A-01 Accounting Theory Notes

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Table of Contents
Unit 1-Fundamentals of Accounting 3 Unit 18-Introduction to financial Statements Analysis

66
Unit 2-Principles of Accounting 4
Unit 19-Introduction to financial Market & System 70
Unit 3-Golden Rules of Accounting 5
Unit-20 Types of Financial Market 74
Unit 4-Double Entry System 9
Unit 21- Types of Company: - Types of Companies 78
Unit 5-Types of Accounts 10
Unit-22 Stock Exchange Companies in India (NSE, BSE)
80
Unit 6-Rules of Debit & Credit 18
Uni-23-Regulatory Authorities (SEBI, RBI) 82

Unit 7-Types of Business Transection 20
Unit 24-Difference Between Capital & Money Market

Unit 8-Meaning and Purpose of Subsidiary Book 22
86
Unit 9-Importance of Bank Reconciliation 25

Unit-25 Computerized Accounting Software (Tally
Prime/Busy win) 90
Unit 10-Depriciation On Fixed Assets 27
Unit 26 Different Terms in Taxation 95
Unit 11-Bills of Exchange 29
Unit-27-Income Tax Act 1961 97
Unit 12-Preparation of Trial Balance 36
Unit-28 Exemption Income Under Income Tax Act 101
Unit 13-Computerized Accounting System 42
Unit-29 Deduction Under Different Sections 105
Unit-14 Preparation of Final Accounts 45
Unit-30-Income Tax Calculation 111
Unit 15-Part of final Account (Trading Profit & Loss/Balance
Sheet) 48
Unit-31 Goods & Service Tax Return Filing 115
Unit 16-Cash flow/Fund Flow Statement Preparation 51

Communication Skills 125
Unit-17 Introduction to company Accounts 57

Unit 1-Fundamentals of Accounting
Fundamentals of Accounting: - accounting is a cycle or process (Record Keeping /Summary

/Reporting /Analysis) that includes recording, summarizing, analyzing, and reporting of data related to
financial transactions. There are various components of accounting that one has to understand to know
the actual meaning and the basic fundamentals of accounting.
ADVANTAGES OF ACCOUNTING
Maintaining the accounts of financial transactions according to the golden rules of accounting gives certain
advantages.
1. Maintenance of business records - The maintenance of business records is critical to the success
of a business. The practice of accounting will make sure that all your business transactions are
recorded in a safe place in the correct order and, more importantly, in a systematic way.
2. Preparation of financial statements - If the golden rules of accounting are applied, then the
financial transactions will be recorded appropriately. Financial statements like profit and loss
account, trading account, balance sheets, can all be prepared quickly if the accounting is correctly
done.
3. Comparison of financial results - Accounting done by following the golden rules will make it easy
to compare one year's financial results against another year. Analysis of year-on-year financial
results becomes easier and trustworthy.
4. Corporate Decision making - An accounting process based on the three golden accounting rules
makes the financial results trustworthy and valuable in senior management and leadership's
decision-making process.
5. Evidence in Legal matters - Business matters need to be recorded systematically and filed away
in an organized fashion for quick reference in legal issues.
6. Regulatory compliance - For businesses, accounting is of paramount importance helping
compliance with regulatory authorities. Without the basic foundation laid down by the three golden
accounting rules, it would be difficult to achieve regulatory compliance.
7. Helps in Taxation matters - Due to incorrect accounting practices, the shortfall in taxes could
attract heavy penalties from government authorities, negatively impacting image and brand value.
8. Valuation of business - A robust accounting process helps in proper business valuation, helping
to get more investment and expand the business.
9. Budgeting and Future Projections - A good budget based on proper accounting practices can be
a strong foundation for any business to be scaled up. Future projections are more accurate with a
robust accounting practice in place.
Who requires accounting?

Any business with gross receipts of more than Rs. 1.5 lakhs in the preceding three years of an existing
profession must maintain a record of financial transactions, following the golden rules of accounting.
According to Rule 6F of the Income Tax Act, the following professions must maintain an account of
financial transactions:
• Medical
• Legal
• Architectural
• Engineering
• Accountancy
• Interior Decoration
• Technical Consultation
• Authorized Representative
• Film Artists
• Company Secretary
The primary function that accounting seeks to accomplish is recording the various transactions within a
business. Accounting is also known as bookkeeping that recognizes transactions and prepares them as
records. The process of bookkeeping only deals with the recording/registering part and nothing
otherwise. It further helps maintain a few books to record each transaction. Each bookkeeping procedure
is carried out systematically for smooth functioning and clear understanding.
Steps Involved in Accounting Process: -
• Defining & Analyzing Transactions

• Recording Journals
• Posting in the General Ledger
• Unadjusted Trial Balance
• Input Adjustments
• Trial Balance Adjustments
• Financial Statements
• Final Entries
• Post-Closing Trial Balance
• Reverse Entries (Optional Step)
Unit 2-Principles of Accounting

Accounting principles are the rules and the guidelines that the companies must follow while
reporting the financial data. The Standard board issues a standard set of accounting principles in the
U.S. which is referred to as (GAAP). Some of the most basic accounting principles include the
following:
1.Business Entity : This concept assumes that business has distinct and separate entity from its
owners. Thus, for the purpose of accounting, business and its owners are to be treated as two
separate entities.
2. Money Measurement: The concept of money measurement states that only those transactions
and happenings in an organization, which can be expressed in terms of money are to be recorded
in the book of accounts. Also, the records of the transactions are to be kept not in the physical
units but in the monetary units.
3.Going Concern: The concept of going concern assumes that a business firm would continue to
carry out its operations indefinitely (for a fairly long period of time) and would not be liquidated
in the near future.
4.Accounting Period: Accounting period refers to the span of time at the end of which the
financial statements of an enterprise are prepared to know whether it has earned profits or incurred
losses during that period and what exactly is the position of its assets and liabilities, at the end of
that period.
5. Cost Concept: The cost concept requires that all assets are recorded in the book of accounts at
their cost price, which includes cost of acquisition, transportation, installation and making the
asset ready for the use.
6. Dual Aspect: This concept states that every transaction has a dual or two- fold effect on
various accounts and should therefore be recorded at two places. The duality principle is
commonly expressed in terms of fundamental accounting equation, which is: Assets = Liabilities
+ Capital
7.Revenue Recognition: The concept of revenue recognition requires that the revenue for a
business transaction should be considered realized when a legal right to receive it arises.
8.Matching Concept: The concept of matching emphasizes 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 this revenue must belong to the same accounting
period.
9. Full Disclosure: This concept requires that all material and relevant facts concerning
financial performance of an enterprise must be fully and completely disclosed in the financial
statements and their accompanying footnotes.
10. Consistency: This concepts states that accounting policies and practices followed by
enterprises should be uniform and consistent one the period of time so that results are comparable.
Comparability results when the same accounting principles are consistently being applied by
different enterprises for the period under comparison, or the same firm for a number of periods.
11.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
unrealized gains should be ignored.
12.Materiality: This concept states that accounting should focus on material facts. If the item is
likely to influence the decision of a reasonably prudent investor or creditor, it should be regarded
as material, and shown in the financial statements.
13.Objectivity: According to this concept, accounting transactions should be recorded in the
manner so that it is free from the bias of accountants and others.
What is Accounting Standards? Accounting standards are the authoritative standards for the
financial reporting and these are the primary source of generally accepted accounting principles
(GAAP). Accounting standards specify how the transactions and other events are to be recognized
and measured and then to be presented in the financial statement. Accounting standards (AS) are
the general policy files. Their prior goal is to make certain clarity, reliability, consistency, and
comparability of the monetary and the financial statements. They achieve this through the
standardizing of the accounting insurance policies and the concepts of a nation or economic
system.
Unit 3-Golden Rules of Accounting

Every process has a set of rules universally applicable and followed by all. These rules are important
as they are central to the core functions. Similarly, there are golden rules of accounting too. There
are three golden rules of accounting, which we shall learn about in this blog. But let us first
understand more about accounting.
Debit the receiver, credit the giver.
Debit what comes in, credit what goes out
Debit all expenses and losses and credit all incomes and gains
Looking at the nature of all the accounts, the accounting rules have been devised. For each account
there is a set of Golden Rules and hence there are three Golden Rules of Accounting. The Golden
rules define the treatment of all transactions conducted by the business.
Illustration An entity named Orange Ltd. has the following transactions.
It deposits Rs.10,000 into Bank
It buys goods worth Rs.50,000 from Apple Ltd.
It sells goods worth Rs.35,000 to Melon Ltd.
It pays Rs.12,000 as Rent for its premises
It earns Rs.3,000 as interest on a bank account.
First of all, let us identify the accounts involved in these transactions and classify them into the different
types of accounts:
Transaction Accounts involved Type of Accounts
Bank Account Real Account - Asset account

Deposit Rs.10,000 in Bank
Cash Account Real Account - Asset account
Purchase Account Nominal Account - Expense account

Purchase goods worth Rs.50,000 from Apple Ltd.
Apple Ltd. Account Personal Account - Creditors account
Sales Account Nominal Account -Income Account

Sale of goods worth Rs. 35,000 to Melon Ltd.
Melon Ltd. Account Personal Account - Debtors Account
Rent Account Nominal Account

Pays Rs.12,000 as rent
Bank Account Real Account - Asset account
Interest received Nominal Account - Income Account

Earn Rs.3,000 as interest on Bank account
Bank Account Real Account - Asset Account
Now applying the golden rules to each of the transactions we will get the following journal entries :
• Deposit Rs.10,000 in Bank

Both Bank and Cash are real accounts and so the Golden rule is:
• Debit what comes into the business

• Credit what goes out from the business
So the entry will be:
Bank A/C Dr. 10,000
To Cash A/C 10,000
• Purchase goods worth Rs.50,000 from Apple Ltd.
The Purchase Account is a Nominal account and the Creditors Account is a Personal account. Applying
Golden Rule for Nominal account and Personal account:
• Debit the expense or loss

• Credit the giver
The entry will be:
Purchase A/C Dr 50,000
To Apple Ltd. A/C 50,000
• Sale of goods worth Rs.35,000 to Melon Ltd.
The sale account is a Nominal account and the Debtors Account is a Personal account. Hence the Golden
Rule to be applied is:
• Debit the receiver

• Credit the income or gain
Thus the entry will be:
Melon Ltd. A/C Dr 35,000
To Sales A/C 35,000
• Pays Rs.12,000 as rent
Rent is a Nominal account and Bank is a real account. The Golden Rule to be applied is:
• Debit the expense or loss

• Credit what goes out of business
The entry thus will be:

Rent A/C Dr. 12000
To Bank A/C 12000
• Earn Rs.3,000 as interest on Bank Account
Interest and Bank are Nominal account and Real Account. The Golden rule to be applied is:
• Debit what comes into the business

• Credit the income or gain
Hence the entry will be:
Bank A/C Dr 3,000
To Interest Received A/C 3,000
Conclusion
All transactions of an entity must be accounted for. To account these transactions the entity must pass
journal entries which will then summaries into ledgers. The journal entries are passed on the basis of the
Golden Rules of accounting. To apply these rules, one must first ascertain the type of account and then
apply these rules.
• Debit what comes in, Credit what goes out

• Debit the receiver, Credit the giver
• Debit all expenses Credit all income
Unit 4-Double Entry System
Double-entry bookkeeping, in accounting, is a system of book keeping where every entry to an
account requires a corresponding and opposite entry to a different account. The double-entry system
has two equal and corresponding sides known as debit and credit. The left-hand side is debit and
the right-hand side is credit.
Example of a Double-Entry System
To illustrate double entry, let's assume that a company borrows $10,000 from its bank. The
company's Cash account must be increased by $10,000 and a liability account must be increased by
$10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is
required. Hence, the account Cash will be debited for $10,000 and the liability Loans Payable will
be credited for $10,000.
Debits Credits
Always on the left side Always on the right side
Increase assets Increase liabilities
Increase expenses Increase equity
Decrease liabilities Increase revenue
Decrease equity Decrease expense
Decrease revenue Decrease assets
Example #1
Annie purchased a laptop worth₹5,000. She paid cash for the same from all the savings she had
made for this. Hence, the entries for this date should be:
Example #2
Dan booked an office table for his new set up at ₹2,000. He paid ₹1,000 in advance, and ₹1,000
was due upon delivery after the table was ready. Here is how the entries should be posted in the
Double entry system of accounting on that particular date:
The first case is a clear example of a debit and a corresponding credit – the net amount is 0. In the
second case, although three accounts were given effect, the net entry between debit and credit is
“0”. Hence, the double-entry system of accounting suggests that every debit should have a
corresponding credit, whether the transaction realizes or not, to get nullified. On the date when Dan
booked his office table, he paid only $1,000. Even if the rest of the amount is not paid on this day,
it becomes accrued in Accounts Payable A/c (which means it is supposed to be paid on a later date).
Once the amount is paid after the delivery of the table, below will be the effect of entries:
Example #3
ABC Corporation provides laptop repair services. They offer services on the advance part-payment
policy. A customer walked into their shop for services, paid $500 in the beginning, and once the
laptop got repaired, he paid $500 upon delivery. In this case, entries on the first day will be as
follows:
On the date of delivery, below will be the entries in the company’s system:
If we take a net effect for both these days only in the company’s accounting system, we see that
Cash A/c holds $1,000 debit, and Service Revenue holds $1,000 credit, which again nets off the
total amount.
Unit 5-Types of Accounts
1. Personal Account 2. Real Accounts 3. Nominal Accounts

Personal Account-A personal account is a general ledger account. All accounts related to persons,
whether natural persons like individuals or artificial persons like companies, fall in this category.
In the case of a personal account, when a business receives something from another business or
individual, the first business becomes the receiver, and the second business or individual from which
it was received becomes the giver.
Golden Rule 1 says, Debit the receiver, credit the giver. Applying the rule to our example, the
books should reflect a debit on the personal account and a credit on the business account.
Let’s take the example of buying a gift from a gift shop. In your account, the transaction will reflect as such.
Date Account Debit Credit
XXXX Purchase Account Rs.5000
Gift Shop Rs.5000
Real Account-In a real account, the closing balance is retained and carried forward at the end
of the year. These carried forward amounts then become the opening balances for the next year.
These accounts usually pertain to assets, liabilities and equity.
Golden Rule 2 says, Debit what comes in, Credit what goes out. In a real account, if a
business receives something of value (property or goods), it is represented in the books as debited.
If something of value goes out from the business it is represented in the books as credited. An
example is given below.
The example below is of a furniture purchase worth Rs. 10000 in cash.
XXXX Furniture Account Rs. 10000
Cash Account Rs. 10000
Nominal Account-A nominal account is the type of account in which all accounting
transactions are stored for one fiscal year, transferring balances to permanent accounts at the end
of a fiscal year. This allows for resetting the balances to zero and starting afresh. Nominal
accounts are usually related to Revenues, Expenses, Gains and Losses.
Golden Rule 3 says, debit all expenses and losses, credit all incomes and gains. If a
business incurs a loss or expense, then the books' respective entry is represented as a debit. If the
business earns a profit or gains income by way of rendering services, then the entry in the book is
represented as credit. An example below demonstrates this. A business pays rent for the premises it
holds and is an expense for the business.
XXXX Rent account Rs.12000
Cash Account Rs.12000
All Accounting Terms

• Accounts Payable
Accounts payable refers to the money a business owes to its suppliers, vendors, or creditors for
goods or services bought on credit. A short-term debt that must be paid back quickly to avoid
default, accounts payable shows up as a liability on an organization’s balance sheet. An example of
accounts payable includes when a restaurant receives a beverage order on credit from an outside
supplier. Accounts payable acts as an IOU to another company
• Accounts Receivable
Essentially the opposite of accounts payable, accounts receivable refers to the money owed to a
business, typically by its customers, for goods or services delivered. An example of accounts
receivable includes when a beverage supplier delivers a beverage order on credit to a restaurant.
While the restaurant records that transaction to accounts payable, the beverage supplier records it
to accounts receivable and a current asset in its balance sheet.
• Accounting Period
An accounting period refers to the span of time in which a set of financial statements are released.
Businesses and investors analyze financial performance over time by comparing different
accounting periods. Accounting cycles track accounting events from when the transactions first
occur to when they end, all within given accounting periods.
Publicly held companies must report to the Security and Exchanges Commission every three
months, so they go through four accounting periods per year. Other organizations use different
accounting periods, but no matter the length, accounting periods should remain consistent over time.
• Accruals
A type of record-keeping adjustment, accruals recognize businesses’ expenses and revenues before
exchanges of money take place. Accruals include expenses and revenues not yet recorded in
companies’ accounts. Accruals affect businesses’ net income and must be documented before
financial statements are issued.
Types of accrual accounts include accrued interest, accounts receivable, and accounts payable.
Companies note accrued expenses before receiving invoices for goods or services. Businesses
indicate accrued revenue for goods or services for which they expect to receive payment later on.
• Accrual Basis Accounting
Accrual basis accounting deals with anticipated expenses and revenues by incorporating accounts
receivable and accounts payable. In contrast, cash basis accounting focuses more on immediate
expenses and revenues and does not document transactions until the company pays or receives cash.
Most people find cash basis accounting easier, but it does not offer as accurate a portrayal of an
organization’s financial health as accrual basis accounting.
• Assets
Assets are resources with economic value which companies expect to provide future benefits. These
can reduce expenses, generate cash flow, or improve sales for businesses. Companies report assets
on their balance sheets.
Asset types include fixed, current, liquid, and prepaid expenses. Assets may include long-term
resources like buildings and equipment. Current assets include all assets a company expects to use
or sell within one year. Liquid assets can easily convert to cash in a short timeframe. Prepaid
expenses include advance payments for goods or services a company will use in the future.
• Balance Sheet
Balance sheets are financial statements providing snapshots of organizations’ liabilities, assets, and
shareholders’ equity at specific moments in time. Balance sheets represent one type of financial
statement used to evaluate companies’ financial health and worth. Accountants use the accounting
equation, also known as the balance sheet equation, to create balance sheets: “Assets = Liabilities
+ Equity.”
• Capital
Capital refers to a person’s or organization’s financial assets. Capital may include funds in deposit
accounts or money from financing sources. Working capital refers to a business’s liquid capital,
which the owner can use to pay for day-to-day or ongoing expenses. A company’s working capital
indicates its overall health and ability to meet financial obligations due within a year.
• Cash Basis Accounting

