ECO 14 Solved Assignment 2022 – 23 (IGNOU)


ECO 14 Solved Assignment 2022 – 23

IGNOU B.Com Free Solved Assignment 2022 – 23

Accountancy – II ECO 14 Solved Assignment 2022 – 23

COURSE TITLE: ACCOUNTANCY-II

ASSIGNMENT CODE: ECO-14/TMA/2022-23

COVERAGE: ALL BLOCKS

Maximum Marks: 100

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ECO 14 Solved Assignment

Attempt all the questions.

1. (a) What is partnership? Define partnership deed.         10

Ans: Partnership is an association of two or more persons who agreed to do business and share profits and losses arises from it in an agreed ratio. The partners act both as agents and principals of the firm.

In India, Partnership firm is governed by the Indian Partnership Act 1932. Section 4 of this act defines partnership as: “The relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all.”

Partnership in this way is an agreement, between two or more persons to carry on legal business with profit motive, which is carried on by all or any one of them acting for all.

Essential (Characteristics) of Partnership:

a) Agreement: Partnership is the result of an agreement, either written or oral, between two or more persons. It arises from contract and not from status or process of law.

b) Number of Persons: In a partnership firm there must be at least two people to form the business. Partnership Act 1932, does not specifies the maximum numbers of persons, but the Indian Company Act 2013, restricts the number of Partners to 100 for a partnership firm. But in case of limited liability partnership there is no maximum limit.

c) Business: There must be a legal business. Business includes trade, vocation and profession.

d) Profit-Sharing: The agreement between/amongst the partners must be to share profit or losses arise from the business.

e) Agents and principals: The partners act both as agents and principals of the firm. Partnership firm can be carried on by all or any of them acting on behalf of all the partners.

f) Separate legal entity: Partnership is a separate legal entity from the accounting point of view. But from the legal view point firm is not separate from its partners. If a firm is bankrupt, private estate of the partners is liable to meet firm’s obligations.

Partnership deed: Meaning

A partnership is formed by an agreement. This agreement may be oral or in writing. Though the law does not expressly require that the partnership agreement should be in writing, it is desirable to have it in writing. A written agreement, which contains the terms of partnership, as agreed to by the partners is called ‘Partnership Deed.’

Importance: It is a very important document of the firm which defines relationship amongst the partners. It is necessary to avoid disputes amongst the partners and can be presented in the court as evidence.

Contents (Clauses) of the Deed:

a) Name and address of the firm.

b) Names and addresses of the partners.

c) Nature of Business.

d) Amount of capital to be contributed by each partner.

e) Profit or loss sharing ratio.

f) Date of commencement of partnership.

g) Interest of Capital, if provided the rate of interest must be specified.

h) Partner’s salaries and commission, if provided.

i) Interest on Drawings, if charged, the rate of interest should also be specified.

(b) Hari and Giri entered into partnership contributing capitals of Rs. 60,000 and Rs. 30,000 respectively. They agreed to share profits and losses in the ratio 2:1. During the year Hari and Giri withdraw Rs. 10,000 and Rs. 6,000, respectively. The profit for the year ended December 31, 1989 was Rs. 42,000. Prepare Profit and Loss Appropriation Account taking into consideration the following:        10

(1) Hari is to be allowed a salary of Rs. 3,000 p.a.

(2) Interest on capitals is to be provided at 5% p.a.

(3) Interest on Giri’s Loan Account of Rs. 20.000 is to be charged for the whole year.

(4) Interest on drawings is to be charged at 6% p.n.

Ans:

Profit and Loss Appropriation A/c

For the year ended on Dec 31, 1989

Particulars

Amount

Particulars

Amount

To Interest on capital

Hari = 60,000 x 5%

Giri = 30,000 x 5%

To Partners Salary

Hari

To Share of Profit

Hari = 33,780 x 2/3

Giri = 33,780 x 1/3

3,000

1,500

3,000

22,520

11,260

By Net Profit (42,000 – 1,200)

BY Interest on Drawings

Hari = 10,000 x 6/100 x 6/12

Giri = 6,000 x 6/100 x 6/12

40,800

300

180

41,280

41,280

2. What are the special features of the Profit and Loss Account of a Company? What do you understand by Appropriation of Profits? What are the items relevant in that connection?  (20)

Ans: Buy Full Assignment @ R.s 25

3. (a) What is Stock Turnover Ratio? What are the implications of high and low stock turnover ratios? Explain with examples.           10

Ans: Stock turnover ratio (STR) is a ratio between cost of goods sold and average stock. This ratio is also known as stock velocity or inventory turnover ratio.

Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where Average Stock = [Opening Stock + Closing Stock]/2

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit.

