributed among all the partners in their profit sharing ratio.
Joint Life Policy A/c Dr.
To All Partner’s Capital A/c

(c) When premium is treated as an asset and Life Policy Reserve
Account is maintained.
(i) For payment of premium of Joint Life Policy
Joint Life Policy A/c Dr.
To Bank A/c

(ii) At the year end an amount equal to the premium paid is appropriated and transferred to Policy Reserve Account:
Profit/Loss A/c Dr.
To Joint Life Policy Reserve A/c

(iii) The balance of Joint Life Policy Account and Joint Life Policy Reserve Account shall be made equal to the surrender value, for this purpose Joint Life Policy Account is credited and Joint Life Policy Reserve Account is debited with an amount equal to the difference between balance of Joint Life Policy Account and surrender value.
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c

(iv) When amount is received on maturity Bank A/c Dr.
To Joint Life Policy A/c.

(v) Closing Joint Life Policy Reserve Account by transferring its balance to Joint Life Policy Account.
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c

(vi) Balance remaining in Joint Life Policy A/c is distributed among partners.
Joint Life Policy A/c Dr.
To All Partners Capital A/c

Individual policies on life of each partner:

  • Sometimes, instead of taking a joint life policy, policy is taken on life of individual partners.
  • When the partner dies, the amount of his policy will be received in cash and other policies will be shown at their respective surrender values.

Repayment of amount due to the deceased partner:
The amount due to the deceased partner shall be paid as follows –

  • Whole amount in lumpsum
  • Repayment in installments over a period of time and interest paid on outstanding balance.
  • Amount due will be treated as a loan to the firm.
  • Payment of annuity to the heirs of deceased partner.

Note:
As per Sec. 37 of the Partnership Act, the representatives of the deceased partner would be entitled, at their discretion to interest @ 6% p.a. on amount due from the date of death to the date of payment or to that portion of profit which is earned by the firm with the amount due to the deceased partner.

Partnership Accounts-Retirement and Death of a Partner MCQ Questions

1. Outgoing partner is compensated for parting with firm’s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount?
(a) Gaining Ratio
(b) Capital Ratio
(c) Sacrificing Ratio
(d) Profit Sharing Ratio.
Answer:
(a) Gaining Ratio

2. Claim of the retiring partner is payable in the following form:
(a) Fully in cash.
(b) Fully transferred to loan account to be paid later on with some interest on it.
(c) Partly in cash and partly as loan repayable later with agreed interest.
(d) Any of the above forms.
Answer:
(d) Any of the above forms.

3. The balance in the retiring or deceased partner’s capital account is transferred to the _________ capital account in the profit sharing ratio.
(a) Solvent Partners
(b) Insolvent Partners
(c) Remaining Partners
(d) New Partners.
Answer:
(c) Remaining Partners

4. At the time of retirement of a partner, firms gets _________ from the insurance company against the Joint Life Policy taken severally for each partner.
(a) Policy Amount
(b) Surrender Value
(c) Policy Value for the retiring partner and surrender value for the rest
(d) Surrender Value for all the partners.
Answer:
(d) Surrender Value for all the partners.

5. As per Section 37 of the Indian Partnership Act, 1932, the executors would be entitled at their choice to the interest calculated from the date of death till the date of payment on the final amount due to the dead partner at _________ percentage per annum.
(a) 7
(b) 4
(c) 6
(d) 12.
Answer:
(c) 6

6. When premium paid on JLP taken up severally for each partner, the amount received on death of a partner would be firm’s profit. It is also, necessary to credit Partner’s Capital Account with _________ of the policy on the lives of the remaining partners.
(a) Policy Value
(b) Lump-Sum Value
(c) Surrender Value
(d) Actual Value.
Answer:
(c) Surrender Value

7. To provide funds to pay to the retiring partner or to the representatives of a deceased partner generally partner creates:
(a) Sinking Fund
(b) Joint Life Policy
(c) Reserve Fund
(d) Separate Bank Account.
Answer:
(b) Joint Life Policy

8. At the time of death of a partner, firm gets _________ from the insurance company against the Joint Life Policy taken jointly for all partners and policies taken severally for each of the partner.
(a) Policy Amount
(b) Surrender Value
(c) Policy Value for the dead partner and surrender value for the rest
(d) Surrender Value for all the partners.
Answer:
(c) Policy Value for the dead partner and surrender value for the rest

9. A, B and C takes a Joint Life Policy. After five years, B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement, A and C decide to share profits equally. They had taken a Joint Life Policy of ₹ 2,00,000 with the Surrender Value ₹ 30,000. What will be the treatment in the Partner’s Capital Account on receiving the JLP amount if Joint Life Policy A/c is maintained at Surrender Value along with the reserve for JLP?
(a) ₹ 30,000 Credited to all the partners in old ratio.
(b) ₹ 2,00,000 Credited to all the partners in old ratio.
(c) ₹ 1,70,000 Credited to all the partners in old ratio.
(d) Distribute JLP Reserve Account in old profit sharing ratio.
Answer:
(d) Distribute JLP Reserve Account in old profit sharing ratio.

10. Balance of M/s A, B and C, sharing profits and losses in proportionate to their capitals, stood as follows: Capital Account: ₹ 3,00,000; ₹ 2,00,000 and ₹ 1,00,000 respectively. A desired to retire from the firm and the remaining partners decided to carry on. Joint Life Policy of the partners is surrendered and cash obtained ₹ 50,000. What will be the treatment for JLP?
(a) ₹ 50,000 Credited to Revaluation Account
(b) ₹ 50,000 Credited to Joint Life Policy Account
(c) ₹ 25,000 Debited to A’s Capital Account
(d) Either (a) or (b).
Answer:
(b) ₹ 50,000 Credited to Joint Life Policy Account

11. A, B and C are the partners sharing profits and losses in the ratio 2:1:1, firm has a Joint Life Policy of ₹ 1,40,000 and in the balance sheet it is appearing at the surrender value i.e. ₹ 40,000. On the death of A, how this JLP will be shared among the partners?
(a) ₹ 50,000 : 25,000 : 25,000
(b) ₹ 60,000 : 30,000 : 30,000
(c) ₹ 40,000 : 35,000 : 25,000
(d) Whole of ₹ 1,20,000 will be paid to A
Answer:
(a) ₹ 50,000 : 25,000 : 25,000

12. A, B and C were partners sharing profits and losses in the ratio of 3:2:1. A retired and goodwill of the firm is to be valued at ₹ 50,000 and Goodwill Account is to be raised which is not appearing in the balance sheet. What will be the treatment for goodwill?
(a) Credited to Revaluation Account at ₹ 50,000
(b) Credited to Partners Capital Account ₹ 50,000 in Profit Sharing Ratio.
(c) Only A’s Capital Account Credited with ₹ 25,000
(d) Only A’s Capital Account Credited with ₹ 50,000.
Answer:
(b) Credited to Partners Capital Account ₹ 50,000 in Profit Sharing Ratio.

13. A, B and C are partners with profit sharing ratio 4:3:2. B retires and Goodwill ₹ 30,000 was shown in books of account. If A & C share profits of B in 5:3, then find the new profit sharing ratio.
(a) 47:25
(b) 17:11
(c) 31:11
(d) 14:21.
Answer:
(a) 47:25

14. A, B and C are partners with profit sharing ratio 4:3:2. B retires and goodwill was valued ₹ 10,800. If A & C share profits in 5:3, find out the goodwill shared by A and C in favour of B.
(a) ₹ 1,850 and ₹ 1,950
(b) ₹ 1,650 and ₹ 1,750
(c) ₹ 2,000 and₹ 1,600
(d) ₹ 1,950 and ₹ 1,650.
Answer:
(d) ₹ 1,950 and ₹ 1,650.

15. The capitals of A, B and C are ₹ 1,00,000; ₹ 75,000 and ₹ 50,000, profits are shared in the ratio of 3:2:1. B retires on the basis of firm purchased by A and C. The new ratio between A and C is 3:1, find the capital of A and C.
(a) ₹ 1,25,000 and ₹ 1,00,000
(b) ₹ 1,46,250 and ₹ 42,000
(c) ₹ 1,56,250 and ₹ 68,750
(d) ₹ 86,250 and ₹ 46,250.
Answer:
(c) ₹ 1,56,250 and ₹ 68,750

16. A, B and C take a Joint Life Policy. After five years, B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A and C decide to share profits equally. They had taken a Joint Life Policy of ₹ 2,00,000 with the Surrender Value ₹ 30,000. What will be the treatment in the partner’s capital account on receiving the JLP amount if, Joint Life premium is fully charged to revenue as and when paid?
(a) ₹ 30,000 credited to all the partners in old ratio
(b) ₹ 2,00,000 credited to all the partners in old ratio
(c) ₹ 1,70,000 credited to all the partners in old ratio
(d) No treatment is required.
Answer:
(a) ₹ 30,000 credited to all the partners in old ratio

17. A, B and C were partners in a firm sharing profits and losses in the ratio of 2:2:1. The capital balance are ₹ 50,000 for A, ₹ 70,000 for B, 135,000 for C. B declared to retire from the firm and balance in reserve on the date was t 25,000. If goodwill of the firm was valued as ₹ 30,000 and profit on revaluation was ₹ 7,500 then, what amount will be payable to B?
(a) ₹ 70,820
(b) ₹ 76,000
(c) ₹ 75,000
(d) ₹ 95,000.
Answer:
(d) ₹ 95,000.

18. At the event of retirement, the remaining partners will pay the amount of Goodwill to the retiring partner in:
(a) New Profit Sharing Ratio
(b) Old Profit Sharing Ratio
(c) Gaining Ratio
(d) Sacrificing Ratio.
Answer:
(c) Gaining Ratio

19. Amar, Akbar, Anthony and Suleman are partners sharing profits and losses in the ratio of 1/3, 1/6, 1/3 and 1/6 respectively. Anthony retires and Amar, Akbar and Suleman decide to share the profits and losses equally in future. Which of the statements hold true.
(a) Amar gains nothing; Akbar and Suleman gains equally
(b) Akbar gains nothing; Amar and Suleman gains equally
(c) Suleman gains nothing; Amar and Akbar gains equally
(d) Akbar, Suleman and Amar gains equally.
Answer:
(a) Amar gains nothing; Akbar and Suleman gains equally

20. As per which Accounting Standard, goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it.
(a) AS-11
(b) AS-12
(c) AS 10
(d) AS 9
Answer:
(c) AS 10

21. When Memorandum Revaluation Account is opened:
(a) When value of Assets and Liabilities will not be altered in the books of accounts
(b) When value of Assets and Liabilities will be altered in the books of accounts
(c) On Revaluation of Assets and Liabilities
(d) None of these.
Answer:
(a) When value of Assets and Liabilities will not be altered in the books of accounts

22. Aman, Ashish & Manish are partners in a business and divide profits and losses in the ratio of 15:9:8 respectively. Manish retires. Aman and Ashish decide to share profits in equal proportions. Calculate the gaining ratio.
(a) 1:7
(b) 1:1
(c) 7:1
(d) 1:2
Answer:
(a) 1:7

23. At the time of retirement of a partner, if the goodwill appears in the Balance Sheet, it must be written off. The Capital Accounts of all partners are debited in:
(a) The old profit sharing ratio
(b) The new profit sharing ratio
(c) The capital ratio
(d) Equal ratio.
Answer:
(a) The old profit sharing ratio

24. A, B and C are partners with profits sharing ratio 4:3:2. B retires and goodwill of ₹ 10,800 is shown in books of account. If A & C shares profits of B in 5:3, then find the new profit sharing ratio.
(a) 13:11
(b) 17:11
(c) 31:11
(d) 14:21.
Answer:
(a) 13:11

25. The Capitals of A, B and C are ₹ 1,00,000; ₹ 75,000 and ₹ 50,000, profits are shared in to the ratio of 3:2:1. B retires on the basis that his shares is purchased by other partners keeping the total capital intact. The new ratio between A and C is 3:1. Find the capital of A and C after purchasing B’s share.
(a) ₹ 1,50,000 and ₹ 1,00,000
(b) ₹ 1,46,250 and ₹ 42,000
(c) ₹ 1,56,250 and ₹ 68,750
(d) ₹ 86,250 and ₹ 46,250.
Answer:
(c) ₹ 1,56,250 and ₹ 68,750

26. Joint Life Policy is taken by the firm on the life(s) of _________.
(a) All the partners jointly
(b) All the partners severally
(c) On the life of all the partners and employees of the firm
(d) Both ‘a’ and ‘b’.
Answer:
(d) Both ‘a’ and ‘b’.

27. A, B and C are partners sharing profits in the ratio 2:2:1, on retirement of B, goodwill was valued as ₹ 30,000. Find the contribution of A and C to compensate B.
(a) ₹ 20,000 and ₹ 10,000
(b) ₹ 8,000 and ₹ 4,000
(c) They will not contribute anything
(d) Information is insufficient for any comment.
Answer:
(b) ₹ 8,000 and ₹ 4,000

28. A, B, and C were partners in a firm sharing profits and losses in the ratio of 2:2:1 respectively with the capital balance of ₹ 50,000 for A and B for C ₹ 25,000. B declared to retire from the firm and balance in reserve on the date was ₹ 15,000. If goodwill of the firm was valued as ₹ 30,000 and profit on revaluation was ₹ 7,050 then, what amount will be transferred to the loan account of B:
(a) ₹ 70,820
(b) ₹ 50,820
(c) ₹ 25,820
(d) ₹ 58,820.
Answer:
(a) ₹ 70,820

29. A, B and C were partners sharing profits and losses in the ratio of 3:2:1. A retired and goodwill of the firm is to be valued at ₹ 24,000 and goodwill Account is to be raise which is not appearing in the Balance Sheet. What will be treatment for goodwill?
(a) Credited to Revaluation Account at ₹ 24,000
(b) Credited to Partners Capital Account ₹ 24,000 in profits sharing ratio
(c) Only A’s Capital Account Credited with 12,000
(d) Only A’s Capital Account Credited with ₹ 24,000.
Answer:
(b) Credited to Partners Capital Account ₹ 24,000 in profits sharing ratio

30. Balances of M/s Ram, Rahul and Rohit sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: Ram ₹ 3,00,000 Rahul ₹ 2,00,000 and Rohit ₹ 1,00,000. Ram desired to retire from the firm and the remaining partners decided to carry on. Joint Life Policy of the partners surrendered and cash obtained ₹ 60,000. What will be the treatment for JLP?
(a) ₹ 60,000 credited to Revaluation Account
(b) ₹ 60,000 credited to Joint Life Policy Account
(c) ₹ 30,000 debited to Ram’s Capital Account
(d) Either ‘a’ or ‘b’
Answer:
(b) ₹ 60,000 credited to Joint Life Policy Account

31. Balances of A, B and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000; B ₹ 3,00,000 and C ₹ 2,00,000 JLP Reserve ₹ 80,000 and JLP ₹ 80,000. A desired to retire from the firm and the remaining partners decided to carry on in equal ratio, Joint Life Policy of the partners surrendered and cash obtained ₹ 80,000. What will be the treatment for JLP?
(a) Cash Received credited to Revaluation Account
(b) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio
(c) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio
(d) Cash Received credited to Partner’s Capital Account in old profit sharing ratio.
Answer:
(b) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio

32. Balances of A, B, and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000. B ₹ 3,00,000 and C ₹ 2,00,000. A desired to retire from the firm, B and C share the future profits equally. Goodwill of the entire firm be valued at ₹ 1,40,000 and no Goodwill account being raised.
(a) Credit Partner’s Capital Account with old profit sharing ratio for ₹ 1,40,000.
(b) Credit Partner’s Capital Account with new profit sharing ratio for ₹ 1,40,ooo.
(c) Credit A’s Account with ₹ 40,000 and debit B’s Capital Account with ₹ 10,000 and C’s Capital Account with ₹ 30,000.
(d) Credit Partner’s Capital Account with gaining ratio for ₹ 1,40,000.
Answer:
(c) Credit A’s Account with ₹ 40,000 and debit B’s Capital Account with ₹ 10,000 and C’s Capital Account with ₹ 30,000.

33. Balance of A, B and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000. B ₹ 3,00,000 and C ₹ 2,00,000. JLP Reserve and JLP at ₹ 80,000. A desired to retire from the firm. B and C share the future profits equally. Joint Life Policy of the partners surrendered and cash obtained ₹ 80,000. Goodwill of the entire firm be valued at ₹ 1,40,000 and no Goodwill account being raised. Revaluation Loss was ₹ 10,000. Amount due to A is to be settled on the following basis: 50% on retirement and the balance 50% within one year. The total capital of the firm is to be the same as before retirement. Individual capitals to be in their profit sharing ratio. Find the balances of partner’s capital Account:
(a) ₹ 3,50,000 each
(b) ₹ 3,20,000 each
(c) ₹ 1,90,000 each
(d) ₹ 1,30,000 each.
Answer:
(a) ₹ 3,50,000 each

34. Balance of Ram, Hari & Mohan sharing profits and losses in the ratio 2:3:2 stood as follows: Capital Accounts: Ram ₹ 10,00,000; Hari ₹ 15,00,000 Mohan ₹ 10,00,000 Joint Life Policy ₹ 3,50,000. Hari desired to retire from the firm and the remaining partners decided to carry on with the future profit sharing ratio of 3:2. Joint Life Policy of the partners surrendered and cash obtained ₹ 3,50,000. What would be the treatment for JLP?
(a) ₹ 3,50,000 credited to Partner’s Capital Account in new ratio.
(b) ₹ 3,50,000 credited to Partner’s Capital Account in old ratio.
(c) ₹ 3,50,000 credited to Partner’s Capital Account in capital ratio.
(d) ₹ 3,50,000 credited to JLP account.
Answer:
(d) ₹ 3,50,000 credited to JLP account.

35. A, B and C are three partners sharing profit and loss in the ratio of 1:2:3 and their capital are 50,000, 1,00,000 and 1,50,000 respectively. The balance in reserve stood at ₹ 20,000 and goodwill is valued at ₹ 10,000. Calculate the amount to be paid to B by the firm _________.
(a) ₹ 1,10,000
(b) ₹ 90,000
(c) ₹ 1,00,000
(d) ₹ 30,000
Answer:
(a) ₹ 1,10,000

36. Ram, Krishna and Ganesh were sharing profits and losses in the ratio of 5:3:2. Ram retires and Krishna and Ganesh share the future profits & losses equally. Goodwill of the firm is valued at 1,00,000. Calculate the amount of goodwill to be debited to Krishna’s and Ganesha’s capital A/c.
(a) ₹ 60,000 & ₹ 40,000
(b) ₹ 40,000 & ₹ 60,000
(c) ₹ 50,000 each
(d) ₹ 30,000 & ₹ 70,000
Answer:
(b) ₹ 40,000 & ₹ 60,000

37. P, Q and R are sharing profits and losses equally. R retires and the goodwill is appearing in the books at ₹ 10,000. Goodwill of the firm is valued at ₹ 40,000. Calculate the net amount to be credited to A’s capital A/c.
(a) ₹ 20,000
(b) ₹ 5,000
(c) ₹ 10,000
(d) ₹ 30,000
Answer:
(c) ₹ 10,000

38. A, B and C are sharing profits equally. C retires from the firm. The new profit sharing ratio will be 1:2. Calculate the gaining ratio of A and B respectively
(a) 0:1/2
(b) 1:1
(c) 1:1/3
(d) 0:1/3
Answer:
(d) 0:1/3

39. X, Y and Z are sharing profits in the ratio of 3:5:1. Y retires and his entire shares of profits is taken over by Z. Calculate the new profit sharing ratio _________.
(a) 1:2
(b) 1:3
(c) 3:1
(d) 1:1
Answer:
(a) 1:2

40. A, B and C are sharing profit and losses equally. A dies on 30th September, 2005 and the profits for the year ending 31st March, 2006 are ₹ 3,00,000. Calculate A’s share in profits
(a) ₹ 25,000
(b) ₹ 66,667
(c) ₹ 50,000
(d) None of the above
Answer:
(c) ₹ 50,000

41. X, Y and Z are partners sharing profits in the ratio of 7:5:8. Z died on 30th November, 2005 and the profits for the year are 4,80,000. Calculate Z’s share in profits
(a) ₹ 1,28,000
(b) ₹ 1,26,000
(c) ₹ 1,24,000
(d) None of the above
Answer:
(a) ₹ 1,28,000

42. The amount due to the deceased partner is paid to _________.
(a) Father
(b) Executor
(c) Wife
(d) Relatives
Answer:
(b) Executor

43. The interest rate which is paid to the executors from the date of death to the date of payment is _________.
(a) 7%
(b) 6%
(c) 9%
(d) 12%
Answer:
(b) 6%

44. The amount which the firm gets from the insurance company on the death of a partner is called _________.
(a) Premium value
(b) Surrender value
(c) Policy value
(d) None of these
Answer:
(c) Policy value

45. The premium paid on JLP is debited to _________.
(a) P&L A/c
(b) Insurance company A/c
(c) Partners capital A/c
(d) None of these
Answer:
(a) P&L A/c

46. The balance of Joint Life Policy appearing in the balance sheet represents _________.
(a) Surrender value
(b) Total premium paid
(c) Annual premium paid
(d) Policy amount
Answer:
(a) Surrender value

47. The JLP amount received by a firm is distributed in _________.
(a) Old profit sharing ratio
(b) Capital ratio
(c) Gaining ratio
(d) New ratio
Answer:
(a) Old profit sharing ratio

48. Claim of the retiring partner is payable in the following form _________.
(a) Cash
(b) Loan A/c
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)

49. If the firm dissolves due to the retirement of one of the partner, then what amount of JLP will be credited in the partners capital A/c _________.
(a) Surrender value
(b) Maturity value
(c) Premium paid
(d) None of these
Answer:
(a) Surrender value

50. JLP is taken by the firm on the life of _________.
(a) All the partners jointly
(b) All the partners severally
(c) On the life of employees
(d) None of the above
Answer:
(a) All the partners jointly

51. Retiring partner is compensated for parting with the firm’s future profits in favour of remaining partners. The remaining partner’s contribute to such compensation amount in:
(a) Gaining Ratio
(b) Capital Ratio
(c) Sacrificing Ratio
(d) Profit sharing Ratio
Answer:
(a) Gaining Ratio
On retirement of a partner, remaining partner contributes amount to retiring partner as compensation for his share in the firm. This compensation is borne by remaining as continuing partners in gaining ratio.
Gaining ratio can be determined as – Gaining ratio = New profit sharing ratio – old profit sharing ratio

52. A, B and C share profits and losses of the firm equally. B retires from business and his share is purchased by A and C in the ratio of 2 : 3. New profit sharing ratio between A and C respectively would be:
(a) 01 : 01
(b) 02 : 02
(c) 07 : 08
(d) 03 : 05
Answer:
(c) 07 : 08
A’s old ratio = \(\frac { 1 }{ 3 }\)
B’s old ratio = \(\frac { 1 }{ 3 }\)
C’s old ratio = \(\frac { 1 }{ 3 }\)
Gaining ratio of A and C = 2 : 3
Gaining share of A = \(\frac { 1 }{ 3 }\) x \(\frac { 2 }{ 5 }\) = \(\frac { 2 }{ 15 }\)
Gaining share of C = \(\frac { 1 }{ 3 }\) x \(\frac { 3 }{ 5 }\) = \(\frac { 3 }{ 15 }\)
A’s new ratio = Old ratio + Gaining ratio
= \(\frac { 1 }{ 3 }\) + \(\frac { 2 }{ 15 }\) = \(\frac { 7 }{ 15 }\)
New Ratio between A and C = \(\frac { 7 }{ 15 }\) : \(\frac { 8 }{ 15 }\) = 7 : 8

53. If a partner goes insolvent and is not able to bring his share of deficiency in cash, then his deficiency should be borne by the remaining solvent partners:
(a) Equally
(b) On the basis of their profit sharing ratio
(c) On the basis of their adjusted capital ratio
(d) On the basis of their original investments.
Answer:
(c) On the basis of their adjusted capital ratio
In India, if it is mentioned in the Partnership Deed that on the insolvency of a partner deficiency of his capital A/c will be borne in particular ratio, it will be borne accordingly in the case of insolvency of the partner, but if no mention about any ratio is made in this connection in the partnership deed, the deficiency of the insolvent partner’s capital A/c will be shared by the solvent partners in their capital ratio.

54. A, B and C share profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C in 40 : 60 ratio. New profit and loss sharing ratio between A and C would be _________.
(a) 1 : 1
(b) 2 : 3
(c) 7 : 8
(d) 3 : 5.
Answer:
(c) 7 : 8
Calculation of New Profit or Loss Sharing Ratio
Old Ratio of A, B and C partners is 1 : 1 : 1
After retirement of B, his share is distributed between A and C in 40 : 60.
Therefore, New Ratio of A’s = \(\frac { 1 }{ 3 }\) + (\(\frac { 1 }{ 3 }\)x\(\frac { 4 }{ 10 }\))
= \(\frac { 1 }{ 3 }\) + \(\frac { 4 }{ 30 }\) = \(\frac { 14 }{ 30 }\) = \(\frac { 7 }{ 15 }\)
C’s = \(\frac { 1 }{ 3 }\) + (\(\frac { 1 }{ 3 }\) x \(\frac { 6 }{ 10 }\))
= \(\frac { 1 }{ 3 }\) + \(\frac {6}{ 30 }\) = \(\frac {16}{ 30 }\) = \(\frac {8}{ 15 }\)
New share between A and C is 7:8
Thus option (c) is Right.

55. At the time of retirement of a partner from a partnership firm, the adjustment of goodwill is done in _________.
(a) Old profit sharing ratio
(b) Gaining ratio
(c) Sacrificing ratio
(d) New profit sharing ratio.
Answer:
(b) Gaining ratio
At the time of Retirement of a partner from a Partnership Firm, the continuing partners will gain in terms of profit sharing ratio. Therefore, the adjustment of goodwill is to be done in the gaining ratio to the retiring partners.
This Option (b) is Right.

56. X, Y, Z capitals are ₹ 80,000, 75,000 and 50,000 respectively. Z retired and is paid ₹ 60,000 and no goodwill is valued. What is the new capital of Y after retirement of Z.
(a) ₹ 71,000
(b) ₹ 74,000
(c) ₹ 75,000
(d) ₹ 86,000
Answer:
(c) ₹ 75,000
Amount of Z’s Capital – ₹ 50,000
Amount Paid to him = ₹ 60,000
Amount Paid to Z in excess of his capital = ₹ (60,000 – 50,000)
= ₹ 10,000
→ ₹ 10,000 to be borne by X & Y in equal ratio.
→ Y’s initial capital = ₹ 75,000
Less : Amount of capital borne
by him (10,000 x \(\frac { 1 }{ 2 }\)) 5,000
y’s capital after Z’s retirement 70,000/-

57. If at the time of retirement, JLP is received, it will be distributed among which partners _________.
(a) Retiring Partner
(b) Remaining Partner
(c) All Partners
(d) None of these
Answer:
(c) All Partners
At the time of retirement of a partner, the amount of JLP is distributed among existing partners along with the retiring partner. Hence, it can be said the amount of JLP received is distributed among all partners at the time of retirement

58. X, Y, Z are Partners in a firm, sharing profit and losses in the ratio 3 : 2 : 1. Z retires from the firm what will be the new profit sharing ratio.
(a) 3 : 1
(b) 3 : 2
(c) 2 : 3
(d) 1 : 2
Answer:
(b) 3 : 2
If the new profit sharing ratio of remaining partners are not given, it will be assumed that the remaining partners continue to share profits and losses in old ratio. Thus, after retirement of Z, new profit sharing ratio will be 3 : 2

59. Which amongst the following is transferred to Partner’s Executor’s A/c at the time of death of the partner?
(a) Interest on Capital
(b) Share in Goodwill
(c) Share in Profit
(d) All of the above.
Answer:
(d) All of the above
Following particulars are transferred to the Partners’s executor account at the time of death of a partner:

(a) Partner’s Capital A/c
(b) Interest on Partner’s Capital A/c
(c) Share in Goodwill
(d) Share of Profit & Loss

Hence, option all of the above is correct.

60. Calculate Gaining Ratio from following information :
Current Profit Sharing Ratio of A, B & C = 5 : 4 : 3
C retires and his share was taken equally by A and B.
(a) 1 : 1
(b) 1 : 3
(c) 13 : 11
(d) None of these.
Answer:
(a) 1 : 1
Gaining Ratio = New Share – Old Share.
→ Old Profit Sharing ratio of A, B, C= 5 : 4 : 3.
→ C’s Share = \(\frac { 3 }{ 12 }\) = \(\frac { 1 }{ 4 }\)
→ A’s Gain = \(\frac { 1 }{ 4 }\) x \(\frac { 1 }{ 2 }\) = \(\frac { 1 }{ 8 }\)
→ B’s Gain = \(\frac { 1 }{ 4 }\) x \(\frac { 1 }{ 2 }\) = \(\frac { 1 }{ 8 }\)
→ Gaining ratio = \(\frac { 1 }{ 8 }\) : \(\frac { 1 }{ 8 }\) = 1 : 1
→ Hence, option (a) is correct.