Cash basis accounting is an accounting method that does not incorporate transactions until the
business receives or pays cash for goods and services. This method focuses on immediate revenues
and expenses. Alternatively, accrual basis accounting includes future revenues and expenses,
documenting accounts payable and accounts receivable.
• Cash Flow
Cash flow is the total amount of money that comes into and goes out of a business. Net cash flow
refers to the sum of all money a business makes. Cash flow statements are financial statements, and
they include all cash a business receives from its operations, investments, and financing.
• Certified Public Accountant
Certified public accountants (CPAs) are accounting professionals certified to practice public
accounting by the American Institute of Certified Public Accountants. These professionals must
meet education and experience requirements and pass the uniform CPA exam. State requirements
for the CPA exam vary, but applicants typically need bachelor’s degrees in accounting with at least
150 credit hours of coursework.
• Chart of Accounts
An index of the financial accounts in a company’s general ledger, a chart of accounts (COA)
provides a snapshot of all the financial transactions a company has conducted in a specific
accounting period. COAs help companies organize their finances and provide insight into
organizations’ financial health for investors and stakeholders. COAs can include assets, liabilities,
and shareholders’ equity.
• Closing the Books
Referring to when accountants used physical ledger books to track transactions, closing the books
means accounting for all financial transactions within a certain period. This helps ensure the
accuracy of companies’ reports for given time periods, including their income statements and
balance sheets.
Closing the books is simple for organizations using cash basis accounting, but it’s more complicated
for those employing accrual basis accounting. Accountants refer to closing the books at the end of
the year as year-end closing.
• Cost of Goods Sold
The total cost of producing the goods sold by a business is called cost of goods sold (COGS). COGS
includes the direct costs of creating goods, including materials and labor, and it excludes indirect
costs, such as distribution expenses.
• Credit
Accountants using double-entry bookkeeping systems record numbers for each business transaction
in two accounts: credit and debit. Credits are accounting entries that either increase an equity or
liability account or decrease an expense or asset account. Credits are made on the right side of an
account. Debits must equal credits for an account to be in balance.
• Debit
The opposite of a credit, a debit is an accounting entry made on the left side of an account. Used in
double-entry bookkeeping systems, debits either increase expense or asset accounts or decrease
equity or liability accounts.
• Depreciation
The depreciation accounting method determines the decreasing value of a tangible asset over its
lifetime. A business can make money from a depreciating asset by expensing or deducting part of
the asset each year it is in use, for accounting and tax purposes. The Internal Revenue Service (IRS)
requires companies to spread out the cost of depreciating assets over time.
• Diversification
A risk management strategy, diversification mixes many different investments and assets in one
portfolio, allowing individuals or businesses to spread out risk and protect themselves from financial
ruin if any investments or assets fail. Many financial experts think diversified portfolios boast better
performance in the long term, but short-term growth may prove slower.
• Dividends
Dividends consist of company earnings, or profit, which a business pays to its shareholders as a
reward for their investment in its equity. Companies may distribute dividends as cash or additional
shares of stock. Shareholders may receive regularly scheduled or special one-time dividends.
Exchange-traded funds and mutual funds also pay dividends.
• Double-Entry Bookkeeping
A type of bookkeeping system that keeps the accounting equation (“Assets = Liabilities + Equity”)
in balance, double-entry bookkeeping requires every entry to an account to have an opposite,
corresponding entry in another account. Every transaction impacts at least two accounts in double-
entry bookkeeping, including liability, asset, revenue, equity, or expense accounts.
Credits and debits make up the two types of entries, with credits entered on the left side and debits
entered on the right. A much more simplified system, single-entry bookkeeping records only one
entry per transaction.
• Expenses
Expenses refer to costs of conducting business. Companies can deduct some eligible expenses from
their taxes. Types of expenses include fixed, variable, accrued, and operation expenses. Fixed
expenses do not change from month to month, including rent, salaries, and insurance payments.
Variable expenses do change monthly, and they may include discretionary or unpredictable but
necessary costs.
Accountants recognize accrued expenses when companies incur them, not when companies pay for
them. Primarily necessary and unavoidable, businesses incur operating expenses (often abbreviated
as OPEX), like rent, marketing, and payroll, through their normal operations. The IRS allows
companies to deduct operating expenses.
• Equity
Equity, often called stockholders’ equity or owners’ equity, is the amount of money left over and
returned to shareholders after a business sells all assets and pays off all debt, represented by the
equation “Equity = Assets – Liabilities.”
An indicator of a company’s financial health, equity can consist of both tangible (buildings, cash,
land) and intangible (copyrights, patents, brand recognition) assets. It exists as a record on a
company’s balance sheet. Sole proprietorships only use the term owners’ equity, because there are
no shareholders.
• Fixed Cost
A type of expense, fixed costs do not change from month to month. Fixed costs include things like
payroll, rent, and insurance payments. Variable costs, on the other hand, change each month and
may include discretionary spending or unpredictable expenses.
• General Ledger
Accountants use a general ledger to record financial transactions and data for companies. Employed
by companies that use double-entry bookkeeping, general ledgers include debit and credit account
records. Companies use the information in their general ledgers to prepare financial reports and
understand their financial performance and health over time.
• Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) refer to a group of major accounting rules,
standards, and ways of reporting financial information. The Financial Accounting Standards Board
sets GAAP. Using GAAP can improve the consistency and transparency of financial reporting
across organizations. The U.S. Securities and Exchange Commission requires publicly traded
companies to use GAAP. Internationally, most countries use the International Financial Reporting
Standards.
• Gross Profit
Gross profit, also called gross income or sales profit, is the profit businesses make after subtracting
the costs related to supplying their services or making and selling their products. Accountants
calculate gross profit by subtracting the cost of goods sold from revenue. Gross profit considers
variable costs, not fixed costs. Analysts can look at gross profit as indicative of a company’s
efficiency at delivering services or producing goods.
• Gross Margin
Gross margin refers to businesses’ net sales revenue after subtracting the costs of goods sold. It
represents the revenue companies keep as gross profit. An indicator of financial health, higher gross
margins typically mean that a company can make more profit on its sales. Lower gross margins may
mean a business needs to reduce production costs. The formula for gross margin is “Gross Margin
= Net Sales – Cost of Goods Sold.”
• Income Statement
Also known as statements of revenue and expense or profit and loss statements, income statements
provide information about businesses’ expenses and revenue in specific periods of time. Along with
balance sheets and statements of cash flows, income statements offer insight into companies’
financial health.
• Inventory
Inventory refers to a company’s goods and raw materials used for making the goods it sells. It
appears on a balance sheet as an asset. Inventory includes finished goods, raw materials, and works-
in-progress. Generally, companies should avoid holding large amounts of inventory for long periods
of time, due to the risk of obsolescence and storage costs.
• Journal Entry
A journal entry refers to a business transaction recorded in a business’s general ledger. A journal
entry may include the journal entry date and number, account name and number, debit, and credit.
The recorder may also include a description or miscellaneous information about the entry.
• Liabilities
A liability is when someone owes someone else money. Someone can fulfill the obligation of
settling a liability through the transfer of money, services, or goods. Types of liabilities can include
loans, mortgages, accounts payable, and accrued expenses. Short-term liabilities conclude in less
than a year, while businesses may expect long-term liabilities to take longer than a year to resolve.
• Liquidity
Liquidity relates to how easily an individual or business can convert an asset to cash for its full
market value. The most liquid asset, cash, can easily and quickly convert to other assets. Accounting
liquidity measures how easily someone can pay for things using liquid assets. Market liquidity refers
to how easily a market (such as a housing market or stock market) facilitates the transparent buying
and selling of assets at stable prices.
• Net Income
Also called net earnings or net profit, net income is the amount an individual or business earns after
subtracting deductions and taxes from gross income. To calculate the net income of a business,
subtract all expenses and costs from revenue. Sometimes called the bottom line in business, net
income appears as the last item in an income statement. Investors and shareholders look at net
income to assess companies’ financial health and determine businesses’ loan eligibility.
• On Credit
On credit, also called on account, is an agreement for an individual or company to pay for a good
or service at a later date. Using credit cards is one way of buying on credit.
• Overhead
Overhead refers to the ongoing costs of doing business, other than those related to directly creating
a good or service. Companies must understand the cost of overhead to figure out how much they
need to charge for their goods or services and make a profit. Income statements include information
about overhead expenses.
• Payroll
Human resources and accounting departments typically handle payroll, the total compensation a
company pays its employees for a specific time period. Determining payroll includes keeping track
of hours worked, distributing payments, and separating out money for Social Security and Medicare
taxes.
• Present Value
Money today is typically assumed to be worth more than the same amount of money received in the
future. This is due to the assumed rate of return and inflation. Present value is the current value of
money in the future, with a specific assumed interest rate that could accrue over that period of time.
• Profit and Loss Statement
A profit and loss statement, also called an income statement, shows the expenses, costs and revenues
for a company during a specific time period. This financial statement, along with the cash flow
statement and the balance sheet, provides information about a business’s financial health and ability
to generate profit.
• Receipts
Receipts are written notices acknowledging that one party received something of value from
another. An acknowledgement of ownership, receipts are proof of a financial transaction. The IRS
requires small businesses to hold onto some receipts to document tax deductible expenses.
• Retained Earnings
Retained earnings, also called an earnings surplus, refers to the amount of net income left for a
business to use after paying dividends to its shareholders. A company’s management typically
decides whether to keep the earnings or give them to shareholders.
• Return on Investment
Return on investment (ROI) measures the efficiency of an investment, including the amount of
return on an investment relative to its cost. Accountants can also use ROI to compare the efficiency
of more than one investment. To calculate ROI, subtract the cost of investment from the current
value of investment, and divide that by the cost of the investment. A popular metric, ROI helps
investors choose the best investment opportunities.
• Revenue
Revenue, also called sales, is the gross income a business makes through normal business
operations. To calculate sales revenue, multiply sales price by number of units sold. Accrual
accounting and cash accounting methods calculate revenue differently. When using the accrual
accounting method to calculate revenue, accountants include sales made on credit. Those who use
the cash accounting method only count sales as revenue once the business receives payment.
• Single-Entry Bookkeeping
Single-entry bookkeeping is a type of accounting system that records the financial transactions of a
business. The system uses one entry per transaction to record cash, taxable income, and tax-
deductible expenses going in or out of the business. Businesses can use accounting software or even
simple tables to perform single-entry bookkeeping. Single-entry bookkeeping is much simpler than
double-entry bookkeeping, which requires two entries per transaction.
• Trial Balance
A periodical bookkeeping worksheet, a trial balance compiles the balance of ledgers into credit and
debit columns that equal each other. Companies create trial balances to ensure the mathematical
accuracy of their bookkeeping systems entries.
• Variable Cost
Variable cost refers to expenses that change depending on the level of a business’s production.
Variable costs go up when production increases and down when production decreases. In contrast
to variable cost, fixed cost refers to expenses for a company that stay the same, regardless of
production. Fixed costs may include insurance, rent, and interest payments.
Unit 6-Rules of Debit & Credit
A debit is an accounting entry that either increases an asset or expense account. Or decreases
a liability or equity account. It is positioned on the left in an accounting entry.
A credit is an accounting entry that increases either a liability or equity account. Or decreases
an asset or expense account. It is positioned on the right in an accounting entry.
(1). Asset accounts: Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all
asset accounts.
(2). Expense accounts: Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all
expense accounts.
(3). Liability accounts: Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all
liability accounts.
(4). Revenue/Income accounts: Normal balance: Credit

revenue accounts
(5). Capital/Equity accounts: Normal balance: Credit

equity accounts.
(6) Contra accounts: Normal balance: Always opposite

to the relevant normal account. The normal balance of a contra account can be a debit balance or
a credit balance
An example: Accounts receivable is an asset account that normally has a debit balance.
The allowance for doubtful accounts is a contra account to the accounts receivable and normally
has a credit
(opposite)
balance.
Unit 7-Types of Business Transection
Introduction to types of Business Transactions

This chapter gives a brief introduction to organizations, accounting documentation, and computer-
based accounting systems.
Types of business transaction an organization can be defined as:
A social arrangement which pursues collective goals, which controls its own performance and
which has a boundary separating it from its environment.
Organizations can include businesses such as companies and partnerships, clubs, charities,
government departments, hospitals and schools.
Even if not strictly a ‘business’ all organizations will have business transactions. Typically, these
will include:
Purchasing goods and materials. Purchases can be for cash or credit. Cash purchases are paid for
immediately and are fairly rare in most businesses. Credit purchases are paid for after some time,
typically a month or so
Purchasing services, for example, repair s to equipment, advertising, printing costs.
Sales. Cash sales, for example in shops, are paid for immediately. Credit sales are paid for after
some time.
Paying wages and salaries. Purchase of non-current assets.
Raising finance and paying rewards to the suppliers of finance. For example, owners putting in
capital or loans being raised from banks. Owners of the business expect rewards based on a share
of the profit; banks usually expect interest to be paid.
Accounting for and paying tax.
Movements of cash and money in the bank account. These movements usually arise from the
transactions above. All to these transactions are summarized at the end of accounting periods into
two statements: Statement of financial position Assets (amounts owned) and Liabilities (amounts
owed). Income statement Income (such as sales) less expenses (such as rent, wages, electricity,
raw materials). If income is greater than expenses, a profit will result.
In the statement of financial position, assets are divided into:
Non-current assets such as equipment, premises, motor vehicles. These are kept long-term in the
business. Current assets such as inventory (stock) receivables or cash. These either are cash or
will become cash within 12 months.
Liabilities are divided into: Current liabilities such as amounts that have to be paid to suppliers
(trade payables). These liabilities have to be settled within 12 months.
Long-term liabilities These don’t have to be settled until at least 12 months’ time
Types of business documentation

Each type of business transaction has its own set of documentation. The documentation is needed
to:
Control the progress of the transaction, Record the transaction, Provide a history of how the
transaction proceeded. This is sometimes known as an ‘audit trail’
Sometimes the documentation is purely internal; sometimes it arises externally or is sent outside
the business. Nowadays, the term ‘documentation’ is not confined to paper documents as many
business transactions are mostly handled using computerized records.
Typical documentation is as follows:
Purchase of goods and materials: this will usually be initiated by someone in the warehouse or
factory who can see that more materials will soon be needed. Often this person raises a purchase
requisition which goes the buyers’ department. Buyers will then raise a purchase order to order
goods from the most suitable supplier. Goods, accompanied by the supplier’s delivery note, will
be received in the warehouse, where a goods received note will be raised. These must be checked
back to the order to ensure that the correct goods are being received. Invoices from suppliers will
be received and recorded by the accounting department first in a purchase’s day book (just a list
of invoices received) and then in the payable’s ledger. Usually, suppliers will send statements of
account setting out the amounts still owed. Statements act as reminders and also, they can be used
to check that buyers agree with suppliers’ versions of events. Later the invoices will be paid and
a remittance advice sent by the customer to indicate which invoices have been settled.
If goods are returned to suppliers (for example their quality was poor) then buyers will ask for a
credit note. This acts like a negative invoice.
Unit 8-Meaning and Purpose of Subsidiary Book
Subsidiary Books are the books that record the transactions which are similar in nature in an
orderly manner. They are also known as special journals or Daybooks. In big organizations, it is
not easy to record all the transactions in one journal and post them into various accounts. So, for
the easy and accurate recording of all the transactions, the journal is subdivided into many
subsidiary books. For every type of transaction, there is a separate book.
Types of Subsidiary Books
There are basically 8 types of subsidiary books that are used for recording different types of
transactions. So, what are the subsidiary books?
The 8 Subsidiary books are as follows:
• Cash Book
• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Books
• Journal Proper
Cash Book
The first and most important subsidiary book is the cash book. It records all the transactions related
to cash and bank receipts and payments. There are 3 types of cash books which are maintained by
an organization. They are:
• Single Column Cash Book: A single column cash book is like a ledger account. It contains
a debit side and a credit side. All Cash receipts are recorded in the debit side, and all the
cash payments are recorded in the credit side of the cash book.
Format of Single Column Cash Book:
Cash Book (Single Column)
Dr. Cr.
Date Particulars L.F. Cash Date Particulars L.F. Cash
• Double Column Cash Book: Double Column Cash Book is the same as that of Single
Column Cash Book; only an extra column of discount is added on both the debit and credit
side of the cash book. It records discounts allowed on the debit side and discounts received
on the credit side of the cash book.
Format of double column cash book is given below.
Cash Book (Double Column)

Dr. Cr.
Discount Discount
Date Particulars L.F. Cash Date Particulars L.F. Cash
Allowed Received
• Triple Column Cash Book: Triple Column Cash Book contains all the columns of double
column cash book and also has an extra column for the bank. The format of the triple
column cash book is given below:
Cash Book (Triple Column)
Dr.
Cr.
Discoun Discoun
Dat Particula L.F t Cas Ban Dat Particula L.F t Cas Ban
e rs . Allowe h k e rs . Receive h k
d d
Purchase Book
Purchase Book is a subsidiary book that is used to record all the transactions related to credit
purchases. The purchases of the asset are never recorded in the purchase book.
Format of Purchase Book:
Purchase Book
Date Particulars Inward Invoice No. L.F. Amount
Sales Book
The Sales Book records all the transactions related to credit sales. The sales book cannot record
the sale of assets. The sales book format is given below.
Sales Book
Date Particulars Outward Invoice No. L.F. Amount
Purchase Return Book

The purchase return book, also known as the return outward book, is used to record transactions
of all the returns made to the supplier. A debit note is issued against every return and is recorded
in the Purchase Return Book.
Format of Purchase Return Book:
Purchase Return Book

Date Particulars Debit Note No. L.F. Details Amount
Sales Return Book

The sales return book records all the transactions related to inward returns. It is also known as a
return inward book. When the customer returns goods, a credit note is issued to the customer for
every return, and it is recorded in the Sales Return Book.
Sales Return Book Format:
Sales Return Book
Date Particulars Credit Note No. L.F. Details Amount
Bills Receivable Book

The Bills Receivable Book records all the transactions of bills drawn in favor of the business. The
total of the bills receivable book is posted on the debit side of the Bills Receivable account. The
Format of Bills Receivable Book is as follows.
Bills Receivable Book
Date of Bill Bill No. Acceptor From Terms Due Date Amount
Bills Payable Book

The Bills Payable Book records all the transactions related to bills that are drawn on the business
and are payable by the business. The Bills Payable Books Format is as follows.
Bills Payable Book
Date of Bill Bill No. Drawee Payee Terms Date of Maturity Amount
Journal Proper
There are certain transactions that cannot be recorded in any of the above-mentioned books;
these transactions are termed as miscellaneous transactions. So, the Journal Proper is used to
record all the miscellaneous transactions. It includes transactions such as credit purchase and
sale of assets, depreciation etc. The Difference between Subsidiary Books and Ledger is as follows.
Ledger
Subsidiary Books
These are a set of intermediary accounts linked They are referred to as master accounts where
to ledger accounts. transactions are recorded.
The group of transactions share common The group of transactions have different
characteristics. characteristics.
Contains a large amount of data. Contains a limited amount of data.
It does not have a chart of accounts. It has a chart of accounts.
It is a part of the ledger accounts. It controls the Subsidiary books.
It is optional for the purpose of recording It is compulsory for the purpose of recording
transactions. transactions.
Unit 9-Importance of Bank Reconciliation
What is a Bank Reconciliation?
A bank reconciliation is a process performed by a company to ensure that its records (check
register, general ledger account, balance sheet, etc.) are correct. This is done by comparing the
company's recorded amounts with the amounts shown on the bank statement. Any differences
must be justified. When there are no unexplained differences, accountants state that the bank
statement has been reconciled.
The bank reconciliation is an important part of a company's internal controls over its assets. To
be effective, it should be done by someone other than an authorized check signer and/or record
keeper.
Example of a Bank Reconciliation
Let's assume that a new company opens its first checking account on June 4 with a deposit of
$10,000. During the month of June, the company wrote five checks with a total of $5,000. It also
made a $2,000 deposit in the bank's night depository after banking hours on June 30. As a result,
the company's Cash account (in its general ledger and referred to as the "books") as of June 30
shows a positive, debit balance of $7,000.
The bank statement shows a June 30 balance of $5,975. Note that this balance is different from
the company's general ledger's Cash account balance of $7,000. Generally, neither balance is the
correct amount of cash that should be reported on the company's balance sheet.
To reconcile the company's balance and the bank's balance requires comparing the details
Bank Reconciliation Procedure
1. On the bank statement, compare the company’s list of issued checks and deposits to the checks
shown on the statement to identify uncleared checks and deposits in transit.
2. Using the cash balance shown on the bank statement, add back any deposits in transit.
3. Deduct any outstanding checks.
4. This will provide the adjusted bank cash balance.
5. Next, use the company’s ending cash balance, add any interest earned and notes receivable amount.
6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company cash
balance.
7. After reconciliation, the adjusted bank balance should match with the company’s ending adjusted
cash balance.
Example
XYZ Company is closing its books and must prepare a bank reconciliation for the following items:
• Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the company’s
ledger shows an ending balance of $260,900
• Bank statement contains a $100 service charge for operating the account
• Bank statement contains interest income of $20
• XYZ issued checks of $50,000 that have not yet been cleared by the bank
• XYZ deposited $20,000 but this did not appear on the bank statement
• A check for the amount of $470 issued to the office supplier was misreported in the cash payments
journal as $370.
• A note receivable of $9,800 was collected by the bank.
• A check of $520 deposited by the company has been charged back as NSF.
Bank Reconciliation statements

Amount Adjustment to Books
Ending Bank Balance $300,000
Deduct: Uncleared cheques – $50,000 None
Add: Deposit in transit + $20,000 None
Adjusted Bank Balance $270,000
Ending Book Balance $260,900
Deduct: Service charge – $100 Debit expense, credit cash
Add: Interest income + $20 Debit cash, credit interest income
Deduct: Error on check – $100 Debit expense, credit cash
Add: Note receivable + $9,800 Debit cash, credit notes receivable
Deduct: NSF check – $520 Debt accounts receivable, credit cash
Adjusted Book Balance $270,000
Bank Reconciliation Statement is a valuable tool to identify differences between the balance as per Cash
Book and bank statement. Bank reconciliation also helps in detecting some frauds and manipulations. It
is a good practice to carry out this exercise at regular intervals, which helps in maintaining controls in
the organization. This also keeps the Cash Book up to date as those transactions which are rightly
recorded in the bank statement can be recorded in the Cash Book.
Unit 10-Depriciation On Fixed Assets
What is the depreciation-Fixed assets are company’s tangible assets that are relatively durable
and used to run operations and generate income. They are not used to be consumed or sold, but to
produce goods or services.
Due to the long-term use, the value of fixed assets decreases as they age. Some examples of depreciable
fixed assets are buildings, machinery, and office equipment. Land is not one of them, because it has an
unlimited useful life and it increases in value over time.
In short, depreciation is the allocation of the acquisition cost of a fixed asset caused by a decrease in its
value. To find out what factors affect the depreciation of fixed assets and how to calculate them, see the
explanation below.
The Causes of Depreciation
In general, there are two main causes of depreciation:
Physical Factor
The value of company’s assets can shrink due to overuse, aging, and damage.
Functional Factor
Depreciation of assets can also be caused by the inability of assets to meet production needs, so that they
need to be replaced with new ones.
Factors That Affect the Depreciation Expenses
Acquisition Cost
This is the most influential factor on the depreciation expense. The acquisition cost refers to the total
cost of buying an asset. It becomes the basis for calculating the depreciation that should be allocated per
accounting period.
The acquisition cost includes shipping, sales and customs duty, as well as site preparation, installation
and testing fees. With regard to manufacturing or production equipment, any costs related to bringing
the equipment to an operational state may also be included in the acquisition cost. This includes the cost
of shipping & receiving, general installation, mounting and calibration.
Salvage Value
The salvage value is the amount for which the asset can be sold at the end of its useful life. To determine
the total amount depreciated, the salvage value must be subtracted from its initial cost.
For example, company A buys an asset worth 100,000,000 and they estimate that the salvage value will
be 20,000,000 in five years. That means, they will depreciate 80,000,000 of the total cost of the asset
and may expect to sell it for 20,000,000.
Economic Life
The economic life of an asset is the expected period of time as long as the asset remains useful to the
owner. It can differ from its actual age. It is important for business owners to estimate the economic life
of their assets, so they can determine when the right time to invest in or allocate funds for new assets.
How to Calculate Depreciation on Fixed Assets
There are several methods that you can implement to calculate depreciation on your fixed assets. Here
are the five most commonly used methods:
Straight-Line Depreciation Method
According to the straight-line method, the depreciation value of a fixed asset will always be stable until
the end of its economic life.
For example, if you buy a production machine for 50,000,000, the depreciable amount is 5,000,000, and
the estimated economic life is 5 years, then the calculation is as follows:
Depreciation expense = (50,000,000 – 5,000,000)/5
Depreciation expense = 9
Double Declining Balance Method
The double-declining balance method is a form of accelerated depreciation in which most of the
depreciation associated with a fixed asset is recognized for the first few years of its economic life.
To calculate depreciation with this method, double the book value of the asset at the beginning of the
fiscal year with a multiple of the straight-line depreciation rate. The formula is as follows:
Sum of the YearS’ Digits Depreciation
Sum of the years’ digits depreciation is an accelerated form of depreciation based on the assumption that
the asset productivity decreases over time.
This method seeks to impose higher depreciation cost in the early years of an asset’s economic life,
because it is most productive in the early years of their use. The formula is as follows:
Service Unit Method

This method is especially useful for depreciating company’s vehicles. This method takes into account
the life span of an asset to calculate depreciation. With this method, depreciation is calculated by
dividing the total net cost of the asset by its estimated useful life. For example, in the case of a car, its
useful life is its effective mileage.
Here is the formula:
Depreciation expense per year = reachable hours of work X depreciation rate per hour
Unit of Production Method
The unit of production method calculates depreciation based on the actual use of an asset. According to
this method, the depreciation expense of a fixed asset is determined based on the number of units of
product produced. The formula is as follows:
𝑴𝒐𝒏𝒕𝒉𝒍𝒚 𝑼𝒏𝒊𝒕𝒔 𝑷𝒓𝒐𝒅𝒖𝒄𝒆𝒅
Depreciation= X Cost
𝟐𝑳𝒊𝒇𝒆𝒕𝒊𝒎𝒆 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏
How to Instantly Calculate Depreciation on Your Fixed Assets

Depreciation of fixed assets must be calculated to account for the wear and tear on business assets over
time. As depreciation is a noncash expense, the amount must be estimated. Each year a certain amount
of depreciation is written off and the book value of the asset is reduced.
Unit 11-Bills of Exchange
A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another
party as of a predetermined date or on demand. Bills of exchange are primarily used in international
trade. Their use has declined as other forms of payment have become more popular. There are three
entities that may be involved with a bill of exchange transaction. They are as follows:
• Drawee. This party pays the amount stated on the bill of exchange to the payee.
• Drawer. This party requires the drawee to pay a third party (or the drawer can be paid by the
drawee).
• Payee. This party is paid the amount specified on the bill of exchange by the drawee.
A bill of exchange normally includes the following information:
• Title. The term "bill of exchange" is noted on the face of the document.
• Amount. The amount to be paid, expressed both numerically and written in text.
• As of. The date on which the amount is to be paid. Can be stated as a certain number of days after
an event, such as a shipment or receipt of a delivery.
• Payee. States the name (and possibly the address) of the party to be paid.
• Identification number. The bill should contain a unique identifying number.
• Signature. The bill is signed by a person authorized to commit the drawee to pay the designated
amount of funds.
Bill of Exchange Example
Let's say Company ABC purchases auto parts from Car Supply XYZ for 25,000. Car Supply XYZ draws
a bill of exchange, becoming the drawer and payee in this case. The bill of exchange stipulates that
Company ABC will pay Car Supply XYZ $25,000 in 90 days. Company ABC becomes the drawee and
accepts the bill of exchange and the goods are shipped. In 90 days, Car Supply XYZ will present the bill
of exchange to Company ABC for payment. The bill of exchange was an acknowledgment created by
Car Supply XYZ, which was also the creditor in this case, to show the indebtedness of Company ABC,
the debtor.
Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a bill of exchange is defined as “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 Bill of Exchange
• It is important to have a bill of exchange in writing

• It must contain a confirm order to make a payment and not just the request
• The order should not have any condition
• The bill of exchange amount should be definite
• Fixed date for the amount to be paid
• The bill must be signed by both the drawee and the drawer
• The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
• The amount is paid to the beneficiary of the bill, specific person, or against a definite order
Types of Bill of Exchange
• Documentary Bill- In this, the bill of exchange is supported by the relevant documents that confirm the
genuineness of sale or transaction that took place between the seller and buyer.
• Demand Bill- This bill is payable when it demanded. The bill does not have a fixed date of payment,
therefore, the bill has to be cleared whenever presented.
• Usance Bill- It is a time-bound bill which means the payment has to be made within the given time
period and time.
• Inland Bill- An Inland bill is payable only in one country and not in any other foreign country. This bill is
opposite to the foreign bill.
• Clean Bill- This bill does not have any proof of a document, so the interest is comparatively higher than
the other bills.
• Foreign Bill- A bill that can be paid outside India is termed as a foreign bill. Two examples of a foreign bill
are an export bill and import bill.
• Accommodation Bill- A bill that is sponsored, drawn, accepted without any condition is known as an
accommodation bill.
• Trade Bill- This kind of bill is specially related only to trade.
• Supply Bill- The bill that is withdrawn by the supplier or contractor from the government department is
known as the supply bill.
Advantages of Bill of Exchange
• Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be easier for
the drawer to recover the amount legally.
• Discounting Facility- In cases where the drawer is in immediate need of money, the bill can be
converted into cash by discounting it from a bank by paying some nominal charges.
• Endorsement Possible- This bill of exchange can be exchanged from one individual to another for the
adjustment of the debt.
Bill of Exchange Format
In the above-mentioned bill of exchange format, Kunal Singh is the drawer as well as the payee of the
bill.
Parties of Bill of Exchange
A bill of exchange has three parties:
(1) Drawer:
• The drawer is the maker of a bill of exchange.

