ACCOUNTING GST SHORT NOTES

Financial accounting assists keeping a systematic record of financial transactions the preparation and presentation of financial reports in order to arrive at a measure of organisational success and financial soundness. It relates to the past period, serves the stewardship function and is monetary in nature. Cost accounting assists in analysing the expenditure for ascertaining the cost of various products manufactured or services rendered by the firm and fixation of prices thereof. It also helps in controlling the costs and providing necessary costing information to management for decision-making. Management accounting deals with the provision of necessary accounting information to people within the organisation to enable them in decision-making, planning and controlling business operations. Management accounting draws the relevant information mainly from financial accounting and cost accounting which helps the management in budgeting, assessing profitability, taking pricing decisions, capital expenditure decisions and so on. Qualitative characteristics are the attributes of accounting information which tend to enhance its understandability and usefulness. reliability, relevance, understandability and comparability. Basic objective of accounting is to provide useful information to the interested group of users, both external and internal. the primary objectives of accounting include the following: 1. Maintenance of a systematic record of all financial transactions in book of accounts. 2. accounting is to ascertain the profit earned or loss 3. ascertaining the financial position of the business Chapter-2 Institute of Chartered Accountants of India, (ICAI), which is the regulatory body for standardisation of accounting policies in the country has issued Accounting Standards which are expected to be uniformly adhered to, in order to bring consistency in the accounting practices. ‘Principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice. The term concept refers to the necessary assumptions and ideas which are fundamental to accounting practice, and the term convention connotes customs or traditions as a guide to the preparation of accounting statements. Business entity; • Money measurement; • Going concern; • Accounting period; • Cost • Dual aspect (or Duality); • Revenue recognition (Realisation); • Matching; • Full disclosure; • Consistency; • Conservatism (Prudence); • Materiality; • Objectivity. The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period. To ensure proper disclosure of material accounting information, the Indian Companies Act 1956 has provided a format for the preparation of profit and loss account and balance sheet of a company, which needs to be compulsorily adhered to, for the preparation of these statements. The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the book of accounts and is based on the policy of playing safe. The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided for in the books of account. hidden profits, called secret reserves. The concept of materiality requires that accounting should focus on material facts. Efforts should not be wasted in recording and presenting facts, which are immaterial in the determination of income. Goods and Services Tax (One Country One Tax) GST is a destination based tax on consumption of goods and services. It is proposed to be levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. There are three main components of GST which are CGST, SGST, CGST means Central Goods and Services Tax. Taxes collected under CGST will constitute the revenues of the Central Government . The present central taxes like central excise duty, additional excise duty, special excise duty, central sales tax etc., will be subsumed under CGST. SGST means State Good and Services Tax. A collection of SGST is the revenue of the State Government. With GST all state taxes like VAT, entertainment tax, luxury tax, entry tax etc, will be merged with GST. IGST means Integrated Goods and Services Tax. Revenue collected under IGST is divided between Central and State Government as per the rates specified by the Government. IGST is charged on transfer of goods and services from one state to another. Import of goods and services are also covered under IGST. Conservatism: This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealised gains should be ignored. Basis of Accounting: The two broad approach of accounting are cash basis and accrual basis. Under cash basis transactions are recorded only when cash are received or paid. Whereas under accrual basis, revenues or costs are recognises when they occur rather than when they are paid. Accounting Standards: Accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing the uniform and consistent financial statements. These standards cannot over ride the provisions of applicable laws, customs, usages and business environment in the country. Chapter-3 Business transactions are usually evidenced by an appropriate documents such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the transactions is called the Source Document or a Voucher. All recording in books of account is done on the basis of vouchers. At times, there may be no documentary for certain items as in case of petty expenses. Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers, journal vouchers, etc. A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared for such transaction is known as Transaction Voucher. Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be: (a) Debit Voucher o7r (b) Credit Voucher. Transactions with multiple debits and multiple credits are called complex transactions and the accounting voucher prepared for such transaction is known as Complex Voucher/ Journal Voucher. In accounting, the terms — debit and credit indicate whether the transactions are to be recorded on the left hand side or right hand side of the account. In its simplest form, an account looks like the letter T. Because of its shape, this simple form called a T-account. The difference between the totals of the two sides called balance shall reflect the amount due to the customer. In a T account, the left side is called debit (often abbreviated as Dr.) and the right side is known as credit (often abbreviated as Cr.). Rules of Debit and Credit All accounts are divided into five categories for the purposes of recording the transactions: (a) Asset (b) Liability (c) Capital (d) Expenses/Losses, and (e) Revenues/Gains. Two fundamental rules are followed to record the changes in these accounts: (1) For recording changes in Assets/Expenses (Losses): (i) “Increase in asset is debited, and decrease in asset is credited.” (2) (ii) “Increase in expenses/losses is debited, and decrease in expenses/ losses is credited.” (2) For recording changes in Liabilities and Capital/Revenues (Gains): (i) “Increase in liabilities is credited and decrease in liabilities is debited.” (ii) “Increase in capital is credited and decrease in capital is debited.” (iii) “Increase in revenue/gain is credited and decrease in revenue/gain is debited.” Real accounting systems do not record transactions directly in the accounts. The book in which the transaction is recorded for the first time is called journal or book of original entry. The source document is required to record the transaction in the journal. The process of recording transactions in journal is called journalising. The process of transferring journal entry to individual accounts is called posting. This sequence causes the journal to be called the Book of Original Entry and the ledger account as the Principal Book of entry. the journal is subdivided into a number of books of original entry as follows: (a) Journal Proper (b) Cash book (c) Other day books: (i) Purchases (journal) book (ii) Sales (journal) book (iii) Purchase Returns (journal) book (iv) Sale Returns (journal) book (v) Bills Receivable (journal) book (vi) Bills Payable (journal) book The journal entry is the basic record of a business transaction. It may be simple or compound. When only two accounts are involved to record a transaction, it is called a simple journal entry. When the number of accounts to be debited or credited is more than one, entry made for recording the transaction is called compound journal entry. The ledger is the principal book of accounting system. It contains different accounts where transactions relating to that account are recorded. A ledger is the collection of all the accounts, debited or credited, in the journal proper and various special journal. A ledger may be in the form of bound register, or cards, or separate sheets may be maintained in a loose leaf binder. In the ledger, each account is opened preferably on separate page or card. The net result of all transactions in respect of a particular account on a given date can be ascertained only from the ledger. The Journal is the book of first entry (original entry); the ledger is the book of second entry. 2. The Journal is the book for chronological record; the ledger is the book for analytical record. 3. The Journal, as a book of source entry, gets greater importance as legal evidence than the ledger. 4. Transaction is the basis of classification of data within the Journal; Account is the basis of classification of data within the ledger. 5. Process of recording in the Journal is called Journalising; the process of recording in the ledger is known as Posting. All permanent accounts appears in the balance sheet. Thus, all assets, liabilities and capital accounts are permanent accounts and all revenue and expense accounts are temporary accounts. Posting is the process of transferring the entries from the books of original entry (journal) to the ledger. In other words, posting means grouping of all the transactions in respect to a particular account at one place for meaningful conclusion and to further the accounting process. Posting from the journal is done periodically, may be, weekly or fortnightly or monthly as per the requirements and convenience of the business. These special journals are also called day books or subsidiary books. Transactions that cannot be recorded in any special journal are recorded in journal called the Journal Proper. Special purpose books: • Cash Book • Purchases Book • Purchases Return (Return Outwards) Book • Sales Book • Sales Return (Return Inwards) Book • Journal Proper Cash Book Cash book is a book in which all transactions relating to cash receipts and cash payments are recorded. It starts with the cash or bank balances at the beginning of the period. Generally, it is made on monthly basis. This is a very popular book and is maintained by all organisations, big or small, profit or not-forprofit. It serves the purpose of both journal as well as the ledger (cash) account. It is also called the book of original entry. When a cashbook is maintained, transactions of cash are not recorded in the journal, and no separate account for cash or bank is required in the ledger. Pretty Cash Book a large number of small payments such as conveyance, cartage, postage, telegrams and other expenses (collectively recorded under miscellaneous expenses) are made. These are generally repetitive in nature. If all these payments are handled by the cashier and are recorded in the main cash book, the procedure is found to be very cumbersome. The cashier may be overburdened and the cash book may become very bulky. To avoid this, large organisations normally appoint one more cashier (petty cashier) and maintain a separate cash book to record these transactions. Such a cash book maintained by petty cashier