61. In a partnership firm A, B and C are partners sharing profit and loss in ratio of 3:2:1. They have taken a joint life policy of ₹ 1,00,000 and the Joint Life Insurance premium is treated as an expense. On death of B, the claim amount was received. The amount received on Joint Life Policy will be:
(a) Credited to all partners capital account
(b) Credited to B’s capital account
(c) Debited to B’s capital account
(d) Credited to remaining partners capital account.
Answer:
(a) Credited to all partners capital account
Partner’s often take out a Joint Life Policy to provide funds for settling the claim of the deceased partner. Annual premium is paid by the firm and on the death of a partner, the amount of the policy is received by the firm from the insurance company. On death of a partner, the amount due to his legal representatives will have to be paid.
So, on the death of B, the amount received of JLP will be credited to all partner’s capital account.

62. On the retirement of a partner any reserve lying in the books of account:
(a) Should be transferred to retiring partner only
(b) Should be transferred to all partner in the old profit sharing ratio
(c) Should not be transferred
(d) Should be transferred to remaining partners in the new profit sharing ratio.
Answer:
(b) Should be transferred to all partner in the old profit sharing ratio
On the retirement of a partner, any reserve lying in the books of account should be transferred to all partner’s capital account in profit sharing ratio.

63. In a Partnership firm, the Joint Life Insurance premium is treated as an expense. Which of the following account is credited for amount received from Joint Life Insurance Policy on the death of a partner?
(a) Bank Account
(b) All Partners Capital Account
(c) Deceased Partners Capital Account
(d) Remaining Partners Capital Account.
Answer:
(b) All Partners Capital Account
Joint Life Policy A/c Dr.
To All Partners Capital A/c

64. In a partnership firm, Ram’s Capital is (b) All Partners Capital Account
(b) All Partners Capital Account
(b) All Partners Capital Account
80,000, Sita’s Capital is ₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3:2:1 ratio respectively. Mohan is retiring from the partnership. Mohan is paid ₹ 60,000 and no goodwill is recorded. What will be the Ram’s Capital balance after the retirement of Mohan?
(a) ₹ 74,000
(b) ₹ 70,000
(c) ₹ 75,000
(d) ₹ 86,000.
Answer:
(a) ₹ 74,000
Retiring partner Mohan’s capital account is ₹ 50,000 but he is paid ₹ 60,000 in order to settle his account.
Thus, ₹ 10,000 is being paid to him towards the goodwill of the business. This share is 1/6, therefore he will get this goodwill from remaining partner’s in their gaining ratio which will be 3 : 2.
Entry will be:
(3 : 2) Ram’s Capital A/c Dr. 6,000
Sita’s Capital A/c Dr. 4,000
To Mohan’s Capital A/c 10,000
Hence, after this Ram’s Capital Account will be ₹ 80,000 – 6,000 = ₹ 74,000/-

65. A, B and C were in partnership sharing profits in the ratio of 4:2:1 respectively. A guaranteed that is no case C’s share in profit should be less than ₹ 7,500. Profits of the firm for the year 2013 amounted to ₹ 31,500. A’s share in profit will be:
(a) ₹ 15,000
(b) ₹ 18,000
(c) ₹ 16,000
(d) ₹ 3,000
Answer:
(a) ₹ 15,000
A’s share → 31,500 x \(\frac { 4 }{ 7 }\) = 18,000
B’s share → 31,500 x \(\frac { 2 }{ 7 }\) = 9,000
C’s share → 31,500 x \(\frac { 1 }{ 7 }\) = 4,500
was guaranteed by A that his share will not be less than 7,500. Therefore, A will compensate from his share i.e. 18,000 – 3,000 = 15,000 = A’s share 4,500 + 3,000 = 7,500 ← C’s share.

66. A, B and C are partners in a firm, sharing profits and losses in the ratio of 5:3:2 respectively. The balance of capital is ₹ 50,000 for A & B each and ₹ 40,000 for ‘C’, ‘B’ decides to retire from firm. The goodwill of firm is valued at ₹ 30,000 and profit on revaluation of assets at ₹ 5,000. The firm also have a balance in the Reserve A/c for ₹ 15,000 on that date. What amount will be payable to ‘B’?
(a) ₹ 55,000
(b) ₹ 65,000
(c) ₹ 75,000
(d) ₹ 45,000
Answer:
(b) ₹ 65,000
B’s share in the profit & loss ratio = \(\frac { 3 }{ 10 }\)
B’s Capital A/c
Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting Notes 1

67. On the death of a partner. Joint life policy amount if company treat JLP as expenses. Then amount is distributed among:
(a) All partner
(b) Gaining partner
(c) Deceived partner
(d) None of these
Answer:
(a) All partner
If Joint life policy is treated as an expense, then on the death of a partner the amount of policy received by the firm is credited to all partners capital accounts in profit sharing ratio.

68. A, B, C are partners. B retires A & C. Gaining ratio, if profit sharing ratio of A, B, C is 2 : 3 : 1?
(a) 3 : 1
(b) 2 : 4
(c) 2 : 1
(d) 3 : 2
Answer:
(c) 2 : 1
If nothing is given, it will be assumed that remaining partners will gain in their old profit sharing ratio. Thus, after retirement of B, A & C will gain in their old ratio i.e. 2 : 1.

69. In a partnership firm, Ram’s Capital is ₹ 80,000, Sita’s Capital is ₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3 : 2 : 1 ratio respectively. Mohan is retiring from the partnership and his share is purchased by the remaining partners equally. Mohan is paid ₹ 60,000 and no goodwill is recorded. The Capital of Ram would be:
(a) ₹ 74,000
(b) ₹ 75,000
(c) ₹ 86,000
(d) ₹ 71,000
Answer:
(b) ₹ 75,000
Mohan’s share is 1/6 which is taken up equally by Ram and Sita i.e.
1 /12 each therefore Ram’s new ratio will be 3/6 + 1/12 = \(\frac { 6+1 }{ 12 }\) = 7/12
Sita’s new ratio = \(\frac { 2 }{ 6 }\) + \(\frac { 1 }{ 12 }\) = \(\frac { 4+1 }{ 12 }\) = 5/12
and there gaining ratio is 1 : 1
Mohan is paid ₹ 10,000 over and above his capital which will be borne equally by Ram and Sita i.e. ₹ 5,000 each therefore capital of Ram will be 80,000 – 5,000 = 75,000

70. According to Garner Vs. Murray rule in case of fixed capital, loss arising due to insolvency of a partner is :
(a) Divided among all partner in capital ratio
(b) Divided among all partner in profit and loss ratio
(c) Divided among all solvent partner in capital ratio
(d) Divided among all solvent partner in profit sharing ratio.
Answer:
(c) Divided among all solvent partner in capital ratio
According to the decisions in Garner Vs. Murray, in case of insolvency of a partner, the loss should be divided among the other partners in the ratio of capitals then standing. The effect of this decision practically is that the deficiency in the capital account of the insolvent partner has to be borne by the solvent partners in the ratio of capitals standing just prior to dissolution.

71. X, Y and Z are partner and sharing profit and losses equally. Y died, X and Z decided to continue with the partnership and Y’s share is purchased by X and Z in 2 : 3 ratio. Goodwill of the firm was valued for ₹ 18,000. The firm also booked revaluation loss of ₹ 9,000. If at the time of death of Y, his capital was ₹ 20,000 the amount payable to Y’s executors would be :
(a) ₹ 23,000
(b) ₹ 20,000
(c) ₹ 38,000
(d) ₹ 29,000
Answer:
(a) ₹ 23,000
Goodwill = 18,000
Revaluation Loss = \(\frac { (9,000) }{ 9,000 }\)
Share of Y in above = 9,000 x \(\frac { 1 }{ 3 }\) = 3,000
Total amount to be paid to Y’s executors = 20,000 + 3,000 = ₹ 23,000

72. P, Q and R are partners and having profit and loses equally. The capital balance stood at ₹ 25,000, ₹ 20,000 and ₹ 18,000 respectively. Their last three year’s profit were ₹ 18,000, ₹ 12,000 and ₹ 15,000 Q died. P and R decided to continue with the partnership and Q’s share is purchased by P and R in 2 : 3. As per agreement, the value of goodwill is calculated at 3 year’s purchase price of average profit of last three years. It is decided that no goodwill account is opened in the books of account and it is to be adjusted through Capital Account after adjustment, the Capital of P would be :
(a) ₹ 19,000
(b) ₹ 25,000
(c) ₹ 20,000
(d) ₹ 18,000
Answer:
(d) ₹ 18,000
Goodwill of the firm
Average Profit = \(\frac { Sum of Profit of years }{ No.of years }\)
= \(\frac{18,000+12,000+15,000}{3}\)
= 15,000
Goodwill = No. of purchase year x Average Profit
= 3 x 15,000 = 45,000
Q’s share of Goodwill = \(\frac{45,000}{3}\) = 15,000
Goodwill will be contributed by P and R in gaining ratio 7 : 8
P’s share = 15,000 x \(\frac { 7 }{ 15 }\) = 7,000
Goodwill
Q’s share of Goodwill
R’s share = 15,000 x \(\frac { 8 }{ 15 }\) = 8,000
P’s Capital A/c Dr. 7,000
R’s Capital A/c Dr. 8,000
To Q’s Executor’s A/c 15,000.
After Adjustment P’s capital would be 25,000 – 7,000 = ₹ 18,000

73. In a partnership firm, Ram’s capital is ₹ 80,000, Sita’s Capital is.₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3 : 2 : 1 ratio, respectively. Mohan is retiring from the partnership, Mohan is paid ₹ 60,000, and no goodwill is recorded. What will be the Ram’s Capital balance after the retirement of Mohan?
(a) ₹ 74,000
(b) ₹ 71,000
(c) ₹ 75,000
(d) ₹ 86,000
Answer:
(a) ₹ 74,000
Amount of Goodwill paid = ₹ 10,000
Goodwill contribution ratio = 3 : 2
Ram = 10,000 x \(\frac { 3 }{ 5 }\) = 6,000
Sita = 10,000 x \(\frac { 2 }{ 5 }\) = 4,000
Capital After Retirement = 80,000 – 6,000 = ₹ 74,000

74. A, B and C share profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C is 70 : 90. New profit sharing ratio below A and C would be
(a) 1 : 1
(b) 11 : 13
(c) 1 : 2
(d) 5 : 3
Answer:
(c) 1 : 2
If on retirement of partner, that remaining partners purchase the share of retiring partner and the new profit sharing ratio will be;
A’s old share : \(\frac { 1 }{ 3 }\)
A’s new share (after purchase of retiring partner) : \(\frac { 70 }{ 160 }\) – \(\frac { 1 }{ 3 }\) = \(\frac { 50 }{ 480 }\)
B’s old share : \(\frac { 1 }{ 3 }\)
B’s new shares (after purchase of retiring partner) : \(\frac { 90 }{ 160 }\) – \(\frac { 1 }{ 3 }\) = \(\frac { 110 }{ 480 }\)
B’s gain : \(\frac { 110 }{ 480 }\) = \(\frac { 50 }{ 480 }\) = \(\frac { 50 }{ 110 }\) = \(\frac { 1 }{ 2 }\)
Hence, ratio of gain between A & B is 1 : 2; option (c) is correct.

75. A, B and C Share Profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C in 40 : 60 ratio. New profit and loss sharing ratio between A and C would be :
(a) 1 : 1
(b) 2 : 3
(c) 7 : 8
(d) 3 : 5
Answer:
(c) 7 : 8
Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting Notes 2
New Ratio between A & C = 7 : 8.

76. At the time of retirement of a partner from a partnership firm, the adjustment of goodwill is done in :
(a) Old profit Sharing ratio
(b) Gaining ratio
(c) Sacrificing ratio
(d) New profit sharing ratio.
Answer:
(b) Gaining ratio
Due to retirement of one of the partner the other partners will gain in share and hence goodwill adjustment will be done in Gaining Ratio.

77. A, B and C were partner ‘B’ died and his share was taken over by A & C equally and later ‘P’ was enter for ‘1/4’ share. Find the new profit sharing ratio.
(a) 3 : 3 : 2
(b) 1 : 1 : 2
(c) 4 : 3 : 2
(d) None of the above
Answer:
(a) 3 : 3 : 2
A : B : C
\(\frac { 1 }{ 3 }\) : \(\frac { 1 }{ 3 }\) : \(\frac { 1 }{ 3 }\)
B died and his share taken by A & B equally hence
B = \(\frac { 1 }{ 3 }\) x \(\frac { 1 }{ 2 }\) → \(\frac { 1 }{ 6 }\)
A’s share = Old Ratio + Gaining Ratio
= \(\frac { 1 }{ 3 }\) + \(\frac { 1 }{ 6 }\) → \(\frac { 2+1 }{ 6 }\) → \(\frac { 3 }{ 6 }\) = \(\frac { 1 }{ 2 }\)
C’s Share = Old + Gaining
= \(\frac { 1 }{ 3 }\) + \(\frac { 1 }{ 6 }\) → \(\frac { 1 }{ 2 }\)
P is admitted for \(\frac { 1 }{ 4 }\)th share.
1 – \(\frac { 1 }{ 4 }\) → \(\frac { 3 }{ 4 }\)
A’s share = \(\frac { 3 }{ 4 }\) x \(\frac { 1 }{ 2 }\) → \(\frac { 3 }{ 8 }\)
C’s share = \(\frac { 3 }{ 4 }\) x \(\frac { 1 }{ 2 }\) → \(\frac { 3 }{ 8 }\)
P’s Share = \(\frac { 1 }{ 4 }\)
Hence, new Ratio of A : C : P = \(\frac { 3 }{ 8 }\) x \(\frac { 3 }{ 8 }\) → \(\frac { 1 }{ 4 }\)
i.e. 3 : 3 : 2

78. Profit of deceased partner is transfer in his _________.
(a) Loan A/c
(b) P/LA/c
(c) Executors A/c
(d) Both ‘a’ and ‘c’
Answer:
(d) Both ‘a’ and ‘c’
Profit of deceased partners is transferred in his either loan. All with the interest of @ 6% p.a. or partner’s Executors A/c.

Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Go through this Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Depreciation:

  • Depreciation means a fall in the value of asset due to usage, efflux of time or due to obsolescence.
  • It is a permanent, continuous or gradual shrinkage in the book value of a fixed asset.
  • The annual loss in the value of the asset is taken as the expenditure of the business.
  • Depreciation is a process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner.
  • “Depreciation is a process of allocation of expired cost and not of valuation of fixed asset”.

Depreciation Accounting:
Definition: “A measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.”

Institute of Charted Accountants of India (ICAI):
“A system of accounting which aims to distribute the cost or other basic value of tangible capital assets less salvage (if any) over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation.”

American Institute of Certified Public Accountants (AICPA):
Characteristics of Depreciation –

  • Depreciation is the reduction in the book value of an asset.
  • Depreciation reduces the book value of an asset and not the market value.
  • Depreciation is a charge against profit.
  • Depreciation is a process of allocation of cost of an asset over the period of its life.
  • The term depreciation is used for tangible fixed assets. For wasting assets (Like mines) it is called depletion and for fictitious assets such as goodwill it is called amortization.
  • The amount of depreciation can never be calculated exactly, it can only be estimated.
  • Depreciation is must, i.e. it always takes place whether the asset is carefully handled or neglected.
  • If market value of fixed asset is fluctuating, the same does not affect the amount of depreciation so made on respective assets.
  • Total depreciation cannot exceed its depreciable value or original cost where the scrap value is nil.

The fundamental objectives of depreciation are:

  • To maintain the nominal capital invested in fixed assets.
  • To allocate the expired cost of fixed assets over a number of accounting years.

Causes of Depreciation:

  • Physical wear and tear due to continuous use.
  • Efflux (passage of time)
  • Physical deterioration
  • Obsolescence (asset becoming redundant due to technological changes
  • Accidents (fire etc.)
  • Depletion

Objectives of providing Depreciation:

  • To ascertain correct profit/loss
  • To show a true and fair view of financial statements
  • To show assets at their proper value
  • To make provision for replacement of assets.
  • Compliance of legal provisions
  • To get tax benefit

Note : Replacement of asset.
Depreciation is a non cash expenditure, hence the amount debited in the profit and loss account are retained In the business. These are available for the replacement of the asset (buying a new asset), when replacement is required.

Factors in Measurement of Depreciation –
Cost of Asset:
Cost of the asset refers to the cost at which the asset is purchased. It includes all expenses incurred upto the point the asset is ready for use. Original cost = Purchase price + freight + installation cost

Useful Life of the Asset:
Useful life of the asset means the period for which an asset can be used productively without incurring extraordinary repairs and maintenance expense.
Determination of useful life is a matter of estimation.

Scrap (Residual value):
Residual value is the estimated sale value of the asset at the end of the economic life. Difference between the cost and the residual value is the depreciable amount which is to be written off over the useful life.

Other factors:
The following are the other factors affecting the measurement of depreciation.

  • Obsolescence i.e. chance of going out of fashion of the asset.
  • Working hours of the asset.
  • Repairs and Renewals.
  • Skills of the operator handling the asset.
  • Legal provisions relating to the asset.
  • The addition if any made during the year.

Depreciation Accounting:
Depreciation Accounting is the process of allocating the cost of depreciable asset less its salvage value over its serviceable useful life.

Note:
Depreciable assets are the assets which:

  • Are expected to be used for more than one accounting period
  • Have a limited useful life
  • Are held by the organisation for use in the production or supply of goods and services.
  • Depreciation is not a process of valuation but it is an allocation.
  • There are two methods of recording depreciation:
  • When depreciation is charged to asset account
  • When provision of depreciation/ accumulated depreciation account is created.

(i) When Depreciation is Charged to Asset A/c:

  • Depreciation is charged from the asset directly.
  • At the year end, depreciation A/c is closed by transferring it to the Profit & Loss Account.
  • In Balance Sheet, asset is shown at the written down value (cost less depreciation).
  • Depreciation is to be charged whether the business incurs profit or loss.
  • Depreciation provides funds for replacing the asset when its useful life ends

Journal Entries:
1. Charging Depreciation from Asset:
Depreciation A/c Dr. (With amount of depreciation)
To Asset A/c
(Being depreciation on asset charged)

2. Transferring Depreciation A/c to P/L A/c :
Profit & Loss A/c Dr. (With amount of depreciation)
To Depreciation A/c (Being depreciation transferred to P/L)

(ii) When Provision for Depreciation A/c is Made:

  • Current year’s depreciation will be transferred to Profit/Loss A/c each year.
  • In the Balance Sheet, asset will continue to appear at its original cost and total amount of depreciation charged till date will be shown in provision for depreciation or accumulated depreciation A/c.
  • The balance is calculated by deducting provision for depreciation from original cost of asset.

Journal Entries:
1. Charging Depreciation:
Depreciation A/c Dr. (With amount of depreciation)
To Provision for depreciation A/c
(Being the depreciation on asset charged)

2. Transfer of Depreciation to P/L A/c at the year end:
Profit/Loss A/c Dr. (With amount of current year depreciation)
To Depreciation A/c
(Being depreciation transferred to P/L Account)

3. When asset is sold/discarded/exchanged accumulated depreciation for that asset in provision for Dep. A/c is transferred to asset account Provision for Dep. A/c Dr.
To Relevant Asset A/c

Notes :
1. Accumulated depreciation means total depreciation provided on an asset till date.

2. If the words “p.a.” i.e. per annum are attached to the rate of depreciation, then depreciation must be calculated only for that period when asset was held. Whereas if the words “p.a.” is not attached then depreciation is to be charged for the full year.

Component Method of Depreciation:
It may be noted that Accounting Standards as well as the Companies Act, 2013 allow depreciation to be charged on a component basis. Each part of an item of Property, Plant and Equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately, eg.: It may be appropriate to depreciate separately the airframe and engines of an aircraft.

Methods of Providing Depreciation:
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 1

Uniform Charge Method:
(i) Straight Line Method (Fixed Installment Method):
1. Under this method, a percentage of original cost of the asset is written off every year so that asset account may be reduced to its residual value at end of its estimated economic life.

2. If the percentage of depreciation is not given, then the amount of depreciation to be charged every year shall be calculated as follows:
Amount of Depreciation = \(\frac { Cost-Estimated scrao value }{ Expected life }\)
Percentage of Depreciation = \(\frac { Deprecation × 100 }{ Ongnal cost of assete }\)

Example:
A firm bought an asset for ₹ 2,00,000 on 1st January, 2012. ₹ 10,000 are spent on installation. The life of the asset is estimated to be 5 years. Its scrap value at the end of the period is ₹ 10,000. Find the amount of annual depreciation.
Solution:
Amount of depreciation = \(\frac{\text { Cost – scrapvalue }}{\text { Estimatedlife }}\)
Here;
Cost of asset Original cost + expenses upto installation
= 2,00,000 + 10,000
= ₹ 2,10,000
Scrap value = ₹ 10,000 (given)
Estimated life = 5 years (given)

Applying the above Formula :
Amount of depreciation = \(\frac{\text { Cost – scrapvalue }}{\text { Estimatedlife }}\)
= \(\frac{2,10,000-10,000}{5}\)
= ₹ 40,000.
Therefore, ₹ 40,000 will be charged annually as depreciation.

Note : Calculating rate of depreciation
[Taking figures of above example]
Rate of depreciation = \(\frac{\text { Amount of Annual Depreciation }}{\text { Cost of Asset }}\)
= \(\frac{40,000}{2,10,000} \times 100\)
= 19% (approx)

  • The amount of depreciation under this method will remain same every year.
  • If the asset is purchased in between the year, depreciation will be charged only for that part of the year when the asset was held by the company.
  • If the date on which asset is purchased is not given, depreciation will be charged for half year (assuming that the asset was purchased in the mid of the year).
  • Value of asset each year in Balance Sheet is reasonably fair.

Merits of this Method:

  • Simple to calculate
  • Asset can be completely written off
  • Amount and rate of depreciation remains same throughout the useful life.
  • Best suited when asset is depreciating due to efflux of time (passage of time).
  • The value of the asset each year in the Balance Sheet is reasonably fair.

Demerits of this Method:

  • It assumes that the asset should be used equally throughout its life. This is not realistic.
  • Charge on asset will not be uniform because in the later years apart from depreciation, repair expenses to the asset will also be incurred.
  • It does not take into account the effective utilization of the asset.

Declining Charge Method – Diminishing Balance Method:

  • This method is also known as written down value method.
  • Under this method, depreciation is charged at a fixed rate on the reducing balance.
  • Reducing Balance or Written Down Value = Cost of Asset – Depreciation
  • The depreciation charge under this method goes on decreasing gradually.

Hence in the earlier years when there are negligible repairs, depreciation is high and in the later years when repairs are high, depreciation charge is low.

Annuity Method:

    • Under this method, depreciation takes into account element of interest on capital outlay.
    • Here, along with the value of asset, the interest lost over the life of the asset is also written off.
    • The amount of Interest is calculated on Book value of the asset in the beginning of each year.
    • Since the amount of interest lost cannot be computed easily, hence we make use of annuity tables for calculating the amount of depreciation.
    • Here, the amount written off annually is constant.
    • This method is best suited for writing off amount paid for long leases which involve a heavy capital outlay.

Note:
What is the element of interest on capital outlay?
When an amount is invested to purchase a capital asset, it is assumed that if that amount was invested elsewhere, it would have earned interest. This notional income is considered as a cost of the asset. It is a type of opportunity cost.

Journal Entries:
(i) On Purchase of Asset:
Asset A/c Dr.
To Bank A/c

(ii) For Charging Interest on Asset:
Asset A/c Dr.
To Interest A/c

(iii) For Charging Depreciation:
Depreciation A/c Dr.
To Asset A/c

(iv) For Transfer of Interest A/c to P/L A/c:
Interest A/c Dr.
To P/L A/c

(v) For Transfer of Depreciation A/c to P/L:
Profit & Loss A/c Dr.
To Depreciation A/c

Depreciation Fund Method (Sinking Fund Method):

  • Under this method, the amount of depreciation is not charged from the assets and remain same year after year.
  • Here, the amount annually provided for depreciation is placed to the credit of a special account named as “Sinking Fund A/c”.
  • The amount so accumulated in the sinking fund account shall be invested in government securities bearing interest at specified rate.
  • When the asset is due for replacement, the securities are sold and the new asset is purchased with the proceeds of their sale.
  • The book value of old asset is transferred to the Sinking Fund A/c.
  • Any amount realised from sale of old asset as well as Profit/Loss on sale of securities is transferred to Sinking Fund A/c.
  • Sinking Fund A/c is closed by transferring the balance to Asset A/c.

Journal Entries:
(a) At the end of First Year:
(i) For setting aside amount of depreciation :
Depreciation A/c Dr.
To Depreciation Fund A/c

(ii) For investing the amount of depreciation :
Depreciation Fund Investment A/c Dr. (with the amount in dep. fund) To Bank

(b) In the Second and Subsequent Years :
(i) For interest received on investment:
Bank A/c Dr.
To Interest on Dep. Fund Investment A/c

(ii) For transferring interest to depreciation fund A/c :
Interest on depreciation fund
Investment A/c Dr.
To Depreciation Fund

(iii) For annual installment of depreciation :
Depreciation A/c Dr.
To Depreciation Fund A/c

(iv) For investing the amount of depreciation and interest received on investment:
Depreciation Fund Investment A/c Dr.
To Bank

At the end of Last Year:
First three entries will be same as in second year.
In the last year, the amount will not be invested because the old asset is replaced by new one for which investments will need to be sold.
(i) For Sale of Investment:
Bank A/c Dr.
To Depreciation Fund Investment A/c

(ii) For Transfer of Profit or Loss on sale of Investment:

In case of Profit In case of Loss
Depreciation Fund Investment A/c Dr.
To Depreciation Fund A/c
(with the amount of net profit on sale of investment)
Depreciation Fund A/c   Dr.
To Depreciation Fund
Investment A/c
(with net loss on sale of investment)

(iii) For Sale of Old Asset:
Bank A/c Dr. (with net amount
To Old Asset A/c

(iv) Transferring Depreciation Fund A/c to Old Asset A/c:
Depreciation Fund A/c Dr.
To Old Asset A/c (with the balance of depreciation fund A/c) The Balance in Old Asset A/c represents Profit or Loss. It will be transferred to P/L A/c.

(v) For Purchases of New Asset
New Asset A/c Dr. (with cash realised on sale of old asset)
To Bank

Insurance Policy Method:

  • Under this method, the company takes an insurance policy for replacement of the asset.
  • At the beginning of every year, a fixed amount of premium is paid.
  • At the end of the term, the agreed sum is received from the insurance company which is used for the replacement of asset.
  • Amount will be paid in the beginning of year.

Journal Entries:
(a) First year and Subsequent years:
(i) Insurance premium paid at the beginning of the year:
Depreciation Insurance Policy A/c Dr.
To Bank A/c

(ii) At year end:
P/L A/c Dr.
To Depreciation Reserve A/c

(b) At the end of Last year:
(i) Amount realised from insurance company:
Bank A/c Dr.
To Depreciation Insurance Policy A/c

(ii) For transfer of profit on insurance policy:
Depreciation Insurance Policy A/c Dr.
To Depreciation Reserve A/c

(iii) For transfer of accumulated depreciation to asset A/c:
Depreciation Reserve A/c Dr.
To Asset A/c

(iv) On purchase of new asset:
New Asset A/c Dr.
To Bank A/c

Note:
Sinking Fund Method and Insurance Policy Method:
Under sinking fund, the amount in the reserve is used for buying government securities whereas in insurance policy method an insurance policy is taken for this purpose.

Example : Cost of asset is ₹ 1,00,000 Rate of depreciation to be written off each year is 10% on the reducing balance. Calculate the depreciation charge for the first 3 years.
Solution:
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 2
Depreciation under this method can also be determined using the following formula:
Rate of Depreciation = 1 – n\(\sqrt{\frac{N e t \text { Residual Value(Salvage Value) }}{\text { Costof Acquisition }}}\)
Where n = life of the asset

Merits of this Method:

  • Uniform weight of charge to P/L A/c for depreciation and repairs
  • This method is recognized by the Income Tax Act
  • Easier to compute
  • Any additions to the asset are depreciated at the same rate.

Demerits of this Method:

  • Value of asset can never be reduced to zero.
  • Computation of rate of depreciation is a bit complex.
  • Depreciation is neither based on use of asset nor a uniform charge is made.

Difference between Straight Line Method and Written Down Value Method:

Basic Straight Line Method Written Down Value Method
1. Depreciation Charge Depreciation is calculated on the original cost of a fixed asset: Depreciation is calculated on the diminishing balance or written down value of a fixed asset.
2. Amount of Depreciation The amount of depreciation remains the same for all years. The amount of depreciation reduces year after year.
3. Zero Balance At the expiry of the working life of the asset, the balance in the asset account reduces to zero. The balance in the asset account will not reduce to zero.
4. Cost of Depreciation and Repairs The combined cost on account of depreciation and repairs is lower in the initial years and higher in the later years. The combined cost on account of depreciation and repairs are more or less, equal throughout the period.
5. Suitability This method is more suitable for assets which get depreciated on account of expiry of working life of the asset. This method is suitable for such assets which require more and more repairs in the later years of their working life.
6. Calculation Easy or Difficult It is easy to calculate the rate of depreciation. It is difficult to calculate the rate of depreciation.