• The bill is signed by Drawer.
• A creditor who is entitled to receive payment from the debtor can draw a bill of exchange.
(2) Drawee:
• Drawee is the person upon whom the bill of exchange is drawn.

• Drawee is the debtor who has to pay the money to the drawer.
• He is also known as ‘Acceptor’.
(3) Payee:
• The payee is the person to whom payment has to be made.

• The payee may be the drawer himself or a third party.
What is Promissory Note
The promissory note is defined as an instrument in writing (not being a banknote or a currency note),
containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or
to the order of a certain person, or to the bearer of the instrument.
Importance of Promissory note in Bill of Exchange
According to the Negotiable Instruments Act 1881, the meaning of promissory note is ‘an instrument in
writing (not being a banknote or a currency note), containing an unconditional undertaking signed by the
maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the
instrument. However, according to the Reserve Bank of India Act, a promissory note payable to bearer
is illegal. Therefore, a promissory note cannot be made payable to the bearer.’
Parties to a Promissory Note
There Are Two Parties to a Promissory Note:
(1) Maker: Maker or drawer is an individual or entity who makes or draws the promissory note with a
promise to pay a certain sum as is specified in the promissory note. Maker is also known as promsior.
(2) Payee: The payee is the person in whose favour the promissory note is drawn.
The above mentioned is the concept, that is elucidated in detail about ‘Bill of Exchange’ for the
Commerce students.
Important Terms:
Q.1 Define the Terms:
(a) Term of Bill or Period of Bill
(B) Due Date
(C) Days of Grace
(D) Date of Maturity

Answer:
(a) Term of Bill or Period It is the time period between the date on which a bill is drawn and the date on which
of Bill it is payable.
(B) Due Date It is the date on which the payment of the bill is due.
(C) Days of Grace These are the three extra days added to the period of bill.
(D) Date of Maturity The date which comes after adding three days of grace to the period of bill.
Q.2 Briefly Explain the Terms :
(a) Discounting of Bill
(B) Endorsement of Bill; and
(C) Bill Sent for Collection.

Answer:
• It means encashment of bill before the date of its maturity.

(a) Discounting of Bill • The bank deducts its charges from the bill.
• Endorsement means the transfer of bill or promissory note to another

person.
(B) Endorsement of Bill
• It is transferred on account of the settlement of debts and dues.
• When a bill is sent to the bank for collection with instruction, that it will be
(C) Bill Sent for retained till the maturity date.
Collection • Bill will be realised on its due date. It is known as ‘Bill sent for collection’.
Q.3 Briefly Explain the Terms
(a) Dishonour of Bill;
(B) Noting of a Bill; and
(C) Nothing Charges.

Answer:
• When payment is not made by the acceptor of the bill on its due date. It is known as
(a) Dishonour ‘Dishonor of Bill’.
of Bill • Non-payment may be due to insufficient balance or insolvency.
• On dishonour of a bill, when this fact is brought to the notice of a Notary Public, it is
(B) Noting of a termed as ‘Noting of a bill’.
Bill • Notary public charges to record or take a noting of dishonour.
(C) Noting • It is the fee paid to the Notary Public for noting of dishonour of a bill.
Charges
Q.4 What Do You Mean by Retiring of a Bill and Renewal of a Bill?
Answer:
• When the Drawee pays the bill before its due date, It is termed as the retirement of a
bill.
(a) Retiring of • It happens with the mutual understanding between the Drawer and the Drawee.
a Bill • To encourage Retiring of the bill, the holder allows some discount called Rebate on the
bill amount from the date of retiring the bill to the maturity.
• When the holder of a bill is not in a position to meet the bill on its due date, Drawee
approaches the Drawer with a request of extension of time for payment.
(B) Renewal of
• If Drawer agrees, the old bill is cancelled, and a fresh bill with the new terms of
a Bill
payment is drawn and duly accepted and delivered. This is called Renewal of the Bill.
Important Points Regarding Due Date or Date of Maturity

Q.1 Briefly Explain the Following Situations Related to Due Date of a Bill.
(a) When the Period of Bill is Given in Months
(b) When the Period of Bill is Given in Days
(c) When Maturity Date Falls on a Public Holiday
(d) When the Maturity Date Has Been Declared as Emergency Holiday
Answer:
• In this case, the maturity date is calculated according to

calendar months.
• Ignoring the number of days in a month.
• 3 days of the Grace period are added.
(a) When the Period of Bill is Given in
Months For example: – if a bill dated 4th May, 2017 is payable 3 months
after date:-
= Then the maturity date will be 4 th August 2017 + 3 Days of

Grace = 7th August 2017.
• The maturity date will be calculated in days,
• This excludes the date of transaction but includes the date of
payment.
(B) When the Period of Bill is Given in • 3 days of the Grace period are added in this case also.
Days • For example: -if a bill dated 5th June 2017 is payable after 65
days, then the maturity date will be:-
=25 Days of June + 31 Days of July + 9 Days of August + 3

Days of Grace=12th August 2017
• If the due date of the bill is on the national holiday
• Then the maturity day of the bill shall be the preceding
business day.
(C) When Maturity Date Falls on a • Example:-If due date of the bill falls on 26th January (Republic
National Holiday Day), then its due date will be 25th January.
• If the due date is 15th August (Independence Day), then the
due date will be 14th August.
• If the due date of the bill is declared as an emergency holiday,
• Then the due date of the bill shall be after 1 day from the
(D) When the Maturity Date Has Been date of maturity.
Declared as Emergency Holiday • Example:- if the due date of a bill is 25th July and it is declared
as an emergency holiday, then the due date will be 26th July.
Q.2 What Do You Mean by the Following Terms-
(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument Payable on Demand’.
(B) Maturity Date in Case of ‘bill After Date’.
(C) Maturity Date in Case of ‘bill After Sight’.

Answer:
• The bill at sight becomes due for payment, as soon as it is

presented for payment.
(a) Maturity Date in Case of ‘bill at Sight’ • In case of ‘Instrument payable on demand’, No time for
or ‘instrument Payable on Demand’. payment is mentioned.
• Such Bills are not entitled to the Days of Grace. `
• In the case of ‘Bill after date,’ the time for payment is

(B) Maturity Date in Case of ‘bill After mentioned.
Date’. • Three Days of Grace is allowed on such a bill.
• In case of ‘Bill after Sight, payable at a fixed period ‘after

sight’.
(C) Maturity Date in Case of ‘bill After
• The period begins from the date of accepting the bill.
Sight’.
• Three Days of Grace is allowed on such a bill.
Accounting Treatment of Bill of Exchange or Promissory Note
Q.1 What Are the Options Available to the Holder of the Bill?
Answer:
1. Bill can be Retained till the date of Maturity

The Holder of the Bill Can Use It in 2. Bill can be discounted with the bank
Either of the Following Ways 3. Bill can be Endorsed or Negotiated in favour of Creditor
4. Bill can be sent to Bank for collection
Q.2 What Do You Mean by Bills Receivable and Bills Payable?

Answer:
• For the person who draws the bill of exchange and is entitled to
receive its payment is known as Bill Receivable.
(a) Bills Receivable or B/R • The drawer of the bill will show B/R on the assets side of the
Balance Sheet.
• For the person who accepts the bill, and is liable to make its
payment, is known as Bills Payable.
(B) Bills Payable or B/P • The Drawee of the bill will show B/P on the liabilities side of the
Balance Sheet.
When Bill Is Discounted With the Bank
Q.1 When Bill is Discounted With the Bank. Give the Necessary Journal Entries in the Books of Drawer and
Drawee.
Answer:
• Discounting of the bill means encashing the bill before the date of its maturity.
• Bank charges an amount (Discounting charges) from the bill amount.
The journal entries are as follows:
In case of Drawers Books
Drawee’s A/c Dr.

To Bank A/c
(Being discounted bill dishonoured)
In case of Drawee’s Books
To Drawer’s A/c
(Being bill dishonoured)
Renewal of Bill
Q.1 What Do You Mean by Renewal of a Bill?
Answer:
• When the acceptor is not in his capacity to pay his bill on the due date.
Renewal of • He may request the drawer of the bill to cancel the original bill and draw a new Bill in
Bill place of the old Bill.
• If drawer agrees and a new bill is drawn, it is known as Renewal of a Bill.
Dishonour of a Bill
Q.1 What Do You Mean by Dishonour of Bill?
Answer:
• A bill is said to be dishonoured when the drawee fails to make the payment on the
Dishonour of a date of maturity.
Bill • The bill may get dishonoured when the drawee does not have sufficient funds to pay
the bill or he becomes insolvent.
• In this situation, the liability of the acceptor is restored.
Accommodation Bill
Q.1 Explain the Concept of Accommodation Bill.
Answer:
• Accommodation bill is drawn and accepted for the purpose of

mutual help.
• It is accepted by the drawee to accommodate the drawer.
Accommodation Bill • Hence, the drawee is called the ‘Accommodating Party’ and the
drawer is called the ‘Accommodation Party’.
• Accounting entries are made for accommodation bills in the
same manner as for other bills.
Q.2 Distinguish Between an Accommodation Bill and a Trade Bill.

Answer:
Parameters Trade Bills Accommodation Bills
These bills are drawn to facilitate the

These bills are drawn to help someone in need of
Objectives trade transactions of sale and
financial assistance.
purchases of goods.
There is a definite consideration for

Consideration These bills are drawn without consideration.
which the bill is accepted.
Extension of Trade bills are a form of credit

These bills are not a form of credit extension.
Credit extension.
When trade bills are discounted, the When these bills are discounted, the proceeds may be
Proceeds
proceeds remain with the holder. shared by two parties in an agreed ratio.
If trade bills are dishonoured, the

In case of dishonour of these bills, the drawer cannot
Recovery amount may be recovered easily
file a suit against the drawee.
through the court.
Unit 12-Preparation of Trial Balance

A trial balance is a bookkeeping worksheet-like account that reflects all the credit and debit balances of
all the ledger accounts. Once we prepare this statement, we can prepare the final accounts of the
company on the basis of this trial balance.
One other important use of the trial balance is that it can determine the arithmetic accuracy of the
accounts. So, if both columns of the trial balance tally, we can be reasonably assured of the accuracy of
the accounts. It does not ensure that the accounts are free of all errors but it can at least establish
mathematical accuracy.
Preparation of Trial Balance
Preparation of trial balance is the third step in the accounting process. First, we record the transactions in
the journal. And then we post them in the general ledger. Then we prepare a trial balance to verify that
the debit totals equal to the credit totals. Let us take a look at the steps in the preparation of trial balance.
Trial Balance Format

All Assets A/c All Liabilities A/c All Expense A/c All Income A/c
Debit Side Credit Side Debit Side Credit Side
Opening stock account which has a debit balance is recorded in the debit column of the trial balance.
However, closing stock is not recorded in the trial balance and is given as additional information
below the trial balance. It shows the balance of unsold goods from the opening stock and purchases
Trial Balance Example
Kapoor Pvt Ltd entered into the following transactions for the month April 30, 2018.
1. April 1, 2018 – Kapoor Pvt Ltd started business with a capital of Rs 8,00,000
2. April 4, 2018 – Bought goods from Singhania Pvt Ltd on credit for Rs 2,00,000
3. April 5, 2018 – Sold goods to M/s Khanna for Rs 2,50,000
4. April 6, 2018 – Cash purchases Rs 2,50,000
5. April 8, 2018 – Cash sales Rs 1,50,000
6. April 10, 2018 – Goods returned to Singhania Pvt Ltd Rs 20,000
7. April 11, 2018 – Purchased furniture for Rs 1,50,000
8. April 12, 2018 – Cash paid to Singhania Pvt Ltd Rs 1,20,000
9. April 13, 2018 – Goods returned by M/s Khanna Rs 30,000
10. April 15, 2018 – Goods taken by Kapoor Pvt Ltd for private use Rs 30,000
11. April 16, 2018 – Cash received from M/s Khanna Rs Rs 1,20,000
12. April 17, 2018 – Kapoor Pvt Ltd took loan from M/s Sahani Rs 3,00,000
13. April 18, 2018 – Salary paid Rs 50,000
14. April 19, 2018 – Purchased stationery for Rs 10,000
15. April 20, 2018 – Money paid to M/s Sahani for loan Rs 1,80,000
16. April 21, 2018 – Interest received Rs 40,000
Cash Account
Dr. Cr.
Date Particulars Amount (in Rs) Date Particulars Amount
1/4/2018 To Capital 8,00,000 6/4/2018 By Purchases 2,50,000
8/4/2018 To Sales 1,50,000 11/4/2018 By Furniture 1,50,000
16/4/2018 To M/s Khanna 1,20,000 12/4/2018 By Singhania 1,20,000
17/4/2018 To M/s Sahani 3,00,000 18/4/2018 By Salary 50,000
21/4/2018 To interest 40,000 19/4/2018 By Stationery 10,000
20/4/2018 By M/s Sahani 1,80,000
30/4/2018 By Balance c/d 6,50,000

14,10,000 14,10,000
1/5/2018 To Balance b/d 6,50,000
Capital Account
Dr. Cr.
30/4/2018 To Balance c/d 8,00,000 1/4/2018 By Cash 8,00,000
8,00,000 8,00,000
1/5/2018 By Balance b/d 8,00,000
Stock Account
Dr. Cr.
To Singhania Pvt
4/4/2018 2,00,000 5/4/2018 By M/s Khanna 2,50,000
Ltd
6/4/2018 To Cash 2,50,000 8/4/2018 By Cash 1,50,000
13/4/2018 To M/s Khanna 30,000 10/4/2018 By Singhania Pvt Ltd 20,000
17/4/2018 15/4/2018 By Drawings 30,000
30/4/2018 By Balance c/d 30,000
4,80,000 4,80,000
1/5/2018 To Balance b/d 30,000
Singhania Pvt Ltd’s Account
Dr. Cr.
10/4/2018 To Goods Return 20,000 4/4/2018 By Stock 2,00,000
12/4/2018 To Cash 1,20,000
30/4/2018 To Balance c/d 60,000
2,00,000 2,00,000
1/5/2018 By Balance b/d 60,000
M/s Khanna Account

Dr. Cr.
5/4/2018 To Stock 2,50,000 13/4/2018 By Goods Return 30,000
16/4/2018 By Cash 1,20,000
30/4/2018 By Balance c/d 1,00,000
2,00,000 2,00,000
1/5/2018 To Balance b/d 1,00,000
Furniture Account
Dr. Cr.
11/4/2018 To Cash 1,50,000 30/4/2018 By Balance c/d 1,50,000
1,50,000 1,50,000
1/5/2018 To Balance b/d 1,50,000
Drawings Account
Dr. Cr.
30/4/2018 To Stock 30,000 15/4/2018 By Balance c/d 30,000
30,000 30,000
1/5/2018 By Balance b/d 30,000
M/s Sahani Account
Dr. Cr.
20/4/2018 To Cash 1,80,000 17/4/2018 By Cash 3,00,000
30/4/2018 To Balance c/d 1,20,000
3,00,000 3,00,000
1/5/2018 By Balance b/d 1,20,000
Salary Account
Dr. Cr.
18/4/2018 To Cash 50,000 30/4/2018 By Balance c/d 50,000
50,000 50,000
1/5/2018 To Balance b/d 50,000
Stationery Account
Dr. Cr.
19/4/2018 To Cash 10,000 30/4/2018 By Balance c/d 10,000
10,000 10,000
1/5/2018 To Balance b/d 10,000
Interest Account
Dr. Cr.
19/4/2018 To Balance c/d 40,000 21/4/2018 By Cash 40,000
40,000 40,000
1/5/2018 By Balance b/d 40,000
Trial Balance of Kapoor Pvt Ltd as on April 31, 2018

Particulars Amount (Debit) Amount (Credit)
Cash 6,50,000 –
Capital – 8,00,000
Stock 30,000 –
Singhania Pvt Ltd – 60,000
M/s Khanna 1,00,000 –
Furniture 1,50,000 –
Drawings 30,000 –
M/s Sahani – 1,20,000
Salary 50,000 –
Stationery 10,000 –
Interest – 40,000
Total 10,20,000 10,20,000
Preparation of Trial Balance
Preparation of trial balance is the third step in the accounting process. First, we record the
transactions in the journal. And then we post them in the general ledger. Then we prepare
a trial balance to verify that the debit totals equal to the credit totals. Let us take a look at
the steps in the preparation of trial balance.
1. Learn more about Objectives and Limitations of Trial Balance here

2. To prepare a trial balance we need the closing balances of all the ledger accounts
and the cash book as well as the bank book. So firstly every ledger account must be
balanced. Balancing is the difference between the sum of all the debit entries and
the sum of all the credit entries.
3. Then prepare a three-column worksheet. One column for the account name and the
corresponding columns for debit and credit balances.
4. Fill out the account name and the balance of such account in the appropriate debit
or credit column
5. Then we total both the debit column and the credit column. Ideally, in a balanced
error-free Trial balance these totals should be the same
6. Once you compare the totals and the totals are same you close the trial balance. If
there is a difference we try and find and rectify errors. Here are some cases that
cause errors in the trial balance.
• A mistake in transferring the balances to the trial balance.