High Stock Turnover Ratio: High STR is a very good sign for any company because it indicates that company is frequently selling it products to customer. Capital of company is not blocked in inventory and it can be assumed that company is earning a decent return on equity.

For example, cost of goods sold of A Ltd. is Rs. 1,00,000 and average stock is 10,000. In such case, STR will be 1,00,000/10,000 i.e., 10 times which is very high. This ratio indicates that A Ltd. is able to sale its products quickly.

Low Stock Turnover Ratio: Low SRT is not a good sign for any company. A low STR indicates that company is not able to sale its product. Inventory of the company is not properly managed and too capital of company is blocked in inventory.

For example, cost of goods sold of B Ltd. is Rs. 60,000 and average stock is Rs. 40,000. In such case, STR will be 60,000/40,000 i.e., 1.5 times which is very low. This ratio indicates that B Ltd was not able to sale its stock immediately. It took around 8 months to sale its stock.

(b) What is cash flow statement? What are the various sources and uses of cash? How does it differ from fund flow statement?        10

Ans: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.

Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.

Various Sources and Applications of Cash

Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised of three sections: Operating activities, investing activities and financing activities.

A) Section one: Cash flow from operating activities:Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.

Examples of Operating Activities:

Ø Cash receipts from the sale of goods and rendering of services. (Source)

Ø Cash payments to suppliers of goods and services. (application)

Ø Cash receipts from royalties, fees, commission and other revenue. (Source)

Ø Cash payments to and on behalf of employees for wages, etc. (application)

Ø Cash payments and refunds of income taxes. (application)

B) Section two: Cash from investing activities: The investing activities of a business include all cash flow arises due to acquisition and disposal of long term assets (whether tangible and intangible) and investments. Acquisition or disposal of companies also comes under investing activities. These are separately disclosed in cash flow statement.

Examples of Investing Activities:

Ø Cash payments to acquire long term fixed assets (tangible and intangible) and investments. (application)

Ø Cash receipts from the disposal of long term fixed assets (including intangibles) and investments.(Source)

Ø Cash payments for purchase or of shares, warrants, or debt instruments of other enterprises and interest in joint ventures. (application)

Ø Cash receipts from sale of shares, warrants, debt instruments of other enterprises and interest in joint ventures. (source)

Ø Cash receipts from repayments of advances and loans made to third parties. (source)

All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.

C) Section three: Cash flows from financing activities: Financing activities are the activities which results in changes in the size and composition of the owner’s capital and borrowings of the enterprises from other sources. The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures, raising and repayment of long term loans etc. Dividends and Interest paid are also come under financing activities.

Examples of Financing Activities: (Sources and applications of cash flow)

Ø Cash proceeds from the issue of shares or other similar instruments. (source)

Ø Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings. (source)

Ø Buy-back of equity shares. (application)

Ø Cash repayments of the amounts borrowed including redemption of debentures. (application)

Ø Payments of dividends and interest on borrowings. (application)

All the sources of cash from financing activities are added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.

Difference between Funds Flow Statement and Cash Flow Statement

Basis of Difference

Funds Flow Statement

Cash Flow Statement

Basis of Analysis

Funds flow statement is based on broader concept i.e. working capital.

Cash flow statement is based on narrow concept i.e. cash, which is only one of the elements of working capital.

Objective

The object funds flow statement is to disclose the magnitude, direction and causes of changes in working capital.

The object of cash flow is to disclose the magnitude, direction and causes of changes in cash and cash equivalents.

Source

Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put.

Cash flow statement starts with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.

Usefulness

Funds flow statement is more useful in assessing the long-term financial position.

Cash flow statement is more useful in assessing the short-term financial position of the business.

Schedule of Changes in Working Capital

In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital.

In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement.

4. Describe various provisions of Companies Act that deal with the issue of debentures at a discount. Give accounting treatment of debentures issued as a collateral security by the company.           20

Ans: When debentures are issued at a price lower than its face value, then such debentures are said to be issued as “Debentures issued at a Discount”. Discount on issue of debentures is a Capital loss and is show in the Balance sheet on the Assets side under the head “Miscellaneous Expenditure” till it is written off.

The amount of discount on issue of debenture can be written off in two ways:

1. All debentures are to be redeemed after a fixed period: When the debentures are to be redeemed after a fixed period, the amount of discount will be distributed equally within the number of years spreaded between the issue of debentures and their redemption. The amount of discount on issue of debentures to be written off each year is calculated as: Amount of discount to be written off annually = Amount of Discount / No of Years

2. Debentures are redeemed in instalments: Debentures may also be redeemed in instalments but over a fixed period.In that case the amount of debenture discount will be written off each year in proportion to the amount of debentures redeemed.