Sum of Years Digit Method:

  • This method is a slight variation of reducing balance method.
  • Under this method, the charge for depreciation for an accounting period is calculated in proportion of the remaining life of the asset at the beginning of every accounting year.
  • Depreciation = \(\frac { Remaining life of asset including current year × Cost of asset }{ Sum of digits of life of the asset }\)

In the above Formula :
Remaining life of assets Individual digits used in life of asset taken in reverse order
Sum of digits representing life of asset = n\(\frac { (n+1) }{ 2 }\)

Example
Suppose the estimated life of an asset is 10 years and cost of asset is ₹ 1,00,000.
Depreciation for the First year:
\(\frac { Remaining life including C.Y × Cost of asset }{ Sum of digits of life of asset }\)
→ Remaining life including C.Y. =10
→ Sum of digits n\(\frac { (n+1) }{ 2 }\) = \(\frac { 10×11 }{ 2 }\) = 55
Depreciation = \(\frac { 10 }{ 55 }\) x 1,00,000 = ₹ 18,181.
Depreciation for Second Year = \(\frac { 9 }{ 55 }\) x 1,00,000 = ₹ 16,363

Note : The depreciation is reducing year by year.

Depreciation Accounting MCQ Questions

1. Depreciation is:
(a) a fall in the original cost of an asset
(b) a fall in the book value of an asset
(c) a fall in the market value of asset
(d) a fall in the real value of an asset
Answer:
(b) a fall in the book value of an asset

2. Depreciation is:
(a) a process of valuation of fixed asset
(b) a process of allocation of the cost of fixed asset
(c) a method of providing funds for replacement
(d) a process of writing off losses
Answer:
(b) a process of allocation of the cost of fixed asset

3. The amount of depreciation remains constant year after year under:
(a) Written Down Value Method
(b) Straight Line Method
(c) Sinking Fund Method
(d) Annuity Method
Answer:
(b) Straight Line Method

4. Any Profit of Loss on the sale of Sinking (depreciation)fund investment is transferred to:
(a) Profit and loss account
(b) Asset account
(c) Sinking fund account (depreciation fund account)
(d) Depreciation A/c
Answer:
(c) Sinking fund account (depreciation fund account)

5. Under annuity method, the amount of depreciation is:
(a) Increasing every year
(b) Decreasing every year
(c) Fixed for all the years
(d) Revalued every year
Answer:
(c) Fixed for all the years

6. The number of production units expected to be obtained from the use of an asset by an enterprise is called as:
(a) Unit life
(b) Useful life
(c) Production life
(d) Expected life
Answer:
(b) Useful life

7. In which of the following methods, the cost of the asset is not spread over in equal proportion during its useful economic life?
(1) Straight Line Method
(2) Written Down Value Method
(3) Units of Production Method
(4) All of the above
(a) 2 and 3
(b) 1 and 2
(c) 3 and 4
(d) 1 and 4
Answer:
(a) 2 and 3

8. For charging depreciation, on which of the following assets, the depletion method is adopted?
(a) Plant & machinery
(b) Land & building
(c) Goodwill
(d) Wasting assets like mines and quarries
Answer:
(d) Wasting assets like mines and quarries

9. If a concern proposes to discontinue its business from March 31,2006 and decided to dispose off all its assets within a period of 4 months, the Balance Sheet as on March 31,2006 should show the assets at their:
(a) Historical cost
(b) Net realizable value
(c) Cost less depreciation
(d) Cost price or market value, whichever is lower.
Answer:
(b) Net realizable value

10. Obsolescence of a depreciable asset may be caused by:
I. Technological Changes
II. Improvement in Production Method
III. Change in Market Demand for the Product or Service Output
IV. Legal or Other Restrictions
(a) Only (I) above
(b) Both (I) and (II) above
(c) All (I), (II),(III) and (IV) above
(d) only (IV) above.
Answer:
(c) All (I), (II),(III) and (IV) above

11. Using the equal instalment method for depreciation the relevant formula is:
(a) Annual charge against profit = \(\frac { Originalcost-Residual value }{ Number of year of active life }\)
(b) Annual charge against profits = \(\frac { Number of year of active life }{ Originalcost-Residualvalue }\)
(c) Annual charge against profits = \(\frac { Originalcost-Residual value }{ Estimated number of year remaining }\)
(d) Annual charge against profits = \(\frac { Estimated number of year remaining }{ Originalcost-Residual value }\)
Answer:
(a) Annual charge against profit = \(\frac { Originalcost-Residual value }{ Number of year of active life }\)

12. A Second hand machinery was purchased for ₹ 1,00,000 five years ago and was overhauled by carrying out some repairs at a cost of ₹ 10,000. It has also an accumulated depreciation of ₹ 50,000. It has been disposed off in the beginning of the sixth year for ₹ 60,000.Profit /loss on such disposal shall be:
(a) Profit of ₹ 10,000
(b) Loss of ₹ 50,000
(c) Loss of ₹ 40,000
(d) No Profit, no loss
Answer:
(d) No Profit, no loss

13. An asset was purchased for ₹ 12,500 and under the reducing balance method 20 percent of the reducing value of the asset is written off each year. What is the value of the asset at the end of three years?
(a) ₹ 8,000
(b) ₹ 7,500
(c) ₹ 6,400
(d) ₹ 5,000
Answer:
(c) ₹ 6,400

14. A machine is purchased for ₹ 200. To achieve a residual value of ₹ 128 at the end of the second year (assuming that depreciation is calculated at the end of each year) the percentage depreciation using the reducing balance method must be:
(a) 72%
(b) 36%
(c) 20%
(d) 12%
Answer:
(c) 20%

15. The main objective of providing depreciation is to:
(a) Create secret reserves
(b) Reduce the book value of assets
(c) Value the assets property
(d) Allocate cost of the assets
Answer:
(d) Allocate cost of the assets

16. Charging a period for the proportionate cost of an intangible asset is termed as:
(a) depreciation
(b) diminution
(c) amortisation
(d) expiration
Answer:
(c) amortisation

17. In the books of D Ltd. machinery account shows a debit balance of ₹ 60,000 as on April 1,2003. The machinery was sold on September 30,2004 for 7 20,000. The Company charges depreciation @ 20% P.a. on diminishing balance method Profit / Loss on sale will be:
(a) ₹ 23,200 Profit
(b) ₹ 23,200 loss
(c) ₹ 7,800 Profit
(d) ₹ 7,800 loss
Answer:
(b) ₹ 23,200 loss

18. A new machine costing ₹ 1,10,000 was purchased by a company to manufacture a special product. Its useful life is estimated to be 5 years and scrap value of 7 20,000. The production plan for the next 5 years using the above machine is as follows:
Year 1-10,000 units: Year 2-20,000 units: Year 3-24,000 units: Year4- 40,000 units : year 5- 50,000 units.
The depreciation for the 1sl year under units-of-production method will be
(a) ₹ 6,250
(b) ₹ 12,500
(c) ₹ 15,000
(d) ₹ 25,000
Answer:
(a) ₹ 6,250

19. A Co. purchased a machine on Jan, 1,03 for ₹ 2,20,000. Installation expenses were ₹ 40,000. Residual value after 5 years ₹ 5,000 on 01.07.2003, expenses for repairs were incurred to the extent of ₹ 2,000. Depreciation is provided @ 10% p.a. underwritten down value method. Depreciation for the 4th year will be:
(a) ₹ 52,000
(b) ₹ 26,000
(c) ₹ 21,060
(d) ₹ 18,954
Answer:
(d) ₹ 18,954

20. Original Cost = ₹ 1,30,000: Salvage Value = 4,000. Useful Life = 6 years.
Depreciation for the first year under sum of years digits method will be:
(a) ₹ 6,000
(b) ₹ 12,000
(c) ₹ 18,000
(d) ₹ 36,000
Answer:
(d) ₹ 36,000

21. A Co. purchased a machine on Jan 1,2003 for ₹ 1,20,000. Installation expenses were ₹ 10,000. Residual value after 5 years ₹ 5,000. On July 1, 2003 expenses for repairs were incurred to the extent of ₹ 2,000. Depreciation is provided under straight line method. Annual Depreciation will be:
(a) ₹ 13,000
(b) ₹ 24,000
(c) ₹ 21,000
(d) ₹ 25,000
Answer:
(d) ₹ 25,000

22. Original Cost of a machine was ₹ 1,26,000; Salvage Value was nil, Useful Life was 6 years. Depreciation for the fourth year under sum of years digits method will be:
(a) ₹ 6,000
(b) ₹ 12,000
(c) ₹ 18,000
(d) ₹ 24,000
Answer:
(c) ₹ 18,000

23. Which of the following statements is / are True?
I. The term ‘depreciation’,’depletion’ and ‘amortization’ convey the same meaning.
II. Provision for depreciation a/c is created.
III. The main purpose of charging the Profit and Loss a/c with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) All (I), (II) and (III) above.
Answer:
(d) All (I), (II) and (III) above.

24. Which of the following expenses is not included in the acquisition cost of a Plant and Equipment?
(a) Cost of site preparation
(b) Delivery and handling Charges
(c) Installation costs
(d) Financing costs incurred subsequent to the period after plant and equipment is put to use.
Answer:
(d) Financing costs incurred subsequent to the period after plant and equipment is put to use.

25. The portion of the acquisition cost of the asset, yet to be allocated is known as:
(a) Written down value
(b) Accumulated value
(c) Realizable value
(d) Salvage value
Answer:
(a) Written down value

26. Depreciation is charged because of:
(i) Wear & tear
(ii) Deterioration
(iii) Depletion
(iv) Passage of time
(a) Only (i)
(b) Both (i) & (iii)
(c) Only (ii)
(d) All (i), (ii), (iii) & (iv)
Answer:
(d) All (i), (ii), (iii) & (iv)

27. Objectives of charging depreciation are:
(i) Ascertaining correct profits
(ii) Ascertaining the cost of the product
(iii) To gain tax benefits
(iv) To meet the legal requirements
(a) Both (i) & (ii)
(b) (iii) only
(c) Both (ii) & (iv)
(d) All (i), (ii), (iii) & (iv)
Answer:
(d) All (i), (ii), (iii) & (iv)

28. If an asset is purchased for ₹ 5,00,000 and installation charges are ₹ 50,000. The estimated scrap value is ₹ 1,00,000 and the useful life of the asset is 5 years, then the amount of depreciation to be charged as per SLM method is:
(a) ₹ 90,000
(b) ₹ 80,000
(c) ₹ 1,11,111
(d) ₹ 1,20,000
Answer:
(a) ₹ 90,000

29. Scrap value of an asset refers to the amount that it can fetch at the:
(a) Beginning of its life
(b) End of its life
(c) Middle of its life
(d) None of the above
Answer:
(b) End of its life

30. Obsolescence of a depreciable asset Is caused by:
(a) Change in technology
(b) Innovation
(c) Improvement in the method of production
(d) All of the above
Answer:
(d) All of the above

31. Depreciation is a process of:
(a) Verification of asset
(b) Degradation of asset
(c) Allocation of cost of asset to the period of its life
(d) All of the above
Answer:
(c) Allocation of cost of asset to the period of its life

32. Annuity method of depreciation is suitable for:
(a) Tangible assets
(b) Intangible assets
(c) Leasehold assets
(d) None of the above
Answer:
(c) Leasehold assets

33. A gold mine was taken on lease for ₹ 50,00,00,000. The total production capacity of the mine is 10,000 tonnes. The total production in the year 2010 was 2,000 tonnes. The depreciation for the year 2010 is:
(a) ₹ 10,00,00,000
(b) ₹ 5,00,00,000
(c) ₹ 20,00,00,000
(d) None of the above
Answer:
(a) ₹ 10,00,00,000

34. Depletion method is normally applied in case of:
(a) Wasting Assets
(b) Intangible Asset
(c) Tangible Asset
(d) None of these
Answer:
(a) Wasting Assets

35. In the sinking fund method of charging depreciation, the amount debited to P&L A/c is:
(a) More in the initial years
(b) More in the ending year
(c) Remains the same every year
(d) None of the above
Answer:
(c) Remains the same every year

36. If diminishing value method is used then the amount of depreciation charged to P&L A/c is:
(a) Equal in all years
(b) Decreases year after year
(c) Increases year after year
(d) None of these
Answer:
(b) Decreases year after year

37. In sinking fund investments method, the profit on sale of investments is transferred to:
(a) Asset A/c
(b) Bank A/c
(c) Depreciation Fund A/c
(d) Depreciation Fund Investment A/c
Answer:
(c) Depreciation Fund A/c

38. Under the insurance policy method, the fixed premium is paid:
(a) To the beginning of the year
(b) Middle of the year
(c) End of the year
(d) None of the above
Answer:
(a) To the beginning of the year

39. In group depreciation method:
(a) Assets having similar average life is grouped together
(b) Depreciation is charged on the entire group and not on individual assets
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

40. The effect of change in the method of depreciation is to be taken:
(a) Retrospectively
(b) Prospectively
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Retrospectively

41. Depreciation is charged on the:
(a) Historical cost
(b) Replacement cost
(c) Realisable cost
(d) None of these
Answer:
(a) Historical cost

42. During inflationary period, which method of depreciation is the most suitable:
(a) Charging depreciation on historical cost
(b) Charging depreciation on realisable value
(c) Charging depreciation on replacement cost
(d) None of the above
Answer:
(c) Charging depreciation on replacement cost

43. A machine was purchased for ₹ 10,000 on Jan, 2008. Depreciation is to be charged @ 25% on WDV method. It was sold for ₹ 6,000 at the end of the third year. Calculate the profit / loss:
(a) Profit ₹ 1,781
(b) Profit ₹ 2,300
(c) Loss ₹ 3,219
(d) Loss ₹ 3,299
Answer:
(a) Profit ₹ 1,781

44. Which of the following is depleted?
(a) Land
(b) Goodwill
(c) Machinery
(d) Quarries
Answer:
(d) Quarries

45. Which method is allowed as per Income Tax Act?
(a) Reducing balance method
(b) Sinking fund method
(c) Annuity method
(d) Straight line method
Answer:
(a) Reducing balance method

46. Under the annuity method, the asset account is debited by:
(a) Depreciation fund A/c
(b) Interest A/c
(c) Sinking fund A/c
(d) None of these
Answer:
(b) Interest A/c

47. Which method of depreciation considers the element of interest on capital outlay?
(a) WDV method
(b) Sinking fund method
(c) Annuity method
(d) SLM method
Answer:
(c) Annuity method

48. The value of an asset is ₹ 50,000. Its working life is 10 years. Firm uses sum of years digits method for providing depreciation. What will be the amount of depreciation for second year?
(a) ₹ 5,000
(b) ₹ 9,091
(c) ₹ 4,500
(d) ₹ 8,181
Answer:
(d) ₹ 8,181
Sum of year digits = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55
Depreciation for the second year will be:
= 50,000 x \(\frac { 9 }{ 55 }\)
= ₹ 8,181

49. Decrease in value of a fixed asset due to normal wear and tear is known as:
(a) Depreciation
(b) Obsolescence
(c) Appropriation
(d) Spoilage.
Answer:
(a) Depreciation
Depreciation means a fall in the value of asset due to usage, efflux of time or due to obsolescence. In other words we can say, that decrease in value of a fixed assets due to normal wear and tear is known as Depreciation.

50. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its erection. On the date of purchase, it was estimated that effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for second year on straight line basis
is:
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) ₹ 6,200
Answer:
(a) ₹ 5,000
Cost of Machine = 50,000 + 6,000 = ₹ 56,000
Depreciation as per Straight line basis = \(\frac { Cost of Machine-Scrap value }{ Estimated Life of year }\)
= \(\frac{56,000-6,000}{10}\)
= ₹ 5 000
Depreciation for each year will be ₹ 5,000
Thus, Second year Depreciation = ₹ 5,000

51. A firm charges depreciation on straight line method. The rate of depreciation is reduced from 25% to 10%. What will be the impact of this change on profits?
(a) Decrease in profits
(b) Increase in profits
(c) Decrease in assets
(d) Increase in expenses.
Answer:
(b) Increase in profits
Depreciation is transferred to debit side of profit & loss A/c. If depreciation rate is reduced from 25% to 10%, depreciation amount will be less than other past years. The less amount of depreciation will be transferred to profit & loss A/c while will result in increase in profits.

52. Under straight line method, depreciation is calculated on:
(a) Written Down Value
(b) Salvage Value
(c) Original Cost
(d) Market Value
Answer:
(c) Original Cost
Under straight line method, a fixed proportion of the original cost of the asset is written off each year so that asset account may be reduced to its residual value at the end of its estimated economic useful life. Thus, it can be said that under this method, depreciation is calculated on Original Cost.

53. Which of the following assets are shown at written down value in Balance Sheet?
(a) Current Assets
(b) Liquid Assets
(c) Floating Assets
(d) Fixed Assets
Answer:
(d) Fixed Assets
Depreciation is charged only on fixed assets and depreciation is a permanent, continuous and gradual shrinkage in the book value of fixed assets. So, it can be said that Fixed Assets are shown at written down value in Balance Sheet.

54. On 1st April, 2012 in Sethi’s Ledger, furniture account showed a balance of ₹ 2,00,000. On 1st October, 2012 Sethi purchased new furniture by paying ₹ 5,000 and giving old furniture whose book value on 1st April, 2012 was ₹ 12,000 to the seller. Sethi provides depreciation on furniture @ 10% per annum on diminishing balance method. The net value of furniture in Sethi’s books as on 31st March, 2013 would be:
(a) ₹ 1,85,080
(b) ₹ 1,83,960
(c) ₹ 1,84,780
(d) ₹ 2,04,400.
Answer:
(c) ₹ 1,84,780
In Books of Sethi
Furniture Account
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 3

55. The written down value of machine on 31st March, 2013 is ₹ 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
(a) ₹ 1,00,000
(b) ₹ 90,000
(c) ₹ 81,000
(d) ₹ 72,900.
Answer:
(a) ₹ 1,00,000
Cost price of machine = \(\frac{72,900}{90 \% \times 90 \% \times 90 \%}\)
= ₹ 1,00,000

56. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 8%
(b) 9%
(c) 10%
(d) None of the above.
Answer:
(b) 9%
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 4

57. Madhur and Company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and Company is ₹ 3,89,344. What was the purchase value of machine.
(a) ₹ 5,00,000
(b) ₹ 4,60,000
(c) ₹ 4,23,000
(d) ₹ 5,52,000.
Answer:
(a) ₹ 5,00,000
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 5

58. The value of a fixed asset after deducting depreciation is known as its __________.
(a) Book value
(b) Market Value
(c) Face Value
(d) Realisable value.
Answer:
(a) Book value
The value of a fixed asset after deducting depreciation is known as written down value or book value.

59. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its creation. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for each year on straight line basis is __________.
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) None of the above.
Answer:
(a) ₹ 5,000
Total cost of machinery will be = 50,000 + 6,000 = ₹ 56,000
Scrap value after 10 years will be = ₹ 6,000
Dep. on the basis of straight line
= \(\frac { Cost of machinery – Scrap Value }{ Life of machinery }\)
= \(\frac{56,000-6,000}{10}\)
= ₹ 5,000
Thus, Option (a) is right.

60. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its books of account on 31st December every year, what would be the net book value of the equipment as at 31st December, 2013 __________.
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545.
Answer:
(a) ₹ 12,250
Calculation of Net Book Value of the Equipment
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 6

61. Coal mine is which type of asset __________.
(a) Fixed Asset
(b) Current Asset
(c) Wasting Asset
(d) Fictitious Asset.
Answer:
(c) Wasting Asset
Coal mines are wasting assets as their value loses because they get exhausted on account of continuous extractions.

62. If the original and current price of machinery is given, it will be recorded at which value?
(a) Historical value
(b) Market value
(c) Realisable value
(d) Original cost.
Answer:
(d) Original cost.
Due to the cost concept, we record the fixed assets at cost price and not at market price.

63. An equipment was purchased on 1st January, 2012 for ₹ 25,000 & is to be depreciated at 30% based on WDV method. If the company closes its books of account on 31st March every year. What would be the net book value of the equipment as at 31st December 2013:
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
Answer:
(a) ₹ 12,250
Calculation of Net Book Value of the Equipment
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 7

64. Which of the following are amortised :
(a) Patent
(b) Copyright
(c) Goodwill
(d) All of these
Answer:
(d) All of these
Amortization is nothing but the name given to the depreciation charged on intangible assets such as goodwill, patents, copyright, trademark, etc.
Hence, all of the above are amortized.

65. The WDV of machine is ₹ 72,900, rate of depreciation @ 10%, period 3 years. Calculate the original cost of machinery.
(a) ₹ 72,900
(b) ₹ 80,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000.
Answer:
(d) ₹ 1,00,000.
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 7a

66. Valueless assets are treated as:
(a) Tangible Asset
(b) Intangible Asset
(c) Fictitious Asset
(d) Current Asset.
Answer:
(c) Fictitious Asset
Fictitious assets are those assets which have no value but are recognised as an asset. Thus, the valueless assets are treated as fictitious assets.

67. A company purchased a mine of ₹ 50,000. Its scrap value is ₹ 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life. Units produced in first 3 years are 7,000, 15,000 and 19,000 respectively. Calculate the amount of depreciation for the third year by using depletion method.
(a) ₹ 3,150
(b) ₹ 8,550
(c) ₹ 3,000
(d) ₹ 6,750
Answer:
(b) ₹ 8,550
Rate of depreciation = \(\frac { Total cost of mine }{ Total Units }\)
= \(\frac{50,000-5,000}{1,00,000}\)
= 45
= 45%
Depreciation = Quantity extracted during the year x Rate of depreciation
= 19000 x 45%
= ₹ 8,550 is the depreciation for third year.
Hence option (b) is correct.

68. The value of a fixed asset after deducting depreciation is known as its __________.
(a) Face Value
(b) Market Value
(c) Realisable Value
(d) Book Value
Answer:
(d) Book Value
Depreciation is a process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner. The value of a fixed asset after deduction of depreciation is said as book value of the respective asset.

69. Samar purchased a machinery worth ₹ 1,00,000 and spent ₹ 20,000 on its repairs and ₹ 15,000 on its carriage. He decided to sell the machinery at 25% margin on selling price. What will be the expected sale value of machinery?
(a) ₹ 1,25,000
(b) ₹ 1,53,000
(c) ₹ 1,80,000
(d) ₹ 1,33,000
Answer:
(c) ₹ 1,80,000
Cost of machinery = ₹ 1,00,000 + 20,000 + 15,000
= ₹ 1,35,000.
25% on selling price = \(\frac { 25 }{ 100-25 }\) on cost.
\(\frac { 25 }{ 75 }\) x ₹ 1,35,000 = ₹ 45,000
₹ 1.35,000 + ₹ 45,000 = ₹ 1,80,000

70. A decrease in value of fixed asset due to age, wear and tear:
(a) Appreciation
(b) Written down value
(c) Depreciation
(d) Accumulated depreciation.
Answer:
(c) Depreciation
Depreciation is decrease in value of fixed asset due to physical wear and tear, obsolescence, passage of time.

71. Depletion is charged on:
(a) Fixed Assets
(b) Wasting Assets
(c) Current Assets
(d) All of the above
Answer:
(b) Wasting Assets
Depletion method is applicable in case of wasting assets, example – mines, quarries, oil well etc. from which a certain quantity of output is expected to be obtained.

72. An asset becomes useless because of technical changes this is because of:
(a) Obsolescence
(b) Physical Deterioration
(c) Depletion
(d) Passage of time
Answer:
(a) Obsolescence
Sometimes an asset becomes useless because of technical changes within the industry, technical progress in other industry, change in supply etc., this is known as Obsolescence.

73. Which of the following is not considered while calculating depreciation under straight line method?
(a) Salvage value of asset
(b) Annual repair cost of the asset
(c) Life of the asset
(d) Cost of the asset.
Answer:
(b) Annual repair cost of the asset
Under straight line method, a fixed proportion of the original cost of the asset is written off each year, so that asset account may be reduced to its residual value at the end of its estimated economic useful life. It ignores annual repair cost of the asset.
The formula is:
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 8

74. On 14th April, 2014 tools account showed a balance of ₹ 12,960. On 31st March, 2015 closing balance of tools was ₹ 14,040. The tools purchased during the year were for ₹ 4,320. Depreciation on loose tools for the year would be:
(a) ₹ 3,240
(b) ₹ 1,080
(c) ₹ 3,600
(d) ₹ 3,000
Answer:
(a) ₹ 3,240
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 9

75. As per Income Tax Act, which method of providing depreciation is recognised?
(a) Replacement method
(b) Depletion method
(c) Diminishing balance method
(d) Sum of the year digit method.
Answer:
(c) Diminishing balance method
Diminishing Balance Method is recognised by the income tax authorities. Under this depreciation is calculated at a certain percentage each year on the balance of the assets which is brought forward in the previous year. Thus, amount of depreciation becomes higher in the earlier periods and becomes gradually lower in subsequent periods, while repairs and maintenance charges increase gradually.

76. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 9%
(b) 8%
(c) 10%
(d) 7%
Answer:
(a) 9%
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 10

77. On April 1,2013 the debit balance of the Machinery A/c of A Ltd. was ₹ 7,29,000. The machine was purchased on April 1,2010. The company charged depreciation @ 10% p.a, under diminishing balance method. The value of machinery on April 1,2012 was:-
(a) ₹ 10,00,000
(b) ₹ 9,00,000
(c) ₹ 8,10,000
(d) ₹ 12,00,000
Answer:
Let the Original Cost be 100 Dep. @ 10% under WDV
Cost after 1 year = 100 – 10 = 90
Cost after 2 year = 90 – 9 = 81
Cost after 3 year = 81 – 8.1 = 72.9
Original Cost = \(\frac { 100 }{ 72.9 }\) x 7,29,000 = 10,00,000
Cost on 1 April, 2010 = ₹ 10,00,000
Cost on 1 April, 2011= ₹ 9,00,000
Cost on 1 April, 2012 = ₹ 8,10,000

78. The amount of depreciation charged on machinery will be debited to __________.
(a) Machinery A/c
(b) Depreciation A/c
(c) Cash A/c
(d) Repair A/c.
Answer:
(b) Depreciation A/c
The amount of depreciation charged on machinery will be debited to depreciation account. Hence, option (b) is correct.

79. A company purchased a mine of ₹ 50,000. Its scrap value is ₹ 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life. Units produced in first 3 years are ₹ 7,000, ₹ 15,000 and ₹ 19,000 respectively. Calculate the amount of depreciation for the third year by using depletion method.
(a) ₹ 3,150
(b) ₹ 8,550
(c) ₹ 3,000
(d) ₹ 6,750
Answer:
(b) ₹ 8,550
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 11

80. The written down value of machine on 31st March 2013 is ₹ 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
(a) ₹ 1,00,000
(b) ₹ 90,000
(c) ₹ 81,000
(d) ₹ 72,900
Answer:
(a) ₹ 1,00,000
Cost price of Machine would be ₹ 1,00,000 on 1st April, 2010.
Written down Value of Machine on 1st April, 2011 is ₹ 90,000 (1,00,000 – 1,00,000 x 10%).
Written down Value of Machine on 1st April, 2012 is (90,000 – 90.0 x 10%) = ₹ 81,000.
Written down Value of Machine on 31st March, 2013 is (81,000 – 81.0 x 10%) = ₹ 72,900.

81. E Ltd. a dealer in second-hand machinery has the following five machines of different models and makes in their stock, at the end of the financial year 2012-13?
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 12
The value of stock included in the Balance Sheet of the company as on 31st March, 2013 was:
(a) ₹ 7,62,500
(b) ₹ 7,70,000
(c) ₹ 7,90,000
(d) ₹ 8,70,000
Answer:
(b) ₹ 7,70,000
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 13
So, Closing Stock included in Balance Sheet by following Golden Rule ‘Cost or NRV whichever is lower’.
Machine cost or NRV whichever is less taken
A – 90,000, C – 2,65,000, E – 2,00,000
B – 1,15,000, D-1,00,000
Total Stock included in Balance Sheet is
90,000 + 1,15,000 + 2,65,000 + 1,00,000 + 2,00,000 = ₹ 7,70,000

82. Fire Insurance premium paid on 1st October, 2011 for the year ended on 30th September, 2012 was ₹ 2,400 and Fire Insurance Premium paid on 1st October, 2012 for the year ending on 30th September, 2013 was ₹ 3,200. Fire Insurance Premium paid as shown in the profit and loss account for the accounting year ended 31st December, 2012 would be:
(a) ₹ 2,400
(b) ₹ 2,600
(c) ₹ 2,800
(d) ₹ 3,000
Answer:
(b) ₹ 2,600
Premium paid as follows:
1.10.11 – 30.9.12 2,400
1.10.12 – 30.9.13 3,200
Premium to be shown in P/L A/c for the year ending on 31.12.12 would be:
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 14

83. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 8%
(b) 9%
(c) 10%
(d) None of the above
Answer:
(b) 9%
Plant purchased for ₹ 50,000 Residual Value = ₹ 5,000
So, Plant Cost after Residual Value is ₹ 45,000 (50,000 – 5,000)
Useful life = 10 years.
Rate of Depreciation = ?
Amount of Depreciation = \(\frac{50,000-5,000}{10}\)
= \(\frac{45,000}{10}\)
= 4,500
Amount of depreciation = Original Cost x \(\frac{Rate of Deprecation}{100}\)
4,500 = 50,000 x \(\frac{Rate of Deprecation}{100}\)
Rate of Depreciation = \(\frac{4,500 \times 100}{50,000}\) = 9%

84. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated @ 30% based on written down value method. If the company closes its books of accounts on 31st March every year. What would be the net book value of the instrument /equipment as at on 31st December, 2013.
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
Answer:
(d) ₹ 12,545
Purchase Price of Asset: ₹ 25,000 (Jan. 2012)
Depreciation = \(\frac{Price of on Asset }{100 }\) x Rate of Depreciation
Jan 2012 – March 2012 = \(\frac{25,000}{100} \times 30 \times \frac{9}{12}\) = ₹ 1,875
Value of an asset on 1st April, 2012 = 25,000 – 1,875 = ₹ 23,125
Dep. for 1st April, 2012 to 31st March, 2013 = 23,125 x \(\frac{ 30 }{100}\) = ₹ 6,938
Value of an asset on 1st April, 2013 = 23,125 – 6,938 = ₹ 16,187
Dep. for 1st April, 2013 to 31st Dec. 2013 = 16,187 x \(\frac{ 30 }{100}\) x \(\frac{9}{12}\) = ₹ 3,642
Book Value of An Asset = Purchase Price of Asset – Sum of all depreciation.
Purchase Price : ₹ 25,000
Sum of All depreciation = 1,875 + 6,938 + 3,642 = 12,455
= 25,000 – 12,455 = ₹ 12,545, hence, option (d) is correct.

85. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its erection. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for each year on straight line basis is:
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) None of the above
Answer:
(a) ₹ 5,000
Depreciation = \(\frac{Cost-Scrap Value}{Estimated useful life}\)
= \(\frac{56,000-6,000}{10}\)
= ₹ 5,000 p.a.

86. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its book of accounts on 31st March every year, what would be the net book value of the equipment as at 31st December, 2013:
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
Answer:
(d) ₹ 12,545
Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes 15

87. Madhur and company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and company is ₹ 3,89,344 what was the purchase value of machine:
(a) ₹ 5,00,000
(b) ₹ 4,60,000
(c) ₹ 4,23,000
(d) ₹ 5,52,000
Answer:
(a) ₹ 5,00,000
Cost of Machine = \(\frac{3,89,344}{92 \% \times 92 \% \times 92 \%}\)
= ₹ 5,00,000.

88. The value of a fixed asset after deducting depreciation is known as its:
(a) Book value
(b) Market value
(c) Face value
(d) Realisable value
Answer:
(a) Book value
Value of an asset, less its depreciation is known as its book value or written down value.

89. Under which method of depreciation value can be zero __________.
(a) SLM
(b) WDV
(c) Both ‘a’ and ‘b’
(d) None of the above
Answer:
(a) SLM
As the book value reduces every years, it is also known as the Reducing Balance Method or written down value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of asset never reduces to zero.

90. Depreciation is provided under which AS?
(a) AS-1
(b) AS-6
(c) AS-10
(d) AS-4
Answer:
(c) AS-10
Deprecation under AS 10 Property, Plant and Equipment Depreciable amount of any asset should be allocated on a methodical basis over the useful life of asset. Every part of property or P&E (Plant and Equipment) whose cost is substantial with respect to the overall cost of the item must be depreciated separately

91. Among which of the following is changed in depreciation?
(a) SLM or WDV
(b) WDV or SLM
(c) Both
(d) None
Answer:
(c) Both
Method of Deprecation are:

  • WDV
  • SLM
  • Depletion method
  • Double dealing method
  • Annuity method
  • Machine hours method etc.

92. Which of the following is common method of charging depreciation
(a) SLM
(b) WDV
(c) Annuity
(d) None
Answer:
(a) SLM
The most commonly used method for calculating depreciation under generally accepted accounting principles, or GAAP, is the straight line method. This method is the simplest to calculated results in fewer errors, stays the most consistent and transitions well from company prepared statements to tax returns.

Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes

Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes

Go through this Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Meaning:

  • A debenture is a bond issued by a company acknowledging a debt and containing provisions for repayment of interest and principal.
  • It refers to the loan capital of the company or a source of long-term borrowing.
  • The interest on debentures is a charge against profits of the company.
  • The holders of debentures are known as the debenture holders.
  • Debenture holders are not the owner of the company and hence, do not have voting rights.
  • Debentures may or may not create a charge on the assets of the company.
  • Debentures may be issued at par, premium or discount.
  • Interest on debenture is to be paid even if the company does not earn any profits i.e. at loss also.

Distinction between Shares and Debentures:

Shares Debentures
1. Shareholders are owners of company. Debenture holders are creditors of the company.
2. Shareholders have voting rights. Debenture holders do not have voting rights.
3. Dividend on equity shares is not fixed and is an appropriation of profit. Interest on debentures is at a fixed rate and is a charge against profit.
4. Shares are owned capital of the company. Debentures are the loan capital of the company.
5. In Balance Sheet, shares are shown under Shareholders fund. Debentures are shown in the Balance Sheet under the head Non-Current liabilities.

Types of Debentures:

  • Secured Debentures: These are secured by a charge on the assets of the company.
  • Unsecured Debentures: These are not secured by any charge on the assets of the company.
  • Convertible Debentures: Debentures which have an option of conversion into equity shares at some point of time are called convertible debentures.
  • Non-convertible Debentures: These can never be converted into equity shares.
  • Redeemable Debentures: These debentures have to be redeemed after a fixed period of time.
  • Irredeemable Debentures: Also known as perpetual debentures, these are not redeemable and will be repaid only at the time of liquidation.
  • Registered Debentures: These debentures are payable only to that person whose name is present in the Register of Debenture holders. These are not transferred by mere delivery.
  • Bearer Debentures: Debentures which are transferred by mere delivery and not entered in Register are bearer debentures.

Issue of Debentures:
Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes 3
1. Issue of Debentures for cash:
(a) Debentures issued at par and redeemable at par –
→ If full amount is paid at once:
(i) Bank A/c                                   Dr.
To Debenture Application A/c (Being receipt of application money)

(ii) Debenture Application A/c      Dr.
To Debentures A/c (Being debentures allotted)

→ If payment is made in installments:
(i) Bank A/c                                    Dr.
To Debenture Application A/c (Being amount received on application)

(ii) Debenture Application A/c       Dr.
To Debenture A/c (Being debentures allotted)

(iii) Debenture Allotment A/c         Dr.
To Debenture A/c (Being allotment due)

(iv) Bank A/c                                   Dr.
To Debenture Allotment A/c (Being allotment money received)

(v) Debenture Calls A/c                   Dr.
To Debenture A/c (Being call due)

(vi) Bank A/c                                    Dr.
To Debenture Call A/c (Being call amount received)

(b) Issue of Debentures at a premium:
If premium is to be received at the time of allotment:
Debenture Allotment A/c                Dr.
To Debenture A/c To Securities Premium A/c

(c) Issue of Debentures at discount:
Debenture Allotment A/c                Dr.
Discount on issue of debenture A/c Dr.
To Debentures A/c
(Being Debentures issued at a discount)
All other entries will be same.

Note:
Discount on issue of debenture being a Capital Loss must be shown specifically on the asset side under the heading Non-Current Assets. Discount on issue of debentures should be written off as quickly as possible. However, it can be treated as deferred revenue expenditure and written off over the life of the debentures.

Introduction to Company Accounts-Issue of Debentures MCQ Questions

1. Unless written off, the loss on issue of debentures is shown:
(a) On the assets side of Balance Sheet
(b) On the debit side of Profit and Loss Account
(o) By way of deduction from the amount of debentures
(d) On the liabilities side of Balance Sheet.
Answer:
(a) On the assets side of Balance Sheet

2. If debentures are issued as consideration for purchase of any fixed asset, the entry is:
(a) Debit Asset A/c; Credit Vendor A/c
(b) Debit Asset A/c; Credit Bank A/c
(c) Debit Asset A/c; Credit Debentures A/c
(d) Debit Debenture A/c; Credit Asset A/c.
Answer:
(c) Debit Asset A/c; Credit Debentures A/c

3. When debentures are issued as collateral security, the final entry for recording the transaction in the books is:
(a) Credit Debentures A/c and Debit Cash A/c
(b) Debit Debenture Suspense A/c and Credit Cash A/c
(c) Debit Debentures Suspense A/c and Credit Debenture A/c
(d) Debit Cash A/c and Credit the Loan A/c for which security is given.
Answer:
(c) Debit Debentures Suspense A/c and Credit Debenture A/c

4. Interest payable on debentures is:
(a) an appropriation of profits of the company
(b) a charge against profit of the company
(c) transferred to sinking fund investment account
(d) transferred to general reserve.
Answer:
(b) a charge against profit of the company

5. A company issues 14%, debentures of ₹ 10,00,000 at a discount of 10%. The discount allowed will be treated in the account books as:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) Capital Loss
Answer:
(d) Capital Loss

6. Which of the following statements is false?
(a) At maturity, debenture holders get back their money
(b) Debentures can be forfeited for non – payment of call money.
(c) In company’s balance sheet, debentures are shown under the head Secured Loans.
(d) Interest on debentures is charged against profits.
Answer:
(b) Debentures can be forfeited for non – payment of call money.

7. Discount on issue of debentures is a:
(a) revenue loss to be charged in the year of issue
(b) capital loss to be written off from capital reserve
(c) capital loss to be written off over the period of the debentures
(d) capital loss to be shown as goodwill.
Answer:
(c) capital loss to be written off over the period of the debentures

8. When debentures are issued at par and are redeemable at premium, the credit given to Premium of Redemption of Debenture Account is in the nature of:
(a) Personal Account
(b) Real Account
(c) Nominal A/c – Exps.
(d) Nominal Account – Income
Answer:
(a) Personal Account

9. Loss on issue of debentures is treated as:
(a) Intangible Asset
(b) Non Current Asset
(c) Non Current Liability
(d) Miscellaneous Expenditure
Answer:
(b) Non Current Asset

10. Which of the following is false?
(a) A Company can issue redeemable debentures.
(b) A Company can issue debentures with voting rights.
(c) A Company can issue convertible debentures.
(d) A Company can buy its own debentures and shares.
Answer:
(b) A Company can issue debentures with voting rights.

11. The following journal entry appears in the books of X Co. Ltd:
Bank A/c Dr. ₹ 4,75,000
Loss on Issue of Debenture A/c Dr. ₹ 25,000
To 12% Debentures A/c 5,00,000
Debentures have been issued at a discount of:
(a) 15%
(b) 5%
(c) 10%
(d) 20%.
Answer:
(b) 5%

12. X Co. Ltd. purchased assets worth ₹ 28,80,000. It issued debentures of ₹ 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to the vendors of asset are:
(a) ₹ 30,000
(b) ₹ 28,000
(c) ₹ 32,000
(d) ₹ 35,000
Answer:
(a) ₹ 30,000

13. How many debentures will a company be required to issue for satisfying the purchase consideration of ₹ 28,80,000, if debentures of ₹ 100 are issued at a premium of ₹ 20 per debenture?
(a) ₹ 24,000
(b) ₹ 28,000
(c) ₹ 36,000
(d) ₹ 32,000
Answer:
(a) ₹ 24,000

14. F Ltd. purchased machinery from G company for a book value of ₹ 4,00,000. The consideration was paid by issue of 10% debentures of ₹ 100 each at a discount of 20%. The debenture account will be credited by:
(a) ₹ 4,00,000
(b) ₹ 5,00,000
(c) ₹ 3,20,000
(d) ₹ 4,80,000.
Answer:
(b) ₹ 5,00,000

15. T Ltd. has issued 15% Debentures of ₹ 20,00,000 at a discount of 10% on April 01,2004 and the company pays interest half-yearly on June 30 and December 31 every year. On March 31,2006, the amount shown as “interest accrued but not due” in the Balance Sheet will be:
(a) ₹ 75,000
(b) ₹ 2,25,000
(c) ₹ 1,50,000
(d) ₹ 3,00,000.
Answer:
(a) ₹ 75,000

16. When debentures of ₹ 1,00,000 are issued as Collateral Security against a loan of ₹ 1,50,000, the entry for issue of debentures will be:
(a) Credit Debentures ₹ 1,50,000 and debit cash A/c ₹ 1,50,000
(b) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Cash A/c ₹ 1,00,000
(c) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Debentures A/c ₹ 1,00,000
(d) Debit Cash A/c ₹ 1,50,000 and Credit Bank A/c ₹ 1,50,000.
Answer:
(c) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Debentures A/c ₹ 1,00,000

17. P Ltd. issued 10,000, 12% debentures of ₹ 100 each at a premium of 10%, which are redeemable after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year will be ________.
(a) ₹ 1,60,000
(b) ₹ 80, 000
(c) ₹ 20,000
(d) ₹ 16,000
Answer:
(c) ₹ 20,000

18. On May 01, 2003, Y Ltd. issued 7%, 40,000 convertible debentures of ₹ 100 each at a premium of 20%. Interest is payable on September 30 and March 31, every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March 31,2004 is:
(a) ₹ 2,80,000
(b) ₹ 2,33,333
(c) ₹ 3,36,000
(d) ₹ 2,56,667
Answer:
(d) ₹ 2,56,667

19. W Ltd. issued 20,000, 8% debentures of ₹ 10 each at par which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year is:
(a) ₹ 40,000
(b) ₹ 10,000
(c) ₹ 20,000
(d) ₹ 8,000
Answer:
(d) ₹ 8,000

20. Which of the following statements is false ________.
(a) Debenture is a form of public borrowing.
(b) It is customary to prefix debentures with the agreed rate of interest.
(c) Debenture interest is a charge against profits.
(d) The issue price and redemption value of debentures cannot differ.
Answer:
(d) The issue price and redemption value of debentures cannot differ.

21. Which of the following is not a characteristic of Bearer Debentures?
(a) They are treated as negotiable instruments.
(b) Their transfer requires a deed of transfer.
(c) They are transferable by mere delivery.
(d) The interest on it is paid to the holder irrespective of identity.
Answer:
(b) Their transfer requires a deed of transfer.

22. The debentures which are secured by a charge upon some or all assets of the company are known as:
(a) First mortgage debenture
(b) Second mortgage debenture
(c) Bearer debenture
(d) Secured debenture
Answer:
(d) Secured debenture

23. When debentures are to be redeemed at premium an extra entry has to be made at the time of issue of debentures, which a/c should be credited in this entry?
(a) Loss on issue of debentures A/c
(b) Debenture redemption premium A/c
(c) Bank A/c
(d) Debenture holder’s A/c
Answer:
(b) Debenture redemption premium A/c

24. When debentures are issued at par and are redeemable at premium, the credit given to premium on redemption of debentures account is in nature of:
(a) Personal A/c
(b) Real A/c
(c) Nominal A/c
(d) None of the above
Answer:
(a) Personal A/c

25. When debentures are issued at a discount, it is prudent to write off the discount:
(a) In the year of the issue of debentures
(b) During the life of the debentures if it is treated as deferred revenue expenditure.
(c) Within 3 years of the issue of debentures
(d) In the year of redemption of debentures
Answer:
(b) During the life of the debentures if it is treated as deferred revenue expenditure.

26. Ansh Ltd. issued 5,000 Debentures of ₹ 10 each for subscription. 4,000 Debentures were subscribed by the public by paying ₹ 3 as application money. Number of debentures allotted to public by Ansh Ltd. will be:
(a) 5,000 shares
(b) 4,000 shares
(c) 3,000 shares
(d) 1,000 shares
Answer:
(b) 4,000 shares

27. Interest received on debenture redemption fund investment is:
(a) Capital reserve a/c
(b) General reserve a/c
(c) Debenture redemption fund A/c
(d) None of the above
Answer:
(c) Debenture redemption fund A/c

28. Puru Ltd. issued 10,000 12% Debentures of ₹ 100 each at a discount of 10% payable in full on application by 31st March, 2007. Application were received for 12,000 debentures. Debentures were allotted on 9th June, 2007. The amount of excess money refunded on the same date will be:
(a) ₹ 1,80,000
(b) ₹ 1,00,000
(c) ₹ 1,10,000
(d) ₹ 1,50,000
Answer:
(a) ₹ 1,80,000

29. “Non-convertible” debentures is inferred as:
(a) Owner’s capital
(b) Loan capital
(c) Short term debts
(d) None of these
Answer:
(b) Loan capital

30. Tahil Ltd. has issued 14% Debentures of ₹ 20,00,000 at a discount of 10% on April 01, 2005 and the company pays interest half-yearly on June 30, and December 31 every year. On March 31,2007, the amount shown as “interest accrued but not due” in the balance sheet will be:
(a) ₹ 70,000 shown along with Debentures
(b) ₹ 2,10,000 under current liabilities
(c) ₹ 1,40,000 shown along with Debentures
(d) ₹ 2,80,000 under current liabilities
Answer:
(a) ₹ 70,000 shown along with Debentures

31. XYZ Ltd. purchased a machinery for ₹ 10,00,000 from Mohan Ltd. and the consideration was paid by the issue of 18% debentures of ₹ 100 each at a discount of 20%. Calculate the number of debentures to be issued:
(a) 12,500
(b) 10,000
(c) 9,333
(d) None of the above
Answer:
(a) 12,500

32. Yadav Ltd. purchased a building from Gandhi Ltd. for ₹ 50,00,000 and the consideration was paid by the issue of debentures of ₹ 100 each at a premium of ₹ 25 each. Calculate the number of debentures to be issued to Gandhi Ltd.
(a) 50,000
(b) 40,000
(c) 66,667
(d) None of the above
Answer:
(b) 40,000

33. Debenture holders are called the ________ of a company.
(a) Banker
(b) Owner
(c) Creditor
(d) Debtor
Answer:
(c) Creditor

34. ABC Ltd. purchased a machinery from Microtee Ltd. for ₹ 50,00,000 and the consideration was paid by issuing debentures of ₹ 100 each at a discount of 20%. Calculate the amount to be credited to the debenture account:
(a) ₹ 50,00,000
(b) ₹ 43,00,000
(c) ₹ 75,00,000
(d) ₹ 62,50,000
Answer:
(d) ₹ 62,50,000

35. Ram Ltd. purchased a car from Harish Ltd. for ₹ 10,00,000 and the consideration was paid by issuing debentures of ₹ 10 each at a premium of ₹ 2.5 each. Calculate the amount to be credited to Debentures Account:
(a) ₹ 8,00,000
(b) ₹ 13,33,000
(c) ₹ 12,50,000
(d) None of these
Answer:
(a) ₹ 8,00,000

36. Morseny Ltd. issued 2,000,15% debentures of ₹ 100 each at a premium of 10% which are redeemable after 10 years at a premium of 20%. Thus the discount of loss on debenture is to be written off:
(a) ₹ 20,000
(b) ₹ 10,000
(c) ₹ 40,000
(d) None of these
Answer:
(c) ₹ 40,000

37. ABCD Ltd. issued 1,000, 9% debentures of ₹ 100 each at a discount of 10%, which will be redeemed after 5 years at a premium of 10%. Calculate the discount on loss of issue of debentures to be written off each year:
(a) ₹ 40,000
(b) ₹ 20,000
(c) ₹ 10,000
(d) ₹ 5,000
Answer:
(c) ₹ 10,000

38. When the debentures are issued as a collateral security then what entry will be passed?
(a) No entry
(b) Debit Debenture Suspense A/c and Credit Debentures A/c
(c) Both (a) & (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) & (b)

39. Which of the following statement is NOT true?
(a) On maturity the debenture holders get back their money
(b) Debentures can be forfeited for non payment of call money
(c) In the balance sheet, debentures are shown under secured loans
(d) Interest on debentures is payable even in case of loss
Answer:
(b) Debentures can be forfeited for non payment of call money

40. Interest on debentures issued as a collateral security is paid on:
(a) Nominal value of debentures
(b) No interest is paid
(c) Face value of debentures
(d) Paid up value of debentures
Answer:
(b) No interest is paid

41. A debenture holder is entitled to:
(a) Fixed dividend
(b) Share in profits
(c) Voting rights in the company
(d) Interest at the fixed rates
Answer:
(d) Interest at the fixed rates

42. If the debentures allotted for consideration other than cash are more than the agreed purchase price, the difference shall be debited to:
(a) Goodwill Account
(b) P&LA/c
(c) Securities Premium A/c
(d) Debentures A/c
Answer:
(a) Goodwill Account

43. If the debentures allotted for consideration other than cash are less than the agreed purchase price, the difference is credit to:
(a) Goodwill A/c
(b) Capital Reserve A/c
(c) P&LA/c
(d) None of these
Answer:
(b) Capital Reserve A/c

44. Shares may be issued ________.
(a) For cash
(b) For consideration other than cash.
(c) For both (a) and (b)
(d) None of the above
Answer:
(c) For both (a) and (b)
Generally a company issue shares to raise his capital for cash but company may also issue shares for consideration other than cash to vendor who sell some assets to the company.
Thus, shares can be issued both for cash or consideration other than cash.

45. Which of the following will be the journal entry for recording the issue of shares at par against purchase of Machinery?
(a) Debit Machinery A/c, Credit Share Capital A/c
(b) Debit Share Capital A/c, Credit Machinery A/c
(c) Debit Bank A/c, Credit Share Capital A/c
(d) Debit Machinery A/c, Credit Cash A/c
Answer:
(a) Debit Machinery A/c, Credit Share Capital A/c
Following entry will be passed for recording the issue of shares at par against purchase of Machinery –
Machinery A/c Dr.
To Share Capital A/c

46. Debentures of a company can be issued ________.
(a) For cash
(b) For consideration other than cash
(c) As a collateral security
(d) Any of the above.
Answer:
(d) Any of the above.
Debentures are issued for cash by a company. A company may allot debentures to the vendors for acquiring some assets as payment for purchase consideration. A company obtains a loan from a bank or insurance policy, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered.
Thus, answer is all of the above.

47. On issue of debentures as a collateral security, which account is credited?
(a) Debentures Account
(b) Bank Loan Account
(c) Debenture holdings Account
(d) Debenture Suspense Account
Answer:
(a) Debentures Account
On issue of debentures as a collateral security, the following entry will be passed –
Debentures Suspense A/c Dr.
To Debentures A/c
Here, Debentures A/c will be credited

48. G Ltd. purchased land and building from H Ltd. at a book value of ₹ 2,00,000. The consideration was paid by issue of 12% debentures of ₹ 100 each at a discount of 20%. For this transaction, the debentures account would be credited with ________
(a) ₹ 2,60,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 1,60,000
Answer:
(b) ₹ 2,50,000
No. of Debentures will be
Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes 1
Debentures A/c will be credited by = No. of debentures x Face value of debentures = 2,500 x 100 = 2,50,000

49. A limited company issued a prospectus inviting application for 2,000 shares of ₹ 10 each at premium of ₹ 2 per share payable as follows:
On application – ₹ 2
On allotment – ₹ 5
(including premium)
On Ist call – ₹ 3
On IInd final call – ₹ 2
Application were received for 3,000 shares and allotment was made on pro-rata basis to applicant of 2,400 shares. Money received in excess on application was adjusted towards allotment.
Ramesh whom 40 shares were allotted, failed to pay allotment money & first call his shares were forfeited. Find the number of shares Ramesh has applied for₹
(a) 52
(b) 50
(c) 42
(d) 48
Answer:
(d) 48
Allotment to applicants of 2,400 shares = 2,000.
Ramesh applied for some shares.
He is allotted 40 shares.
He applied for shares = \(\frac{2,400}{2,000}\) x 40
= 48 shares
Hence, option (d) is correct.

50. T Ltd. has issued 14% Debentures of ₹ 20,00,000 at a discount of 10% in April 2013 and the company pays interest half- yearly on June 30 and December 31 every year. On March 31, 2014, the amount shown as ‘interest accrued but not due’ in the balance sheet will be:
(a) ₹ 70,000
(b) ₹ 2,80,000
(c) ₹ 1,40,000
(d) ₹ 2,10,000
Answer:
(a) ₹ 70,000
Accrued but not due means amount of interest computed as per the period of the computation but the payment of amount of installment is not due. So, on March, 31,2014, the amount shown as interest “accrued but not due” in the Balance sheet will be:
20,00,000 x \(\frac{14}{100}\) x \(\frac{3}{12}\) = ₹ 70,000

51. T Ltd. has issued 14% debentures of ₹ 20,00,000 at a discount of 10% in April, 2013 and the company pays interest half yearly on June 30, and December 31, every year. On March 31, 2014 the amount shown as interest accrued but not due in the balance sheet will be:
(a) ₹ 1,40,000
(b) ₹ 2,10,000
(c) ₹ 2,80,000
(d) ₹ 70,000
Answer:
(d) ₹ 70,000
Accrued interest but not due is that interest which has been earned since the last coupon payment. Because the bond hasn’t expired yet or the next payment is not yet due, the owner of the bond hasn’t officially received the money.
∴ Interest accrued but not due as on 31st March, 2014
→ \(\frac{20,00,000 \times 14 \% \times \frac{6}{12}}{2}\)
→ ₹ 70,000

52. The holder of debentures issued as collateral security to a loan is entitled to interest on:
(a) The amount of loan only
(b) On the face value of debentures
(c) Neither loan nor debentures
(d) Both the loan amount and debentures.
Answer:
(a) The amount of loan only
Where a company obtains a loan from a bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. Such an issue of debenture is known as “Debentures issued as collateral security.”

53. K Ltd. Issued ₹ 15,000, 12% Debentures of ₹ 50/- each at premium of 10% payable as ₹ 20/- on application and balance on allotment Debentures are redeemable at per after 6 years. All the money due on allotment was called up and revised. The amount of premium will be:
(a) ₹ 3,00,000
(b) ₹ 2,25,000
(c) ₹ 75,000
(d) ₹ 5,25,000
Answer:
(c) ₹ 75,000
K Ltd. issued deb = 15,000
Face Value = ₹ 50/-
Premium = 10% on face value
Amount of premium = \(\frac { 10 }{ 100 }\) x 50 = ₹ 5
Total premium = ₹ 5 x 15,000
= ₹ 75,000

54. Debenture is issued as a collateral security to a loan, interest will be given on ________.
(a) On debentures only
(b) Both loan & debentures
(c) On loan but not on debentures
(d) None of the following
Answer:
(c) On loan but not on debentures
The term ‘Collateral Security’ implies additional security given for a loan. Where a company obtains a loan from a bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered. In such a case, the lender has the absolute right over the debentures until and unless the loan is repaid.

On repayment of the loan, however, the lender is legally bound to release the debentures forthwith. But in case the loan is not repaid by the company on the due date or in the event of any other breach of agreement, the lender has the right to retain these debentures and to realise them. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. Such an issue of debentures is known as “Debentures issued as Collateral Security”.

55. Which of the following statement is true?
(a) A Debenture holder is an owner of the company.
(b) A Debenture is issued at a discount and can be redeemed at a premium.
(c) A Debenture Holder can get his money back only on liquidation.
(d) A Debenture Holder receives interest only in the event of profit
Answer:
(b) A Debenture is issued at a discount and can be redeemed at a premium.

A Shareholder is the owner of the company.
A Debenture is issued at discount and redeemed at premium.
A Debenture holder can get his money back on redemption also.
A Debenture holder gets profit irrespective of the fact that the company is earning profit or not.

56. Match list l with list II and select the correct answer using the codes given below the list:
Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes 2
Answer:
(d) 4 2 1 3
Discount on debenture is non-current liability because debenture cannot be redeemed within a year so, discount on debenture is not a current liability.

57. If shares are reissued, then they are issued at:
(a) Par
(b) Premium
(c) Discount
(d) All of the above.
Answer:
(d) All of the above.
If shares are reissued the would be issued at:
Forfeited share can be issued at Par, Premium and discount any of these. Hence, option (d) is correct.

58. G Ltd. purchased land and building from H Ltd. at a book value of ₹ 2,00,000. The consideration was paid by issue of 12% debentures of ₹ 100 each at a discount of 20%. For this transaction, the debentures account would be credited with:
(a) ₹ 2,60,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 1,60,000
Answer:
Journal entries would be as follows:
(a) Land and Building A/c Dr. 2,00,000
To H Ltd. 2,00,000

(b) H Ltd.’s A/c Dr. 2,00,000
Debenture Discount A/c Dr. 50,000
To 12% Debentures A/c 2,50,000
(\(\frac { 2,00,000 }{ 80 }\) = 2,500 debentures of ₹ 100/each on)

59. Total amount issued for shares is ₹ 3,60,000 at the rate of ₹ 10 each and premium of 20%. What is the number of issued shares.
(a) 36,000
(b) 2,460
(c) 3,000
(d) 4,000
Answer:
(a) 36,000
The Amount Issued for Share = ₹ 3,60,000
It issued @ 10 each.
Hence no. of shares issued = \(\frac {Amount issued }{ issued price }\)
= \(\frac { 3,60,000 }{ 10 }\)
= 36,000 shares.

Theoretical Framework – CS Foundation Fundamentals of Accounting Notes

Theoretical Framework – CS Foundation Fundamentals of Accounting Notes

Go through this Theoretical Framework – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Theoretical Framework – CS Foundation Fundamentals of Accounting Notes

Introduction:

  1. A description of proper Accounts is also found in “Arthashastra” written by Kautilya.
  2. Modern day accounting concept was originated by “Luca Pacioli” in Italy.
  3. Accounting is the process of collecting, recording, summarizing and communicating financial information.
  4. This financial information is communicated to the users i.e. proprietor, creditors, investors, government etc.
  5. As per the definition of American Institute of Certified Public M Accountants
  6. Accounting is “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results thereof”.

Characteristics (attributes) of Accounting:
(i) Accounting records transactions and events which are of financial nature.

(ii) Accounting is an art.
A subject is an art, if it helps us in attainment of a given objective. The main aim of accounting is to ascertain financial result and hence it is an art.

(iii) It involves the following activities: recording, classifying and summarizing

  • Recording: Writing down the transactions and events in the book systematically and chronologically.
  • Classifying: Process of grouping transactions of similar nature.
  • Summarizing: Preparation of reports or results from the classified data.

(iv) Accounting helps in determining the financial position of an enterprise by analysing and interpreting the summarized records and communicating them to users.

(v) Accounting information can be manipulated and thus cannot be considered as the true test of performance.