• Error in balancing an account.
• The wrong amount posted in the ledger.
• Made the entry in the wrong column, debit instead of credit or vice versa
• Mistake made in the casting of the journal or subsidiary book
Rules for Preparation of Trial Balance

While preparation of trial balances we must take care of the following rules/points
1] The balances of the following accounts are always found on the debit column of the trial balance
following balances from all accounts are placed on the debit Side column
Assets
• Expense Accounts
• Drawings Account
• Cash Balance
• Bank Balance
• Any losses
2] And the following balances are placed on the credit column of the trial balance
• Liabilities
• Income Accounts
• Capital Account
• Profits
Unit 13-Computerized Accounting System

Computerized Accounting System
In the present day, accountants no longer record every transaction of a company or any corporate
body with the help of pen and pencils using a ledger book. After the birth of computers and the
emergence of digitalization in most professional sectors in India, accounting is also computerized.
For the past few decades, computerized data was used mainly in the field of science and
technology. However, as the years go by, computerized accounting systems are also becoming
quite common.
Introduction to Computerized Accounting
Several accounting firms still perform book-keeping manually, while most firms comprise
financial transactions that can be a lot for a manual accounting process.
Moreover, the complicated financial transactions of a firm are quite difficult to be recorded
manually. That led to the introduction of the concept of computerized accounting systems.
Before you learn the meaning of computerized accounting, it is important to know about the
various factors to consider before using such a system.
Features of Computerized Accounting Systems
The characteristic features of computerized accounting systems are as follows –
a. Components of computerized accounting systems are software programs which are
installed on a company machine, network server or accessed remotely with the help of the Internet.
b. Such a system allows accounting professionals to set up income and expense accounts such
as purchases and sales accounts, salary distribution account, advertising expenses account, etc.
c. The process of computerized accounting systems includes programs that can be used to
manage and control bank accounts, prepare company budgets, etc.
d. Depending upon the program and how advanced it is accountants can also construct tax
documents, handle company payroll, and manage project expenses properly.
e. Programs in this system can be customized as per user demands. This feature helps every
accounting professional to meet the requirements of their firm.
However, it is essential for the employees of a firm who are using a computerized accounting
system to get proper training so that they can use the system correctly and execute the required
programs accurately.
What are MIS and AIS?
MIS or Management Information System is a digitized database where all the financial
information of a company is organized and input in the system. With its help, the program can
execute daily reports on management operations of a company.
AIS or Accounting Information System is nothing but means of collection, storage and
execution of accounting data of a firm. This system is a popular choice for a company before it
needs to take an important decision for any purpose.
Components of AIS include data, users, i.e., people, software programs, accounting procedure,
information technology, and other internal variables.
Types of Computerized Accounting Software
Multiple accounting software programs are used by professionals across the globe. They can be
classified as three types, which are -
A. Readymade Software
This kind of software is developed for all users in general and does not possess any tweaks or
elements that would help out a specific category of users substantially. Readymade software
programs are suitable for a firm where the overall volume of accounting work is relatively low.
Compared to other accounting software programs, readymade software programs require
minimum system requirements and are usually cheap. Moreover, such programs have an easy and
dynamic learning curve.
B. Customized Software
Customized accounting software programs are those readymade software programs that have been
altered to meet the specific requirements of any user. Such programs are usually used in large and
medium scale organizations. In the case of customized accounting software programs, not only
the installation expense but also the cost of maintenance is relatively higher than other accounting
programs. In most cases, to acquire its services, users need to pay the vendor a certain amount as
a customization fee.
The advantages of using such an accounting program include enhanced security and secrecy of
data along with easier maintenance. Moreover, users are required to undergo proper training
before using this program for professional work.
c. Tailor-Made Software
As its name suggests, tailor-made accounting software programs are developed for particular
firms. Such programs form an integral part of MIS. These kinds of programs are usually designed
for large scale businesses only and require specialized training before users are adept in working
with this software to execute programs accurately.
Advantages of Computerized Accounting Systems
The benefits of such systems are as follows –
i.Speed, accuracy, and reliability of accounting executions
ii.High efficiency along with top security
iii.Real-time user interference along with quality report preparation, which is mostly automated
Limitations of Computerized Accounting Systems
The limitations of Computerized Accounting Systems are as follows –
i.Failure of systems such as technical failures like virus attack, circuit problems in the computer,
etc.
ii.The cost of training to master Computerized accounting systems is usually a bit expensive.
iii.Disruptions are quite common
iv.Most accounting systems suffer from an inability to check errors that are not anticipated.
We hope that this discussion on Computerized Accounting Systems will help substantially in
fetching your top marks in the upcoming board exams! You can visit our website or app for more
such discussions on various topics from senior secondary Commerce curriculum.
1. What is a Computerized Accounting System?
Ans. A computerized accounting system is one where the financial transactions of a company are
accounted for as per the GAAP to execute accounting reports as per user requirements.
2. What do you Understand by AIS? State its Components.
Ans. AIS or Accounting Information System refers to the collection, storage and execution of financial
data of a firm. The components of AIS include users, accounting programs, the procedure of data
execution, information technology, and others.
3. What are the Limitations of Computerized Accounting Systems?
Ans. The limitations of Computerized Accounting Systems are failure of systems, high cost of training,
frequent disruptions, and inability to find out unanticipated errors.
Unit-14 Preparation of Final Accounts
What are Final Accounts?
Final Accounts is the ultimate stage of accounting process where the different ledgers maintained in the
Trial Balance (Books of Accounts) of the business organization are presented in the specified way to
provide the profitability and financial position of the entity for a specified period to the stakeholders and
other interested parties i.e., Trading Account, Statement of Profit & Loss, Balance Sheet.
Explanation
Initially, the transactions are recorded in the Journal of the company, which is then reflected in the
individual ledgers maintained for the relative transaction type & party. The closing balance of this ledger
is maintained in the Trial Balance, which shows equal debit and credit side for the period. Then for
providing the status & performance of the business organization for the specified period (i.e., a year,
half-year, quarter, etc.), Final accounts are prepared which included Trading Account for calculation of
Gross profit (now generally inclusive with the statement of profit & loss), Statement of Profit & Loss for
net profit earned during the period and Balance Sheet which provide the Assets & Liabilities of the
entity at the period end.
Features
1. The final account is legally required for the entities. The financial accounting and preparation
Financial statements are obligatory for the entities as well as getting those accounts audited.
2. These accounts are prepared for presenting and providing the financial performance and status
of the entity to the stakeholders, users, investors, promoters, etc.
3. The presentation of comparable figures of the current period from the previous period
increases the utility of the statements of accounts.
4. It presents the accurate & fair view of the organization’s financial performance by providing
accurate & full information regarding the business with proper notes and disclosures of the real
facts.
Objectives of Final Accounts
1. They are prepared for the calculation of Gross profit & net profit earned by the organization for
the relevant period by presenting the Statement of Profit & Loss.
2. The Balance sheet is prepared for providing the correct financial position of the company as on
the date.
3. These accounts use the bifurcation of direct expenses to obtain the gross profit & loss and
bifurcation in indirect expenses to ascertain the Net profit & loss for the organization.
4. These accounts through the Balance sheet bifurcate the assets & liabilities as per the holding &
usage periods of the same.
Example of Final Accounts
ABC Inc. shows the following balances in its ledger:
Particulars Amount
Opening Stock of Inventory $5,000
Closing Stock of Inventory $2,000
Purchases $4,000
Sales $10,000
Direct Expenses $1,000
Indirect Expenses $3,500
Other Income $4,000
Assets:
Fixed Assets $17,500
Other Assets $5,000
Liabilities:
Loan $3,500
Other Liabilities $2,500
Capital $10,000
Reserve $4,000
Prepare the final accounts based on the given data.
Solution:
Importance
• As the size and the business of the organization grows, it becomes necessary for the
management of the organization to take proper steps to maintain the growth of the
organization as well as creating the appropriate internal control in the organization for the
prevention of fraud & errors. It helps the management to find the possible weak areas of the
entity and also identifying the major areas which need special attention.
• Final Accounts is the source for the external components like shareholders and investors to
study the status of the entity and the entity’s business. Based on the entity, the investors
decide whether to invest their funds in the same business industry or not.
• It provides the authenticated information to the public, who is the judge for the company based
on who the company’s future lies. Ultimately the company aims to satisfy its consumers. Final
Accounts provide just enough data and information to the users to assess the worth of the
entity.
Advantages
• The preparation of Final Accounts increases the accuracy as well as the effectiveness of the
accounts.
• During the preparation, any innocent mistakes or fraud can be discovered and could be
rectified quickly.
• This account shows the status of the entity and business for the period, and the audit of the
same create a check on the entity and its processes, which reduces the risk of the fraud and
misstatement.
• Provide the information for the valuation of the business and evaluation of the real worth of
the business.
Disadvantages
• Final accounts are mainly prepared based on historical & monetary transactions. This only
provides the presentation and status of the money transaction to the users and public but does
not provide the information relating to the work environment of the entity, customer
satisfaction for the services & goods supplied by the company.
• It cannot be assured that the Financials are entirely free from any misstatements as there are
inherent limitations in the audit of the financial, which cannot ensure the 100% guarantee that
the financials are free to form any inaccuracies.
• There are substantial chances that the financials are influenced due to the personal judgment
of the accountant or the judgment from the management personnel.
Unit 15-Part of final Account (Trading Profit & Loss/Balance Sheet)
Final accounts are an essential financial component of any accounting year for every company.
Simply put, it is the full and final accounting procedure which is carried out at the end of an
accounting year, resulting in the preparation of relevant accounts. It derives reference from the
final trial balance, which is itself a reference to the ending balance in every ledger account.
The final accounts for all companies must be produced on or by the 31st of March every year as
it marks the end of a financial year.
What Constitutes Final Accounts?
The final account of every company comprises the journal entries necessary to complete the
accounting books for that specific financial year. Thus, some of the components of any entity’s
final accounts are the following:
• Customer billings.
• Allocation of overheads for the following financial year.
• Writing downs of any assets which may be necessary.
• Income tax accruals.
• Wages and any accruals on payroll tax.
• Additional adjustments for obsolete inventory, bad debts or return of goods sold.
• Amortization and depreciation of asset value.
The final account balance depends on the final trial balance and the financial statements of each
year. The importance of final accounts lies in the fact that they help a company analyses its annual
financial standing.
What are the Common Constituents of Final Accounts?
Most companies and corporations across the world use primarily 3 types of final accounts:
• Trading account.
• Profit and loss account.
• Balance sheet.
Examples of Final Accounts
The compilation of final accounts must be done at the end of the financial year by book-keepers
of an entity. They are subject to audits by either external or internal auditors, who are mostly
Chartered Accountants.
It is of utmost importance that the accounts are drawn up in a fair and transparent manner.
Trading Account
This is often the first final account to be tabulated. This account is used to determine the gross
profit or the gross loss that is incurred by a corporation at the end of a financial year. On the left-
hand side (LHS), all debited sums, including direct purchases, opening stock and direct expenses,
are recorded.
A company will have a gross profit scenario when the credit side (RHS or right-hand side) is
greater than the value represented on the LHS. The gross profit is later transferred to the credit
side of a profit and loss account, which is drawn up after the completion of a trading account.
A company will have a gross loss scenario when the debit side is greater than the credit side or
when LHS > RHS. Should there be a gross loss incurred, it will then be transmitted to the debit
side of the P & L account.
Here is a Sample Trading Account
Particulars Amount Amount Particulars Amount Amount
To opening stock XX By sales xx

(Less returns
To purchases xx (xx) XX
inward)
(Less returns outward) (xx) XX By closing stock XX
By gross loss
To wages (Adjust O/S
XX (transfer to P & L XXX
and prepaid)
A/C)
To carriage inwards XX
To freight and octroi,

among other XX
transportation
To direct expenses XX
To fuel and power XX
To gross profit (transfer

XXX
to P & L A/C)
Profit and Loss Account

Once a trading account is finished, the profit and loss account are readied. This final account is
also known as an income statement in some companies. It is started as soon as the gross profit or
gross loss from the table made earlier is transferred.
All indirect expenses, including salary, office and administrative expenses, rent, wages and costs
on marketing and advertising, are mentioned on the debit side.
All indirect incomes, including dividends received on shares, interests earned, profits earned on
asset sales and recovered debts go to the credit side.
Here is a Sample P & L Account
Particulars Amount Particulars Amount
To gross loss (brought from trading By gross profit (brought from

XXX XXX
account) trading account)
To salaries (adjust O/S and prepaid) XXX By rent received XXX
To rents and taxes XXX By discounts earned XXX

To travelling expenses XXX By interests earned XXX
To stationary/printing expenses XXX By bad debts recovered XXX
To postage XXX By commissions earned XXX
To audit & legal charges XXX By dividends received XXX
To telephone expenses XXX By income from other sources XXX
To insurance premium (prepaid By Net Loss (transferred to

XXX XXX
adjusted) Capital A/C)
To marketing/advertisement XXX
To interest paid XXX
To interest paid XXX

To discount allowed XXX
To sundry expenses XXX

To carriage outwards XXX
Too bad debts XXX

To depreciation XXX
To loss by fire/theft XXX

To any other expenses XXX
To net profit (transferred to Capital
XXX
A/C)
A Profit and Loss Account may have certain other essential information too. For a further and
detailed study, refer to online resources. Such information can help you become a more adept
student of commerce.
Balance Sheet
Since this is, by definition, a sheet of information and not a statement, there are no elements of
‘to’ and ‘by’ as in the other accounts. The balance sheet consists of a company’s total assets,
liabilities and capital as on the last day of a financial year.
All LHS elements of a balance sheet are liabilities. All RHS elements of a balance sheet are assets.
During Balance Sheet preparations, the liabilities must equal the assets.
Here is a Sample of the Balance Sheet of a Fictitious Company
Liabilities Amount Assets Amount
Capital
75000 Land and building 1,00,000
(Less drawings-85000-10000)
Reserves and surplus 25000 Plant and machinery 10000
Outstanding expenses 5000 Furniture 3000
Loans 25000 Stock 10000
Trade creditors 10000 Sundry debtors 6000
Bills payable 10000 Bill’s receivable 9000
Misc. investments 2000
Cash in hand 10000
Total sum 1,50,000 Total sum 1,50,000
The Balance Sheet is the most important financial tool for any enterprise to assess its financial
position and where it stands for future planning and implementation.
Balance Sheet also helps identify areas where the company is facing hurdles and difficulties. The
management can then plan accordingly.
Unit 16-Cash flow/Fund Flow Statement Preparation

As prescribed by the Accounting standard -3, there are two methods which can be used to prepare cash
flow statements:
• Indirect method
• Direct method
Whichever method be used, the end result under all three activities i.e., operating, investing and
financing will be the same.
Preparation under Indirect method

Operating Activities
The cash flow from operating activities are derived under two stages;
• Calculating the operating profit before changes in working capital
• The effect of changes in working capital
Stage 1: Operating profit before changes in working capital can be calculated as follows:
Net profit before Tax and extra ordinary Items xxx
Add: Non-cash and non-operating Items which have already been debited to profit and Loss Account
like;
Depreciation xxx
Amortization of intangible assets xxx
Loss on the sale of Fixed assets xxx
Loss on the sale of Long-term Investments xxx
Provision for tax xxx
Dividend paid xxx xxx
Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss Account
like
Profit on sale of fixed assets xxx
Profit on sale of Long-term investment xxx xxx
Operating profit before working Capital changes xxx
Stage 2: Effect of changes in Working Capital is to be taken into as follows:
• Current Assets
o An increase in an item of current assets causes a decrease in cash inflow because cash is blocked
in current assets
o A decrease in an item of current assets causes an increase in cash inflow because cash is
released from the sale of current assets
• Current Liabilities
o An increase in an item of current liability causes a decrease in cash outflow because cash is
saved
o A decrease in an item of current liability causes an increase in cash outflow because of payment
of the liability
Thus, in a nutshell
Cash from operating activities = Operating profit before working capital changes + Net decrease in
current assets + Net Increase in current liabilities – Net increase in current assets – Net decrease in
current liabilities
Investing Activities
The cash flow from investing activities is derived by adding all the cash inflows from the sale or
maturity of assets and subtracting all the cash outflows from the purchase or payment for new fixed
assets or investments.
Cash flow arising from Investing activities typically are:
• Cash payments to acquire Fixed Asset

• Cash receipts from disposal of fixed asset
• Cash payments to acquire shares or debenture investment
• Cash receipts from the repayment of advances and loans made to third parties
Furthermore, Examples of Cash inflow from investing activities are:
• Cash sale of plant and machinery, land and Building, furniture, goodwill etc.
• Cash sale of investments made in the shares and debentures of other companies
Cash receipts from collecting the Principal amount of loans made to third parties
Examples of Cash outflow from investing activities are:
• Purchase of fixed assets i.e., land, Building, furniture, machinery etc.

• Purchase of Intangible assets i.e., goodwill, trademark etc.
• Purchase of shares and debentures
• Purchase of Government Bonds
• Loan made to third parties
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Financing activities
Cash flows from financing activities are the cash paid and received from activities with non-current or
long-term liabilities and shareholder’s capital.
Cash flow arising from Financing activities typically are:
• Cash proceeds from the issue of shares or other similar instruments

• Cash proceeds from the issue of debentures, loans, notes, bonds, and other short-term borrowings
• Cash repayment of the amount borrowed
Examples of cash inflow from financing activities are:
• The issue of Equity and preference share capital for cash only
• The issue of Debentures, Bonds and long-term note for cash only
Examples of cash outflow from financing activities are:
• Payment of dividends to shareholders

• Redemption or repayment of loans i.e., debentures and bonds
• Redemption of preference share capital
• Buyback of equity shares
Illustration of Indirect method:
Net profit before Tax and extra ordinary Items xxx
Cash flow from Operating activities
Add: Non-cash and non-operating Items which have already been debited to profit and Loss
Account like;
Depreciation xxx
amortization of intangible assets xxx
Loss on the sale of Fixed assets xxx
Loss on the sale of Long-term Investments xxx
Provision for tax xxx
Dividend paid xxx xxx
Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss
Account like
Profit on sale of fixed assets (xxx)
Profit on sale of Long-term investment (xxx) (xxx)
Operating profit before working Capital changes (A) xxx
Changes in working capital:
Add: Increase in current liabilities xxx
Decrease in current assets xxx xxx
Less: Increase in current assets (xxx)
Decrease in current liabilities (xxx) (xxx)
Net increase / decrease in working capital (B) xxx
Cash generated from operations (C) = (A+B) xxx
Less: Income tax paid (Net tax refund received) (D) (xxx)
Cash flow from before extraordinary items (C-D) = (E) xxx
Adjusted extraordinary items (+/–) (F) xxx
Net cash flow from operating activities (E+F) = (G) xxx
Cash flow from Investing activities

Illustration of Indirect method:
Proceeds from sale of fixed assets xxx
Proceeds from sale of investments xxx
Purchase of shares/debentures/fixed assets (xxx)
Net cash from investing activities (H) xxx
Cash flow from Financing activities
Proceeds from issue of shares xxx
Proceeds from issue of debentures xxx
Payment of dividend (xxx)
Net cash flow from financing activities (I) xxx
Net increase in cash and cash equivalents (G+H+I) = (J) xxx
Cash and cash equivalents and the beginning of the period (K) xxx
Cash and cash equivalents and the end of the period (J+K) xxx
Preparation under the Direct method
The fundamentals of preparation of cash flow statement under Direct method is more or less same as in
Indirect method with only a few exceptions in terms of its presentation.
Illustration of an Indirect method
The Cash flow statement under Direct method is prepared as follows:
Add: Operating cash receipts: (A)
Cash sales xxx
Cash received from customers xxx
Trading commission received xxx
Royalties received xxx xxx
Less: Operating cash payments: (B)
Cash purchase (xxx)
Cash paid to suppliers (xxx)

Cash paid for business expenses (xxx) (xxx)
Cash generated from operations (A-B) = (C) xxx
Less: Income tax paid (Net of tax refund received) (D) (xxx)
Cash flow before extraordinary items (C-D) = (E) xxx
Adjusted extraordinary items (+/–) (F) xxx
Net cash flow from operating activities (E-F) = (G) xxx
Cash flow from investing activities (calculation same as under indirect method) (H) xxx
Cash flow from financing activities (calculation same as under indirect method) (I) xxx
Net increase in cash and cash equivalents (G+H+I) = (J) xxx
Cash and cash equivalents and the beginning of the period (K) xxx
Cash and cash equivalents and the end of the period (J+K) xxx
Difference between Cash Basis and Accrual Basis of Accounting

In the world of accounting, there are two methods of recording accounting transactions, which are cash
basis and accrual basis.
While the cash basis method of recording involves immediate recognizing of any expenses and
revenues, the accrual basis is based on anticipation of the expenses and revenues.
In other words, the cash basis of accounting recognizes the expenses incurred and revenues earned
immediately, when money changes hands between two parties involved in the transaction.
Whereas, the accrual basis of accounting recognizes expenses when they are billed (not paid) and
revenues when they are earned.
Cash basis of accounting is adopted by small businesses while large corporations and publicly traded
companies prefer the accrual method.
Let us discuss some of the points of difference between the cash basis of accounting and accrual basis of
accounting.
Cash Basis of Accounting Accrual basis of Accounting

Definition
It is that basis of accounting where any income or It is that basis of accounting where any income or
expense is recognized only when there is an inflow expense is recognized when it is earned/ incurred,
or outflow of cash irrespective of the time when it is paid/ collected
Nature
Cash basis is simple in nature Accrual basis is complex in nature

Accounting system followed
Cash basis of accounting follows the single-entry It follows a double entry system of accounting
system that records either inflow or outflow of where each transaction has two outcomes in the
cash form of debit and credit
Variations in Income Statement
Income statement will show a relatively lower Income statement will show higher income levels
income under cash basis of accounting under the accrual basis of accounting
Accuracy
Accrual basis of accounting is more accurate than

Cash basis of accounting has low accuracy
the cash basis of accounting
Auditing of Financial Statements
Under cash basis of accounting financial Financial statements can be audited only when
statements cannot be audited they are prepared using accrual basis of accounting
Suitable for
Cash basis of accounting is suitable for micro to Accrual basis of accounting is suitable for large
small businesses corporations
Unit-17 Introduction to company Accounts
Basics of Accounting for Companies: -

What is company: - According to the definition of a company by the Indian Act 2013;
‘‘A registered association which is an artificial legal person, having an independent legal, entity with
perpetual succession, a common seal for its signatures, a common capital comprised of transferable
shares and carrying limited liability.’’
Types of Companies: - We can categorize companies based on various types like; liability, taxes,
shares members and control. Some of those classifications are given below with examples;
Classification of Companies based on Liabilities

Companies Limited by Shares
As the name implies, the liability of the company is limited to the share price of each shareholder.
Personal assets of the shareholders won’t be disturbed; their responsibilities are limited to their debt of
the company up to their share price only.
Companies limited by shares can be public or private.
Companies Limited by Guarantee

Companies limited by guarantee doesn’t issue shares or have shareholder. They’re usually non-profit
organizations. If in the case of profit, the company distributes it among its members if it’s not a
charitable organization. If the company goes bankrupt, then their liability is limited to the amount they
have pre-decided in the memorandum of the company. Guarantors are the members of the companies
limited by guarantee.
Unlimited Companies
As the name implies the liability of the shareholders is not limited to the share price they own, it goes
beyond. They may lose their assets if the company is unable to pay debt to its creditors. We don’t see
many unlimited companies because it involves a lot of risks.
Classification of Companies based on Members
One Person Company
One person company is an Indian concept where one person can create a company without having
partners, board of directors or shareholders. In OPC, you’ll have all the advantages of sole
proprietorship like; you don’t have to share profit with others, take the risk on your own without
requiring approval from others. Your liabilities are limited like a company.
OPC has some differences with private limited companies like; you should mention the name of a
person in the memorandum of association, who’d take the charge after your passing. The minimum
capital for starting the OPC is 100,000.
ARADO Farms, VISHRUT Biotech, and HCARE Holistic Enterprise are some of the well known one-
person companies.
Private Company
A private company is a form of company that doesn’t offer its shares to the public like in the public
companies. The numbers of shares are limited to the close members only. However, members can
transfer their shares to anyone but they can’t offer it to the general public.
A private company also goes by the name of unlisted or unquoted company. Some people think that
private companies are small because they aren’t public.
Some of the big companies like Dell (hardware and tech equipment), Virginia Atlantic (airline),
PricewaterhouseCoopers (business supplier and Service Company), Mars (food and drink) and John
Lewis Partnership (retail). These are all are the private companies that are doing their business across
the world.
Public Company
Public companies are those that advertise their stock and shares to the general public. People can freely
trade the stock of the public company without any restrictions. The shares of listed companies are traded
in the stock exchange market.
In England, a public company must have a minimum of two directors and shareholders respectively. It’s
then it would fall into the category of public companies. It should have a total share value of £50,000.
When investors buy the stock of the company, then they become the equity owners of the company.
Some companies are private in the beginning, later they become the public companies after fulfilling all
the mandatory legal requirements.
Google, F5 Network, Chevron Corporation, Proctor and Gamble Company are some public companies;
they also used to be the private companies. The reason companies move from private to public is
because they need capital to expand their business operations.
Classification of Companies based on Control