Journal Entry for Writing of Discount on issue of Debentures/Loss on issue of Debentures is:

Profit and Loss Account                 Dr.

To Discount on issue of Debentures Account

Issue of Debentures as Collateral security and Its Accounting Treatment

When debentures are issued as security in addition to any other security against a loan or bank overdraft such an issue of debentures is known as issue of debentures as collateral security. The use of such an issue is that if the company does not repay the loan and the interest and the main security is not sufficient, the bank will be entitled to sell the debentures in the market or the bank may keep the debentures with it. If the company repays the loan, the bank will return the debentures issued as collateral security to the company.

Debenture issued as Collateral security can be dealt in two ways:

First Method: No entry needs to be passed in the books of the company because debentures are issued only as a collateral security. Debentures become alive only when loan is not repaid. The fact of such an issue of debentures must be clearly stated in the Balance Sheet by way of a note under the loan and debentures as shown below:

Balance Sheet of — Co. Ltd.As on—

Liabilities

Rs.

Assets

Rs.

Secured Loans

Bank Loan

(secured by issuing 6,000 12% Debentures of Rs. 100 each)

5,00,000

 Second Method: Alternatively, the following entry may be passed in books of the company:

Date

Particulars

L.F.

Debit

Rs.

Credit

Rs.

Bank A/c Dr.

5,00,000

            To Bank Loan A/c

5,00,000

(For loan borrowed from bank)

Debentures Suspense A/c Dr.

6,00,000

              To 12% Debentures A/c

6,00,000

(For 6,000 Debentures of Rs. 100 each issued as collateral security)

Balance Sheet of — Co. Ltd.as on—

Liabilities

Rs.

Assets

Rs.

Secured Loans

Miscellaneous Expenditures

Bank Loan

5,00,000

Debentures Suspense A/c

6,00,000

12% Debentures

(6,000 12% Debentures of Rs. 100 each issued as collateral security)

6,00,000

5. (a) What do you mean by Departmental Accounts? What are the advantages of Departmental Accounts?     10

Ans: Departmental Accounting: Department accounting or departmental accounting is a system of financial accounting which is used in the organizations whose all works are done through their different departments or departmental stores.  Departmental accounts are prepared separately for each department and trial balance will also be prepared. Departmental P&L account is prepared to ascertain the profit or loss of each department separately and at the end of the year it is transferred to General profit and loss account of the whole organisation. The main objects of preparing such accounts are:

a) To have comparison of the results of a particular department with previous year and also with the other departments of the same concern;

b) To help the proprietor in formulating policy to expand the business on proper lines so as to optimize the profits of the concern;

c) To allow departmental managers’ commission on the basis of the profits of their departments; and

d) To generate information, which may be helpful for planning, control, and evolution of performance of each department and for taking various managerial decisions?

Advantages of Department Accounts: The main advantages of Departmental accounting are as follows:

a) It provides an idea about the affairs of each department.

b) It helps to evaluate the performance of each department.

c) It helps to reward the Departmental mangers and staff on the basis of performance.

d) It facilitates control over the working of each department.

e) It helps to compare the result of one department with those of other departments.

f) It helps the management to formulate the right business policies for the various departments.

g) It will help in the preparation of departmental budgets.

h) It helps to calculate stock turnover ratio of each department.

(b) What is working capital? What do you understand by gross working capital and net working capital?    10

Ans: Meaning and definition of Working Capital

The capital required for a business is of two types. These are fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital.The capital which is needed for the regular operation of business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital.

In the words of John. J Harpton “Working capital may be defined as all the short term assets used in daily operation”.

According to “Hoagland”, “Working Capital is descriptive of that capital which is not fixed. But, the more common use of Working Capital is to consider it as the difference between the book value of the current assets and the current liabilities.

From the above definitions, Working Capital means the excess of Current Assets over Current Liabilities. Working Capital is the amount of net Current Assets. It is the investments made by a business organisation in short term Current Assets like Cash, Debtors, Bills receivable etc.

Concepts of Working Capital: There are two concepts of working capital:

a) Gross working capital

b) Net working capital

Gross working capital refers to investment in all current assets -raw materials, work-in-progress, finished goods, book debts, bank balance and cash balance. The gross concept of working capital is significant in the context of measuring working capital needed, measuring the size of the business, continued and smooth flow of operations of the business and the like. Simply Gross working capital can be defined as aggregate of current assets.

Net working capital refers to the excess of current assets over current liabilities. That is, value of current assets minus value of current liabilities (current liabilities include trade creditors, bills payable, outstanding expenses such as wages, salaries, dividend payable and tax payable, bank overdraft, etc.) The net concept of working capital is significant in the context of financing of working capital, the short term liquidity aspects of the business, and the like.

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