(vi) It records transactions in terms of money.

Objectives of Accounting:

  • Maintaining accounting records
  • Ascertaining profit/loss of the enterprise
  • Ascertaining the financial position of the enterprise
  • Providing accounting information to the users.

Functions of Accounting:

  • Maintaining systematic records
  • Protecting and controlling business properties
  • Ascertaining the operational profit/loss
  • Ascertaining financial position
  • Facilitating rational decision making.

Process of Accounting/Stages of Accounting:
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 1

Branches or sub fields of Accounting:

  • Financial Accounting: It is concerned with recording of financial data and ascertaining results thereof. It is directed towards preparation of trial balance, P/L A/c and-Balance Sheet.
  • Cost Accounting: Accounting for the cost of the product is known as cost accounting. It helps in cost ascertainment and cost control.
  • Management Accounting: It helps the management in decision making, increasing efficiency and maximizing profit.

Advantages of Accounting:

  • Provides financial information about the business to interested parties
  • Helps in comparison of financial results – Comparison of its own results of different years, Comparison of financial results with other firms in the industry.
  • Helps in decision making
  • Accounting information can be used as an evidence in legal and taxation matter
  • Helps in valuation of the business
  • Maintenance of business record
  • Preparation of financial statements

Disadvantages (Limitations) of Accounting:

  • Accounting ignores non monetary transactions
  • Accounting information is sometimes based on estimates which may be unrealistic
  • Window Dressing may lead to faulty results.
  • Accounting ignores the effect of price level changes as the recordings are done at historical costs. Fixed assets are recorded at historical cost.
  • Accounting information can be manipulated and thus can not be considered as the true test of performance, i.e. it. may be biased. Money as measurement unit changes in value.
  • Accounting information may be biased. Accounting information is not without personal influence or bias of accountant.

Note:
Window Dressing:
The term window dressing means manipulation of accounts in such a way so as to conceal the important facts and show a rosy picture of the financial statements. It is mainly done to attract investors.

Book Keeping:

  • Book keeping is a branch of knowledge that educates us how the financial records are maintained. Due to being clerical in nature, it is done by junior employees.
  • It is concerned with recording financial data of the business in a significant and orderly manner.
  • It is meant to show the effect of all the transactions made during the accounting period on the financial position of the business.
  • Book keeping is a clerical work which covers procedural aspects of accounting work and includes record keeping function. It is science and art both.
  • Book keeping is mechanical and repetitive.

Book Keeping and Accounting:
1. Book keeping and accounting are often used interchangeably but they are different from each other
Book keeping is a part of accounting. Accounting requires more skill, experience and imagination.

2. Book keeping involves only recording of financial data whereas accounting also involves analysing, interpreting and communicating financial information to users.

3. We can say, book keeping is the first stage of accounting or in simple words “Accounting begins where book keeping ends”.

Basis Book Keeping Accounting
1. Scope Book keeping is concerned with identifying financial transactions, measuring them in money terms, recording and classifying them. Accounting is concerned with summarising the recorded transactions, interpreting them and communicating the results.
2. Stage It is a primary stage and constitutes the base for accounting. It is the secondary stage. It begins where book keeping ends.
3. Performance Junior staff performs this function. Senior staff performs this function.
4. Nature of Job This job is clerical and routine in nature. This job is analytical and dynamic in nature.
5. Objective The objective of Book keeping is to maintain systematic records of financial transactions. The objective of accounting is to ascertain net results of operations and financial position and to communicate information to the interested parties.
6. Structure Done in accordance with basic accounting concepts and conventions. Method and procedure for analysis and interpretations may vary from firm to firm.

 

Accountancy:

  • Accounting include design of accounting system which book-keepers use.
  • This work requires more skill, experience and imagination.
  • Accountancy refers to the systematic knowledge of accounting.
  • Accountancy is an area of knowledge whereas accounting is a process of recording data.
  • The application part of accountancy is known as accounting.
  • Relationship between book keeping, accounting and accountancy.
    Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 2

Systems of Accounting:
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 3

Cash System:

  • Accounting is done not when the transaction takes place but when cash is paid or received.
  • No entry is made when a payment or receipt is due.

Example:
If the transaction took place in the previous year but the cash is received in the current year, the recording will be done in the current year.

For example : In case of professionals i.e. doctor, CA, CS etc. In such the financial statements prepared by them for determination of their income is termed as receipt and expenses A/c.

Merits of Cash System:

  • This method is less complex as the recording is to be done when cash is received or paid, (concepts of accrued or due not used).
  • It is most suited where credit transactions are almost negligible and collections are uncertain and where the organisation is small.

Demerits of Cash System:

  • Cash system of accounting violates the matching principle which states that expenses should be matched with their revenues and should be shown in the same year.
  • Financial statements prepared under cash system do not show a true and fair view of books of account.

Accrual or Mercantile System of Accounting:

  • Under this system, transactions are recorded when they occur and not when cash is realised.
  • Accrual system of accounting complies with the matching principle which means it relates the revenue earned to the cost incurred during a given period.
  • Mercantile system of accounting is widely used and recognized by the business enterprises.
  • Costs which are not charged to income are carried forward and are kept under continuous review.

Accounting Information:

  • Accounting helps in communicating financial information of the business to the users, hence accounting is known as the language of business.
  • Accounting information collects the reports and interprets financial information about the activities of the organisation.
  • Example : Organisations have to submit its financial details to the banks for applying for loans or to the government while paying taxes.
  • Therefore, accounting is concerned with communicating results of an organisation to its various users.
  • Many law requires financial information like income tax, sales tax, department company board etc.

Characteristic of accounting information:
Relevant – The accounting information should be relevant enough to help the users to evaluate the events while taking economic decisions. The relevance of information depends upon the materiality and nature.

Reliable – An information is said to be reliable if it is faithful complete, prudent, free from material errors and non-biased. Thus, the accounting information should be reliable. The key aspects of reliability are:

  • faithful representation
  • substance overform
  • neutrality
  • prudence
  • ompleteness

1. Comparability – Accounting information should be capable in facilitating comparison of results of different periods of the same enterprise or comparing the results of different enterprises at same time.

2. Understandability – The information should be readily understandable to the users

3. Timeliness – The accounting information should be communicated to its user within an appropriate time period to facilitate quick decision making.

4. Cost Benefit – The benefits of using the accounting information should be more than the cost of preparing it and preparation of that information. It must not be costly and time consuming.

5. Verifiability – The information should be capable of being verified by a person other than the accountant himself.

6. Neutrality – The accounting information should be free from any bias and should not support any particular person or group.

7. Completeness – The information should be complete and contain all necessary information which is required by the users to take their decisions.

Users of accounting information:
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 4

Accountant – Accounting is a clerical work and the person involved in this work is known as an accountant.

Role of Accountant – An accountant performs the following functions:

  1. Maintenance of books of accounts
  2. Performing audits (conducted by Chartered Accountant)
    (i) Statutory Audit
    (ii) Internal Audit
  3. Performs budgeting – Budgeting means planning of business activities and after the completion of activities comparing the actual results with the planned results to know the variations.
  4. Handling taxation matters
  5. Carrying out investigations
  6. Giving advices to the management
  7. Any other business work.
    Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 5

Accounting Principles, Accounting Concepts and Accounting Conventions:

Accounting Principles Accounting Concepts Accounting Conventions
Scientifically laid down guidelines to establish standard for sound accounting practices and procedure. Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternative exists. Accounting concepts define the assumption on the basis of which financial statements of an entity are prepared. Accounting conventions emerge out of accounting principles which are adopted by the enterprises over a period of time. These are derived by usage and practice.
1. Profit loss and Balance Sheet are prepared according to it.

Accounting Concepts:
1. Going Concern Concept
It is on this concept that a clear distinction is made between assets and expenditure. This concept assumes that business shall continue for an indefinite period. The proprietor has no intention to close it in the near future and would be able to meet its obligations according to plan.

Due to this concept:

  • Assets are valued at cost and then depreciated every year.
  • Expenses and incomes are classified into capital and revenue.

2. Business Entity Concept:

  • According to this concept, business and its owners are separate entities.
  • The owner is treated as the creditor of the company to the extent of capital contributed by him.
  • All transactions of the business are recorded in the books of business from the point of view of business.
  • This concept keeps the personal affairs of the owner away from the business affairs.
  • Income or profit is the property of the business unless distributed among the owners.

3. Money Measurement Concept:

  • As per this concept, only those transactions which can be expressed in terms of money can be recorded.
  • Transactions and events which cannot be expressed in terms of money, even if they affect the business, are not recorded in the books.
  • Income or profit is the property of the business unless distributed among the owners.

Example: Death of the director, disputes within the organisation, strikes, etc. may affect the working and profits of the business, but are not recorded in books of accounts. Measuring unit for money is the currency of the ruling country.

Note:
Entity and money measurement are considered as the basic concepts on which other procedural concepts depend.

4. Cost Concept:

  • According to this concept, the value at which the various assets shall be recorded in the books shall be the historical cost or acquisition cost.
  • This concept says that the assets shall be recorded at cost at the time of its purchase and its value shall be reduced systematically by charging depreciation.
  • This concept helps to keep the statements free from personal bias or judgements.
  • This concept is not beneficial for new investors as they are more interested in knowing the present worth of the business rather than its historical cost.

5. Dual Aspect Concept

  • According to this concept, every transaction has two aspects, a debit aspect and a credit aspect.
  • Due to these two aspects, the total amount debited is always equal to the total amount credited (i.e. total assets are equal to total liabilities).

Note: Concept of Accounting Equation:
Accounting equation is based on the dual aspect concept.

Assets: These are the resources owned by the business.

Liabilities: These are the claims against the assets.

  • Liability to owners – capital
  • Liability to outsiders – liabilities.

As per the dual aspect concept, at any point of time, total assets of a business are equal to total liabilities.
Hence, based on above, the following equation can be framed :
Assets = Liabilities + Capital
OR
Capital = Asset – Liabilities

Example:
1. Owner contributed ₹ 1,00,000 as cash into the business. The two aspects will be:
(i) Bringing cash in business – increase in asset.
(ii) Owner is treated as a creditor – increase in liability Asset = Capital + Liability
1,00,000 = 1,00,000
(Cash) = (Owner)

2. Purchased furniture on credit from Mr. X for ₹ 30,000.
(i) Purchase of furniture – increase in asset
(ii) Mr. X will become creditor – increase in liability
Assets = Capital+ Liabilities
30,000 = +30,000
(furniture) (Mr. X Creditor)
From, the above it is clear, that every transaction has two aspects and due to this accounting equation always balances.

6. Realisation Concept:

  • According to this concept, revenue is recognized only when sale is made.
  • This concepts says that any change in the value of an asset is to be recorded only when business realises it.
  • This concept prevents business firms from inflating their profits by showing expected incomes, (which have not yet materialised)
  • Example: An increase in the value of asset cannot be considered as a profit until and unless the asset is sold and profit is realised.

Note : Going concern + Cost Concept + Realization Concept = Valuation criteria criteria.

7. Accrual Concept:

  • It is fundamental to the usefulness of financial accounting information.
  • According to this concept, a transaction should be recorded at the time when it takes place and not when the cash is realised.
  • Every transaction and event effects, one or more or all the three aspects, assets, liabilities and capital.
  • They have their impact on both the Profit & Loss A/c and Balance Sheet.
  • This concept implies that income should be measured as a difference between revenue and expenditure.

Example:
Mr. A purchases furniture on 1st January, 2012 of ₹ 1,00,000. The amount is agreed to be paid on 15th April, 2012. Here, although the payment is made in financial year 2012-13 but entry will be done in 2011-12 (i.e. the date of transaction).

8. Accounting Period Concept:

  • This is also known as the concept of periodicity.
  • According to this principle, the life of an enterprise is broken into smaller periods (generally one year) know as accounting period.
  • The main objective of this concept is to know the performance of the enterprise at regular intervals.
  • Accounting period is an interval of time at the end of which the income or revenue statement and balance sheet are prepared in order to show the results of the operations.

9. Matching Concept/Revenue match Concept:

  • Based on accounting period concept
  • As per this concept, expenses of a period should be matched with the revenues of that period.
  • It says, the cost incurred to earn the revenue should be recognized as expenses in the period when revenue is recognized.
  • Matching principle requires that all revenues earned during an accounting year, whether received or not and all cost incurred, whether paid or not, have to be taken into account while preparing Profit/Loss Account.
  • In the same manner all amounts received or paid during the current year but pertaining to the previous year or the next year should be excluded from current year’s revenue and cost.
  • The term matching means appropriate association of related revenues and expenses.

Accounting Conventions:
1. Consistency:

  • According to this convention, accounting practices once selected and adopted should be applied consistently year after year.
  • This convention helps in comparison of financial statements.
  • Consistency does not mean that accounting principles once adopted can never be changed. They can be changed, if the change is desirable.

Example:
If a company follows written down value method of depreciation, it shall continue to follow it year after year.

2. Disclosure:

  • This is also known as the “Full disclosure” principle.
  • According to this convention, all significant information should be fully and fairly disclosed in the financial statements.
  • Ensuring this convention increases the relevance and reliability of financial statements. The companies act make ample provision for disclosure of essential information.

3. Conservatism:

  • The concept of conservatism states that we should not anticipate a profit but should provide for all possible losses while preparing financial statements.
  • It enables the financial statements to show a realistic picture of the state of affairs of the enterprise.
  • This convention understates the assets and overestimates the liabilities.
  • Financial statement are usually drawn up on a conservative basis.
  • Choice between two methods of valuing an asset, the accountant should choose a method which leads to lesser value.

Example:
Valuing stock at lower of cost or market value, making provision for doubtful debts in anticipation of debts becoming bad, are done to comply with the convention of conservatism.

4. Materiality:

  • According to the convention of materiality, accountant should record only those items which are material and ignore all insignificant items.
  • An item is said to be material if it is likely to influence the decision of the users, (like investors etc.)
    Judgement of materiality depends from organisation to organisation and on the basis of professional experience and judgement.

Example
An item of expense of ₹ 1,00,000 may be material for a small organisation but immaterial for a large firm.

Accounting Standards:

  • Accounting standards are the written policy documents guiding the measurement, treatment and disclosure of financial transactions.
  • Accounting standards are issued by the regulatory body known as the “Institute of Chartered Accountants of India”.
  • The Institute of Chartered Accountants of India constituted Accounting Standard Board (ASB) on 21st April, 1977 for making these standards.
  • The main objective of setting standards is to bring uniformity and harmony in the financial statements and enabling consistency and comparability in the data established by the enterprise.

Accounting Policies:
1. Accounting policies refers to specific accounting principles and the methods of applying those principles.

2. Accounting policies are based on accounting concepts, principles and conventions.

3. Choice of accounting policy is an important decision and hence, the following basis should be considered while choosing accounting policies:

  • Prudence
  • Substance over form
  • Materiality.
Accounting Concept Accounting Conventions
1. Theoretical idea forming a set of practices Method or procedure accepted by general agreement
2. Not based on accounting conventions Based on Accounting concept
3. Non internally consistent Internally inconsistent
4. Personal judge has no role in adoption Personal judgment may play crucial role
5. Established by law Established by common accounting practices
6. Uniform Not so in conventions

Note:
Areas where different accounting policies are used:

  • Methods of depreciation/depletion/amortization.
  • Valuation of inventories
  • Treatment of goodwill
  • Valuation of investments
  • Valuation of fixed assets, etc.

Accounting as a Measurement of Discipline:
1. Measurement means assigning numerical values to specific attributes. In accounting, we take money as a measurement tool.

2. There are three elements of measurement:

  • Identification of objects and events
  • Selection of standards or scale
  • Evaluation of dimensions of measurement standard or scale.

3. Value refers to the benefits to be derived from objects, abilities or ideas.

4. Measurement and valuation do not mean the same thing. Valuation is a part of measurement.

5. Measurement is a broader concept than valuation.

6. Valuation is an economic concept.

7. In Accounting. monetary unit is used to value an object.
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 6

Accounts:
An account is an individual records of a person, firm, thing and item of an income or expense.

Classification of Accounts:
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 7

Personal Accounts:
(i) Natural personal account: It relates to transactions of human beings like Ram, Shyam etc.

(ii) Artificial (legal) personal account: Business entities have a separate identity from that of its owners. These business entities are said to be artificial legal person. For example: companies, clubs, co-operative societies.

(iii) Representative personal accounts: These accounts are not in the name of any person but are represented as personal accounts. For e.g: outstanding liability, prepaid account, capital account, drawings account etc.

Impersonal Accounts:
(i) Real Account: Accounts which relate to the assets of the firm are known as real accounts e.g – Cash A/c, Building A/c, Investment A/c etc.

(ii) Nominal Accounts : Accounts which relate to expenses, losses, gains, revenue etc. are nominal accounts e.g – salary account, interest paid account, dividend-received account etc.

Notes:
1. Real Accounts can be divided into tangible real accounts and intangible real accounts.

  • Tangible Real Accounts – Land, building etc.
  • Intangible Real Accounts – Goodwill, patent, copyright etc.

2. Bank balance is an asset but bank account is not a real account but a personal account because it is an account of some banking company which is an artificial person.

3. According to Kohler Dictionary for Accounts, an account has been defined as a formal record of a particular type of transaction expressed in money.

Systems of Record Keeping
There are two system of record keeping:

  • Single Entry System
  • Double Entry System

Single Entry System:

  • Under this system some entries are recorded partially and some are entirely eliminated.
  • It is also known as accounting from incomplete records.
  • This system is economical and time saving but is unscientific and not reliable.

Double Entry System:
(i) Under this system, every transaction has two aspects – debit and credit and at the time of recording a transaction, it is written once on the debit side and again on the credit side of another account.

(ii) This is a system which recognizes and records both aspects of a transaction.

Features of Double Entry System:

  • Complete record of transactions
  • Recognizes dual aspect of every transaction.
  • Under this, one aspect is debited and other is credited.
  • The accounts will always balance.

Merits of Double Entry System:

  • Keeps complete record of transactions.
  • Keeps a check on arithmetical accuracy of accounts. Helps in the preparation of final accounts.
  • Chances of frauds and errors are less.

Rules of Accounting
1. Rules of accounting are also known as the rules of debit or credit or Golden Rules of Accounting.Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 8

Example:

Transaction Entry Type of A/c Reason
1. Cash deposited for opening an account Bank A/c Dr.
To Cash A/c
Personal
Real
Debit the receiver, credit what goes out.
2. Cash withdrawn Cash A/c Dr.
To Bank A/c
Real
Personal
Debit what comes in, credit the giver
3. Payment of Expenses (Say Rent) Rent A/c Dr.
To Bank A/c
Nominal
Personal
Debit all expenses and losses, credit the giver
4. Interest allowed by the bank Bank A/c Dr.
To Cash A/c
Recevied A/c
Personal Nominal Debit the receiver, credit all incomes and gains

2. Rules of debit and credit can be explained under:

  • Traditional classification of accounts.
  • Modern classification of accounts.

Debit and Credit relating to various accounts:

Personal Accounts Debit: The person has become a debtor of company.
Credit: The person has become a creditor of company.
Real Accounts Debit: Increase in asset, Decrease in liability
Credit: Increase in liability, Decrease in asset
Nominal Accounts Debit: Expenses or losses
Credit: Incomes or gains

Accounting Equation:
All business transactions are recorded as having a dual aspect. Thus,

  • Total Assets = Total Liabilities, or
  • Capital + Liabilities = Assets, or
  • Capital = Assets – Liabilities, or
  • Assets = (Capital at the begining + Incomes – Expenditures) = Capital at the end.

This equation is known as accounting equation. This is based on the concept that for every debit, there is an equivalent credit.

Bills of Exchange: Negotiable Instrument Act, 1881 : Section 5:
“A bills of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

Features of BoE:

  1. It must be in writing
  2. It must contain an order to make payment
  3. It must be unconditional
  4. Date of payment should be certain
  5. Must be signed by the drawer
  6. Must be accepted by the drawee by signing on it
  7. Amount specified in the bill is payable either on demand or on the expiry of a fixed period.
  8. Bill is payable either to a certain person or to his order or to the bearer of the bill.
  9. The amount of bill of exchange must be certain
  10. It must be stamped as per legal requirements.

Parties to a Bill of Exchange:

  1. Drawer : Writer of bill of exchange, drawer is entitled to receive money from the drawee.
  2. Drawee : Acceptor of the bill, drawee is liable to pay money to the creditor/drawer.
  3. Payee : Payee is the person who receives the payment from the drawee. Usually, drawer and payee are the same person. In the following cases, they are two different persons
  4. When bill is discounted from bank.
  5. When bill is endorsed by the drawer to his creditors.

Contents of Bill of exchange:

  • Date
  • Term/Tenure
  • Amount
  • Stamp
  • Name of Parties
  • For value received.

Theoretical Framework MCQ Questions

Question 1.
Double Entry Principle means:
(a) Having debit for every credit and similarly, credit for each debit
(b) Writing all the entries twice in the book
(c) Maintaining the double account for all business transactions
(d) Writing two times the same entry.
Answer:
(a) Having debit for every credit and similarly, credit for each debit

Question 2.
Which of the following is not a function of accounting _________.
(a) Keeping systematic record
(b) Protecting properties of business
(c) Maximising the results
(d) Meeting legal requirements
Answer:
(c) Maximising the results

Question 3.
The system of recording transactions based on dual concept is called _________.
(a) Double account system
(b) Double entry system
(c) Single entry system
(d) Cash system.
Answer:
(b) Double entry system

Question 4.
According to money measurement concept, the following will be recorded in the books of account.
(a) Health of the chairman of the company
(b) Quality control in the business
(c) Value of the building
(d) All of those
Answer:
(c) Value of the building

Question 5.
Which of the following is not dependent on accounting₹
(a) Management accounting
(b) Cost accounting
(c) Financial accounting
(d) Book-keeping.
Answer:
(d) Book-keeping.

Question 6.
Which is not function of accounting₹
(a) Decision making
(b) Measurement
(c) Forecasting
(d) Ledger posting.
Answer:
(d) Ledger posting.

Question 7.
The practice of appending note regarding contingent liabilities in the accounting statements is in pursuant to:
(a) Convention of consistency
(b) Money measurement concept
(c) Convention of disclosure
(d) None of these.
Answer:
(c) Convention of disclosure

Question 8.
The proprietor is treated as a creditor to the extent of his capital, accounting to:
(a) Cost concept
(b) Business entity concept
(c) Going concern concept
(d) All of these.
Answer:
(b) Business entity concept

Question 9.
The accounting equation is based on _________
(a) Going concern concept
(b) Dual aspect concept
(c) Money measurement concept
(d) All of these.
Answer:
(b) Dual aspect concept

Question 10.
Market value of investment is shown as a footnote according to _________.
(a) Convention of disclosure
(b) Convention of consistency
(c) Convention of conservatism
(d) All of these.
Answer:
(a) Convention of disclosure

Question 11.
Making the provision for doubtful debts in anticipation of actual bad debts is on the basis of _________.
(a) Convention of disclosure
(b) Convention of consistency
(c) Convention of conservatism
(d) None of these.
Answer:
(c) Convention of conservatism

Question 12.
Which of the following is accounting equation₹
(a) Capital = Assets + Liabilities
(b) Capital = Assets – Liabilities
(c) Assets = Liabilities – Capital
(d) Liabilities = Assets + capital.
Answer:
(b) Capital = Assets – Liabilities

Question 13.
Recording of capital contributed by the owner as liability ensures the adherence of principle of _________
(a) Double entry
(b) Going concern
(c) Separate entity of business
(d) Materiality.
Answer:
(c) Separate entity of business

Question 14.
Contingent liability is shown in the balance sheet because of _________.
(a) Convention of consistency
(b) Convention of materiality
(c) Convention of disclosure
(d) All of these.
Answer:
(c) Convention of disclosure

Question 15.
Two primary qualitative characteristic of financial statements are _________.
(a) Understandability and materiality
(b) Relevance and reliability
(c) Relevance and understandability
(d) Materiality and reliability.
Answer:
(b) Relevance and reliability

Question 16.
A purchased a car for ₹ 10,00,000, making a down payment of ₹ 1,00,000 and signing a ₹ 9,00,000 bill payable due in 60 days. As a result of this transaction.
(a) Total assets increased by ₹ 10,00,000
(b) Total liabilities increased by ₹ 9,00,000
(c) Total assets increased by ₹ 9,00,000
(d) Total assets increased by ₹ 9,00,000 with corresponding increase in liabilities by ₹ 9,00,000.
Answer:
(d) Total assets increased by ₹ 9,00,000 with corresponding increase in liabilities by ₹ 9,00,000.

Question 17.
On sale of old furniture, owner’s equity would _________.
(a) Increase
(b) Decrease
(c) Remain unchanged
(d) May or may not change.
Answer:
(d) May or may not change.

Question 18.
On 31st Dec, 2006 assets of the business are ₹ 3,00,000 and its capital is ₹ 1,00,000. Its liabilities on that date will be _________.
(a) ₹ 4,00,000
(b) ₹ 2,00,000
(c) ₹ 1,00,000
(d) None of the above.
Answer:
(b) ₹ 2,00,000

Question 19.
Revenue is generally recognized at the point of sale. Which principle is applied.
(a) Consistency
(b) Matching
(c) Revenue recognition
(d) Cost principle.
Answer:
(c) Revenue recognition

Question 20.
Economic life of an enterprise is split into the periodic interval as per _________.
(a) Periodicity
(b) Matching
(c) Going concern
(d) Accrual.
Answer:
(a) Periodicity

Question 21.
A machinery is purchased on 1st April, 2005 for ₹ 10,00,000. Its installation charges were ₹ 1,00,000. But its market value as on 3181 March, 2006 was ₹ 13,00,000. If the company shows the machinery at ₹ 13,00,000 in its B/S, which of the following concepts is not followed by the company?
(a) Cost concept
(b) Matching concept
(c) Realisation concept
(d) Periodicity concept
Answer:
(a) Cost concept

Question 22.
A business man purchased goods for ₹ 30,00,000 and sold 20% of such goods during the accounting year ended 31st March, 2005. The market value of the remaining goods was ₹ 5,00,000. He has not valued the closing stock at market price, he has violated the concept of _________.
(a) Money measurement
(b) Conservatism
(c) Cost
(d) Periodicity.
Answer:
(b) Conservatism

Question 23.
Which of the following is not a subfield of accounting?
(a) Management accounting
(b) Cost accounting
(c) Financial accounting
(d) Book-Keeping.
Answer:
(d) Book-Keeping.

Question 24.
Book- keeping is mainly concerned with _________.
(a) Recording of financial data
(b) Designing the systems in recording, classifying and summarizing the recorded data.
(c) Interpreting the data for internal and external users.
(d) None of the above.
Answer:
(a) Recording of financial data

Question 25.
Users of accounting information include _________.
(a) Creditors
(b) Lenders
(c) Customers
(d) All of the above.
Answer:
(d) All of the above.

Question 26.
Financial statements only consider.
(a) Assets expressed in monetary terms.
(b) Liabilities expressed in monetary terms.
(c) Assets expressed in non-monetary terms.
(d) Assets and liabilities expressed in monetary terms.
Answer:
(d) Assets and liabilities expressed in monetary terms.

Question 27.
_________ is a primary stage.
(a) Accounting
(b) Managing.
(c) Book keeping
(d) Auditing
Answer:
(c) Book keeping

Question 28.
External users of accounting informations are :
(a) Investors and Lenders 1
(b) Management 1
(c) Both (a) & (b)
(d) Owners
Answer:
(a) Investors and Lenders 1

Question 29.
Which method of accounting is commonly adopted by business concerns:
(a) Cash method of accounting
(b) Mercantile method of a accounting
(c) Special method of accounting
(d) Systematic method accounting.
Answer:
(b) Mercantile method of a accounting

Question 30.
The job of accounting is :
(a) Routine in nature
(b) Clerical in nature
(c) Analytical in nature
(d) All of the above.
Answer:
(c) Analytical in nature

Question 31.
Accounting cycle starts with ends with :
(a) Recording of transactions, preparation of final accounts
(b) Recording of transactions, posting them in ledger.
(c) Recording & posting of transaction, preparation of final accounts
(d) None of the above.
Answer:
(a) Recording of transactions, preparation of final accounts

Question 32.
According to Dual aspect concept, which of the following is incorrect:
(a) Increase in one asset & decrease in other asset
(b) Decrease in one liability & increase in other liability
(c) Decrease in both liability & asset
(d) None of the above.
Answer:
(d) None of the above.

Question 33.
Which concept holds that a transaction is recorded at the time when it takes place & not when the settlement takes place :
(a) Verifiable objective concept
(b) Matohing concept
(c) Accrual concept
(d) Revenue recognition concept.
Answer:
(c) Accrual concept

Question 34.
The basic concepts related to P & L Account are _________.
(a) Realization concept
(b) Matching concept
(c) Cost concept
(d) Both (a) and (b) above.
Answer:
(d) Both (a) and (b) above.

Question 35.
The underlying accounting principle (s) necessitating amortization of intangible asset (s) is are _________.
(a) Cost concept
(b) Realization concept
(c) Matching concept
(d) Both (a) and (c) above.
Answer:
(c) Matching concept

Question 36.
The accounting measurement that is not consistent with the going concern concept is:
(a) Historical cost
(b) Realization
(c) The transaction approach
(d) Liquidation value.
Answer:
(d) Liquidation value.