Government Companies
The economy of a country plays a very important role in managing the GDP and index. Government
companies are those that hold 51% of the share capital of the company. The remaining 49% of the share,
the company offers it to the public and private individuals.
Mixed Ownership Company is also the name used for the government companies. Where we see the
management and chain of hierarchy of government and technical skill of the private sector, it’s a great
mixture of both public and private sectors.
Heavy Industry Taxila, Industrial Development Bank, Faisalabad Electric Supply Company, and
Karachi Urban Transport Corporation, PTCL, Oil, and Gas Development Company are some of the
examples of Government Companies.
Holding and Subsidiary Companies
Holding and Subsidiary companies are two companies; where holding is a parent company that controls
the business operation of the subsidiary company. By control I mean the holding company has a
complete over the selection and election of board of directors, it holds all the shareholders of the
subsidiary company. The subsidiary company can make its decision once it’s become independent.
Subsidiary companies can be profit or non-profit organizations. The subsidiary company of West’s
Encyclopedia of American Law is 2008, Thompson and Thompson, and The Global Tutor are some of
the examples of Holding and Subsidiary companies.
Associate Companies
An associate company is the business valuation firm in which one company owns a significant voting
share of another company. The voting share usually ranges from 20 to 50%, if it is more than 50%, then
it would be subsidiary company. If it’s less than 50%, then the owner doesn’t have to consolidate the
financial statement of associate. If it is more than 50%, then it has to consolidate the financial statement,
where the associate would consider the balance sheet as an asset.
Shares & types of Shares: - A company’s capital is divided into small equal units of a finite number.
Each unit is known as a share. In simple terms, a share is a percentage of ownership in a company or a
financial asset. Investors who hold shares of any company are known as shareholders.
For example ; if the market capitalization of a company is Rs. 10 lakh, and a single share is priced at Rs.
10 then the number of shares to be issued will be 1 lakh.
Companies invest in raising funds from investors. They also allow stakeholders a stake in the company’s
profits.
Investing in shares gives better returns on investment than traditional investment options and can help
you compound your wealth in the long-run.
Types of Shares:-
1. Preference shares
As the name suggests, this type of share gives certain preferential rights as compared to other types of
share. The main benefits that preference shareholders have are:
• They get first preference when it comes to the payout of dividend, i. e. a share of the profit
earned by the company
• When the company winds up, preference shareholders have the first right in terms of getting
repaid
Further, there are three sub- types in preference shares:

Cumulative preference shares:
Cumulative shareholders have the right to receive arrears on dividend before any dividend is
paid to equity shareholders. For example, if the dividends on preference shares for the year
2017 and 2018 have not been paid due to market downturns, preferential shareholders are
entitled to receive dividend for all preceding years in addition to the current one.
Non-cumulative preference shares:
Non-cumulative shareholders cannot claim any outstanding dividend. These shareholders only
earn a dividend when the company earns profits. No dividends are paid for the prior years.
Convertible preference shares:
As the name suggests, these shares are convertible. Convertible shareholders can convert their
preference shares into equity shares at a specific period of time. However, the conversion of
shares will need to be authorized by the Articles of Association (AoA) of the company.
2. Equity shares
Equity shares are also known as ordinary shares. The majority of shares issued by the company are
equity shares. This type of share is traded actively in the secondary or stock market. These shareholders
have voting rights in the company meetings. They are also entitled to get dividends declared by the
board of directors. However, the dividend on these shares is not fixed and it may vary year to year
depending on the company’s profit. Equity shareholders receive dividends after preference shareholders.
Issue of shares, Calls in Arrears with Example: - The issue of shares is the procedure in which
enterprises allocate new shares to the shareholders. Shareholders can be either corporates
or individuals. The enterprise follows the rules stipulated by Companies Act 2013 while
circulating the shares. The Issue of Prospectus, Receiving Applications, Allocation of
Shares are 3 key fundamental steps of the process of issuing the shares.
A share is a unit of ownership in a company or an organization. It is also considered as an
asset, because in case a company makes a profit, an amount in proportion to share held by
you will be provided to you in the form of a dividend. Anyone who holds a share is called
a shareholder for that specific financial asset or organization.
It should be noted that an organization is allowed to offer shares to be purchased by

others through the Companies Act 2013 and has to follow the rules predefined under the
act.
Generally, the issue of shares is of two kinds - common shares and preference shares. While
the former allows for voting rights to the shareholders, the latter does not permit the holders
of any rights.
However, the dividend is passed on to both in case of a profit. On another instance, when
there is a bankruptcy, the preference shareholders are given preference in matters of
dividend sharing. So, they receive the dividend even before the common shareholders and
have an upper hand.
What is the Issue of Shares?
The meaning of issue of shares is that the shares of an enterprise or any financial asset are
distributed among shareholders whoever wishes to purchase it. These shareholders can be either
individuals or corporates who take part in buying the shares at a specific price.
Let us understand the concept of share allocation with the help of an example.
A company called XYZ has a total capital of Rs. 6 lakhs. It has divided the capital into 6000 units
of shares each amounting to Rs. 100. Therefore, you can see that each unit or share of the company
costs Rs. 100. Individuals or corporates can purchase the share at this price.
Hence, holding a share in an organization is often regarded as partial ownership as well. It is for
the same reason that anyone holding a share is termed as a shareholder.
What are the Steps Involved in Issuing of Shares?

The process of issues of shares is primarily divided into three significant steps, which are -
1. Prospectus Issue
This is the first step of issue of shares wherein an enterprise release a prospectus to the public. It
contains the details that a new enterprise has come into being and that it would require funds from
the public to operate, for which the public can purchase shares of that particular enterprise.
The prospectus has all the necessary details of that share issuing authority along with details
pertaining to how will they collect money from investors.
2. Application Receipt
The second step in share issuing is the receipt of application as and when an investor wishes to
purchase a share of that asset or enterprise. However, they have to follow the necessary rules and
regulations as cited in the prospectus issued earlier.
They also have to deposit the amount against shares they are willing to purchase. The money has
to be deposited to any scheduled bank along with the application.
3. Share Allocation
This is the last step in issues of shares wherein after completing the formalities from the investor’s
side, the enterprise will issue the shares to the investors. As there is a minimum subscription limit,
one has to wait till that quota is fulfilled.
Once that limit is fulfilled, the shares will be allocated to those investors who have subscribed for
the capital shares. A letter of allotment is also sent out to those who have been allocated with
shares.
Therefore, this process makes up for an authentic way of trading shares between investors and
enterprises.
What are the Different Classes of Shares?
The types of issue of shares are usually set by a company or enterprise that is issuing its share to
public. This division is generally set to keep a limitation to all rights being conferred to those
shareholders.
For instance, right to vote and amount of dividend they will receive when there is a profit incurred
by an enterprise whose share is out for sale, is decided on the basis of such divisions.
The division is made in the following two types -
1. Ordinary Share
This is the most common type of share issued by an enterprise which grants voting rights to the
shareholders.
2. Deferred Share
These shares grant fewer rights than common shares, wherein dividends are paid only after a
certain period of time and various other constraints.
3. Redeemable Share
As the name suggests, these shares might be bought back by an enterprise which sold it for the
first time from the shareholders.
4. Non-voting Share
These shares do not permit any voting rights to its shareholders. Meaning that the shareholders
are not able to partake in any executive decision regarding that organization. However, they are
part owners of the enterprise.
5. Preference Share
These shares grant a prefixed amount of dividend to its shareholders. They do not enjoy voting
rights, though they receive a dividend before any other shareholder.
6. Management Share
The shareholders are granted special voting rights when they hold management shares. Herein,
for every share that a shareholder hold, they are permitted to exercise two votes.
7. Alphabet Share
These types of shares are a sub category of common shares, wherein managements divides the
shareholders into multiple classes, all these classes are granted different voting rights.
What are Equity Shares?
Equity shares are issue of shares that are purely meant for ownership. It is entirely opposite to
preference shares and does not provide any preference rights to shareholders during distribution
of dividends. However, these shareholders have voting rights.
(Asked Questions)
1. What are Shares?
A share is a unit of the total capital of enterprise divided into equal portions. So, if a total capital of an
enterprise is Rs.100 and divided into 20 parts, then each share will cost Rs.5, which can be bought by
individuals or companies.
2. How are Shares Issued?
The issue of shares meaning is that an enterprise divides its total capital into multiple sections or units
which are called shares. These shares can be purchased by public individuals or even corporates.
Shares are issued in three steps; 1st. An enterprise releases a prospectus with relevant details of its
shares to the public. 2nd. Whoever wishes to purchase the shares can deposit the amount and an
application in a scheduled bank. 3rd. The shares will be allocated to the concerned investor along with a
confirmation letter.
3.What is Debentures: - The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which
means to borrow or loan. Debentures are written instruments of debt that company’s issue under their
common seal. They are similar to a loan certificate.
Debentures are issued to the public as a contract of repayment of money borrowed from them. These
debentures are for a fixed period and a fixed interest rate that can be payable yearly or half-yearly.
Debentures are also offered to the public at large, like equity shares. Debentures are actually the most
common way for large companies to borrow money.
Let us look at some important features of debentures that make them unique,
• Debentures are instruments of debt, which means that debenture holders become creditors of
the company
• They are a certificate of debt, with the date of redemption and amount of repayment
mentioned on it. This certificate is issued under the company seal and is known as a Debenture
Deed
• Debentures have a fixed rate of interest, and such interest amount is payable yearly or half-
yearly
• Debenture holders do not get any voting rights. This is because they are not instrumenting of
equity, so debenture holders are not owners of the company, only creditors
• The interest payable to these debenture holders is a charge against the profits of the company.
So these payments have to be made even in case of a loss.
Advantages of Debentures
• One of the biggest advantages of debentures is that the company can get its required funds
without diluting equity. Since debentures are a form of debt, the equity of the company
remains unchanged.
• Interest to be paid on debentures is a charge against profit for the company. But this also
means it is a tax-deductible expense and is useful while tax planning
• Debentures encourage long-term planning and funding. And compared to other forms of
lending debentures tend to be cheaper.
• Debenture holders bear very little risk since the loan is secured and the interest is payable even
in the case of a loss to the company
• At times of inflation, debentures are the preferred instrument to raise funds since they have a
fixed rate of interest
Disadvantages of Debentures
• The interest payable to debenture holders is a financial burden for the company. It is payable
even in the event of a loss
• While issuing debentures help a company trade on equity, it also makes it to dependent on
debt. A skewed Debt-Equity Ratio is not good for the financial health of a company
• Redemption of debentures is a significant cash outflow for the company which can imbalance
its liquidity
• During a depression, when profits are declining, debentures can prove to be very expensive due
to their fixed interest rate
Types of Debentures
There are various types of debentures that a company can issue, based on security, tenure,
convertibility etc. Let us take a look at some of these types of debentures.
• Secured Debentures: These are debentures that are secured against an asset/assets
of the company. This means a charge is created on such an asset in case of default
in repayment of such debentures. So in case, the company does not have enough
funds to repay such debentures, the said asset will be sold to pay such a loan. The
charge may be fixed, i.e. against a specific assets/assets or floating, i.e. against all
assets of the firm.
• Unsecured Debentures: These are not secured by any charge against the assets of
the company, neither fixed nor floating. Normally such kinds of debentures are not
issued by companies in India.
• Redeemable Debentures: These debentures are payable at the expiry of their term.
Which means at the end of a specified period they are payable, either in the lump
sum or in installments over a time period. Such debentures can be redeemable at
par, premium or at a discount.
• Irredeemable Debentures: Such debentures are perpetual in nature. There is no
fixed date at which they become payable. They are redeemable when the company
goes into the liquidation process. Or they can be redeemable after an unspecified
long time interval.
• Fully Convertible Debentures: These shares can be converted to equity shares at
the option of the debenture holder. So if he wishes then after a specified time
interval all his shares will be converted to equity shares and he will become a
shareholder.
• Partly Convertible Debentures: Here the holders of such debentures are given the
option to partially convert their debentures to shares. If he opts for the conversion,
he will be both a creditor and a shareholder of the company.
• Non-Convertible Debentures: As the name suggests such debentures do not have
an option to be converted to shares or any kind of equity. These debentures will
remain so till their maturity, no conversion will take place. These are the most
common type of debentures.
Redemption of shares: -
• Redemptions are when a company requires shareholders to sell a portion of their
shares back to the company. For a company to redeem shares, it must have
stipulated upfront that those shares are redeemable, or callable. Redeemable shares
have a set call price, which is the price per share that the company agrees to pay
the shareholder upon redemption. The call price is set at the onset of the share
issuance. Shareholders are obligated to sell the stock in a redemption.
Calls in Arrears with illustrations: -
• If any amount, called in respect of a share, is not paid before or on the date fixed
for payment thereof, such amount which is not paid, is called “CALLS-IN-
ARREARS”. Amount may be called up by the Company either as Allotment
Money or Call Money. Thus, in case, any default on account of not sending the call
money, is known as “CALLS-IN-ARREARS” and separate account i.e.
• Calls-in-Arrears Account to be opened. The company can charge interest on all
such calls in arrears for the period the amount remain unpaid at the rate of 5% p.a.
The total of Calls- in-Arrears is shown in the Balance Sheet as a deduction from
the Called up Capital.
•
• Calls In Advance: -The Money received by the company in excess of what has
been called up is known as “CALLS IN ADVANCE”. A Company may, if
authorized by its Articles, accept calls in advance from its shareholders. If such an
amount, which has not been called, is received, such amount to be credited to a
separate account known as CALLS-IN-ADVANCE ACCOUNT.
• But this amount which is not called should not be credited to Capital Account. A
company may pay interest on such amount received in advance at the rate of 6%
p.a. No dividend is payable on this amount. The amount so received will be
adjusted towards the payment of calls as and when they become due.
✓ Illustration (Calls-in-Advance and Calls-in-Arrears):
• Bharat Limited was registered with a Nominal Capital of Rs. 5,00,000 in shares of
Rs. 100 each 3 000 of which were issued for subscription, payable as to Rs. 12.50
on application Rs. 12.50 on allotment and Rs. 25 three months after the allotment
and the balance to be called up as and when required.
• ADVERTISEMENTS: -All moneys up to allotment were duly received, but as
regards the call of Rs 25, a shareholder holding 100 shares did not pay the amount
due. Another shareholder who was allotted 150 shares paid the entire amount of
the shares.
Difference between Debentures and shares: -
• Below is the topmost comparison between Shares vs Debentures:
Basis Of Comparison Shares Debentures
Shares increase in the capital of Debentures add to the debt of the
Meaning
the company. company.
Raising capital through
Raising capital through shares
debentures does not give
Ownership of capital allows the shareholder a part of
ownership to the debenture-
the ownership.
holder.
Shareholders are the Owners of Debenture holders are like the
Role in the Company
the company. creditors to the company.
Debentures can be divided into 3
Shares are divided into 2 major major heads: Secured vs
Types types: Equity Shares and Unsecured, Convertible vs non-
Preference Shares. convertible, Registered and
bearer debentures.
A dividend is earned on the Interest is earned on the
Form of return
shares by the shareholders. debentures by their holders.
Dividend needs to be paid to the Interest needs to be paid to the
Payment of return shareholders only if profits are debenture holders, even if there is
earned by the company. no profit earned.
The interest payment is an
The dividend that is paid to the expense to the company and is
Deduction from the Net Profit shareholders is reduced when therefore reduced from other
profits are earned. revenue to reach the Net Profit of
the company.
Shares are not convertible to Debentures can be converted to
Conversion
debentures. shares.
On issuance of debentures to the
There is no trust deed for share
Trust Deed public, the trust deed must be
allocation.
executed between both parties.
Equity shareholders have voting Debenture holders do not carry
Voting Rights rights and the right to participate any voting rights or control in the
in general meetings. company.
In the case of dilution of the
company, only preference Debenture holders get their
Dilution of the company shareholders are given preference money back in case of winding
and are repaid before anyone up of the company.
else.
Shares are non-divisible and non- Debentures are freely
Transfer of ownership
transferable. transferable,
Assets of the company cannot be Assets of the company can be
Mortgage mortgaged in lieu of the mortgaged in favor of the
shareholders, debenture holders,
Unit 18-Introduction to financial Statements Analysis

What are financial statements: - Financial statements are written records that convey the
business activities and the financial performance of a company. Financial statements are
often audited by government agencies, accountants, firms, etc. to ensure accuracy and for
tax, financing, or investing purposes. Financial statements include:
• Balance sheet
• Income statement
• Cash flow statement.
Financial statements are written records that convey the business activities and the financial
performance of a company.
The balance sheet provides an overview of assets, liabilities, and stockholders' equity as a
snapshot in time.
The income statement primarily focuses on a company’s revenues and expenses during a
particular period. Once expenses are subtracted from revenues, the statement produces a
company's profit figure called net income.
The cash flow statement (CFS) measures how well a company generates cash to pay
its debt obligations, fund its operating expenses, and fund investments.
Purpose of financial statements: - The general purpose of the financial statements is to
provide information about the results of operations, financial position, and cash flows of
an organization. This information is used by the readers of financial statements to make
decisions regarding the allocation of resources. At a more refined level, there is a
different purpose associated with each of the financial statements. The income statement
informs the reader about the ability of a business to generate a profit. In addition, it
reveals the volume of sales, and the nature of the various types of expenses, depending
upon how expense information is aggregated. When reviewed over multiple time periods,
the income statement can also be used to analyze trends in the results of company
operations.
The purpose of the balance sheet is to inform the reader about the current status of the
business as of the date listed on the balance sheet. This information is used to estimate
the liquidity, funding, and debt position of an entity, and is the basis for a number of
liquidity ratios. Finally, the purpose of the statement of cash flows is to show the nature
of cash receipts and cash disbursements, by a variety of categories. This information is of
considerable use, since cash flows do not always match the sales and expenses shown in
the income statement.
Users of Financial Statements: - There are many users of the financial statements
produced by an organization. The following list identifies the more common users and
the reasons why they need this information:
Company management. The management team needs to understand the profitability,

liquidity, and cash flows of the organization every month, so that it can make operational
and financing decisions about the business.
1.Competitors. Entities competing against a business will attempt to gain access to its
financial statements, in order to evaluate its financial condition. The knowledge they gain
could alter their competitive strategies.
2.Customers. When a customer is considering which supplier to select for a major
contract, it wants to review their financial statements first, in order to judge the financial
ability of a supplier to remain in business long enough to provide the goods or services
mandated in the contract.
3.Employees. A company may elect to provide its financial statements to employees,
along with a detailed explanation of what the documents contain. This can be used to
increase the level of employee involvement in and understanding of the business.
Governments. A government in whose jurisdiction a company is located will request
financial statements in order to determine whether the business paid the appropriate
amount of taxes.
4.Investment analysts. Outside analysts want to see financial statements in order to decide
whether they should recommend the company's securities to their clients.
Investors. Investors will likely require financial statements to be provided, since they are
the owners of the business and want to understand the performance of their investment.
Lenders. An entity loaning money to an organization will require financial statements in
order to estimate the ability of the borrower to pay back all loaned funds and related
interest charges.
5.Rating agencies. A credit rating agency will need to review the financial statements in
order to give a credit rating to the company as a whole or to its securities.
Suppliers. Suppliers will require financial statements in order to decide whether it is safe
to extend credit to a company.
6.Unions. A union needs the financial statements in order to evaluate the ability of a
business to pay compensation and benefits to the union members that it represents.
Financil Statements Analysis tools: -
1. Comparative Statement or Comparative Financial and Operating Statements.

2. Common Size Statements.
3. Trend Ratios or Trend Analysis.
4. Average Analysis.
5. Statement of Changes in Working Capital.
6. Fund Flow Analysis.
7. Cash Flow Analysis.
8. Ratio Analysis.
9. Cost Volume Profit Analysis
A brief explanation of the tools or techniques of financial statement analysis presented

below.
1. Comparative Statements
Comparative statements deal with the comparison of different items of the Profit and Loss Account and
Balance Sheets of two or more periods. Separate comparative statements are prepared for Profit and Loss
Account as Comparative Income Statement and for Balance Sheets.
As a rule, any financial statement can be presented in the form of comparative statement such as
comparative balance sheet, comparative profit and loss account, comparative cost of production statement,
comparative statement of working capital and the like.
2. Comparative Income Statement
Three important information are obtained from the Comparative Income Statement. They are Gross Profit,
Operating Profit and Net Profit. The changes or the improvement in the profitability of the business
concern is find out over a period of time. If the changes or improvement is not satisfactory, the
management can find out the reasons for it and some corrective action can be taken.
3. Comparative Balance Sheet
The financial condition of the business concern can be find out by preparing comparative balance sheet.
The various items of Balance sheet for two different periods are used. The assets are classified as current
assets and fixed assets for comparison. Likewise, the liabilities are classified as current liabilities, long
term liabilities and shareholders’ net worth. The term shareholders’ net worth includes Equity Share
Capital, Preference Share Capital, Reserves and Surplus and the like.
4. Common Size Statements
A vertical presentation of financial information is followed for preparing common-size statements.
Besides, the rupee value of financial statement contents are not taken into consideration. But, only
percentage is considered for preparing common size statement.
The total assets or total liabilities or sales is taken as 100 and the balance items are compared to the total
assets, total liabilities or sales in terms of percentage. Thus, a common size statement shows the relation
of each component to the whole. Separate common size statement is prepared for profit and loss account
as Common Size Income Statement and for balance sheet as Common Size Balance Sheet.
5. Trend Analysis
The ratios of different items for various periods are find out and then compared under this analysis. The
analysis of the ratios over a period of years gives an idea of whether the business concern is trending
upward or downward. This analysis is otherwise called as Pyramid Method.
6. Average Analysis
Whenever, the trend ratios are calculated for a business concern, such ratios are compared with industry
average. These both trends can be presented on the graph paper also in the shape of curves. This
presentation of facts in the shape of pictures makes the analysis and comparison more comprehensive and
impressive.
7. Statement of Changes in Working Capital
The extent of increase or decrease of working capital is identified by preparing the statement of changes
in working capital. The amount of net working capital is calculated by subtracting the sum of curre nt
liabilities from the sum of current assets. It does not detail the reasons for changes in working capital.
8. Fund Flow Analysis
Fund flow analysis deals with detailed sources and application of funds of the business concern for a
specific period. It indicates where funds come from and how they are used during the period under review.
It highlights the changes in the financial structure of the company.
9. Cash Flow Analysis
Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement
of cash instead of movement of working capital would be considered in the cash flow analysis. There are
two types of cash flows. They are actual cash flows and notional cash flows.
10. Ratio Analysis
Ratio analysis is an attempt of developing meaningful relationship between individual items (or group of
items) in the balance sheet or profit and loss account. Ratio analysis is not only useful to internal parties
of business concern but also useful to external parties. Ratio analysis highlights the liquidity, solvency,
profitability and capital gearing.
11. Cost Volume Profit Analysis
This analysis discloses the prevailing relationship among sales, cost and profit. The cost is divided into
two. They are fixed cost and variable cost. There is a constant relationship between sales and variable
cost. Cost analysis enables the management for better profit planning.
Different types of Accounting Ratios: -
There are mainly 4 different types of accounting ratios to perform a financial statement analysis; Liquidity
Ratios, Solvency Ratios, Activity Ratios and Profitability Ratios.
A financial ratio is a mathematical expression demonstrating a relationship between two independent or
related accounting figures. Such ratios are calculated on the basis of accounting information gathered from
financial statements.
Four different ways to show financial ratios are;
Simple or Pure – A simple ratio is shown as a quotient, example – 3:1

Percentage – This type of representation is done in form of a percentage, example 30%
Turnover Rate or Times – Accounting ratio expressed in form of rate or times, example 3 times.
Fraction – It is when a ratio is expressed in a fraction, example 2/3 or 0.67
Types of Accounting Ratios
Liquidity Ratios – First among types of financial ratios is liquidity ratio; it used to judge the paying
capacity of a business towards its short-term liabilities. It helps with the evaluation of a company’s
ability to satisfy its short-term commitments.
Higher the liquidity ratios better the company’s cash position. Main types of liquidity ratios are;
1. Current ratio
2. Quick ratio
3. Net-Working Capital
4. Super-Quick Ratio
5. Cash flow from operations ratio
Solvency Ratios – second among types of accounting ratios is solvency ratios; it helps to determine a
company’s long-term solvency. It is often used to judge the long-term debt paying capacity of a
business.
Solvency ratios look at a firm’s long-term financial strength to meet its obligations including both
principal and interest repayments.
Main types of liquidity ratios are;
1. Debt to Equity Ratio
2. Debt to Asset Ratio
3. Proprietary Ratio
4. Fixed-Assets Ratio
5. Interest-Coverage Ratio
Activity Ratios – Activity ratios are also known as performance ratios, efficiency ratios & turnover
ratios. They are an important subpart of financial ratios as they symbolize the speed at which the sales
are being made.
Higher turnover ratio means better utilization of assets which indicates
improved efficiency and profitability.
Main types of activity ratios are;
6. Stock or Inventory Turnover Ratio

7. Trade Receivables or Debtor’s Turnover Ratio
8. Trade Payables or Creditor’s Turnover Ratio
9. Working Capital Turnover Ratio
Profitability Ratios – Efficiency leads to profitability and profitability is the ultimate indicator of the
overall success of a business. Profitability ratio shows earning capacity of the business with respect
to the resources employed.
Main types of profitability ratios are;
10. Gross Profit Ratio

11. Net Profit Ratio
12. Operating Profit Ratio
13. Operating Ratio
14. Return on Investment or Return on Capital Employed
15. Price Earnings Ratio
All these types of accounting ratios are used by internal and external users for various
different purposes such as management accounting, credit rating, loans and other credit,
etc.
a. Liquidity Ratios, Activity Ratios, Profitability Ratios etc.: -
Unit 19-Introduction to financial Market & System

There are certain types of financial markets and financial institutions that are found in
almost every country in the world. For instance, most countries where economic activities
take place have an established stock exchange and a banking system. Each of these
institutions is different and hence perform different functions. However, together, these
financial markets and institutions make up a financial system. Financial systems all over
the world are similar to some extent since all of them tend to have some common features.
However, financial systems also tend to have unique features based on political, economic,
and even cultural factors.
In this article, we will have a basic look at the fundamental features of the financial system.
What is a Financial System?