is called petty cash book. The petty cashier works on the Imprest system. Under this system, a definite sum, say  2,000 is given to the petty cashier at the beginning of a certain period. This amount is called imprest amount. Purchase journal : A special journal in which only credit purchases are recorded Sales journal : A special journal in which only credit sales are recorded Sales Return Book : A special book in which returns of merchandise sold on credit are recorded. BOOK-2 Accounting for Share Capital Chapter-1 All the affairs of the company are governed by the provisions of the Companies Act, 1956. A company means a company incorporated or registered under the Companies Act, 1956 or under any other earlier Companies Acts. According to Chief Justice Marshal, “a company is a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence”. A company usually raises its capital in the form of shares (called share capital) and debentures (debt capital. Kinds of a Company Companies Limited by Shares: In this case, the liability of its members is limited to the extent of the nominal value of shares held by them. If a member has paid the full amount of the shares, there is no liability on his part whatsoever may be the debts of the company. He need not pay a single paise from his private property. However, if there is any liability involved, it can be enforced during the existence of the company as well as during the winding-up. Companies Limited by Guarantee: In this case, the liability of its members is limited to the amount they undertake to contribute in the event of the company being wound up. Thus, the liability of the members will arise only in the event of its winding up. Unlimited Companies: When there is no limit on the liability of its members, the company is called an unlimited company. When the company’s property is not sufficient to pay off its debts, the private property of its members can be used for the purpose. In other words, the creditors can claim their dues from its members. Such companies are not found in India even though permitted by the Companies Act, 1956. On the basis of the number of members, a company can be divided into two categories as follows: Public Company: A public company means a company which (a) is not a private company, (b) has minimum capital of Rs. 5 lakh on such higher paid-up capital may be prescribed, and (c) is a private company which is a subsidiary of which is not a private company. Private Company: A private company is one which has a minimum paid up capital of Rs. 1 Lakh or such higher paid-up capital as may be prescribed by its Articles. (a) Restricts the right to transfer its shares; (b) Limits the number of its members to fifty (excluding its employees); (c) Prohibits any invitation to the public to subscribe for any shares in or debentures of the company. (d) Prohibits any invitation or acceptance of deposits from person other than its members, directors, and relatives. Share Capital of a Company A company, being an artificial person, cannot generate its own capital which has necessarily to be collected from several persons. These persons are known as shareholders and the amount contributed by them is called share capital. innumerable streams of capital contribution merge their identities in a common capital account called as ‘Share Capital Account’. Categories of Share Capital Authorised Capital: Authorised capital is the amount of share capital which a company is authorised to issue by its Memorandum of Association. The company cannot raise more than the amount of capital as specified in the Memorandum of Association. It is also called Nominal or Registered capital. The authorised capital can be increased or decreased as per the procedure laid down in the Companies Act. It should be noted that the company need not issue the entire authorised capital for public subscription at a time. Depending upon its requirement, it may issue share capital but in any case, it should not be more than the amount of authorised capital. Issued Capital: It is that part of the authorised capital which is actually issued to the public for subscription including the shares allotted to vendors and the signatories to the company’s memorandum. The authorised capital which is not offered for public subscription is known as ‘unissued capital’. Unissued capital may be offered for public subscription at a later date. Subscribed Capital: It is that part of the issued capital which has been actually subscribed by the public. When the shares offered for public subscription are subscribed fully by the public the issued capital and subscribed capital would be the same. It may be noted that ultimately, the subscribed capital and issued capital are the same because if the number of share, subscribed is less than what is offered, the company allot only the number of shares for which subscription has been received. In case it is higher than what is offered, the allotment will be equal to the offer. In other words, the fact of over subscription is not reflected in the books. Called-up Capital: It is that part of the subscribed capital which has been called up on the shares. The company may decide to call the entire amount or part of the face value of the shares. For example, if the face value (also called nominal value) of a share allotted is Rs. 10 and the company has called up only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may be collected from its shareholders as and when needed. Paid-up Capital: It is that portion of the called up capital which has been actually received from the shareholders. When the share holders have paid all the call amount, the called-up capital is the same to the paid-up capital. If any of the shareholders has not paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore, paid-up