Question 37.
Omission of paise and showing the round figures in financial statements is based on:
(a) Conservatism concept
(b) Consistency concept
(c) Materiality concept
(d) Realization concept.
Answer:
(c) Materiality concept

Question 38.
Accounting does not record non-financial transactions because of:
(a) Entity concept
(b) Accrual concept
(c) Cost concept
(d) Money measurement concept.
Answer:
(d) Money measurement concept.

Question 39.
Mr. Rohit, owner of Rohit Furniture Ltd. owns a personal residence that cost ₹ 6,00,000, but has a market value of ₹ 9,00,000. During preparation of the financial statement for the business, the entire value of property was ignored and was not shown in the financial statements. The principle that was being followed was :
(a) The concept of the business entity
(b) The concept of the cost principle
(c) The concept of going concern principle
(d) The concept of realisation principle.
Answer:
(a) The concept of the business entity

Question 40.
The expenses and incomes pertaining to full trading period are taken to the profit and loss account of a business, irrespective of their payment of receipt. This is in recognition of:
(a) Time period concept
(b) Business entity concept
(c) Going concern concept
(d) Accrual concept
Answer:
(d) Accrual concept

Question 41.
What does ‘AICPA’ stands for:
(a) American Institute of Certified Public Accountants
(b) Anglo Institute of Certified Public Accountants
(c) African Institute of Certified Public Accountants
(d) American Institute of Certified Private Accountants
Answer:
(a) American Institute of Certified Public Accountants

Question 42.
Which organisation defined this statement:
‘The art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events which are, in part atleast, of a financial character and interpreting the result there of _________.
(a) IASB
(b) ISB
(c) AICPA
(d) None of the above
Answer:
(c) AICPA

Question 43.
“The system of book keeping by double entry is, perhaps the most beautiful one in the wide domain of literature or science. Were it less common, it would be the administration of the learned world” is spoken by:
(a) Luca Pacioli
(b) Edwin T. Freedly
(c) Warren Buffet
(d) Richard Notebaert
Answer:
(b) Edwin T. Freedly

Question 44.
Who originated the double entry system of accounting:
(a) Alfred Marshall
(b) Edwin T. Freedly
(c) Luca Pacioli
(d) Warren Buffet
Answer:
(c) Luca Pacioli

Question 45.
_________ is the process of grouping transaction and entries of the same type at one place.
(a) Analysing
(b) Summarizing
(c) Recording
(d) Classifying
Answer:
(d) Classifying

Question 46.
_________ involves the preparation of reports and statements from the classified data (ledger) understandable and useful to management and other interested parties.
(a) Analysing
(b) Summarizing
(c) Recording
(d) Classifying
Answer:
(b) Summarizing

Question 47.
_________ is the art of interpreting the results of operation to determine the financial position of the enterprise, the progress it has made and how well it is getting along.
(a) Accounting
(b) Costing
(c) Presentation
(d) None of the above
Answer:
(a) Accounting

Question 48.
_________ is done in manner which identifies the different classes and types of transaction.
(a) Identification
(b) Classification
(c) Both (a) & (b)
(d) Recording
Answer:
(d) Recording

Question 49.
The statement prepared by the summarizing process is known as:
(a) Fund Flow Statement
(b) Financial Statement
(c) Cash Flow Statement
(d) None of the above
Answer:
(b) Financial Statement

Question 50.
Which of the following is not a branch of accounting?
(a) Financial Accounting
(b) Cost Accounting
(c) Strategic Accounting
(d) Management Accounting
Answer:
(c) Strategic Accounting

Question 51.
_________ is concerned with record-keeping directed towards the preparation of trial balance, profit and loss account and balance sheet.
(a) Cost Accounting
(b) Financial Accounting
(c) Management Accounting
(d) None of the above
Answer:
(b) Financial Accounting

Question 52.
The main function of Cost Accounting are to:
(a) Ascertain cost
(b) Help management in controlling cost
(c) Help in reduction of cost
(d) All of the above
Answer:
(d) All of the above

Question 53.
Which of the following is not the function of accounting?
(a) Keeping systematic records
(b) Protecting and controlling business properties
(c) Protecting user interest
(d) Facilitating rational decision making
Answer:
(c) Protecting user interest

Question 54.
Which of the following is not the advantage of accounting:
(a) Ascertaining financial position of a business
(b) Comparison of results
(c) Evidence in legal matters
(d) Help in taxation matters
Answer:
(a) Ascertaining financial position of a business

Question 55.
Which of the following is not the limitation of accounting?
(a) Accounts can be manipulated
(b) Provide information to interested parties
(c) Money as a measurement unit changes in value
(d) Fixed Assets are recorded at original cost
Answer:
(b) Provide information to interested parties

Question 56.
_________ is incompatible with the matching principle of income determination.
(a) Cash System of Accounting
(b) Accrual System of Accounting
(c) Both (a) & (b)
(d) None of the above
Answer:
(a) Cash System of Accounting

Question 57.
In which system of accounting “cost are matched against revenue on the basis of relevant time period to determine relevant income”.
(a) Mercantile System of Accounting
(b) Accrual System of Accounting
(c) Cash System of Accounting
(d) Both (a) & (b)
Answer:
(d) Both (a) & (b)

Question 58.
_________ work is clerical in nature.
(a) Summarizing
(b) Analysing
(c) Both (a) & (b)
(d) Book keeping
Answer:
(d) Book keeping

Question 59.
_________ is the science and art of correctly recording in the books of accounts all those business transaction that result in the transfer of money or money’s worth.
(a) Accounting
(b) Auditing
(c) Book keeping
(d) None of the above
Answer:
(c) Book keeping

Question 60.
Which organisation uses cash system of Accounting?
(a) Company
(b) NPO’s
(c) Partnership Firms
(d) None of the above
Answer:
(b) NPO’s

Question 61.
Any cost that appears to have lost its utility or its power to generate future revenue is written off as a _________.
(a) Expenditure
(b) Deferred Expenditure
(c) Loss
(d) None of the above
Answer:
(c) Loss

Question 62.
Primary aim of accounting is:
(a) Providing necessary information to the owners related to their business
(b) To earn profit
(c) Both (a) & (b)
(d) None of the above
Answer:
(a) Providing necessary information to the owners related to their business

Question 63.
_________ ensures the truthfulness of the recorded transaction.
(a) Neutrality
(b) Verifiability
(c) Cost-benefit
(d) Timeliness
Answer:
(b) Verifiability

Question 64.
What are the key aspects of reliability:
(a) Neutrality
(b) Prudence
(c) Completeness
(d) All of the above
Answer:
(d) All of the above

Question 65.
‘Free from Bias’ is the feature of which characteristics of accounting.
(a) Reliability
(b) Relevance
(c) Neutrality
(d) Completeness
Answer:
(c) Neutrality

Question 66.
What is the full form of GAAP:
(a) Generally Accepted Accounting Parts
(b) Generally Accepted Accounting Provisions
(c) Generally Accepted Accounting Principals
(d) Generally Accepted Accounting Principles
Answer:
(d) Generally Accepted Accounting Principles

Question 67.
_________ means the planning of business activities before they occur.
(a) Budget
(b) Policy
(c) Objectives
(d) All of the above
Answer:
(a) Budget

Question 68.
_________ have been defined as “the body of doctrines commonly associated with the theory and procedure of accounting, serving as an explanation of current practices and as a guide for the selection of conventions or procedure where alternative exist.”
(a) Accounting principles
(b) Accounting concept
(c) Accounting convention
(d) None of the above
Answer:
(a) Accounting principles

Question 69.
Death, Dispute, Sentiments etc. are not recorded in the books in which accounting concept is followed. This is as _________.
(a) Cost concept
(b) Relevant match concept
(c) Money measurement concept
(d) Dual aspect concept
Answer:
(c) Money measurement concept

Question 70.
_________ & _________ are independent variables.
(a) Asset, Capital
(b) Capital, Liabilities
(c) Asset, Liabilities
(d) None of the above
Answer:
(c) Asset, Liabilities

Question 71.
_________ concept means that fixed assets are valued on the basis of cost less proper depreciation keeping in mind their expected useful life ignoring fluctuation in the prices of the asset.
(a) Cost
(b) Going concern
(c) Dual aspect
(d) Realisation
Answer:
(a) Cost

Question 72.
_________ concept implies the income measured by the difference between cash received and disbursement:
(a) Matching Revenue
(b) Accrual
(c) Cash
(d) Accounting period
Answer:
(a) Matching Revenue

Question 73.
_________ concept is based on Accounting Period Concept.
(a) Accrual
(b) Going concern
(c) Realisation
(d) Matching Revenue
Answer:
(d) Matching Revenue

Question 74.
_________ denotes custom or tradition or practices based on general agreement between the accounting bodies which guides the accountant while preparing the financial statement.
(a) Convention
(b) Principle
(c) Both (a) & (b)
(d) None of the above
Answer:
(a) Convention

Question 75.
Who defined this statement “An account has been defined as a formal record of a particular type of transaction expressed in money” _________.
(a) Luca Pacioli
(b) Warren Buffet
(c) Philip Kotler
(d) Kohler
Answer:
(d) Kohler

Question 76.
Which of the following is NOT a characteristic of Accounting?
(a) Accounting is an art
(b) It records transactions only in monetary terms
(c) It is concerned with interpretation of results
(d) None of the above
Answer:
(d) None of the above

Question 77.
Which of the following is NOT a branch of Accounting?
(a) Financial Accounting
(b) Cost Accounting
(c) Corporate Accounting
(d) Management Accounting
Answer:
(c) Corporate Accounting

Question 78.
Which of the following is NOT an advantage of Accounting?
(a) Decision making
(b) Helps in taxation matters
(c) Valuation of Business
(d) Increasing the profits and sales
Answer:
(d) Increasing the profits and sales

Question 79.
“Book keeping starts where accounting ends”:
(a) True
(b) Partly True
(c) False
(d) Partly False
Answer:
(c) False

Question 80.
Accrual System of accounts is also called as:
(a) Merchantile system
(b) Hybrid system
(c) Cash system
(d) None of the above
Answer:
(a) Merchantile system

Question 81.
Which of the following is NOT an accounting concept?
(a) Business Entity Concept
(b) Money Measurement Concept
(c) Consistency Concept
(d) Realisation Concept
Answer:
(c) Consistency Concept

Question 82.
Which of the following is NOT an accounting convention?
(a) Disclosure
(b) Consistency
(c) Going Concern
(d) Conservatism
Answer:
(c) Going Concern

Question 83.
If the transactions are recorded as per the current cost measurement, then the assets are recorded:
(a) At the cost of acquisition
(b) Amount that would be realised by selling the asset
(c) The value of cash required to be paid to acquire the asset
(d) None of the above
Answer:
(c) The value of cash required to be paid to acquire the asset

Question 84.
If the transactions are recorded as per the historical cost measurement, then the assets are recorded at _________.
(a) The value at which they are acquired
(b) The amount required to purchase the asset
(c) The amount that would be realised by selling the asset
(d) None of the above
Answer:
(a) The value at which they are acquired

Question 85.
As per the realisation value measurement base, the liabilities are valued _________.
(a) At the value of amount received in exchange of obligation
(b) At the present value
(c) The amount required to settle the liability
(d) None of the above
Answer:
(c) The amount required to settle the liability

Question 86.
As per the current cost measurement, the liabilities are valued at _________.
(a) Discounted value of cash required to settle the obligation currently ,
(b) Undiscounted value of cash required to settle the obligation currently
(c) At the amount received to settle the obligation –
(d) None of the above
Answer:
(b) Undiscounted value of cash required to settle the obligation currently

Question 87.
As per the present value measurement base, the liabilities are valued at _________.
(a) Sum of present discounted value of future cash outflows
(b) Value of future net cash outflows
(c) At the present settlement value
(d) None of the above
Answer:
(a) Sum of present discounted value of future cash outflows

Question 88.
As per the present value measurement base, the assets are recorded or valued at _________.
(a) Sum of present discounted net cash inflows
(b) Present value of the asset
(c) Cost of acquisition of the asset
(d) All of the above
Answer:
(a) Sum of present discounted net cash inflows

Question 89.
Adjustments of outstanding expenses, accrued income, unexpired income etc. is done to ensure compliance with:
(a) Realisation concept
(b) Cost concept
(c) Revenue match concept
(d) None of the above
Answer:
(c) Revenue match concept

Question 90.
If the proprietor of a business takes goods for his personal use, then which of the following will not be affected:
(a) Assets
(b) Liabilities
(c) Capital
(d) None of the above
Answer:
(b) Liabilities

Question 91.
Which of the following is not a form of personal account?
(a) Natural Personal Account
(b) Artificial Personal Account
(c) Representative Personal Account
(d) Nominal Personal Account
Answer:
(d) Nominal Personal Account

Question 92.
As per the conservatism principle _________.
(a) The accountant should not anticipate income but provide for all losses
(b) The accountant should use a valuation method which leads to taking less value of an asset
(c) Both (a) and (b)
(d) Neither (a) noi (b)
Answer:
(c) Both (a) and (b)

Question 93.
Goodwill, trade marks, patent, rights are examples of:
(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) None of the above
Answer:
(b) Real Account

Question 94.
Profit & Loss Account is prepared because of:
(a) Cost concept
(b) Going concern concept
(c) Dual aspect concept
(d) Accounting period concept
Answer:
(d) Accounting period concept

Question 95.
The assets are recorded as per their book value to ensure compliance with:
(a) Historical cost
(b) Current cost
(c) Present value
(d) None of the above
Answer:
(a) Historical cost

Question 96.
In order to determine whether a transaction or item is material or not, the accountant should consider:
(a) The nature of transaction
(b) The amount of transaction
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

Question 97.
Inclusion of personal expenses of using car in the business expenses would violate the concept of:
(a) Separate business entity
(b) Consistency
(c) Going concern
(d) Dual aspect
Answer:
(a) Separate business entity
In accounting for every type of business organization, be it sale trader ship or partnership or joint stock company, business is treated as a separate accounting entity.
Thus, inclusion of personal expenses of using car in the business expenses would violate the concept of Separate Business Entity.

Question 98.
“Assets should be valued at the price paid to acquire them” is based on _________.
(a) Accrual concept
(b) Cost concept
(c) Money Measurement concept
(d) Matching concept
Answer:
(b) Cost concept
According to cost concept: The various assets acquired by a concern or firm should be recorded on the basis of the actual amounts or the price paid to acquire them.

Question 99.
A businessman purchases goods worth ₹ 25,00,000 and sold 80% of such goods during the accounting year ending on 31st March, 2011. The market value of the remaining goods was ₹ 7,50,000. He valued the closing stock @ ₹ 5,00,000 and not at ₹ 7,50,000 due to _________.
(a) Money Measurement concept
(b) Convention of conservatism
(c) Cost concept
(d) Accounting period concept
Answer:
(b) Convention of conservatism
Purchase ₹ 25,00,000; 80% of the goods have been sold. So, cost of goods sold is ₹ 20,00,000 stock remains at cost of ₹ 5,00,000. Since, market value of the stock left is ₹ 7,50,000 which is higher than the cost of stock. So, stock is valued at ₹ 5,00,000.

This is due to conservatism concept as this concept says that accountant should not anticipate income and should provide for all possible losses. The rule of ‘Lower of cost or market value’ for inventory valuation is due to conservatism (Prudence) concept.

Question 100.
Revenue from sale of products is generally accounted in the period in which:
(a) Cash is collected
(b) Sales is made
(c) Products are manufactured
(d) None of the above.
Answer:
(b) Sales is made
According to accrual concept, if any transaction are not settled in cash then it is proper to record the transaction or the event concerned into the books. So, due to Accrual Concept Revenue from the sale of products is recorded in the period in which Sales is made.

Question 101.
Which of the following is not the purpose of accounting?
(a) Providing information about the assets, liabilities and capital of business entity
(b) Maintaining record of business
(c) Providing information about the performance of business
(d) Providing details about the personal assets and liabilities of the owners of business entity.
Answer:
(d) Providing details about the personal assets and liabilities of the owners of business entity.

The purpose of accounting are as follows :

  • Maintaining systematic records of business.
  • Providing all information about assets, liabilities etc.
  • Meeting legal requirements.
  • Providing and communicating financial result or performance.
  • Facilitating rational decision making.

On considering the purpose of accounting, it is found that ‘Providing details about the personal assets and liabilities of the owner of business entity’ is not purpose of accounting.

Question 102.
Which accounting concept is applicable to record a transaction entered between owner and business?
(a) Productivity
(b) Going concern
(c) Prudence
(d) Business entity
Answer:
(d) Business entity
Business entity concept is applicable to record a transaction entered between owner and business. As according to this concept business is treated as a separate entity from its owner, creditors, managers and others. In accounting, for every type of business organization, be it sole tradership or partnership or joint stock company, business is treated as a separate accounting entity.

Question 103.
Ashok a cloth merchant buys cloth for ₹ 50,000 paying cash ₹ 20,000. What is the amount of expense as per accrual concept?
(a) 50,000
(b) 20,000
(c) 30,000
(d) Nil
Answer:
(a) 50,000
According to accrual concept, all business transaction are recorded when they occur and not when the related payment are received or made. So, here amount of expenses is ₹ 50,000 and not ₹ 20,000.

Question 104.
Which of the following is an accepted method of accounting?
(a) Cash Accounting
(b) Accrual or Mercantile Accounting
(c) Both Accrual Accounting and Cash Accounting
(d) None of the above
Answer:
(b) Accrual or Mercantile Accounting
In cash accounting system, accounting entries are made only when cash is received or paid and no entry is made when a payment or receipt is merely due but in accrual or mercantile accounting system, all transactions are recorded on the basis of amounts having become due for payment or receipt. Since, cash basis accounting ignore accrual concept and revenue match concept.

So, Accrual or Mercantile Accounting system is more acceptable method of accounting. ,

Question 105.
Accounting transactions are recorded in terms of:
(a) Money
(b) Purpose
(c) Characteristics
(d) None of the above
Answer:
(a) Money
According to money measurement concept of accounting, only such transactions and events which can be interpreted in terms of money are recorded. Those transactions which cannot be expressed in money terms do not find place in the books of account though they may be very important for the business.

So, Accounting transactions are recorded in terms of Money.

Question 106.
A businessman purchased goods for ₹ 25,00,000 and sold 70% of such goods during the accounting year ended on 31st March, 2013. The market value of the remaining goods was ₹ 5,00,000. He valued the closing stock at ₹ 5,00,000 and not at ₹ 7,50,000 due to:
(a) Money measurement concept
(b) Conservatism concept
(c) Cost concept
(d) Periodicity concept.
Answer:
(b) Conservatism concept
Purchases ₹ 25,00,000
70% of the goods have been sold
∴ cost of goods sold is ₹ 17,50,000
Stock remaining at cost ₹ 7,50,000
Since, market value of the stock left is ₹ 5,00,000
which is lower than the cost the stock is valued at ₹ 5,00,000.
This is due to conservatism concept as this concept says that accountant should not anticipate income and should provide for all possible losses. The value of “lower of cost or market value” for inventory valuation is due to conservatism (Prudence) concept.

Question 107.
Match List I with List II and select the correct answer using the codes given below the lists.
Theoretical Framework – CS Foundation Fundamentals of Accounting Notes 9
Answer:
(c) The rules are as follows:

  • Real Account : Debit what comes in and credit what goes out
  • Nominal Account : Debit all Expenses and losses credit all income & gains
  • Personal Account : Debit the receiver credit the giver

Therefore the correct matching is x : 2; y : 3 and z : 1

Question 108.
If capital at the end of the year is ₹ 7,000, capital introduced during the year is ₹ 5,000, drawings during the year are ₹ 8,000, loss incurred during the year is ₹ 10,000, then capital in the beginning would be equal to:
(a) ₹ 12,000
(b) ₹ 16,000
(c) ₹ 20,000
(d) ₹ 30,000.
Answer:
(c) ₹ 20,000

Capital at end of year ₹ 7,000
Less: Capital introduced during the year 5, 000
Add: Drawings made during the year 8, 000
Add: Loss incurred during the year 10, 000
Capital at beginning of the year 20, 000

Question 109.
Which one of the following statements is correct?
(a) Capital of the firm is reduced by borrowing
(b) When there is no change in proprietor’s capital, it is an indication of loss in business
(c) Nominal accounts refer to false transactions
(d) Real accounts relate to the assets of a business.
Answer:
(d) Real accounts relate to the assets of a business.
The correct statement is Real accounts relate to the assets of a business both tangible and intangible.
Example : plant & machinery, furniture, goodwill, copyrights, etc.

Question 110.
A concern proposes to discontinue its business from March 2013 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2013 should indicate the assets at their:
(a) Historical cost
(b) Net realisable value
(c) Cost less depreciation
(d) Cost price or market value whichever’is lower
Answer:
(b) Net realisable value
When a concern proposes to discontinue its business operations then balance sheet should indicate assets at their Net Realizable value rather than the Historical Cost.
This is so because the going concern of the organisation is lost.

Question 111.
The convention of conservatism is likely to lead to an in the balance sheet.
(a) Understatement of liabilities
(b) Overstatement of assets
(c) Overstatement of capital
(d) Understatement of assets.
Answer:
(d) Understatement of assets.
The convention of conservatism is likely to lead to an understatement of assets in the Balance Sheet. The concept of conservatism states that an accountant should not anticipate income and should provide for all possible losses. This will lead to understatement of income, wealth and assets.

Question 112.
The rule every transaction affects two or more ledger accounts is based on the concept of _________.
(a) Going concern
(b) Double entry system of book-keeping
(c) Money measurement
(d) Periodicity.
Answer:
(b) Double entry system of book-keeping
Double entry system is based on scientific principles therefore, it is used by most of the business houses. This system recognises the fact that every transaction has two aspects and records both aspects of each and every transaction. Thus, we can say that the rule ‘every transaction affects two or more ledger accounts’ is based on the concept of double entry system of book-keeping.

Question 113.
Which of the following is correct about ‘Accounting Concept’ _________.
(a) Accounting concepts are based on accounting conventions
(b) Accounting concepts are established by common accounting practices
(c) Accounting concepts are methods or procedures accepted by general agreement
(d) Personal judgement has no role in the adoption of accounting concepts.
Answer:
(d) Personal judgement has no role in the adoption of accounting concepts.
Accounting concepts are defined as basic assumptions on the basis of which financial statements of a business entity are prepared. Accounting concepts are used as a foundation for formulating various methods and procedures for recording and presenting the business transactions. In brief we can say that personal judgement has no role in the adoption of accounting concepts.

Question 114.
Which of the following accounting equation is correct:
(a) Capital (₹ 15,000) = Fixed Assets (₹ 12,000) +Cash (₹ 4,000)
(b) Trade payables (₹ 3,000) + Capital (₹ 17,000) + Bills Payable (₹ 4,000) = Fixed Assets (₹ 20,000)
(c) Capital (₹ 15,000) = Cash (₹ 3,000) + Fixed Assets (₹ 9,000)
(d) Trade payables (₹ 8,000) + Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (₹ 3,000).
Answer:
(d) According to accounting equation:
Capital + Trade Liabilities = Assets (or)
Capital + Trade Liabilities = Fixed Assets + Current Assets There, we find that option (D) is right answer because in this equation
Capital (7,000) + Trade Payable (8,000) = ₹ 15,000 is equal to Fixed Assets (8,000) + Cash at Bank (4,000) + Cash (3,000) = ₹ 15,000.

Question 115.
General reserve is created on the basis of convention of:
(a) Conservatism
(b) Uniformity
(c) Materiality
(d) Full disclosure.
Answer:
(a) Conservatism
According to conservatism convention, accountant should not anticipate income and should provide for all possible losses.

Examples:

  • Making provisions for Bad Debts
  • Making General Reserve
  • Valuing the stock at lower of cost or market value

Question 116.
Revaluation account is a:
(a) Nominal account
(b) Real account
(c) Personal account
(d) None of the above.
Answer:
(a) Nominal account
Since Revaluation A/c shows the profit or loss on revaluation, so it is a Nominal Account.

Question 117.
Atul purchased a car for ₹ 5,00,000, by making a down payment of ₹ 1,00,000 and signing a ₹ 4,00,000 bill payable due in 60 days. As a result of this transaction:
(a) Total assets increased by ₹ 5,00,000
(b) Total liabilities increased by ₹ 4,00,000
(c) Total assets increased by ₹ 4,00,000
(d) Total assets increased by ₹ 4,00,000 with a corresponding
Answer:
(d) Total assets increased by ₹ 4,00,000 with a corresponding
On purchase of a Car, total assets of balance sheet will be increased by ₹ 5,00,000 and on making of down payment of ₹ 1,00,000 total assets will decrease by ₹ 1,00,000. The result will be that total assets of B/S will increase by ₹ 4,00,000.
On other hand on signing a B/P of ₹ 4,00,000 liability side of Balance Sheet will be increased by ₹ 4,00,000.
Thus, option (d) is right.

Question 118.
Number of accounting standards presently issued by ICAI and notified by CG _________.
(a) 29
(b) 32
(c) 31
(d) 19
Answer:
(a) 29
Presently these are 32 accounting standards issued by ‘ICAI’ out of which 29 are notified by Central Government.

Question 119.
_________ is an art of recording, classifyIng, summarising transactions and events which are of financial character ¡n terms of money and interpreting the result thereof:
(a) Accountancy
(b) Accounting
(c) Book-Keeping
(d) None of these.
Answer:
(b) Accounting
“Accounting is an art of recording, classifying, summarising transactions and events which are of financial character in terms of money and interpreting the result there of.”

Question 120.
Contingent liability is shown as _________.
(a) Liability
(b) Equity Shareholders fund
(c) Footnote
(d) None of these
Answer:
(c) Footnote
As per Schedule 111 of Companies Act 2013, Contingent liabilities are shown as footnote in the Balance Sheet.

Question 121.
Closing entry means:
(a) All income & expenses
(b) All assets & liabilities
(c) All assets
(d) All liabilities.
Answer:
(b) All assets & liabilities
Closing entry means all assets and liabilities are revalued and closed.

Question 122.
In which of the book cash purchase is recorded?
(a) Cash book
(b) Purchase book
(c) Both (a) and (b)
(d) None of these.
Answer:
(a) Cash book
Cash book is a book of prime entry which records cash and bank transactions includes only cash purchases made.

Question 123.
In case of three column cash book, contra entry is related with:
(a) Cash; Discount
(b) Cash; Bank
(c) Bank; Discount
(d) None of these.
Answer:
(b) Cash; Bank
The entry which involves both cash and bank transactions is called contra entry. These entries are posted on both the sides of cash book one in bank column and the other in cash column.

Question 124.
Which of the following is not considered as an accounting concept?
(a) Conservation
(b) Business Entity
(c) Accrual
(d) Going Concern.
Answer:
(a) Conservation
Accounting concepts are defined as basic assumptions on the basis of which financial statements of a business entity are prepared. Since, conservatism is an accounting convention & not a concept, option (a) is correct.

Question 125.
Which convention implies that the accounting practices should remain same from one year to another year.
(a) Going Concern
(b) Materiality
(c) Accrual
(d) Consistency.
Answer:
(d) According to consistency concept, it is assumed that the accounting practices will be followed continuously over a period of time until & unless there is required a need for change.
Hence, option (d) is correct.

Question 126.
______ and ______ are independent variables.
(a) Asset and Liability
(b) Income and Expenses
(c) Both (a) and (b)
(d) None of these.
(d) None of these.
Answer:
(a) Asset and Liability
Independent variables are those variables which has no effect on each other.
The asset & liability are dependent variables while the income & expenses are independent variables.
Hence, option (a) is correct.

Question 127.
Accounting Transactions are recorded in terms of:
(a) Money
(b) Purpose
(c) Characteristics
(d) None of these.
Answer:
(a) Money
According to money measurement concept, each & every accounting transaction is to be recorded in books of accounts in terms of money.
Hence, option (a) is correct.

Question 128.
Double Entry principle means:
(a) Writing all entries twice in the book
(b) Having debit for every credit and similarly, credit for every debit
(c) Maintaining the double account for each business transactions.
(d) Writing two times the same entry.
Answer:
(b) Having debit for every credit and similarly, credit for every debit
Double entry is a principle in which there is a debit for every credit & similarly a credit for every debit.
Hence, option (b) is correct.

Question 129.
Which one of the following statements is Correct?
(a) Capital of the firm is reduced by borrowing
(b) Nominal accounts refer to false transactions
(c) When there is no change in proprietors capital. it is an indication of loss in business
(d) Real accounts relate to the assets of a business.
Answer:
(d) Real accounts relate to the assets of a business.
Capital of the firm is not reduced by borrowing because both are the different heads of the liabilities side of the balance sheet. Nominal accounts relates with the expenses and incomes, not with false transactions. When there is no change, in proprietor’s capital, it does not mean that it shows a loss, it may be a profit situation in the business.
Thus, option (d) is the correct answer that real account relate to the assets & liabilities of a business.

Question 130.
Which of the following statement is correct?
(a) Assets are equal to liabilities minus capital
(b) Capital is equal to assets minus liabilities
(c) Liabilities are equal to capital plus assets
(d) Capital is equal to assets plus liabilities
Answer:
(b) Capital is equal to assets minus liabilities
According to Accounting Equation.
Capital = Assets – Liabilities.
So, option (b) is correct answer, i.e. Capital is equal to assets minus liabilities.

Question 131.
The convention of conservatism is likely to lead to an __________ in the balance sheet.
(a) Understatement of assets
(b) Overstatement of assets
(c) Overstatement of capital
(d) Understatement of liabilities
Answer:
(a) Understatement of assets
The concept of conservatism states that we should not anticipate profit but should provide for all possible losses while preparing financial statements. This convention understates the assets and over estimates the liabilities.