A financial system is a complex, interrelated arrangement of financial institutions and
markets. In order to understand the system as a whole, we first need to understand its
component parts. The financial systems across the world are generally known to have three
components. These components are as follows:
2. Private financial institutions (banks, insurance companies, mutual funds, etc.)
3. Government regulatory agencies which overlook these institutions
4. The Central bank which decides the monetary policy and thereby impacts all institutions in the
financial market
How the Financial System Works?

A wide variety of motives are at play in the financial system of any country. The three
types of institutions mentioned above have very different incentives.
For instance, private financial institutions are driven purely by financial motives. Private
Banks, insurance companies, and mutual funds collect money from people who have
surplus money to invest. At the same time, they lend this money to industrialists who need
money upfront in order to make investments. The profit motive makes banks and other
financial institutions compete with each other in order to find a mechanism in which
savings can be transferred to investors with the minimum transaction costs.
The financial system is the best example of Adam Smith’s invisible hand at work. In the
pursuit of their individual profits, these financial institutions lead the entire economy
towards growth and development. This transfer of funds from the idle to the industrious
forms the backbone of any economy. Empirical data clearly indicates that countries with
more advanced financial systems record better economic growth. Therefore, having a well-
developed financial system is an indicator of a developed economy.
The regulatory agencies have a very different function as compared to private bodies. Their
task is to ensure that private companies compete with each other in a fair and equitable
manner. For instance, the regulatory body monitoring the stock market needs to ensure that
it prevents insider trading. It is the job of the regulatory body to ensure that the information
related to the company must become available to everyone at the same time. This ensures
that no party has an information advantage over the other. If the regulatory agency fails to
do so, the stock market will cease to function. For some time, a handful of people will make
money at the expense of everybody else. Over a period of time, investors will simply lose
faith in the market and stop investing.
The job of regulatory agencies is to ensure fair play in the markets. Almost every major
financial institution viz. banks, insurance companies, mutual funds, etc. require their own
regulatory agency. However, it needs to be understood that excessive regulation is not
always good. Excessive regulation means that a lot of rules have to be followed. As a result,
compliance costs increase for companies. This makes them less competitive in the
international market. Also, excessive regulation limits the flexibility of investors to run
their company in the manner they want. Therefore, the amount of regulation has to be just
right. It should only prevent unfair trades from happening. Once again, the empirical data
is quite clear on the fact that any country which has been able to set up an effective
regulatory mechanism has reaped dividends in the form of rapid economic growth.
Lastly, a special mention needs to be given to central banks. This is because, on the one
hand, they perform the regulatory function, but on the other hand, they also decide the
money supply of any country. This money supply is one of the factors which leads to
economic cycles. Also, economic cycles like recession, depression, and boom phase affect
the entire financial industry and even other industries. It is for this reason that the central
bank is considered to be the most powerful monetary authority in any country. There is
considerable debate about how this institution should be structured. Some countries prefer
to keep this institution in private hands whereas there are other nations who have
nationalized it. We have covered the structural design of the central bank in a separate
article.
Therefore, it can be said that a financial system is formed with many different types of
parties. These different types of parties have different needs. These different needs, as well
as the contribution of the different parties to the overall financial system, have been
summarized above.
Components of financial System: -
A financial system refers to a system which enables the transfer of money between
investors and borrowers. A financial system could be defined at an international, regional
or organization level. The term “system” in “Financial System” indicates a group of
complex and closely linked institutions, agents, procedures, markets, transactions, claims
and liabilities within a economy.
The financial systems across the world are generally known to have three components.
These components are as follows:
1. Private financial institutions (banks, insurance companies, mutual funds, etc.)
2. Government regulatory agencies which overlook these institutions
3. The Central bank which decides the monetary policy and thereby impacts all institutions in the
financial market
Financial Institutions
Financial institutions facilitate smooth working of the financial system by making investors
and borrowers meet. They mobilize the savings of investors either directly or indirectly via
financial markets, by making use of different financial instruments as well as in the process
using the services of numerous financial services providers.
They could be categorized into Regulatory, Intermediaries, Non-intermediaries and
Others. They offer services to organizations looking for advises on different problems
including restructuring to diversification strategies. They offer complete array of services
to the organizations who want to raise funds from the markets and take care of financial
assets for example deposits, securities, loans, etc.
Figure 1: Five Basic Components of Financial System

Financial Markets
A financial market is the place where financial assets are created or transferred. It can be
broadly categorized into money markets and capital markets. Money market handles short-
term financial assets (less than a year) whereas capital markets take care of those financial
assets that have maturity period of more than a year. The key functions are:
1. Assist in creation and allocation of credit and liquidity.

2. Serve as intermediaries for mobilization of savings.
3. Help achieve balanced economic growth.
4. Offer financial convenience.
One more classification is possible: primary markets and secondary markets. Primary
markets handles new issue of securities in contrast secondary markets take care of
securities that are presently available in the stock market.
Financial markets catch the attention of investors and make it possible for companies to
finance their operations and attain growth. Money markets make it possible for businesses
to gain access to funds on a short term basis, while capital markets allow businesses to gain
long-term funding to aid expansion. Without financial markets, borrowers would have
problems finding lenders. Intermediaries like banks assist in this procedure. Banks take
deposits from investors and lend money from this pool of deposited money to people who
need loan. Banks commonly provide money in the form of loans.
Financial Instruments
This is an important component of financial system. The products which are traded in a
financial market are financial assets, securities or other type of financial instruments. There
is a wide range of securities in the markets since the needs of investors and credit seekers
are different. They indicate a claim on the settlement of principal down the road or payment
of a regular amount by means of interest or dividend. Equity shares, debentures, bonds, etc
are some examples.
Financial Services
Financial services consist of services provided by Asset Management and Liability
Management Companies. They help to get the necessary funds and also make sure that they
are efficiently deployed. They assist to determine the financing combination and extend
their professional services upto the stage of servicing of lenders. They help with borrowing,
selling and purchasing securities, lending and investing, making and allowing payments
and settlements and taking care of risk exposures in financial markets. These range from
the leasing companies, mutual fund houses, merchant bankers, portfolio managers, bill
discounting and acceptance houses.
The financial services sector offers a number of professional services like credit rating,
venture capital financing, mutual funds, merchant banking, depository services, book
building, etc. Financial institutions and financial markets help in the working of the
financial system by means of financial instruments. To be able to carry out the jobs given,
they need several services of financial nature. Therefore, Financial services are considered
as the 4th major component of the financial system.
Money
Money is understood to be anything that is accepted for payment of products and services
or for the repayment of debt. It is a medium of exchange and acts as a store of value.
Unit-20 Types of Financial Market

A financial market is a market in which people and entities can trade financial securities,
commodities and other fungible assets at prices that are determined by pure supply and
demand principles. Markets work by placing the two counterparts, buyers and sellers, at
one place so they can find each other easily, thus facilitating the deal between them.
Financial markets may be viewed as channels through which flow loanable funds directed
from a supplier who has an excess of assets toward a demander who experiences a deficit
of funds.
There are different types of financial markets and their characterization depends on the
properties of the financial claims being traded and the needs of the different market
participants. We recognize several types of markets, which vary based on the type of the
instruments traded and their maturity. A common breakdown is the following:
Capital market
The capital market aids raising of capital on a long-term basis, generally over 1 year. It
consists of a primary and a secondary market and can be divided into two main subgroups
– Bond market and Stock market.
The Bond market provides financing by accumulating debt through bond issuance and
bond trading
The Stock market provides financing by sharing the ownership of a company through
stocks issuing and trading
A primary market, or the so-called “new issue market”, is where securities such as shares
and bonds are being created and traded for the first time without using any intermediary
such as an exchange in the process. When a private company decides to become a publicly-
traded entity, it issues and sells its stocks at a so-called Initial Public Offering. IPOs are a
strictly regulated process which is facilitated by investment banks or finance syndicates of
securities dealers that set a starting price range and then oversee its sale directly to the
investors.
A secondary market, or the so-called “aftermarket” is the place where investors purchase
previously issued securities such as stocks, bonds, futures and options from other investors,
rather from issuing companies themselves. The secondary market is where the bulk of
exchange trading occurs and it is what people are talking about when they refer to the
“stock market”. It includes the NYSE, Nasdaq and all other major exchanges.
Some previously issued stocks however are not listed on an exchange, rather traded directly
between dealers over the telephone or by computer. These are the so-called over-the-
counter traded stocks, or “unlisted stocks”. In general, companies which are traded this
way usually dont meet the requirements for listing on an exchange. Such shares are traded
on the Over the Counter Bulletin Board or on the pink sheets and are either offered by
companies with a poor credit rating or are penny stocks.
Money market
The money market enables economic units to manage their liquidity positions through
lending and borrowing short-term loans, generally under 1 year. It facilitates the interaction
between individuals and institutions with temporary surpluses of funds and their
counterparts who are experiencing a temporary shortage of funds.
One can borrow money within a quite short period of time via a standard instrument, the
so-called “call money”. These are funds borrowed for one day, from 12:00 PM today until
12:00 PM on the next day, after which the loan becomes “on call” and is callable at any
time. In some cases, “call money” can be borrowed for a period of up to one week.
➢ Trading and Speculative Markets
➢ Supply and Demand in Trading
➢ Types of Financial Markets
➢ What Does Forex Stand for?
➢ Forex Trading Terms
➢ Advantages of Forex Over Stocks
Apart from the “call money” market, banks and other financial institutions use the so-called
“Interbank market” to borrow funds within a longer period of time, from overnight to
several weeks and up to one year. Retail investors and smaller trading parties do not
participate on the Interbank market. While some of the trading is performed by banks on
account of their clients, most transactions occur in case a bank experiences extra liquidity,
a surplus of funds, while another has a shortage of liquidity.
Such loans are made at the Interbank rate, which is the rate of interest, charged on short-
term loans between banks. An intermediary between the counterparts, called a dealer,
announces a bid and an offer rate with the difference between the two representing a spread,
or the dealers income. The Interbank interest in London is known as LIBOR (London
Interbank Offered Rate) and LIBID (London Interbank Bid Rate). Respectively in Paris we
have PIBOR, in Frankfurt – FIBOR, in Amsterdam – AIBOR, and Madrid – MIBOR.
Foreign exchange market
The foreign exchange market abets the foreign exchange trading. Its the largest, most liquid
market in the world with an average traded value of more than $5 trillion per day. It
includes all of the currencies in the world and any individual, company or country can
participate in it.
Commodity market
The commodity market manages the trading in primary products which takes place in about
50 major commodity markets where entirely financial transactions increasingly outstrip
physical purchases which are to be delivered. Commodities are commonly classified in two
subgroups.
• Hard commodities are raw materials typically mined, such as gold, oil, rubber, iron ore etc.
• Soft commodities are typically grown agricultural primary products such as wheat, cotton, coffee, sugar
etc.
Derivatives market
It facilitates the trading in financial instruments such as futures contracts and options used
to help control financial risk. The instruments derive their value mostly from the value of
an underlying asset that can come in many forms – stocks, bonds, commodities, currencies
or mortgages. The derivatives market is split into two parts which are of completely
different legal nature and means to be traded.
Exchange-traded derivatives
These are standardized contracts traded on an organized futures exchange. They include
futures, call options and put options. Trading in such uniformed instruments requires from
investors a payment of an initial deposit which is settled through a clearing house and aims
at removing the risk for any of the two counterparts not to cover their obligations.
Over-the-counter derivatives
Those contracts that are privately negotiated and traded directly between the two
counterparts, without using the services of an intermediary like an exchange. Securities
such as forwards, swaps, forward rate agreements, credit derivatives, exotic options and
other exotic derivatives are almost always traded this way. These are tailor-made contracts
that remain largely unregulated and provide the buyer and the seller with more flexibility
in meeting their needs.
Insurance market
It helps in relocating various risks. Insurance is used to transfer the risk of a loss from one
entity to another in exchange for a payment. The insurance market is a place where two
peers, an insurer and the insured, or the so-called policyholder, meet in order to strike a
deal primarily used by the client to hedge against the risk of an uncertain loss.
financial instrument and Money: - Financial instruments are contracts for monetary assets
that can be purchased, traded, created, modified, or settled for. In terms of contracts, there
is a contractual obligation between involved parties during a financial instrument
transaction.
For example, if a company were to pay cash for a bond, another party is obligated to deliver
a financial instrument for the transaction to be fully completed. One company is obligated
to provide cash, while the other is obligated to provide the bond.
Basic examples of financial instruments are cheques, bonds, securities.
There are typically three types of financial instruments: cash instruments, derivative
instruments, and foreign exchange instruments.
Types of Financial Instruments

1. Cash Instruments
Cash instruments are financial instruments with values directly influenced by the condition
of the markets. Within cash instruments, there are two types; securities and deposits, and
loans.
Securities: A security is a financial instrument that has monetary value and is traded on the
stock market. When purchased or traded, a security represents ownership of a part of a
publicly-traded company on the stock exchange.
Deposits and Loans: Both deposits and loans are considered cash instruments because they
represent monetary assets that have some sort of contractual agreement between parties.
2. Derivative Instruments
Derivative instruments are financial instruments that have values determined from
underlying assets, such as resources, currency, bonds, stocks, and stock indexes.
The five most common examples of derivatives instruments are synthetic agreements,
forwards, futures, options, and swaps. This is discussed in more detail below.
Synthetic Agreement for Foreign Exchange (SAFE): A SAFE occurs in the over-the-counter (OTC)
market and is an agreement that guarantees a specified exchange rate during an agreed period of time.
Forward: A forward is a contract between two parties that involves customizable derivatives in which
the exchange occurs at the end of the contract at a specific price.
Future: A future is a derivative transaction that provides the exchange of derivatives on a determined
future date at a predetermined exchange rate.
Options: An option is an agreement between two parties in which the seller grants the buyer the right to
purchase or sell a certain number of derivatives at a predetermined price for a specific period of time.
Interest Rate Swap: An interest rate swap is a derivative agreement between two parties that involves
the swapping of interest rates where each party agrees to pay other interest rates on their loans in
different currencies.
3. Foreign Exchange Instruments

Foreign exchange instruments are financial instruments that are represented on the foreign market and
primarily consist of currency agreements and derivatives.
In terms of currency agreements, they can be broken into three categories.
Spot: A currency agreement in which the actual exchange of currency is no later than the second
working day after the original date of the agreement. It is termed “spot” because the currency exchange
is done “on the spot” (limited timeframe).
Outright Forwards: A currency agreement in which the actual exchange of currency is done
“forwardly” and before the actual date of the agreed requirement. It is beneficial in cases of fluctuating
exchange rates that change often.
Currency Swap: A currency swap refers to the act of simultaneously buying and selling currencies with
different specified value dates.
Asset Classes of Financial Instruments
Beyond the types of financial instruments listed above, financial instruments can also be categorized
into two asset classes. The two asset classes of financial instruments are debt-based financial
instruments and equity-based financial instruments.
1. Debt-Based Financial Instruments
Debt-based financial instruments are categorized as mechanisms that an entity can use to increase the
amount of capital in a business. Examples include bonds, debentures, mortgages, U.S. treasuries, credit
cards, and line of credits (LOC).
They are a critical part of the business environment because they enable corporations to increase
profitability through growth in capital.
2. Equity-Based Financial Instruments
Equity-based financial instruments are categorized as mechanisms that serve as legal

ownership of an entity. Examples include common stock, convertible debentures, preferred
stock, and transferable subscription rights.
They help businesses grow capital over a longer period of time compared to debt-based but
benefit in the fact that the owner is not responsible for paying back any sort of debt.
A business that owns an equity-based financial instrument can choose to either invest
further in the instrument or sell it whenever they deem necessary.
Unit 21- Types of Company: - Types of Companies

• Companies Limited by Shares • Companies in terms of Access to
• Companies Limited by Guarantee Capital
• Unlimited Companies • Government Companies
• One Person Companies (OPC) • Foreign Companies
• Private Companies • Charitable Companies
• Public Companies • Dormant Companies
• Holding and Subsidiary Companies • Nidhi Companies
• Associate Companies • Public Financial Institutions
We can classify all these companies in various categories.
Classification of Different Types of Companies
Type of Capital Market (Primary, Secondary or Stock Market): - Capital markets are used to sell
financial products such as equities and debt securities. ... These markets are divided into two different
categories: primary markets—where new equity stock and bond issues are sold to investors—and
secondary markets, which trade existing securities.
There is Mainly two type of Capital Market…
Primary Market
The primary market is also called “New Issue Market” where a company brings Initial Public
Offer (IPO) to get itself listed on the stock exchange for the first time. In the primary market, the
mobilisation of funds is done through right issue, private placement and prospectus. The funds
collected by the company in the IPO is used for its future expansion and growth. Primary markets
help the investors to put their savings into companies that are looking to expand their enterprises.
Secondary Market
The secondary market is a type of capital market where the securities that are already listed on the
exchange are traded. The trading done on the stock exchange and over the counter falls under the
secondary market. Examples of secondary markets in India are National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE).
After learning about the types of capital market, let us now learn about the capital market instruments
through which money is raised.
Ways of Raising Funds
• Offer through Prospectus
In the primary market, the prospectus is used to raise funds. The company invites the investors and the
general public through an advertisement known as the prospectus to subscribe to the shares of the
company. The shares or debentures are allotted to the public on the basis of subscription. If the company
receives a high subscription then allotment is done to them on pro-rata basis. The company hires
merchant bankers, brokers or underwriters to sell the shares to the public.
• Private Placement
Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give
investment opportunity to few individuals via private placement. Here the companies can offer their
shares for sale to select individuals, financial institutions, insurance companies and banks. This way they
can raise funds quickly and economically.
• Rights Issue
The structure of capital market allows the companies in need of additional funds to first approach their
current investors before looking at the other sources for finance. The right issue gives the current
investors the first opportunity to make additional investments in the company. The allotment of right
shares is done on pro-rata basis. However, if the current shareholders of the company do not want to
exercise their rights, the shares can be offered to the public.
• e-IPO
e-IPO means Electronic Initial Public Offer. e-IPO is an agreement between the stock exchange and the
company to offer its shares to the public through online mode. It is a fast and speedy process. The
company here needs to appoint registrar to the issue and brokers to accept the application received from
the public.
The above mentioned are the ways of raising funds through the capital market. Let us now learn about
the various functions of the capital market.
Functions of the Capital Market
• Helps in the movement of capital from the people who save money to the people who are in need
of it.
• Assists in the financing of long term projects of the companies.
• Encourages investors to own the range of productive assets.
• Minimizes the transaction cost.
• Helps in the faster valuation of financial securities like debentures and shares.
• Creates liquidity in the market by facilitating the trading of securities in the secondary market.
• Offers cover against price or market risks through the trading of derivative instruments.
• Helps in efficient capital allocation by way of competitive price mechanism.
• Helps in liquidity creation and regulation of funds.
The above mentioned are the functions of the capital market. The capital market performs its functions
with the help of buyers and sellers who interact and transact. The structure of the Indian capital market
is well regulated and highly organized. The capital markets may be sometimes termed risky because
they do not give fixed returns annually. But when looked from a long term perspective, their
performance has always been good and rewarding for the investors. If you want to learn more about the
capital market or put your savings in the capital market, you can contact India Nivesh Ltd.
Unit-22 Stock Exchange Companies in India (NSE, BSE)