capital is equal to the called-up capital minus call-in-arrears. Uncalled Capital: That portion of the subscribed capital which has not yet been called-up. As stated earlier, the company may collect this amount any time when it needs further funds. Reserve Capital: A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called ‘Reserve Capital’ of the company. It is available only for the creditors on winding up of the company. a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders. The amount of authorised capital, together with the number of shares in which it is divided, is stated in the Memorandum of Association but the classes of shares in which the company’s capital is to be divided, alongwith their respective rights and obligations, are prescribed by the Articles of Association of the company. As per Section 86 of The Companies Act, a company can issue two types of shares (1) preference shares, and (2) equity shares (also called ordinary shares). Preference Shares According to Section 85 of The Companies Act, 1956, a preference share is one, which fulfils the following conditions: a) That it carries a preferential right to dividend to be paid either as a fixed amount payable to preference shareholders or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders. b) That with respect to capital it carries or will carry, on the winding-up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders. Equity Shares According to Section 85 of The Companies Act, 1956, an equity share is a share which is not a preference share. In other words, shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of the preference share holders. The dividend on equity shares is not fixed and it may vary from year to year depending upon the amount of profits available for distribution. The equity share capital may be (i) with voting rights; or (ii) with differential rights as to voting, dividend or otherwise in accordance with such rules and subject. Issue of Shares A salient characteristic of the capital of a company is that the amount on its shares can be gradually collected in easy installments spread over a period of time depending upon its growing financial requirement. The first installment is collected along with application and is thus, known as application money, the second on allotment (termed as allotment money), and the remaining installment are termed as first call, second call and so on. The word final is suffixed to the last installment. However, this in no way prevents a company from calling the full amount on shares right at the time of application. The important steps in the procedure of share issue are: • Issue of Prospectus: The Company first issues the prospectus to the public. Prospectus is an invitation to the public that a new company has come into existence and it needs funds for doing business. It contains complete information about the company and the manner in which the money is to be collected from the prospective investors. • Receipt of Applications: When prospectus is issued to the public, prospective investors intending to subscribe the share capital of the company would make an application along with the application money and deposit the same with a scheduled bank as specified in the prospectus. The company has to get minimum subscription (Refer Box 1) within 120 days from the date of the issue of the prospectus. If the company fails to receive the same within the said period, the company cannot proceed for the allotment of shares and application money should be returned within 130 days of the date of issue of prospectus. • Allotment of Shares: If minimum subscription has been received, the company may proceed for the allotment of shares after fulfilling certain other legal formalities. Letters of allotment are sent to those whom the shares have been alloted, and letters of regret to those to whom no allotment has been more. When allotment is made, it results in a valid contract between the company and the applicants who now became the shareholders of the company. Minimum Subscription It means the minimum amount that, in the opinion of directors, must be raised to meet the needs of business operations of the company relating to: 1. The price of any property purchased, or to be purchased, which has to be met wholly or partly out of the proceeds of issue; 2. Preliminary expenses payable by the company and any commission payable in connection with the issue of shares; 3. The repayment of any money borrowed by the company for the above two matters; 4. working capital; and 5. any other expenditure required for the usual conduct of business operations. It is to be noted that ‘minimum subscription’ of capital cannot be less than 90% of the issued amount according to SEBI (Disclosure and Investor Protection) Guidelines, 2000 [6.3.8.1 and 6.3.8.2]. If this condition is not satisfied, the company shall forthwith refund the entire subscription amount received. If a delay occurs beyond 8 days from the date of closure of subscription list, the company shall be liable to pay the amount with interest at the rate of 15% [Section 73(2)]. Shares of a company are issued either at par, at a premium or at a discount. Shares are said to have been issued at par when their issue price is exactly equal to their nominal value according to the terms and conditions of issue. When the shares of a company are issued more than its nominal value (face value), the excess amount is called premium and the issue is said to have been made at a premium. When the shares are issued at a price less than the face value of the share, it is known as shares issued at a discount. Irrespective of the fact that shares are issued at par, premium or discount, the share capital of a company as stated earlier, is collected in installments to be paid at different stages.