Question 132.
Mr. Ashish purchased a machinery costing ₹ 3,00,000 on 1st October, 2012. Transportation and installation charges were incurred amounting to ₹ 30,000 and ₹ 12,000 respectively. Dismantling charges of the old machine in place of which new machine was purchased amounted to ₹ 30,000. Market value of the machine was estimated at ₹ 3,60,000 on 31st March, 2013. While finalising the annual accounts, Ashish values the machinery at ₹ 3,60,000 in his books. Which of the following concepts was violated by Ashish?
(a) Cost Concept
(b) Matching Concept
(c) Realisation Concept
(d) Periodicity Concept
Answer:
(a) Cost Concept
Mr. Ashish violated the cost concept. According to this concept, the value at which the various assets shall be recorded in the books shall be the historical cost or acquisition cost.
This concept says that the assets shall be recorded at cost at the time at its purchase and its value shall be reduced systematically by charging depreciation at book value.

Question 133.
The provision for discount on debtors is often provided in keeping with the concept of:
(a) Conservatism
(b) Going Concern
(c) Materiality
(d) Consistency.
Answer:
(a) Conservatism
Conservatism convention states that all anticipated profits should be ignored but all losses anticipated should be accounted and method of valuing asset should be chosen which leads to lesser value.

Example:

  1. Create provision for doubtful debts
  2. Provisions for discount on debtors
  3. Value stock at cost or market price which ever is less.

Question 134.
Which of the following statements describe objectives of accounting?
(i) providing details of the personal assets and liabilities of the owner
(ii) providing information about the assets, liabilities and capital of business entity
(iii) maintaining records of business
(iv) providing information about the performance of business entity:
(a) (ii) and (iii)
(b) (ii), (iii) and (iv)
(c) (i), (iii) and (iv)
(d) (i), (ii) and (iv).
Answer:
(b) (ii), (iii) and (iv)
Objectives of accounting:

  1. Maintaining the accounting records
  2. Ascertaining profit & loss and financial position of business
  3. Providing accounting information to users.

Question 135.
According to which concept, practices once selected and adopted should be applied consistently year after year:
(a) Cost concept
(b) Consistency convention
(c) Conservatism convention
(d) None of the above
Answer:
(b) Consistency convention
The consistency convention implies that the accounting practices should remain the same from one year to another. The results of different years will be comparable only when accounting rules are continuously adhered to from year to year.

Question 136.
The money taken by the proprietor for personal use:
(a) Capital
(b) Interest
(c) Prepaid Expenses
(d) Drawing
Answer:
(d) Drawing
The money taken by the proprietor for personal use is known as Drawing. This will reduce the capital of proprietor.

Question 137.
Money borrowed to start business:
(a) Venture capital
(b) Debt financing
(c) Dividend
(d) Shares
Answer
(d) Shares
The proportion of capital to which each member is entitled is called his share, the capital of the company is known as Share Capital. This money is borrowed from its members or shareholders. Personal

Question 138.
Bank A/c is which of the following:
(a) Personal A/c
(b) Real A/c y
(c) Nominal A/c
(d) Representative Personal A/c
Answer:
(a) Personal A/c
Accounts are those accounts which shows the transaction with customer, suppliers, money lenders, the banks and the owners. Bank Account is the account of some banking company which is an artificial person.

Question 139.
Opening capital ₹ 80,000, Drawing ₹ 2,000 per month in the middle of the month @ 5% p.a. Additional capital ₹ 10,000, profit ₹ 7,000, calculate closing capital:
(a) ₹ 72,400
(b) ₹ 10,000
(c) ₹ 80,000
(d) ₹ 12,094
Answer:
(a) ₹ 72,400
Opening Capital = 80,000
Drawings = 2,000 per month in middle of month
Additional Capital = 10,000
Profit = 7,000
Drawings = 2,000 x 12
= 24,000 x \(\frac { 6 }{ 12 }\) x \(\frac { 5 }{ 100 }\)
= 600
Closing Capital = Opening Capital – Drawings + Additional Capital + Profit
= 80,000 – 600 – 24,000 + 10,000 + 7,000 = ₹ 72,400

Question 140.
Which one of the following are correct (i) Debit the giver, credit the receiver (ii) Debit the receiver credit the giver (iii) what comes in debit, what goes out credited:
(a) I & II
(b) II & III
(c) I, II & III
(d) I & III
Answer:
(b) II & III

  • Rule of Personal A/c – ‘Debit the receiver, Credit the giver.
  • Rule of Real A/c – ‘Debit what comes in, Credit what goes out.
  • Rule of Nominal A/c – ‘Debit all expenses and Losses and Credit all Incomes’. and gains

Thus, only options (II) & (III) are correct.

Question 141.
M/s. Son Exports purchased a computer worth ? 25,000. While preparing the final accounts the proprietor valued the computer at ? 20,000, which he can realize by selling the computer anytime. Which basis of measurement has been used by the proprietor?
(a) Historical cost
(b) Realisable value
(c) Present value
(d) Current cost.
Answer:
(b) Realisable value
The basis of measurement used by the proprietor is realisable value. As per this valuation basis, assets are recorded at the amount of cash or cash equivalent that would be realised by selling the assets in a routine manner. Similarly, liabilities are recorded at their settlement values.

Question 142.
Inventories should generally be valued at lower of cost price or _________.
(a) Fair market value
(b) Present value
(c) Replacement value
(d) Net realizable value
Answer:
(d) Net realizable value
As per the conservatism concept, the golden rule of inventory valuation is lower of cost or net realisable value. Accordingly inventory should be valued at cost or net realisable value whichever is lower.

Question 143.
Revenue should be recognised as recorded when the goods are sold or service are rendered to customer, this concept is known as:
(a) Revenue recognition concept
(b) Matching concept
(c) Materiality concept
(d) Consistency concept
Answer:
(a) Revenue recognition concept
Revenue Recognition concept is based on accounting period concept. Adjustment should be made for all outstanding expenses, accrued incomes, unexpired expenses and unearned income.

Question 144.
Revenue should be recognised/recorded when the goods are sold or services are rendered to the consumer, this concept is known as:
(a) Matching Concept
(b) Consistency Concept
(c) Materiality Concept
(d) Revenue Recognition Concept
Answer:
(d) Revenue Recognition Concept
According to Revenue Recognition Concept, Revenue is deemed to be realised or recorded when the goods are sold or services are rendered.

Question 145.
If owner’s equity of a business is ₹ 70,000 and liabilities are of ₹ 40,000, total assets of the business will be:
(a) ₹ 1,10,000
(b) ₹ 40,000
(c) ₹ 30,000
(d) ₹ 74,000
Answer:
(a) ₹ 1,10,000
Accounting equation states
Total Assets = Liabilities + Owners equity = 40,000 + 70,000
= 1,10,000

Question 146.
A business unit follows the straight line method of depreciation for depreciating its furniture every year which accounting convention is being followed in this case:
(a) Materiality
(b) Consistency
(c) Conservatism
(d) Disclosure
Answer:
(b) Consistency
The business unit follows same method of depreciation year after year because of consistency convention of accounting. The consistency convention implies that the accounting practice should remain the same from one year to another in order to facilitate comparison between result of different years.

Question 147.
ASSET = capital + liability is what?
(a) Ledger
(b) Linear equation
(c) Journal
(d) Accounting equation
Answer:
(d) Accounting equation
The sum of resources (assets) = obligations (capital + liabilities) Therefore, Capital + Liabilities = Assets; or Capital = Assets – Liabilities.
This equation is known as accounting equation. This equation is based on the concept that for every debit, there is an equivalent credit. The entire system of double entry book-keeping is based on this concept.

Question 148.
Which of the following should not be called ‘sales’?
(a) Office fixtures sold
(b) Goods sold for cash
(c) Goods sold on credit
(d) Sale of item previously included in ‘purchases’.
Answer:
(a) Office fixtures sold
Office fixtures will include the desks, chairs, work-stations and the other fittings in the work-station in your office. These include the things which are already attached with work place. Thus the office fixtures sold is not considered as sales.

Question 149.
The Results of Diff. years will be comparable only when accounting rules are continuously adhered to from year to year. This consistency is :
(a) Accounting standard
(b) Accounting convention
(c) Accounting concept
(d) Accounting policy
Answer:
(b) Accounting convention

Various accounting conventions were:

  • Consistency
  • Materiality
  • Disclosure
  • Conservatism

Question 150.
A concern proposes to discontinue its business from March 2015 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2015 should indicate the assets at their:
(a) Net realisable value
(b) Historical cost
(c) Cost less depreciation
(d) Cost price or market price which ever is lower.
Answer:
(a) Net realisable value
Since going concern is no more there, hence assets should be brought down to their realisable values i.e. shown at net realisable valud.

Question 151.
If salaries paid appearing in the trial balance for the year ending 2015 is ₹ 7, 500 and it is given in the adjustments that the salary unpaid for the year ending 2015 is ₹ 2, 500. The total amount to be debited to the Profit and Loss Account under the head salaries will be:
(a) ₹ 10, 000
(b) ₹ 5, 000
(c) ₹ 2, 500
(d) 7, 500
Answer:
(a) ₹ 10, 000
According to Revenue matching concept. The Expenses are charged to the revenue of the same period and that way both paid and unpaid salary are charged to Profit & Loss A/c.

Question 152.
Mr. Ashok buys stationary of ₹ 50,000 and pays cash ₹ 20,000. What is the amount of expense as per the accrual concept?
(a) Nil
(b) ₹ 50,000
(c) ₹ 20,000
(d) ₹ 30,000
Answer:
(b) ₹ 50,000
As per Accrual Concept, Expense and Income are considered to be incurred when they occur not when their payment is done or received.

Question 153.
A concern proposes to discontinue its business from March 2013 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2013 should indicate the assets at their:
(a) Historical cost
(b) Net Realiable value
(c) Cost less depreciation
(d) Cost price or market value whichever is lower
Answer:
(b) Net Realiable value
If a concern proposes to discontinue its operation i.e. going concern is cost, then fixed assets should be shown at net realisable values rather than at fixed cost.

Question 154.
The convention of conservatism is likely to lead to an in the balance sheet:
(a) Understatement of Liabilities
(b) Overstatement of Assets
(c) Overstatement of Capital
(d) Understatement of Assets
Answer:
(d) Understatement of Assets
There is an accounting convention of conservatism which is likely to lead an ‘understatement of assets’ and ‘overstatement of liabilities’ in balance sheet.

Question 155.
Atul purchased a car for ₹ 5,00,000 by making a down payment of ₹ 1,00,000 and signing a ₹ 4,00,000 bill payable due in 60 days. As a result of this transaction:
(a) Total assets increased by ₹ 5,00,000
(b) Total liabilities increased by ₹ 4,00,000
(c) Total assets increased by ₹ 4,00,000
(d) Total assets increased by ₹ 4,00,000 with a corresponding increase in liabilities by ₹ 4,00,000.
Answer:
(d) Total assets increased by ₹ 4,00,000 with a corresponding increase in liabilities by ₹ 4,00,000.
As per Accounting Equation:
Assets = Capital + Liabilities
Accordingly, asset purchased for ₹ 5,00,000 will increase the asset side by ₹ 5,00,000 but down payment of ₹ 1,00,000 will also reduce it by ₹ 1,00,000. Hence asset side will increase by net ₹ 4,00,000. Since, a bill amount of ₹ 4,00,000 has been signed in obligation, the liability also increases by ₹ 4,00,000.

Question 156.
The rule every transaction effects two or more ledger accounts is based on the concept of:
(a) Going concern
(b) Double entry system of book-keeping
(c) Money Measurement
(d) Periodicity
Answer:
(b) Double entry system of book-keeping
Due to Double Entry Book keeping system, every transaction effects two or more ledger accounts at the same time.

Question 157.
Which of the following is correct about “Accounting concept”:
(a) Accounting concepts are based on accounting conventions
(b) Accounting concepts are established by common accounting practices
(c) Accounting concepts are methods or procedures accepted by general agreement
(d) Personal judgement has no role in the adoption of accounting concepts
Answer:
(d) Personal judgement has no role in the adoption of accounting concepts
Accounting Concepts are universally applicable and personal judgement has no role in their adoption.

Question 158.
Which of the following accounting equation is correct:
(a) Capital (₹ 15,000) = Fixed Assets (₹ 12,000) + Cash (₹ 4,000)
(b) Trade payables (₹ 3,000) + Capital (₹ 17,000) + Bills payable (₹ 4,000) = Fixed Assets (₹ 20,000)
(c) Capital (₹ 15,000) = Cash (₹ 3,000) + fixed Assets (₹ 9000)
(d) Trade payables (₹ 8,000) + (Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (7 3,000)
Answer:
(d) Trade payables (₹ 8,000) + (Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (7 3,000)
As per dual entry System, Accounting Equation is:
Assets = Capital + Liabilities
F.A (8,000) + Cash (3,000) + Bank (4,000) = Capital (7,000) + Trade payables (8,000)

Question 159.
General reserve is created on the basis of convention of:
(a) Conservatism
(b) Uniformity
(c) Materiality
(d) Full disclosure
Answer:
(a) Conservatism
As per conservatism, an accountant should not anticipate income but provide for all possible losses.
General reserve is also an outcome of this concept i.e. to provide for future.

Question 160.
Revaluation account is a:
(a) Nominal account
(b) Real account
(c) Personal account
(d) None of the above
Answer:
(a) Nominal account
The nature of Revaluation Account is Nominal Account because it is created to ascertain Profit or Loss.

Question 161.
Purchase A/c is a _________?
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) None of these
Answer:
(b) Nominal A/c
The purchase account is a general ledger account in which is recorded the inventory purchases of a business. This account is used to calculated the amount of inventory available for sale in a periodic inventory system. Hence it is a Nominal A/c.

Question 162.
Prepaid Rent is recorded in _________.
(a) Balance Sheet
(b) Receipt and Payment A/c
(c) Trading A/c
(d) None
Answer:
(a) Balance Sheet
Prepaid expenses are not recorded on an income statement initially. Instead, prepaid expenses are initially recorded on the balance sheet, and then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement.

Question 163.
Trade Mark comes under _________?
(a) Tangible Asset
(b) Intangible Asset
(c) Both
(d) None
Answer:
(b) Intangible Asset
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents trademarks and copyrights are all intangible assets. Intangible assets exit in opposition to tangible assets, which include land, vehicles, equipment and inventory.

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Go through this Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Meaning of Not-for-profit Organisation:
1. There are certain organisation which are formed not to earn profits but to render services to its members and to the public. Such organisations include clubs, hospitals, libraries, schools, religious institutions, charitable institutions and literary societies.

2. These organisations exists with the- primary motive of providing services.

Some Important Items Relating to Non-Profit Seeking Organisations:
1. Subscription:

  • It is the main source of income of non-profit entity.
  • It will be appearing on the debit side of Receipts and Payments Account.

2. Life-Membership Fees:
These could be taken as capital receipts and every year a charge is debited based on some logic.

3. Endowments:

  • Sometimes, donations are also in the form of endowments to be’ used as per instructions of the donor.
  • These are to be treated as capital receipts.

4. Legacy:

  • It is the amount which a non-profit entity receives as per the ‘WILL’ of a deceased person.
  • It appears on the debit side of Receipt and payments A/c.
  • This amount is not of recurring nature, and such it treated as capital receipt and shown on the liabilities side.

5. Donation:

  • They could be used for meeting capital or revenue expenses.
  • It donations are received for a specific purpose, the amount is credited to a fund from which the amounts are distributed.
  • The fund may be invested in specific securities.
  • Income from such investment is credited to the Fund A/c only.
  • Small donation amounts which are not embarked for any specific purpose may be treated as revenue receipt.

6. Entrance Fees:

  • It is received from the new members apart from the amount of annual subscriptions.
  • Some people favour capitalising the entrance fee on the ground that it is collected once for all and as such it is not of the recurring nature.
  • It is treated as revenue income.

Final Accounts or Financial Statements:
1. The Non-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.

2. Although these organisation are non-profit making entities and they are not required to make Trading and Profit & Loss A/c but it is necessary to know whether the income during the year was sufficient to meet the expenses or not.

3. The final accounts of a ‘non-profit organisation’ consist of the following

  • Receipts and Payments A/c.
  • Income and Expenditure A/c.
  • Balance Sheet.

Preparation of Financial Statements of a Non-Trading Concern:
There are certain organisations that are not established for making profit but to provide some service. These services are generally given to members who make subscriptions to avail them. These are also called as non-trading entities. The examples of such organisations are:

  1. Gymkhana / sports clubs
  2. Educational institutions
  3. Public hospitals
  4. Libraries
  5. Cultural clubs like Rotary or Lions club
  6. Religious institutions
  7. Charitable trusts

Receipt and Payment Account:
This is similar to cash book. Entries are made on cash basis and items pertaining to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and payments are shown on credit side. Capital as well as revenue items are entered in the R & P Account. This account is real account in nature. No provisions are recorded in this account.

Features of Receipts and Payment Account:

  1. It is an Account which contains all Cash and Bank transactions made by a nonprofit organization during a particular financial period.
  2. It starts with the opening balances of Cash and Bank. All Cash Receipts both capital and revenue during the period are debited to it.
  3. All Cash Payments both capital and revenue during the period are credited to this Account. It ends with the Closing Cash and Bank Balances.
  4. While recording the Cash and Bank transactions all entries are made on Cash Basis.
  5. It is a summary of Cash Book.
  6. It follows Real Account.

Income and Expenditure Account:
This is similar to the Profit and Loss Account and is prepared exactly based on same principles. As the name suggests only revenue items are recorded herein. Incomes are recorded on the credit side while the expenses on the debit side. Both incomes and expenses must be taken on the basis of accrual concept.

Features of Income and Expenditure Account:

  1. It follows Nominal Account.
  2. All expenses of revenue nature for the particular period are debited to this Account on accrual basis.
  3. Similarly all revenue incomes related to the particular period are credited to this account on accrual basis.
  4. All Capital incomes and Expenditures are excluded.
  5. Only current year’s incomes and expenses are recorded. Amounts related to other periods are deducted. Amounts outstanding for the current year are added.
  6. Profit on Sale of Asset is credited. Loss on Sale of Asset is debited. Annual Depreciation on Assets is also debited.
  7. If income is more than expenditure, it is called a Surplus, and is added with Capital or General Fund etc. in the Balance Sheet.
  8. If expenditure is more than income, it is a deficit, and is deducted from Capital or General Fund etc, in the Balance Sheet.

Fund Asset Accounting and its peculiarities:
Following are the concepts of some funds which are generally maintained by organizations:
(i) Capital Fund: It is also called “General Fund” or “Accumulated Fund.” It is actually the Capital of a non-profit concern. It may be found out as the excess of assets over liabilities. Usually “Surplus” or “Deficit” during a period is added with or deducted from it.

(ii) Special Fund: It may be created out of special donation or subscription or out of a portion of the “Surplus”. For example a club may have a “Building Fund”. It may be used for meeting some specific expenses or for acquiring an asset.

Basic of Distinction Receipts and Payment A/c Income and Expenditure
1. Nature It is the summary of cash book. It is like a profit and loss account.
2. Side Debit side of this account records receipt and credit side payment. Debit side of this account records receipt and credit side payment.
3. Types of Account It is a real account. It is a nominal a/c.
4. Opening Balance It starts with the opening balance of cash and bank. It has no opening balance.
5. Closing Balance Balance at the end represents cash in hand at the end and balance of bank overdraft. Balance at the end represents excess of income over expenditure vice – versa.
6. Period Receipts and payments may also relate to preceding and succeeding period. Income and expenditure items relate only to the current period.

Accounting for Non-Profit Organisation MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Subscription received in advance is shown in ________.
(a) Liabilities side of the Balance Sheet
(b) Assets side of the Balance Sheet
(c) Receipt Item
(d) None of the above
Answer:
(a) Liabilities side of the Balance Sheet

2. Non-Recurring Expenses mean ________.
(a) Expenses incurred at regular intervals
(b) Expenses incurred at irregular intervals
(c) Expenses not incurred more than once
(d) Expenses not incurred at all
Answer:
(c) Expenses not incurred more than once

3. Organisations established for the purpose of providing services to members and beneficiaries are ________.
(a) Private Limited Companies
(b) Public Limited Companies
(c) Partnership Firms
(d) Non Profit Making Organisations
Answer:
(d) Non Profit Making Organisations

4.

No. of Members of Hare Ram Club 250.00
Annual subscription 500.00
Subscription received 97,500.00
Subscription receivable as on 31.03.2007 47,500.00
Subscription received in Advance ?

(a) ₹ 27,500.00
(b) ₹ 77,500.00
(c) ₹ 20,000.00
(d) ₹ 25,000.00
Answer:
(c) ₹ 20,000.00

5. Life membership fees received by a non-profit organisation is treated as:
(a) Revenue receipt.
(b) Capital receipt.
(c) Deferred revenue
(d) Both revenue & capital receipt
Answer:
(b) Capital receipt.

6. Subscription received for current year ₹ 50,000; Subscription of current year received in the previous year ₹ 5,000; Subscription received in advance in the current year ₹ 2500 and Subscription of previous year received in current year ₹ 10000. The amount of subscription to be shown in receipts and payments account is
(a) ₹ 50,000
(b) ₹ 62,500
(c) ₹ 60,000
(d) ₹ 55,000
Answer:
(b) ₹ 62,500

7. On 31st December 2011, a club had subscription in arrears of ₹ 16,000 ‘ and in advance ₹ 4,000 respectively. During the year ended 31.12.2012, the club received subscription of ₹ 2,08,000 which includes ₹ 10,400 relating to 2013. What amount of subscription will be recognized as income for the year 2012?
(a) 2,12,000
(b) 1,96,000
(c) 1,81,600
(d) 1,85,600
Answer:
(d) 1,85,600

8. Which one of the following financial statements is not prepared by a Non-profit organization?
(a) Balance Sheet
(b) Income and Expenditure Account
(c) Cash Flow Statement
(d) Receipt and Payment Account
Answer:
(c) Cash Flow Statement

9. Donations received by Gymkhana club in the form of endowment are treated as ________.
(a) Revenue receipts
(b) Deferred revenue receipts
(c) Capital receipts
(d) General income
Answer:
(c) Capital receipts

10. Subscription fees paid: 4,000; Prepaid fees at end: 1,000; Outstanding fees at end: 500. Profit & loss account is to be debited with:
(a) ₹ 3,500
(b) ₹ 4,500
(c) l 5,500
(d) ₹ 2,500
Answer:
(a) ₹ 3,500

11. Any donation received for a specific purpose is a:
(a) Liability
(b) Assets
(c) Revenue receipts
(d) Capital receipts.
Answer:
(b) Assets

12. Endow fund received by a club is a:
(a) Revenue Receipt
(b) Capital Receipt
(c) Advance Payment
(d) Revenue Payment.
Answer:
(b) Capital Receipt

13. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

14. The subscription details of club are given below:
Received during the year ₹ 1,080
Subscription is advance on 31.12.2014 ₹ 300
Subscription in advance on 31.12.2014 ₹ 50.
What amount will be entered in the income & expenditure account for the year ended 31st Dec., 2014?
(a) ₹ 1,330
(b) ₹ 830
(c) ₹ 1,080
(d) ₹ 1,380
Answer:
(a) ₹ 1,330

15. What does a credit balance of Income & Expenditure Account show at the end of a year?
(a) Surplus
(b) Loss
(c) Deficit
(d) Gross profit
Answer:
(a) Surplus

16. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

17. The capital of a non-profit organization is generally known as :
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund
Answer:
(a) Equity

18. The capital of non – profit organisation is generally known as ________.
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund.
Answer:
(a) Equity

19. Endowment fund receipt is treated as ________.
(a) Capital Receipt
(b) Revenue Receipt
(c) Loss
(d) Expenses
Answer:
(a) Capital Receipt

20. Income and Expenditure Account shows subscriptions at ₹ 10,000. Subscriptions accrued in the beginning of the year and at the end of the’ year were ₹ 1,000 and ₹ 1,500 respectively. The figure of subscriptions received appearing in receipts and payments account will be ________.
(a) ₹ 9,500
(b) ₹ 11,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 9,500

21. Receipts and Payments Account generally shows:
(a) A Debit Balance
(b) A Credit Balance
(c) Surplus or Deficit
(d) Capital Fund.
Answer:
(a) A Debit Balance

22. Income and Expenditure Account records transactions of:
(a) Revenue nature only;
(b) Capital nature only;
(c) Both revenue and capital nature.
(d) Income of only revenue nature and expenditure of revenue and capital nature.
Answer:
(a) Revenue nature only;

23. Income and Expenditure Account reveals:
(a) Surplus or Deficiency
(b) Cash in Hand
(c) Net Profit
(d) Capital Account.
Answer:
(a) Surplus or Deficiency

24. Donation received for special purpose:
(a) Should be credited to Income and Expenditure Account.
(b) Should be credited to separate A/c and shown in the Balance sheet.
(c) Should be shown on the asset side.
(d) Should not be recorded at all.
Answer:
(b) Should be credited to separate A/c and shown in the Balance sheet.

25. Subscription received by a school for organising annual function is treated as ________.
(a) Capital Receipt (i.e. liability)
(b) Revenue Receipt (i.e. Income)
(c) Assets
(d) Earned Income.
Answer:
(a) Capital Receipt (i.e. liability)

26. Amount received from sale of grass by club should be treated as :
(a) Capital Receipt
(b) Revenue Receipt
(c) Asset
(d) Earned Income.
Answer:
(b) Revenue Receipt

27. If there is a ‘Match Fund’ then match expenses and income are transferred to ________.
(a) Income and Expenditure A/c
(b) Assets side of Balance sheet.
(c) Liabilities side of Balance sheet.
(d) Both Income and Expenditure A/c and to Balance Sheet.
Answer:
(c) Liabilities side of Balance sheet.

28. Subscription received in cash during the year amounted to ₹ 40,000 subscription outstanding at the end of previous year was ₹ 1,500 and outstanding at the end of current year was ₹ 2,000. Subscription received in advance for next year was ₹ 800. The amount credited to Income and Expenditure Account will be ________.
(a) ₹ 38,700
(b) ₹ 39,700
(c) ₹ 40,300
(d) ₹ 41,300
Answer:
(b) ₹ 39,700

29. Subscription received in cash during the year amounted to ₹ 60,000 subscription received in advance for next year was ₹ 3,000 and received in advance during previous year was ₹ 2,000. Subscription in arrear at the end of the current year was ₹ 5,400. The amount credited to Income and Expenditure account will be ________.
(a) ₹ 53,600
(b) ₹ 66,400
(c) ₹ 55,600
(d) ₹ 64,400
Answer:
(d) ₹ 64,400

30. The opening balance of Price fund was ₹ 32,800. During the year, donations received towards this fund amounted ₹ 15,400; amount spent on prizes was ₹ 12,300 and was ₹ 4,000. The closing balance of Prize fund will be:
(a) ₹ 56,500
(b) ₹ 67,500
(c) ₹ 39,900
(d) ₹ 31,900
Answer:
(c) ₹ 39,900

31. Salary paid in cash during the current year was ₹ 80,000; outstanding salary at the end was ₹ 4,000; Salary paid in advance last year pertaining to the current year was ₹ 3,200; paid in advance during current year for next year was ₹ 5,000. The amount debited to Income and Expenditure Account will be :
(a) ₹ 85,800
(b) ₹ 77,800
(c) ₹ 82,200
(d) ₹ 74,200
Answer:
(c) ₹ 82,200

32. Subscription received in advance during the current year:
(a) An income
(b) An asset
(c) A liability
(d) None of these.
Answer:
(c) A liability

33. Which of the following is generally considered as non-profit oriented ________.
(a) Charitable Organization
(b) Corporation
(c) Audit Firm
(d) Insurance Companies.
Answer:
(a) Charitable Organization

34. Outstanding Subscription for non-profit organization is considered as/an ________.
(a) Expense
(b) Liability
(c) Equity
(d) Asset.
Answer:
(d) Asset.

35. Expenditure greater than Income of non-profit organization given rise to a ________.
(a) Loss
(b) Profit
(c) Surplus
(d) Deficit
Answer:
(d) Deficit

36. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decreases in liability and increase in capital
(c) Increase in assets and increase in liability
(d) Increase in capital and increase in assets.
Answer:
(d) Increase in capital and increase in assets.
Income earned but not received is accrued income so, when it will be collected, it will result in increase in assets with increase in capital also.

37. Receipt and Payment Account is based on ________.
(a) Cash Book
(b) Profit and Loss A/c
(c) Both a and b
(d) None of the above
Answer:
(a) Cash Book
Receipts and Payments Account is prepared at the end of the accounting year on the basis of cash receipt and cash payments recorded in the Cash Book. It is a summary of cash and bank transactions under various heads.

38. Income and Expenditure is which account ________.
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) Cash A/c
Answer:
(b) Nominal A/c
Income and Expenditure Account is a Nominal Account, Therefore, the rule of Nominal Account debit all expenses and losses and credit all incomes and gains is followed while preparing it while preparing the account, only items of revenue nature are recorded and all items of capital nature are ignored.

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Goodwill:

  • Goodwill means the reputation of the firm.
  • In other words, Goodwill is the value of reputation earned by a firm which helps it to yield more than normal profits.

Features of Goodwill:

  • It is an intangible asset i.e. cannot be seen or touched, (it is not a fictitious asset).
  • The value of Goodwill fluctuates from time to time.
  • It is a valuable asset and placed on the asset side of Balance sheet.