Do you constantly hear the term Sensex, BSE, NSE, and Nifty? BSE, NSE and Nifty form the bedrock
of the Indian stock market. Here’s a guide that explains what these terms mean.
What are BSE and NSE?
BSE is short for the ‘Bombay Stock Exchange’. Founded in 1875, BSE is the first and one of the largest
securities markets based out of Bombay in India. NSE is short for the ‘National Stock Exchange’.
Founded much later than BSE in 1972, and offers a country-wide stock market similar to BSE. While
BSE is older, NSE is larger with a greater number of daily trades occurring on it and a higher turnover
rate.
What are Sensex and Nifty?
While BSE and NSE are stock markets, both Sensex and Nifty are stock market indices. A stock market
index statistically summarises the movements of the market in real-time. A stock market index is created
by selecting similar kinds of stock from a market or exchange and grouping them together. Sensex,
which stands for ‘Stock Exchange Sensitive Index’, is the stock market index for the Bombay Stock
Exchange. It calculates the movement on BSE. Nifty stands for ‘National Stock Exchange Fifty’ and is
the index for the National Stock Exchange.
Types of Stock Market Indices:
There are a variety of stock market indices in India. These are the notable ones you might have heard of
before:
Benchmark Index:
The principal metric of viewing market movements as it indicates the performance of the whole market.
It is a comparative statistical measure meaning it displays the amount earned by the average fund on the
market versus the amount it should have earned. eg: BSE Sensex, NSE Nifty (Nifty 50).
Broad Market Index:

They are benchmark indices, but tend to corroborate more stocks into the index. eg: BSE 100. BSE
Sensex aggregates the movements of 30 biggest financially sound Indian companies listed on BSE. BSE
100 does the same for the top 100 biggest companies.
Market Capitalization Index:
An index where companies’ components are measured with respect to the total market value
(capitalization) of their outstanding shares. eg: BSE Smallcap, BSE Midcap
Sectoral or Industry-based Index:
Giving benchmarks and summaries of the performance of stocks in certain industries like healthcare,
energy, industrial goods, technology, etc. CNX IT, Nifty FMCG Index.
Significance of a Stock Market Index
Stock market indices like BSE and Sensex serve to succinctly depict the condition of the market. They
help investors discover patterns in the market. The following reasons are why the stock market index is
necessary for investors:
Helps You Pick The Right Stocks:

Within a single share market, there are thousands of companies listed. It seems intimidating and tedious
to discover, among this large number, which is the right stock to invest in. Without a benchmark index, it
is difficult to differentiate between two stocks, and sorting them is near impossible. A stock market
index combats this problem by serving to differentiate between stocks. It classifies the shares of
companies based on industry type, size, financial impact, and so on.
Convenient Metric for Beginners:
Equity investing can be high risk especially for beginners who are ill-informed. While learning about the
stock market through courses, or with the help of an expert is recommended, it might prove impractical
for some people as it is a time-consuming process. At times like this, the stock market index like BSE
Sensex and NSE Nifty bridges the knowledge gap between beginners and experienced investors with a
simple depiction of trends in the market.
Reflects Sentiments of Investors:

Another major reason stock market indices are invaluable is because they summarise the daily
sentiments of investors trading on them. For example, during times of political upheaval, certain stocks
start underperforming which suggests that investors are uncertain or nervous about new reforms,
mandates and the like. Understanding the underlying sentiments shows investors whether a trend is
short-term or set to last.
Passive Investment:
Passive investment is when an investor will replicate the stocks in a high-performing index by investing
in a similar portfolio of securities. It is called passive investing because it is quicker, requires less
research, and multiple stocks in a portfolio are bought in a single click. The replica portfolio’s returns
should resemble the returns shown by the index. For instance, suppose your portfolio resembles that of
NSE Nifty. When NSE Nifty earns 7% returns, you will likely get 7% in returns from your portfolio as well.
Uni-23-Regulatory Authorities (SEBI, RBI)
List of Regulatory Bodies in Indian Financial System: The regulators in the Indian Financial Market
ensure that the market participants behave in a responsible manner so that the financial system continues
to work as an important source of ﬁnance and credit for corporate, government, and the public at large.
They take action against any misconduct and ensure that the interests of investors and consumers are
protected.
The objective of all regulators is to maintain fairness and competition in the market and provide the
necessary regulations and infrastructure. In this article, we’ll discuss the various Regulatory Bodies in
Indian Financial System cover.
Regulatory Bodies in Indian Financial System
Briefs about various regulators who regulate and contribute towards the development of the financial
market are as given below:
Table of Contents
• 1. Securities and Exchange Board of India (SEBI)

• 2. Reserve Bank of India (RBI)
• 3. Insurance Regulatory and Development Authority of India (IRDAI)
• 4. Pension Funds Regulatory and Development Authority (PFRDA)
• 5. Association of Mutual Funds in India (AMFI)
• 6. Ministry of Corporate Affairs (MCA)
1. Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is a statutory body established under the SEBI act
of 1992, as a response to prevent malpractices in the capital markets that were negatively impacting
people’s confidence in the market. Its primary objective is to protect the interest of the investors,
preventing malpractices, and ensuring the proper and fair functioning of the markets. SEBI has many
functions, they can be categorized as:
1. Protective functions: To protect the interests of the investors and other market participants. It includes
– preventing insider trading, spreading investor education and awareness, checking for price rigging, etc.
2. Regulatory functions: These are performed to ensure the proper functioning of various activities in the
markets. It includes – formulating and implementing code of conduct and guidelines for all types of
market participants, conducting an audit of the exchanges, registration of intermediaries like brokers,
investment bankers, levying fees, and fines against misconduct.
3. Development functions: These are performed to promote the growth and development of the capital
markets. It includes – Imparting training to various intermediaries, conducting research, promoting self-
regulation of organizations, facilitating innovation, etc.
To perform its functions and achieve its objectives, SEBI has the following powers:
1. To change laws relating to the functioning of the stock exchange

2. To access record and financial statements of the exchanges
3. To conduct hearing and give judgments on cases of malpractices in the markets.
4. To approve the listing and force delisting of companies from any exchanges.
5. To take disciplinary actions like fines and penalties against participants who involve in malpractice.
6. To regulate various intermediaries and middlemen like brokers.
2. Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is India’s central bank and was established under the Reserve Bank of
India act in 1935. The primary purpose of RBI is to conduct the monetary policy and regulate and
supervise the financial sector, most importantly the commercial banks and the non-banking financial
companies. It is responsible to maintain price stability and the flow of credit to different sectors of the
economy.
Some of the main functions of RBI are:
1. It issues the license for opening banks and authorizes bank branches.
2. It formulates, implements, and reviews the prudential norms like the Basel framework.
3. It maintains and regulates the reserves of the banking sector by stipulating reserve requirement ratios.
4. It inspects the financial accounts of the banks and keeps a track of the overall stress in the banking
sector.
5. It oversees the liquidation, amalgamation or reconstruction on financial companies.
6. It regulates the payment and settlements systems and infrastructure.
7. It prints, issues and circulates the currency throughout the country.
The RBI is the banker to the government and manages its debt issuances, it is also responsible to
maintain orderly conditions in the government securities markets (G-Sec). RBI manages the foreign
exchange under the Foreign Exchange Management Act, 1999. It intervenes in the FX markets to
stabilize volatility that facilitates international payments and trade, and development of the foreign
exchange market in India.
The RBI also regulates and controls interest rates and liquidity in the money markets which have a
profound impact on the functioning of other financial markets and the real economy.
3. Insurance Regulatory and Development Authority of India (IRDAI)
The Insurance Regulatory and Development Authority of India (IRDAI) is an independent statutory
body that was set up under the IRDA Act,1999. Its purpose is to protect the interests of the insurance
policyholders and to develop and regulates the insurance industry. It issues advisories regularly to
insurance companies regarding the changes in rules and regulations.
It promotes the insurance industry but also controls the various charges and rates related to insurance.
As pf 2020, there are about 31 general insurance and 24 life insurance companies in India, who are
registered with IRDA.
The three main objectives of IRDA are:
1. To ensure fair treatment and protect the interests of the policyholder.

2. To regulate the insurance companies and ensuring the industry’s financial soundness.
3. To formulate standards and regulations so that there is no ambiguity.
Some important functions of IRDA are:
1. Granting, renewing, cancelling or modifying the registration of insurance companies.

2. Levying charges and fees as per the IRDA act.
3. Conducting investigation, inspection, audit, etc. of insurance companies and other organizations in the
insurance industry.
4. Specifying the code of conduct and providing qualifications and training to intermediaries, insurance
agents etc.
5. Regulating and controlling the insurance premium rates, terms and conditions and other benefits
offered by insurers.
6. Provides a grievance redressal forum and protecting interests of the policyholder.
4. Pension Funds Regulatory and Development Authority (PFRDA)
The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body, which was
established under the PFRDA act, 2013. It is the sole regulator of the pension industry in India. Initially,
PFRDA covered only for employees in the government sector but later, its services were extended to all
citizens of India including NRI’s. Its major objectives are – to provide income security to the old aged
by regulating and developing pension funds and to protect the interest of subscribers to pension
schemes.
The National Pension System (NPS) of the government is managed by the PFRDA. It is also responsible
for regulating custodians and trustee banks. The Central Record Keeping Agency (CRA’s) of the
PFRDA performs record keeping, accounting and provides administration and customer services to
subscribers of the pension fund.
Some functions of PFRDA are:
1. Conducting enquiries and investigations on intermediaries and other particpants.

2. Increasing public awareness and training intermediaries about retirement savings, pension schemes etc.
3. Settlements of disputes between intermediaries and subscribers of pension funds.
4. Registering and regulating intermediaries.
5. Protecting the interest of pension fund users.
6. Stipulating guidelines for investment of pension funds.
7. Formulating code of conduct, standards of practice, terms and norms for the pension industry.
5. Association of Mutual Funds in India (AMFI)
The Association of Mutual Funds in India (AMFI) was set up in 1995. It is a non-profit organization that
is self-regulatory and works for the development of mutual fund industry by improving professional and
ethical standards, thus aiming to make the mutual funds more accessible and transparent to the public. It
provides spreads awareness vital information about mutual funds to Indian investors.
AMFI ensures smooth functioning of the mutual fund industry by implementing high ethical standard
and protects the interests of both – the fund houses and investors. Most asset management companies,
brokers, fund houses, intermediaries etc in India are members of the AMFI. Registered AMC’s are
required to follow the code of ethics set by the AMFI. These code of ethics are – integrity, due diligence,
disclosures, professional selling and investment practice.
The AMFI updates the Net Asset Value of funds on a daily basis on its website for investors and
potential investors. It has also streamlined the process of searching mutual fund distributors.
6. Ministry of Corporate Affairs (MCA)
The Ministry of Corporate Affairs (MCA) is a ministry within the government of India. It regulates the
corporate sector and is primarily concerned with the administration of the Companies Act, 1956, 2013
and other legislations. It frames the rules and regulations to ensure the functioning of the corporate
sector according to the law.
The objective of MCA is to protect the interest of all stakeholders, maintain a competitive and fair
environment and facilitating the growth and development of companies. The Registrar of Companies
(MCA), is a body under the MCA that has the authority to register companies and ensure their
functioning as per the provisions of the law. The issuance of securities by the companies also comes
under the purview of the Companies Act.
Unit 24-Difference Between Capital & Money Market

Key Differences
• Short-term securities are traded in money markets whereas long-term securities are traded in capital
markets
• Capital markets are well organized whereas money markets are not that organized
• Liquidity is high in the money market whereas liquidity is comparatively low in capital markets
• Due to high liquidity and low duration of maturity in money markets, Instruments in money markets are
a low risk whereas capital markets are the comparatively high risk
• A central bank, commercial banks and non-financial institutions are majorly work in money markets
whereas stock exchanges, commercial banks, and non-banking institutions work in capital markets
• Money markets are required to fulfill the capital needs in the short-term especially the working capital
requirements and capital markets are required to provide long-term financing and a fixed capital for
purchasing land, property, machinery, building, etc.
• Money markets provide liquidity in the economy where capital markets stabilize the economy due to
long-term financing and mobilization of savings
• Capital markets generally give higher returns whereas money markets give a low return on investments
Comparative Table
Basis for Comparison Money Market Capital Market
It is the part of financial market where Capital market is part of the financial market
Definition lending and borrowing takes place for where lending and borrowing takes place for
short-term up to one year the medium-term and long-term
Money markets generally deal

Types of instruments in promissory notes, bills of exchange, Capital market deals in equity shares,
involved commercial paper, T bills, call money, debentures, bonds, preference shares, etc.
etc.
The money market contains financial

Institutions It involves stockbrokers, mutual funds,
banks, the central bank, commercial
involved/types of underwriters, individual investors, commercial
banks, financial companies, chit funds,
investors banks, stock exchanges, Insurance Companies
etc.
Nature of Market Money markets are informal Capital markets are more formal
Liquidity of the
Money markets are liquid Capital Markets are comparatively less liquid
market
The maturity of capital markets instruments is

The maturity of financial instruments is
Maturity period longer and they do not have stipulated time
generally up to 1 year
frame
Since the market is liquid and the

Due to less liquid nature and long maturity, the
Risk factor maturity is less than one year, Risk
risk is comparatively high
involved is low
The market fulfills the short-term credit The capital market fulfills the long-term credit
Purpose
needs of the business needs of the business
The money markets increase the The capital market stabilizes the economy due
Functional merit
liquidity of funds in the economy to long-term savings
Return on The return in money markets are The returns in capital markets are high because
investment usually low of higher duration
Participants in the Money Market: -
Reserve Bank of India through the Liquidity Adjustment Facility (LAF) and Open Market Operations
(OMOs) in Treasury Bills and Government Securities manages the money supply and liquidity in the
economy. The rates of interest in the money market are deregulated. The market rates are exclusively
determined by the forces of demand and supply.
Participants in the Money Market:
Theoretically any one can participate in the market. Yet market practices and regulatory
pronouncements have placed certain restrictions on participation for each of the sub-markets in the
money market. For example, call money market is open to only banks. Financial Institutions, Insurance
companies and Mutual funds can only lend in the market.
It would therefore be useful to know the participants in each of the sub-markets of money market. Given
below is the list and profile of the participants which participate both in the Money Market as well as the
debt portion of the Capital Market. While all resident entities are participants in these markets, this
section covers the larger and major participants.
1. Central Government:
ADVERTISEMENTS:
The Central Government is an issuer of Government of India Securities (G-Secs) and Treasury Bills (T-
bills). These instruments are issued to finance the government as well as for managing the Government’s
cash flow. G-Secs are dated (dated securities are those which have specific maturity and coupon
payment dates embedded into the terms of issue) debt obligations of the Central Government.
These bonds are issued by the RBI, on behalf of the Government, so as to finance the latter’s budget
requirements, deficits and public sector development programmes. These bonds are issued throughout
the financial year. The calendar of issuance of G-Secs is decided at the beginning of every half of the
financial year.
T-bills are short-term debt obligations of the Central Government. These are discounted instruments.
These may form part of the budgetary borrowing or be issued for managing the Government’s cash
flow. T-bills allow the government to manage its cash position since revenue collections are bunched
whereas revenue expenditures are dispersed.
2. State Government:
The State Governments issue securities termed as State Development Loans (SDLs), which are medium
to long-term maturity bonds floated to enable State Governments to fund their budget deficits.
3. Public Sector Undertakings:
Public Sector Undertakings (PSUs) issue bonds which are medium to long-term coupon bearing debt
securities. PSU Bonds can be of two types: taxable and tax-free bonds. These bonds are issued to
finance the working capital requirements and long-term projects of public sector undertakings. PSUs can
also issue Commercial Paper to finance their working capital requirements.
Like any other business organization, PSUs generate large cash surpluses. Such PSUs are active
investors in instruments like Fixed Deposits, Certificates of Deposits and Treasury Bills. Some of the
PSUs with long-term cash surpluses are also active investors in G-Secs and bonds.
4. Scheduled Commercial Banks (SCBs):
Banks issue Certificate of Deposit (CDs) which are unsecured, negotiable instruments. These are usually
issued at a discount to face value. They are issued in periods when bank deposits volumes are low and
banks perceive that they can get funds at low interest rates. Their period of issue ranges from 7 days to 1
year.
SCBs also participate in the overnight (call) and term markets. They can participate both as lenders and
borrowers in the call and term markets. These banks use these funds in their day-to-day and short-term
liquidity management. Call money is an important tool to manage CRR commitments.
Banks invest in Government securities to maintain their Statutory Liquidity Ratio (SLR), as well as to
invest their surplus funds. Therefore, banks have both mandated and surplus investments in G-Sec
instruments. Currently banks have been mandated to hold 25% of their Net Demand and Time Liabilities
(NDTL) as SLR. A bulk of the SLR is met by investments in Government and other approved securities.
Banks participate in PSU bond market as investors of surplus funds. Banks also take a trading position
in the G-Sec and PSU Bond market to take advantage of rate volatility.
Banks also participate in the foreign exchange market and derivative market. These two markets may be
accessed both for covering the merchant transactions or for risk management purposes. Banks account
for the largest share of these markets.
5. Private Sector Companies:
Private Sector Companies issue commercial papers (CPs) and corporate debentures. CPs are short-term,
negotiable, discounted debt instruments. They are issued in the form of unsecured promissory notes.
They are issued when corporations want to raise their short-term capital directly from the market instead
of borrowing from banks.
Corporate debentures are coupon bearing, medium to long term instruments which are issued by
corporations when they want to access loans to finance projects and working capital requirements.
Corporate debentures can be issued as fully or partly convertible into shares of the issuing corporation.
Bonds which do not have convertibility clause are known as non-convertible bonds. These bonds can be
issued with fixed or floating interest rates. Depending on the stipulated availability of security these
bonds could be classified as secured or unsecured.
Private Sector Companies with cash surpluses are active investors in instruments like Fixed Deposits,
Certificates of Deposit and Treasury Bills. Some of these companies with active treasuries are also
active participants in the G-Sec and other debt markets.
6. Provident Funds:
Provident funds have short term and long term surplus funds. They invest their funds in debt instruments
according to their internal guidelines as to how much they can invest in each instrument category.
The instruments that Provident funds can invest in are:
(i) G-Secs,
(ii) State Development Loans,
(iii) Bonds guaranteed by the Central or State Governments,
(iv)Bonds or obligations of PSUs, SCBs and Financial Institutions (FIs), and
(v) Bonds issued by Private Sector Companies carrying an acceptable level of rating by at least two
rating agencies.
7. General Insurance Companies:
General insurance companies (GICs) have to maintain certain funds which have to be invested in
approved investments. They participate in the G-Sec, Bond and short term money market as lenders. It is
seen that generally they do not access funds from these markets.
8. Life Insurance Companies:
Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short term money markets. They
have certain pre-determined thresholds as to how much they can invest in each category of instruments.
9. Mutual Funds:
Mutual funds invest their funds in money market and debt instruments. The proportion of the funds
which they can invest in any one instrument vary according to the approved investment pattern declared
in each scheme.
10. Non-banking Finance Companies:
Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to fulfill certain
regulatory mandates as well as to park their surplus funds. NBFCs are required to invest 15% of their net
worth in bonds which fulfill the SLR requirement.
11. Primary Dealers (PDs):
The organization of Primary Dealers was conceived and permitted by the Reserve Bank of India (RBI)
in 1995. These are institutional entities registered with the RBI.
The roles of a PD are:
1. To commit participation as Principals in Government of India issues through bidding in auctions.
2. To provide underwriting services and ensure development of underwriting and market- making
capabilities for government securities outside the RBI.
3. To offer firm buy – sell/bid ask quotes for T-Bills & dated securities and to improve secondary
market trading system, which would contribute to price discovery, enhance liquidity and turnover and
encourage voluntary holding of government securities amongst a wider investor base.
4. To strengthen the infrastructure in the government securities market in order to make it vibrant, liquid
and broad based.
Unit-25 Computerized Accounting Software (Tally Prime/Busy win)

Introduction to tally software: -
Tally. ERP 9 has been developed by Tally. ERP 9 Solutions Pvt. Ltd., a Bangalore-based Company in India. It’s a
very user- friendly and popular Accounting Software that runs on MS Windows and also Computes for Indian
VAT, TDS and Service Tax. It can even maintain your accounts and Inventory simultaneously. A few key features
of Tally. ERP 9 are listed below...
Codeless Accounting System: Normally for other Accounting Software’s, a certain code is used for
identifying any particular ledger, for example, Ledger Code B2081indecates “Printing & Stationary”.
Unlimited Accounting Period: It means you can maintain the records for more than one Financial
Accounting Period, for example, you can maintain the record for the financial Year (F.Y.) 05-06 and 06-
07 for the same company.
Simultaneous Operation of multiple companies: It means you can update the data record for more than
one Company simultaneously, for example: at the same you can update the data for all of your
companies in the same group.
Accounting for the Complete Group of Companies: You can prepare a consolidated balance sheet for all
the members of your group companies.
Top-Level security for each company: You can create different levels of users and restrict their activities
by assigning them rights, for example, you can create a user for data entry, who can only enter the
transaction, but cannot view the report
Facilities with Tally. ERP 9
➢ Data Import and Export Facility: You can import or export any particular data from one
Company to another Company.
➢ Audit Facility: Using this facility you can check the recorded voucher and make modifications as
per requirement.
➢ Budgeting: Allows you to analyze the variance (difference between actual and Standard) for
expenses, income, etc.
➢ Scenario Management: Can be used for projected Profit and Loss A/c and Balance Sheet.
Bank Reconciliation Statement
Price List, Ageing Analysis for Stock Item: Rate of Product can be defined with its quantity.
Cost Center and Cost Category-wise Account Analysis: These features are very useful for Unit –wise
analysis, for Example: You may want to analyze employee-wise cost, Brach-wise Cost etc.
Usefulness in Manufacturing Business: Useful for calculation of Cost of Goods Sold.
Ratio Analysis, Cash Flow, Funds Flow
E-capabilities
➢ Foreign Currency: Useful for calculation of foreign gain and loss using foreign currency.
➢ Defining the Bill / Voucher Entry Setup.
➢ Columnar Reporting related to Stock and Accounts.
➢ Adherence of Purchase and Sales procedure such as Order, Challan, Bill.
➢ Credit Control: Credit Control is possible for a Customer.
➢ Tracking through Receipt / Delivery Notes.
➢ Profitability Analysis of Stock.
Accounts for...
(a) Indian VAT

(b) TDS
(c) E-TDS
(d) Service Tax
(e) GST
Application Areas of Tally. ERP 9

Due to these unique Features and Multifarious facilities, Tally. ERP 9 is widely used by different kinds
of Business Companies and other Organizations for maintaining the Accounts of...
Company Insurance Agents

Individual Restaurant
Charitable Trust School
Trader Institutions
Manufacturer Tutorials
Enterprise Advocate
Partnership Firm Builders
Shop Chartered Accountants
Transport Chit Funds
Service Industries Doctors
Nursing Home Petrol Pump
Departmental Stores Pharmaceuticals
Whole-Seller
➢ Advantages of Computerized Accounting over Manual Book-keeping