Factors affecting Goodwill of a firm:

  • Location of business.
  • Quality of goods sold/services given.
  • Reputation of owners of the firm.
  • Risk involved in business.
  • Efficiency of management.
  • Trends of profits etc.
  • Monopolistic nature of the business.
  • Possibility of competition.
  • Government attitude.
  • Possession of special contract for availability of material.

Need for valuation of Goodwill:

  • On admission of new partner.
  • On retirement or death of a partner.
  • When there is a change in profit sharing ratio.
  • When the business is sold.
  • When a firm is amalgamated with another firm.

Goodwill is the present value of a firm’s anticipated super normal | earnings. Super normal earnings means earnings over and above the normal rate of return.

Calculation of Goodwill:
1. Average Profit Method
It is a very simple and widely followed method.
Formula:
Value of Goodwill = Average profit x Number of years of purchase
Here:
(i) Average profits are the past profits after adjustments.
The following adjustments are made from the past profits.

  • Abnormal income should be deducted
  • Abnormal losses should be added back
  • Income from investments should be deducted as it is not earned from the business.

Note: These adjustments are made because average profit is a figure which represents a profit of all past years. Hence, all abnormal items should be removed/adjusted.

(ii) Number of year of purchase – The number of year of purchase are the years for which the goodwill is expected to remain in the business i.e. the years for which the benefits of goodwill can be taken.

Weighted average profit method:

  • This method is a slight modification of average profit method.
  • Under this method, weights are allotted to each year’s profit.
  • Weights are multiplied by the product to get the product.
  • The total product is then divided by the total weight to get the weighted average profit
  • The method is used when the profits are increasing year after year.
    Goodwill = Weighted average profit x No. of years of purchase.

2. Super Profit Method
1. Under this method, goodwill is calculated on the basis of excess profit earned by a firm over and above normal profits.

2. There are three methods for calculating goodwill using super profit method –

  • Purchase of super profit.
  • Annuity method.
  • Capitalization of super profit.

(i) Purchase of super profit:
Goodwill is calculated as follows
Goodwill = Super profit x No. of years of purchase

(ii) Capitalization of super profit method:
Under this method, goodwill is calculated by capitalizing super profits as follows:
Goodwill = \(\frac { Super Profits × 100 }{ Normal Rate of Return }\)

(iii) Annuity method: Under this method, goodwill is calculated by taking the present value of a terminal annuity of a super profit for a reasonable period.
Goodwill = Super Profit x Annuity
Note: Annuity Rate is generally given in question

Example:
A firm earned net profits during the last seven years as follows:
1992 ₹ 20,000 Profit
1993 ₹ 70,000 Loss
1994 ₹ 40,000 Loss
1995 ₹ 2,50,000 Profit
1996 ₹ 2,70,000 Profit
1997 ₹ 3,00,00 Profit
1998 ₹ 3,20,000 Profit
The capital invested in the firm is ₹ 12,00,000. Normal rate of return in the similar type of business is 10%. Calculate the value of goodwill on the basis of 2\(\frac { 1 }{ 2 }\) years purchases of average super profits earned during the above mentioned seven year
Solution:
(i) Actual Average Profit:
Total Profits of last Seven Years – ₹ 20,000 – ₹ 70,000 – ₹ 40,000 + ₹ 2,50,000 + 2,70,000 : ₹ 3,00,000 + ₹ 3,20,000 = ₹ 10,50,000
Average Profit = \(\frac{10,50,000}{7}\) = 1,50,000

(ii) Normal Profit = Capital Invested x \(\frac { Normal Rate of Return }{ 100 }\)
= 12,00,000 x 10/100 = ₹ 1,20,000

(iii) Super Profit = Actual Average Profit – Normal Profit
= ₹ 1,50,000 – ₹ 1,20,000 = ₹ 30,000

(iv) Value of Goodwill = Super Profit x Number of years purchased
= ₹ 30,000 x 2.5 = ₹ 75,000

(3) Capitalization method:
Under this method, goodwill is ascertained by comparing value of whole business (applying normal rate of return) with the actual capital employed of the business. The difference of the above will be termed as goodwill. Goodwill = Value of whole business – capital employed where,

Example : Suppose capital employed by a partnership firm is ₹ 1,00,000. Average profits are ₹ 25,000 and normal rate of return is 10%. Calculate the value of goodwill using capitalization method.
Solution:
Goodwill = Whole value of firm – Capital employed = ₹ 2,50,000 – 1,00,000 = ₹ 1,50,000
Working Note:
Whole value of firm = \(\frac { Average Profits × 100 }{ Normal Rate of Return }\)
= \(\frac{25,000×100}{10}\) = ₹ 2,50,000

Partnership Accounts-Goodwill MCQ Questions

1. Under super profit basis goodwill is calculated by:
(a) Average profits x years of purchase.
(b) Super profits x Years of purchase.
(c) Total of the discounted value of expected future profits.
(d) Super profit divided with expected rate of return.
Answer:
(b) Super profits x Years of purchase.

2. Goodwill brought in by incoming partner in cash is taken away by tho old partners in:
(a) Old Profit Sharing Ratio.
(b) New Profit Sharing Ratio.
(c) Sacrificing Ratio.
(d) Capital Ratio.
Answer:
(c) Sacrificing Ratio.

3. Under capitalization basis goodwill is calculated by:
(a) Average profit x years of purchase.
(b) Super profits x years of purchase.
(c) Total of the discounted value of expected benefits.
(d) Super profit divided with expected rate of return
Answer:
(d) Super profit divided with expected rate of return

4. Partners are supposed to pay interest on drawing only when provide d by the __________.
(a) Partnership Act
(b) None of these
(c) Agreement
(d) (a) and (c) above
Answer:
(c) Agreement

5. Weighted average method of calculating goodwill is used when:
(a) Profits are not equal
(b) Profits show a trend
(c) Partners who gave the guarantee
(d) None of the above
Answer:
(b) Profits show a trend

6. X, Y and Z are partners sharing profits and losses in the ratio 5:3:2. They decide to share the future profits in the ratio 3:2:1. Workmen compensation fund appearing in the balance sheet on the date if no information is available for the same will be:
(a) Distributed to the partners in old profit sharing ratio.
(b) Distributed to the partners in new profit sharing ratio.
(c) Distributed to the partners in capital ratio.
(d) Carried forward to new balance sheet without any adjustment.
Answer:
(a) Distributed to the partners in old profit sharing ratio.

7. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute among the partners. Profits before Interest on partners capital was ₹ 10,000 and X wanted interest on capital @20% as his capital contribution was ₹ 1,00,000 as compared to that of Y and Z which was ₹ 75,000 and ₹ 50,000 respectively. Find the solution.
(a) Profits of ₹ 10,000 will be distributed equally.
(b) X will get the interest of ₹ 20,000 and the loss of ₹ 10,000 will be shared equally.
(c) All the partners will get interest their capital and the loss will be shared equally.
(d) None of these.
Answer:
(a) Profits of ₹ 10,000 will be distributed equally.

8. A and B are partners sharing profits and losses in the ratio 5:3. On admission C brings ₹ 1,00,000 as Capital and ₹ 50,000 against goodwill. New profit sharing ratio between A, B and C are 7:5:4 Find the sacrificing ratio of A and B:
(a) 3:1
(b) 4:7
(c) 5:4
(d) 2:1
Answer:
(a) 3:1

9. The following trading results are available in respect of the business carried on by a firm:
2001 – Loss – ₹ 10,000
2002 – Loss – ₹ 5,000
2003 – Profit – ₹ 80,000
2004 – Profit – ₹ 55,000
The value of goodwill on the basis of 5 years purchase of average profit of the business will be:
(a) ₹ 1,25,000
(b) ₹ 1,50,000
(c) ₹ 1,00,000
(d) ₹ 1,20,000
Answer:
(b) ₹ 1,50,000

10. X and Y share profits and losses in the ratio of 2:1. They take Z as a partner and the new profit sharing ratio becomes 3:2:1 .Z brings ₹ 5,000 as premium for goodwill. The full value of goodwill be:
(a) ₹ 5,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 25,000
Answer:
(c) ₹ 30,000

11. Find the goodwill of the firm using capitalization method from the following information:
Total Capital Employed in the firm ₹ 8,00,000
Reasonable Rate of Return 15%
Profits for the year ₹ 6,00,000
(a) ₹ 80,00,000
(b) ₹ 40,00,000
(c) ₹ 32,00,000
(d) ₹ 42,00,000
Answer:
(c) ₹ 32,00,000

12. The capital of B and D is ₹ 60,000 and ₹ 30,000 respectively with the profit sharing ratio 3:1. The new ratio admissible after 01.4.2006 is 5:3. Goodwill valued as ₹ 80,000 will be credited to B and D’s capital by ₹:
(a) ₹ 60,000 and 20,000
(b) ₹ 50,000 and 30,000
(c) ₹ 50,000 and 30,000
(d) None of these.
Answer:
(a) ₹ 60,000 and 20,000

13. A and B are partners sharing profits and losses in the ratio of 3:2 having the capital of ₹ 80,000 and ₹ 50,000 respectively. They are entitled to 10% p.a. interest on capital before distributing the profits. During the year, the firm earned ₹ 17,800 before allowing any interest on capital. Profits apportioned among them excluding interest will be:
(a) ₹ 2,880 and 1,920
(b) ₹ 8,800 and 8,800
(c) ₹ 8,000 and 5,000
(d) None of the above.
Answer:
(a) ₹ 2,880 and 1,920

14. A and B are partners sharing profit and losses in the ratio 4:1. C was manager who received the salary of ₹ 2,000 p.m. in addition to a commission of 5% on net profits after charging such commission. Profit for the year is ₹ 3,39,000 before charging salary. Find the total remuneration of C:
(a) ₹ 39,000
(b) ₹ 44,000
(c) ₹ 43,500
(d) ₹ 38,000
Answer:
(a) ₹ 39,000

15. The capital of A and B sharing profits and losses equally are ₹ 90,000 and ₹ 30,000 respectively. They value the goodwill of the firm at ₹ 80,000 which was not recorded in the books. If goodwill is to be raised now, by what amount each partner’s capital account will be debited?
(a) ₹ 20,000 and ₹ 60,000
(b) ₹ 40,000 and ₹ 40,000
(c) ₹ 60,000 and ₹ 20,000
(d) None of these.
Answer:
(d) None of these.

16. A and B are partners with the capital ₹ 50,000 and ₹ 40,000 respectively. They share profits and losses equally. C is admitted on bringing ₹ 50,000 as capital only and nothing was brought against goodwill. Goodwill in Balance Sheet of ₹ 10,000 is revalued as 80,000. What will be value of goodwill in the books after the admission of C?
(a) ₹ 60,000
(b) ₹ 30,000
(c) ₹ 20,000
(d) ₹ 15,000
Answer:
(b) ₹ 30,000

17. Formula for calculation of manager’s commission after charging such commission is:
(a) (Diff of P/L app. A/c x r %) / (100+r %)
(b) (Diff of P/L app. A/c x r %) / (100-r %)
(c) Diff of P/L app. A/c x r %
(d) None
Answer:
(a) (Diff of P/L app. A/c x r %) / (100+r %)

18. The share of profit and loss of partner in absence of oral or written agreement will be:
(a) Equal ratio
(b) Capital ratio
(c) Agreed ratio
(d) No ratio
Answer:
(a) Equal ratio

19. A, B and C partners in the firm sharing profit ratio 5:3:2. They decided to share profits in the future in 3:2:1 ratio. For the aforesaid purpose, goodwill of the firm is valued as ₹ 60,000. Thus capital account of B will be:
(a) Debited with ₹ 2,000
(b) Credited with ₹ 2,000
(c) Will have no effect.
(d) Debited with ₹ 20,000
Answer:
(a) Debited with ₹ 2,000

20. When Goodwill is not purchased goodwill account can:
(a) Never be raised in the books
(b) Be raised in the books
(c) Be partially raised in the books
(d) Be raised as per the agreement of the partners.
Answer:
(a) Never be raised in the books

21. The profits of the last four years are as follows:

Year Amount (₹)
2000 40,000
2001 50,000
2002 60,000
2003 50,000

Calculate the goodwill on the basis of three purchase of average profits
(a) ₹ 1,00,000
(b) ₹ 1,50,000
(c) ₹ 2,00,000
(d) None of the above
Answer:
(b) ₹ 1,50,000

22. The profits of the last three years are as follows

Year Amount (₹)
2004 17,000
2005 20,000
2006 23,000

The capital employed is ₹ 80,000. The return on capital employed is 15%. Calculate the value of goodwill on the basis of two years purchase of average super profit earned.
(a) ₹ 16,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000
Answer:
(a) ₹ 16,000

23. The capital employed in a business is ₹ 1,50,000. The profits are ₹ 50,000 and the normal rate of profits is 20%. Calculate the amount of goodwill as per capitalisation method:
(a) ₹ 2,00,000
(b) ₹ 3,50,000
(c) ₹ 1,50,000
(d) ₹ 1,00,000
Answer:
(d) ₹ 1,00,000

24. A and B are partners in a firm with capital of ₹ 18,000 and ₹ 20,000. Z is admitted for 1/3rd share in profits and brings ₹ 34,000 as capital, calculate the
amount of goodwill
(a) ₹ 24,000
(b) ₹ 30,000
(c) ₹ 15,000
(d) None of these
Answer:
(b) ₹ 30,000

25. Ramu and Shamu are partners sharing profits/losses in the ratio of 3:2. They admit Ramesh and the new profit sharing ratio will be 2:2:1 respectively. If Ramesh brings ₹ 50,000 as goodwill, calculate the share of goodwill which Ramu will get?
[Hint → Calculate the sacrificing ratio]
(a) ₹ 25,000
(b) ₹ 30.000
(c) ₹ 50,000
(d) ₹ 15,000
Answer:
(c) ₹ 50,000

26. The profits and loss for the last three years are:

Year Amount (₹)
2005 20,000
2006 (10,000)
20071 15,000

Calculate the goodwill on the basis of three years purchase of average profits
(a) ₹ 20,000
(b) ₹ 25,000
(c) ₹ 18,000
(d) ₹ 16,667
Answer:
(b) ₹ 25,000

27. The capital employed by a firm is ₹ 1,00,000 and the normal rate of return is 15%. The average profits of the firm are:

Year Profits (₹)
2002 18,000
2003 12,000
2004 15,000
2005 22,000
2006 18,000

Calculate the goodwill on the basis of three years purchase of the super profits
(a) ₹ 6,000
(b) ₹ 10,000
(c) ₹ 8,000
(d) ₹ 12,000
Answer:
(a) ₹ 6,000

28. Under the capitalisation method, the formula for calculating the goodwill is:
(a) Super profit multiplied by the rate of return
(b) Average profits multiplied by the rate of return
(c) Super profits divided by the rate of return
(d) Average profits divided by the rate of return
Answer:
(c) Super profits divided by the rate of return

29. When goodwill is to be raised in the books when there is no goodwill in the books, then the entry to be passed is:
(a) Goodwill A/c debit and capital A/c credit
(b) Partner A/c debit and goodwill A/c credit
(c) General Reserve A/c debit and goodwill A/c credit
(d) None of these
Answer:
(a) Goodwill A/c debit and capital A/c credit

30. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called:
(a) Surplus
(b) Superprofits
(c) Reserve
(d) Goodwill
Answer:
(d) Goodwill

31. Which of the following is NOT true in relation to goodwill?
(a) It is an intangible asset
(b) It is a fictitious asset
(c) It has a realisable value
(d) None of the above
Answer:
(b) It is a fictitious asset

32. Purchasing year means:
(a) Number of years for which the profits is calculated
(b) Number of years for which the goodwill is expected to remain
(c) Number of years in which the goodwill is to be purchased
(d) None of these
Answer:
(b) Number of years for which the goodwill is expected to remain

33. The Goodwill of the firm is NOT affected by:
(a) Location of the firm
(b) Reputation of firm
(c) Better customer service
(d) None of the above
Answer:
(d) None of the above

34. The capital employed in a firm is ₹ 50,000 and the normal rate of return is 20%. The profits for the last three years are:

Year Profits (₹)
2000 20,000
2001 25,000
2002 15,000

Calculate the goodwill on the basis of capitalisation of super profits:
(a) ₹ 50,000
(b) ₹ 60,000
(c) ₹ 20,000
(d) None of these
Answer:
(a) ₹ 50,000

35. The net assets of a firm including fictitious assets of ₹ 5,000 are ₹ 85,000. The net liabilities of the firm are ₹ 30,000. The normal rate of return is 10% and the average profit of the firm is ₹ 8,000. Calculate the goodwill as per capitalisation of super profits.
(a) ₹ 20,000
(b) ₹ 30,000
(c) ₹ 25,000
(d) None of these
Answer:
(b) ₹ 30,000

36. Capital employed by a partnership firm is ₹ 5,00,000. Its average profit is ₹ 60,000. The normal rate of return in similar type of business is 10%. What is the amount of super profits?
(a) ₹ 50,000
(b) ₹ 10,000
(c) ₹ 6,000
(d) ₹ 56,000
Answer:
(b) ₹ 10,000
Capital Employed = ₹ 5,00,000
Normal rate of return = 10%
Average Profit = ₹ 60,000
Normal Profit = Capital employed x normal rate of return = 5,00,000 x 10%
= ₹ 50,000
Super Profit = Average Profit – Normal Profit
= 60,000 – 50,000
= ₹ 10,000
Super Profit is ₹ 10,000

37. If the new partner brings any additional amount in cash other than his capital contribution then, it is termed as:
(a) Capital
(b) Reserves
(c) Profits
(d) Goodwill
Answer:
(d) Goodwill
Whenever a new partner is admitted, he is generally expected to pay cash to old partners for his share of goodwill for the right he acquires to share in super profit of the firm in future.
The payment is made to the old partners for the sacrifice they make on their shares of profits for future. In other words, if a new partner brings any additional amount in cash other than his capital contribution then, it is termed as Goodwill:

38. A firm earns profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill as per capitalisation method will be:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Actual earned profit = ₹ 1,10,000
Normal rate of return = 10%
Total Assets = ₹ 11,00,000
Outside Liabilities = ₹ 1,00,000
Capital Employed = Total Assets – Outside Liabilities = 11,00,000- 1,00,000 = ₹ 10,00,000
Normal Profit = Capital Employed x Normal rate of return = 10,00,000 x 10% = ₹ 1,00,000
Super Profit = Actual Profit – Normal Profit = 1,10,000 – 1,00,000 = ₹ 10,000
Goodwill = \(\frac { Super Profit × 100 }{ Normal rate of return }\)
= \(\frac{10,000 \times 100}{10}\) = ₹ 1,00,000
Goodwill will be ₹ 1,00,000.

39. Total capital employed in the firm is ₹ 8,00,000, reasonable rate of return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000.
Answer:
(c) ₹ 72,00,000
Calculation of Goodwill according to capitalization method would be:
Notional Capital Employed = \(\frac{12,00,000}{15 \%}\)
= 80,00,000
Less: Actual
Capital Employed 8,00,000
Goodwill (operating in the business) 72,00,000

40. A firm earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is _________.
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Calculation of Value of Goodwill
Profit = ₹ 1,10,000
Normal value of Capital Employed
= \(\frac { Profit }{ Normal rate of return }\) x 100
Normal Rate of Return = 10%
= \(\frac{1,10,000}{10 \%}\)
= ₹ 11,00,000
Capital Employed = Total Assets Total Liabilities
= 11,00,000 – 1,00,000
= ₹ 10,00,000
Goodwill = 11,00,000 – 10,00,00
= ₹ 1,00,000

41. A firm of X, Y and Z has a total capital investment of ₹ 2,25,000. The firm earned net profit during the last four years ₹ 35,000, 40,000, 60,000, 50,000. The fair return on the net capital employed is 15% . Find the value of goodwill if it is based on 3 years purchase of average super profit of past 4 years.
(a) ₹ 35,000
(b) ₹ 36,500
(c) ₹ 40,000
(d) ₹ 37,500
Answer:
(d) ₹ 37,500
Average Profit = \(\frac{35,000+40,000+50,000+60,000}{4}\)
= \(\frac{1,85,000}{4}\) = 46,250
Normal profit = Capital employed x Rate
= 2,25,000 x \(\frac{15}{100 }\) = 33,750
Super profit = Average profit – Normal profit
= 46,250 – 33,750 = 12,500
Goodwill of 3 years purchase = 12,500 x 3 = 37,500.

42. Goodwill is which type of asset:
(a) Tangible
(b) Intangible
(c) Depleting
(d) Current.
Answer:
(b) Intangible
An intangible asset is an asset:

  • which cannot be touched
  • or felt
  • but which assists the firm in acquiring long term wealth, ex. goodwill patents, copyrights, etc.

Hence, option (b) is correct.

43. Sona purchased Simmi’s business from 1sl Jan, 1981. The profit disclosed by Simmi’s business for last 3 years:
1985 – ₹ 40,000 [including abnormal gain of ₹ 5,000]
1986 – ₹ 50,000 [after charging abnormal loss of ₹ 10,000]
1987 – ₹ 45,000 [excluding ₹ 5,000 for insurance premium of firms property now to be insured]
Calculate the goodwill on the basis of 2 years purchase of average profit of last 3 years.
(a) ₹ 80,000
(b) ₹ 90,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000
Answer:
(b) ₹ 90,000
Corrected Actual Profits:
Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes 1
Value of Goodwill = Average Actual Profit x Years of Purchase
= 45,000 x 2 = 90,000

44. The goodwill of a business is to be valued at 3 years purchase of the average profits of the last three years. The profits of the last three years are ₹ 5,000, ₹ 6,000 and ₹ 7,000 respectively. Hence, the goodwill be valued at:
(a) ₹ 12,000
(b) ₹ 15,000
(c) ₹ 18,000
(d) ₹ 6,000
Answer:
(c) ₹ 18,000
Under this method, goodwill is valued on the basis of a certain years purchases of the average profits of the past years:
Profits for the last year – ₹ 5,000, ₹ 6,000 and ₹ 7,000.
Average profit = \(\frac{5,000+6,000+7,000}{3}\)
= \(\frac{18,000}{3}\)
= ₹ 6,000
Goodwill = Average profit x No. of yrs. purchase
= 6,000 x 3
= ₹ 18,000

45. Find the average profit of last 3 years and the goodwill of the firm for 2 years of purchase. If the profit for last 2 years is 2010 – ₹ 50,000, 2011 – ₹ 30,000, 2012 – ₹ 1,00,000:
(a) ₹ 80,000, 1,20,000
(b) ₹ 60,000, 1,20,000
(c) ₹ 60,000, 1,00,000
(d) ₹ 70,000, 80,000
Answer:
(b) ₹ 60,000, 1,20,000
Average Profit = \(\frac{50,000+30,000+1,00,000}{3}\)
= \(\frac{1,80,000}{3}\)
= ₹ 60,000
No. of year purchase = 2 years
Goodwill = Average Profit x No. of year purchase
= 60,000 x 2
= ₹ 1,20,000

46. Find the goodwill by super profit method where capital is ₹ 1,00,000, Rate 20%, Average profit is ₹ 25,000:
(a) ₹ 7,000
(b) ₹ 4,000
(c) ₹ 2,000
(d) ₹ 5,000
Answer:
(d) ₹ 5,000
Capital = ₹ 1,00,000
Rate = 20%
Average Profit = ₹ 25,000
Normal Profit = \(\frac{Capital invested × Rate}{100}\)
= \(\frac{1,00,000×20}{100}\)
= ₹ 20,000
Super Profit = Average Profit – Normal Profit
= 25,000 – 20,000
= ₹ 5,000
Goodwill = Super Profit x No. of year purchase
= 5,000 x 1
= ₹ 5,000

47. The profit of last five years are ₹ 85,000, ₹ 90,000, ₹ 70,000, ₹ 1,00,000 and ₹ 80,000. Find the goodwill if it is calculated on average profit of last five years on the basis of 3 years of purchase.
(a) ₹ 2,85,000
(b) ₹ 85,000
(c) ₹ 2,55,000
(d) ₹ 2,75,000
Answer:
(c) ₹ 2,55,000
Average Profit = \(\frac{(85,000+90,000+70,000+1,00,000+80,000)}{5}\)
= 85,000
Goodwill = 85,000 x 3
= 2,55,000

48. A firm has total investment of ₹ 2,25,000. The firm earned net profit for the last 4 years as ₹ 35,000, ₹ 40,000; ₹ 60,000 and ₹ 50,000. The fair return on capital employed is 15%. The value of goodwill on the basis of 3 years purchase of average super profits of past 4 years will be:
(a) ₹ 37,500
(b) ₹ 12,500
(c) ₹ 46,250
(d) ₹ 33,750
Answer:
(a) ₹ 37,500
Profit of last 4 years: 35,000, 40,000, 60,000, 50,000
Average profit = ₹ 46,250
Total Investment = ₹ 2,25,000
Fair Return =15%
Normal Profit = ₹ 33,750
Super profit = Average profit – Normal profit = 46,250 – 33,750 = 12,500
Goodwill = Super profit x No. of purchase year
= 12,500 x 3
= ₹ 37,500.

49. Vales and Wells were in partnership sharing profits and losses equally. They admit Sparks as a partner and decide to share profits equally between the three partner. Goodwill is valued at ₹ 60,000 but is to be immediately written off. What will be the effect of this on Yale’s capital?
(a) Will increase by ₹ 20,000
(b) Will increase by ₹ 30,000
(c) Will increase by ₹ 10,000
(d) Will decrease by ₹ 10,000
Answer:
(c) Will increase by ₹ 10,000
Goodwill = ₹ 60,000
Sparks Share of Goodwill = ₹ 60,000/3
= ₹ 20,000
This amount of Goodwill will be divided between Yales and Wells in equal ratio and as a result the capital of both will be increased by 10,000.

50. Partners who actively take part in the business?
(a) Active partner
(b) Sleeping partner
(c) Partner by estoppels
(d) All of the above
Answer:
(a) Active partner
An invested person who is involved in the daily operations of the partnership. An active partner helps run the business to enhance his or her returns and is therefore considered a material participant. This person typically shares more risk and return versus a limited or silent partner.

51. The profits of last three years are ₹ 43,000, ₹ 38,000 and ₹ 45,000. Find out the goodwill of two years purchase of average profits.
(a) ₹ 84,000
(b) ₹ 42,000
(c) ₹ 36,000
(d) ₹ 1,26,000
Answer:
(a) ₹ 84,000
Avg. profit = \(\frac{43,000+38,000+45,000}{3}\)
Goodwill = 42,000 x 2 = ₹ 84,000

52. P, Q and R are Partners and Sharing profit and losses equally. Their capital balance stood at ₹ 25,000, ₹ 20,000 and ₹ 18,000 respectively. Their last three years profit were ₹ 18,000, ₹ 12,000 and ₹ 15,000. Q died, P and R decided to continue with the partnership and Q’s share is purchased by P and R in 2:3. As per agreement, the value of goodwill is calculated at 3 years purchase price of average profit of last three years. It is decided that no goodwill account is opened in the books of account and if is to be adjusted through capital account. After the adjustment, the capital of P would be:
(a) ₹ 19,000
(b) ₹ 25,000
(c) ₹ 20,000
(d) ₹ 18,000
Answer:
(a) ₹ 19,000
Avg. profit = \(\frac{12,000+15,000+18,000}{3}\)
= 15,000
Goodwill = 15,000 x 3 = 45,000
Q share of Goodwill = \(\frac{45,000}{3}\) = 15,000
Q’ share is purchased by P & R is Ratio of 2 : 3
P’ share of contribution in Goodwill = 15,000 x \(\frac{2}{5}\) = 6,000
Capital After Retirement = 25,000 – 6,000 = 19,000

53. Total capital employed in the firm is ₹ 8,00,000. Reasonable rate of return is 15% and profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000
Answer:
(c) ₹ 72,00,000
Normal Profit = \(\frac{Capital Employed × Normal Rate of Return}{100}\)
\(\frac{8,00,000 \times 15}{100}\) = ₹ 1,20,000
Normal Profits for the year = ₹ 12,00,000
Capitalisation Profit = \(\frac{12,00,000}{15}\) x 100
= ₹ 80,00,000
Goodwill = Profits – Capital Employed
= 80,00,000 – 8,00,000
= ₹ 72,00,000

54. Calculate the amount of goodwill for 3 years purchase of following 5 years ₹ 2,00,000, 2,80,000, 3,20,000, 2,40,000 (including loss 4,000), (14,000)
(a) ₹ 31,200
(b) ₹ 6,15,600
(c) ₹ 42,000
(d) ₹ 18,200
Answer:
(b) ₹ 6,15,600
Calculate the Goodwill
Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes 2

55. A firms earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Net Capital Employed = Assets – Liabilities
= 11,00,000 – 1,00,000
= 10,00,000
Normal Return = 10,00,000 x 10%
= 1,00,000
Super Profit = 1,10,000 -1,00,000
= 10,000
Goodwill = \(\frac{Super Profit}{Normal Rate of return}\)
= \(\frac{10,000}{10 \%}\)
= 1,00,000

56. Find the goodwill of the firm on the basis of 3 years purchase by average profit method from the profit of last 5 years were 32,000; 35,000; 28,000; 26,000; 40,000 respectively.
(a) 32.200
(b) 96,600
(c) 42,000
(d) 32,000
Answer:
(b) 96,600
Average Profit of last 5 years
= 32,000 + 35,000 + 28,000 + 26,000 + 40,000
= \(\frac{1,61,000}{5}\)
= 32,200 5
G/W of A.P = 32,200 x 3 = 96,600