➢ Manual Book-keeping has to bother for all the following steps:
➢ Creating Ledger and carrying forward their closing balances.
➢ Recording Cash Transactions in a Cash-Book and Bank Transactions in a Bank Book.
➢ Recoding other Non-Cash Transactions in a Journal Book.
➢ After recording you have to calculate the balances of the Ledgers.
➢ Preparing Trial Balance to prepare Final Accounts.
➢ Deriving Nominal Account from the Trial Balance in the Profit and Loss Account.
➢ Posting Real & Personal Accounts in the Balance Sheet.
➢ concentrate only on recording the transactions. Tally. ERP 9 automatically generates
Registers and Statements of Accounts • General Ledger • Outstanding Management, Ables and
Accounts Payables • Flexible Voucher Numbering • Flexible Classification of all Down Display • Date
based reporting • Voucher and Cheque printing • Columnar
Financial Management
Multiple Financial Years • Comparison of Data using Multi-Columnar Reporting • Rs • User defined
Vouchers Types • sales and Purchase Extracts • Cash Flows • Daily set Calculations • Percentage based
Reporting
Advanced Financial Management
Payment performances of Debtors) • Branch Accounting • Flexible Period Accounting • ting and Control
• Cost Centre & Profit Centers, with Multiple Cost categories •
Variance Analysis • Ratio Analysis • Scenario Management, including reversing Journals and optional
Vouchers
Why Tally. ERP 9 is the best for simple Inventory/Stock Management
Flexible Invoicing • Purchase Invoices • Discount Column in Invoicing • Flexible Units of Measure –
including Compound Units • Grouping and Categorization of Stock Items • Voucher Classes – with
predefined rules & information • Physical Stock Verification • Separate Actual and Billed Quantity
Columns • Consumption report • Use Names and /or Part Numbers
Why Tally. ERP 9 is the best for basic Inventory/Stock Management
Stock Categories • Stock Query – by Stock Group or Stock Category • Multiple God owns • Stock
Transfers to God owns / Branches • Multiple Stock valuation Methods • Batch wise / Lot wise –
including Expiry date handling • Alternate Units of Measure & Tail Units • Sales and Purchase Order
Processing • Tracking through Receipt Notes / Delivery Notes / Rejections Inward / Rejections Outward
• Additional Costs incurred on Purchase • Movement Analysis – Stock Group wise / Stock Item wise /
Invoice wise / Location wise • Customizable Sales invoices • Price List with Multi Price levels
Why Tally. ERP 9 is the best for Advanced Inventory/Stock Management
Stock items Classification as Raw Materials, Work-in-progress, finished goods • Bill of Material, with
auto adjustment of stocks • Job-working concepts – including subcontracting • Additional cost of
Manufacturing with notional value and percentage • Excise / VAT analysis on invoices • MoD vat
Support • Reorder levels • Stock Ageing Analysis • Batch related stock reports
The technology advantage of Tally. ERP 9
Data Reliability • Data Security • Tally. ERP 9 Audit • Tally. ERP 9Vault • User defined Security
Levels • Simple & Rapid Installation • Unlimited Multi-user Support • Internal Backup / Restore •
Removal of Data into Separate Company • Multi- Directory for Company Management • Import /
Export of Data • Graphical Analysis of Data • ODBC compliance allows other programs to use data
from Tally. ERP 9 directly e.g., MS-Excel • Web-enabled • Ability to publish reports and documents on
the Internet • Direct Internet Access • Print Preview
Tally.ERP 9 is one of the most popular accounting software used in India. It is complete enterprise
software for small & medium enterprises.
Tally.ERP 9 is a perfect business management solution and GST software with an ideal combination of
function, control, and in-built customizability.
Features of Tally Erp9/Prime

1. Stock Categories 14. Drill Down Display Purchase
2. Books, Registers and Statement of 15. Data Base Reporting
Accounts 16. Movement/ Profitability Analysis
3. Multiple God owns 17. Columnar Reports Party-wise, Item-
4. Stock Transfer to God owns & Wise, Stock
5. General Ledger Branches 18. Bank Reconciliation Group-Wise.
6. Accounts Receivable & Accounts 19. Multiple Companies
7. Batch-wise, Lot-wise, including 20. Sales & Purchase Order Processing
Payable 21. Multiple Financial Years
8. Expiry Date 22. Memo Vouchers
9. Flexible Voucher Numbering 23. GST (Goods and Service Tax)
10. Alternate Units of Measure and 24. Post-dated Vouchers
11. Flexible Classification of Tail Units 25. Using Tally.ERP9
12. Accounts Heads. 26. User-defined Voucher types
13. Additional Costs incurred on 27. Stock Ageing Analysis
28. Cash Flow Statement with notional value and percentage.
29. Additional Cost of Manufacturing 30. Batch related Stock Report
Principles of Taxation
Unit 1-History & Background of income Tax in India: -
In India, the system of direct taxation as it is known today has been in force in one form or another even
from ancient times. In this article, we are discussing how the Income Tax evolved over the time in India.
1860- The Tax was introduced for the first time by Sir James Wilson. India’s First “Union Budget”
Introduced by Pre-independence finance minister, James Wilson on 7 April, 1860. The Indian Income Tax
Act of 1860 was enforced to meet the losses sustained by the government on account of the military mutiny
of 1857. Income was divided into four schedules taxed separately:
(1) Income from landed property;
(2) Income from professions and trades;
(3) Income from Securities;
(4) Income from Salaries and pensions.
Time to time this act was replaced by several license taxes.
1886- Separate Income tax act was passed. This act remained in force up to, with
various amendments from time to time. Under the Indian Income Tax Act of 1886, income was divided
into four schedules taxed separately:
(1) Salaries, pensions or gratuities;
(2) Net profits of companies;
(3) Interests on the securities of the Government of India;
(4) Other sources of income.
1918- A new income tax was passed. The Indian Income Tax Act of 1918 repealed the Indian Income Tax
Act of 1886 and introduced several important changes.
1922- Again it was replaced by another new act which was passed in 1922. The organizational history of
the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for the first time, a
specific nomenclature to various Income-tax authorities. The Income Tax Act of 1922 remained in force
until the year 1961.
The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The
Government of India therefore referred it to the law commission in1956 with a view to simplify and
prevent the evasion of tax
1961– In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income
Tax Act 1961 has been brought into force with 1 April 1962.It applies to the whole of India (including
Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the
Union Budget every year which also contains Finance Bill. After it is passed by both the houses of
Parliament and receives the assent of the President of India, it becomes the Finance act.
At present, there are five heads of Income:
(1) Income from Salary;
(2) Income from House Property;
(3) Income from Profits and Gains of Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources.
There are XXIII Chapters, 298 Sections and Fourteen Schedules in the Income Tax Act.
Unit 26 Different Terms in Taxation

Glossary of Common Tax Terms
1. Adjusted gross income. Gross income minus allowable reductions.

2. Adjustment to income. An expense that can be deducted even if the taxpayer does not itemize
deductions.
3. Adoption credit. A nonrefundable credit for qualified adoption expenses.
4. Advance earned income credit. Prepayments of the earned income credit by an employer to an
employee.
5. Audit. When the IRS examines and verifies your return or any other transaction with tax
consequences.
6. Casualty loss. A loss caused by the complete or partial destruction of property that results from an
unexpected event, i.e., floods, storms, fires, etc.
7. Charitable contribution. Money or property donated to a qualified charity.
8. Child and dependent care credit. A tax credit in the amount of a percentage of the amount
expended on child or dependent care by an employed individual.
9. Child tax credit. A tax credit available to people with children under the age of seventeen.
10. Compensation. Wages, commissions, tips, fees, or self-employment income from services rendered.
11. Credits. Reductions of tax liability allowed by Congress for various purposes.
12. Deduction. A subtraction from taxable income.
13. Dependent. A person who meets the five tests of dependency and thereby qualifies to be claimed as
a dependent for tax purposes.
14. Depreciation. Deduction for the wear and tear of an item used for business.
15. Earned income. Income derived from personal services - wages, tips, bonuses, and any other type
of compensation.
16. Earned income credit. A tax credit allowed to employed individuals whose income and modified
gross income is less than a certain amount.
17. Employment expenses. Ordinary and necessary expenses necessary to perform the duties for which
an employee was hired.
18. Entertainment expenses. Employment expenses that have an element of entertainment that is
directly related to conducting business.
19. Estimated tax. What the taxpayer expects to owe in taxes over the course of the year, generally paid
quarterly with vouchers.
20. Exemption. A reduction of income that would otherwise be taxed.
27. Foster child. A child other than a natural or adopted child who lived with the taxpayer for the entire
year and whom the taxpayer treated as his or her own child.
28. Head of the household. A filing status used by an unmarried taxpayer who pays over half of the
cost of maintaining the home of a qualified individual.
29. Hobby loss. A nondeductible loss from a hobby.
30. Home office expense. Expenses arising from operating a business in a qualified manner in your
home.
31. Internal Revenue Service. The Treasury Department division responsible for collecting taxes.
32. Itemized deductions. Expenditures that the tax code deems appropriate for reducing adjusted gross
income.
33. Married filing jointly. A filing status used by a couple that is married at the end of the tax year and
uses one tax return.
34. Married filing separately. The filing status used by a couple that is married at the end of the year
and chooses to file separate tax returns.
35. Modified adjusted gross income. There are different definitions for different purposes. It is usually
the adjusted gross income with various items added back in.
36. Nontaxable income. Income that is not taxed.
37. Permanent and total disability. A disability that is expected to last at least a year and keeps an
individual from any gainful activity.
38. Proprietorship. A business that is owned and controlled by one person.
39. Qualifying widow(er). The filing status used by a qualified person for the two years following a
spouse's death.
40. Schedules. IRS forms that are used to report various kinds of income, deductions, and credits.
41. Self-employed. A person who individually decides when and where to work and pays his or her own
expenses. Self-employed individuals must pay self-employment taxes.
42. Standard deduction. A predetermined amount of income that is not subject to taxes and is claimed
when an individual does not itemize deductions.
43. Taxable income. Adjusted gross income minus deductions and exemptions.
44. Unearned income. Income that is not derived from services performed, such as interest, dividends,
and royalties.
45. Worksheet. An IRS document that is provided to the taxpayer to compile information and is not
usually filed with the return.
Direct & Indirect Taxes: - What is Taxation?
The Central and State government plays a significant role in determining the taxes in India. To
streamline the process of taxation and ensure transparency in the country, the state and central
governments have undertaken various policy reforms over the last few years. One such change was the
Goods and Services Tax (GST) which eased the tax regime on the sale and deliverance of goods and
services in the country.
A detailed breakdown of the procedure for filing the tax
The tax structure in India can be classified into two main categories:
• Direct Tax
• Indirect Tax
Direct Tax: It is defined as the tax imposed directly on a taxpayer and is required to be paid to the
government. Also, an individual cannot pass or assign another person to pay the taxes on his behalf.
Some of the direct taxes imposed on an Indian taxpayer are:

1. Income tax- it is the tax applicable on the income earned by an individual or taxpayer.
2. Corporate tax- this is the tax applicable on the profits earned by companies from their businesses.
Indirect Tax: It is defined as the tax levied not on the income, profit or revenue but the goods and
services rendered by the taxpayer. Unlike direct taxes, indirect taxes can be shifted from one individual
to another. Earlier, the list of indirect taxes imposed on taxpayers included service tax, sales tax, value
added tax (VAT), central excise duty and customs duty.
However, with the implementation of goods and services tax (GST) regime from 01 July 2017, it has
replaced all forms of indirect tax imposed on goods and services by the state and central governments.
GST has not only been reduced the physical interface but also lower the cost of compliance with the
unification of the indirect taxes.
Direct Tax
Direct taxes are levied on individuals and companies by the country's supreme tax body.
➢ Education Cess
➢ Ta, Travelling Allowance Tin,
➢ Taxpayer Identification Number
➢ Ecc, Excise Control Code
➢ Tdr, Tax Deduction And Collection Account Number
Indirect Tax
Indirect tax is defined as the tax imposed by the government on a taxpayer for goods and services
rendered.
➢ Cascading Effect
➢ Supply Under GST
➢ GST Refunds
➢ Provisional Assessment
➢ CST, Central Sales Tax
Income Tax -Income tax is one of the most significant forms of revenues for the government.
Unit-27-Income Tax Act 1961

Income Tax in India : Basics, slabs and E-filing Process 2021
Budget 2020 update:
The income tax department had introduced an optional ‘New Tax Regime’ which offers concessional tax rates,
however the taxpayer choosing this new regime above the old one will have to forgo most of the deductions and
exemptions allowed under the ‘old/existing tax regime’
Budget 2021 update : A new section 194P is inserted which provides conditional exemption for ITR filing for
senior citizens above 75 years of age with pension and interest income only.
In this article We Will Know…
1. Income Tax Basics in India

2. Types of taxpayers
3. Types of Income / Heads of Income
4. Income tax slab regime
a. Income tax slabs under old tax regime
b. Income tax slabs under new tax regime
5. Exception to tax slabs
Income Tax Basics in India
Income tax is a type of tax that the central government charges on the income earned during a financial
year by the individuals and businesses. Taxes are sources of revenue for the government. Government
utilizes this revenue for developing infrastructure, providing healthcare, Education, subsidy to the
farmer/ agriculture sector and in other government welfare schemes. Taxes are mainly of two types,
direct taxes and indirect form of taxes. Tax levied directly on the income earned is called as direct tax,
for example Income tax is a direct tax. The tax calculation is based on the income slab rates applicable
during that financial year.
Types of Income Tax payers
he Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for
different types of taxpayers.
Taxpayers are categorized as below:
• Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)
• Firms
• Companies
Further, Individuals are broadly classified into residents and non-residents. Resident individuals are
liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those
who qualify as Non-residents need to pay taxes only on income earned or accrued in India. The
residential status has to be determined separately for tax purposes for every financial year on the basis of
the individual tenor of stay in India. Resident Individuals are further classified into below mentioned
categories for tax purposes-
• Individuals less than 60 years of age

• Individuals aged more than 60 but less than 80 years
• Individuals aged more than 80 years
Types of Income / Heads of Income
Everyone who earns or gets an income in India is subject to income tax. (Yes, be it a resident or a non-
resident of India ).For simpler classification, the Income tax department breaks down income into five
main heads:
Head of Income Nature of Income covered
Income from Income from savings bank account interest, fixed deposits, winning in lotteries is taxable
Other Sources under this head.
Income from
Income earned from renting a house property is taxable under this head of income.
House Property
Income from Surplus Income from sale of a capital asset such as mutual funds, shares, house property
Capital Gains etc is taxable under this head of Income.
Income from Profits earned by self employed individuals, businesses , freelancers or contractors &
Business and income earned by professionals like life insurance agents, chartered accountants, doctors
Profession and lawyers who have their own practice, tuition teachers are taxable under this head.
Income from
Income earned from salary and pension is taxable under this head of income
Salary
Taxpayers and income tax slabs
Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian
companies have a fixed rate of tax calculated on their tax profits, the individual, HUF, AOP and BOI
taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks
called tax brackets or tax slabs. And each tax slab has a different tax rate. Rate at which income is
charged to tax increases with increase in income. Budget 2020 introduced a ‘New tax regime’ for the
Individuals and HUF taxpayers :
What is the Existing / Old tax regime?
The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate and 30% for
different brackets of income. The individuals have been given the option to continue with this Old tax
regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House Rent
Allowance (HRA), and certain other allowances. Additionally, deductions for tax saving investments as
per section 80C (LIC, PPF ,NPS etc) to 80U can be claimed. Standard deduction of Rs 50,000,
deduction for interest paid on home loan.
Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:
Income Range Tax rate Tax to be paid
Up to Rs.2,50,000 0 No tax
Between Rs 2.5 lakhs and Rs 5 lakhs 5% 5% of your taxable income
Between Rs 5 lakhs and Rs 10 lakhs 20% Rs 12,500+ 20% of income above Rs 5 lakhs
Above 10 lakhs 30% Rs 1,12,500+ 30% of income above Rs 10 lakhs
There are two other tax slabs for two other age groups: those who are 60 and older and those who are
above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be
paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the
progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs
for previous years and other age brackets.
Income Tax Slabs under new tax regime
From the FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and
zero deductions/exemptions. Individuals and HUF have the option to choose the new regime or continue
with the old regime. The new tax regime is optional and the choice should be made at the time of filing
the ITR. If the old regime is continued than all the deductions/exemptions as available can be availed by
the taxpayer. The income tax slabs under the new tax regime are:
New regime slab rates Existing regime slab rates
Income from Rs 2.5 lakh to Rs 5 lakh 5% Income from Rs 2.5 lakh to Rs 5 lakh 5%
Income from Rs 5 lakh to Rs 7.5 lakh 10% Income from Rs 5 lakh to Rs 10 lakh 20%
Income from Rs 7.5 lakh to Rs 10 lakh 15% Income above Rs 10 lakh 30%
Income from Rs 10 lakh to Rs 12.5 lakh 20%
Income from Rs 12.5 lakh to Rs 15 lakh 25%
Income above Rs 15 lakh 30%
Most of the deductions like deductions and exemptions are not allowed if the taxpayers opts for the New
Tax regime. However he exemptions and deductions available under the new regime are:
• Transport allowances in case of a specially-abled person.

• Conveyance allowance received to meet the conveyance expenditure incurred as part of the
employment.
• Any compensation received to meet the cost of travel on tour or transfer.
• Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of
absence from his regular place of duty.
Exceptions to the Tax Slab
One must bear in mind that not all income can be taxed on slab basis. Capital gains income is an
exception to this rule. Capital gains are taxed depending on the asset you own and how long you’ve had
it. The holding period would determine if an asset is long term or short term. The holding period to
determine nature of asset also differs for different assets. A quick glance of holding periods, nature of
asset and the rate of tax for each of them is given below.
Type of capital
Holding period Tax rate
asset
House Holding more than 24 months – Long Term

20% Depends on slab rate
Property Holding less than 24 months – Short Term
Debt mutual Holding more than 36 months – Long Term

20% Depends on slab rate
funds Holding less than 36 months – Short Term
Equity mutual Holding more than 12 months – Long Term Exempt (until 31 March 2018) Gains > Rs
funds Holding less than 12 months – Short Term 1 lakh taxable @ 10% 15%
Shares (STT Holding more than 12 months – Long Term Exempt (until 31 March 2018)Gains > Rs
paid) Holding less than 12 months – Short Term 1 lakh taxable @ 10% 15%
Shares (STT Holding more than 12 months – Long Term

20% As per Slab Rates
unpaid) Holding less than 12 months – Short Term
Holding more than 36 months – Long Term

FMPs 20% Depends on slab rate
Holding less than 36 months – Short Term
Residents and non-residents:
Levy of income tax in India is dependent on the residential status of a taxpayer. Individuals who qualify
as a resident in India must pay tax on their global income in India i.e. income earned in India and
abroad. Whereas, those who qualify as Non-residents need to pay taxes only on their Indian income. The
residential status has to be determined separately for every financial year for which income and taxes are
computed.
Unit-28 Exemption Income Under Income Tax Act

Income Exempt from Tax as Per Section 10
Most income that is exempted from tax is listed under Section 10 of the Income Tax Act. This section
contains a list of income that is deemed or considered to be free from taxation.
Exempted income specified under Section 10 is as follows:
Section 10(1) Income earned through agricultural means
Section 10(2) Any amount received by an individual through a coparcener from an HUF
Section 10(2A) Income received by partners of a firm, as shared between them
Section 10(4)(i) Any interest that has been paid to a person who is not a resident Indian
Section 10(4)(ii) Any interest that has been paid to the account of a person who is not a resident Indian
Any interest that has been paid to a person who is not a resident Indian, but of Indian
Section 10(4B)
origin
Section 10(5) Concession on travel given to an employee who is also a citizen of India
Section 10(6) Any income earned or received by a non-Indian citizen
Section 10(6A), (6B),

Government tax paid on the income of a foreign firm
(6BB), (6C)
Section 10(7) Allowances received by government employees stationed abroad
Income earned by foreign employees in India under the Cooperative Technical

Section 10(8)
Assistance Program
Section 10(8A) Income earned by a consultant

Section 10(8B) Income earned by a consultant’s staff or employees
Income earned by any family member of a foreign employee in India under the
Section 10(9)
Cooperative Technical Assistance Program
Section 10(10) Gratuity
Section 10(10A) The commuted value of the pension earned by an individual
Section 10(10AA) Any amount earned via encashment of leave at the time of retirement
Section 10(10B) Compensation paid to workers due to relocation
Section 10(10BB) Any remittance obtained as per the Bhopal Gas Leak Disaster Act 1985
Section 10(10BC) Any compensation obtained in the event of a disaster
Section 10(10C) Compensation in lieu of retirement from a PBC or any other firm
Section 10(10CC) Any income received through taxation on perquisites
Section 10(10D) Any amount acquired via a life insurance policy
Section 10(11) Any payment received via the Statutory Provident Fund
Section 10(12) Any payment received via a recognised or authorised Fund
Section 10(13) Any payment received through a Superannuation Fund
Section 10(13A) House Rent Allowance
Section 10(14) Allowances utilised to meet business expenses
Section 10(15) Income received in the form of interest
Income received by an Indian firm through the lease of an aircraft from a foreign firm
Section 10(15A)
or government
Section 10(16) Income in the form of a scholarship
Section 10(17) Allowances granted to MLCs, MLAs or MPs
Section 10(17A) Income received in the form of a government award
Section 10(18) Income received in the form of pension by winners of awards for heroism
Section 10(19) Income received by family members of the armed forces in the form of pension
Section 10(19A) Income received from a single palace of an exruler
Section 10(20) Income received by a localised body or authority
Section 10(21) Income received by an association involved with scientific research

Section 10(22B) Income earned by a news or broadcasting agency
Section 10(23A) Income earned by certain Professional Institutes
Section 10(23AA) Income acquired through Regimental Fund
Section 10(23AAA) Income acquired through an employee welfare fund
Section 10(23MB) Insurance pension fund income
Section 10(23B) Income earned by village industry development institutions
Section 10(23BB) Income earned by state level Khadi and Village Industries Board
Section 10(23BBA) Income earned by regulatory bodies of institutions affiliated with religion and charity
Section 10(23BBB) Income received by the European Economic Community
Section 10(23BBC) Income received through SAARC funded regional projects
Section 10(23BBE) Income received by the IRDA
Section 10(23BBH) Income received through Prasar Bharti
Section 10(23C) Income received by any individual through certain specified funds
Section 10(23D) Income earned via Mutual Funds
Section 10(23DA)j Income earned via a Securitisation Trust
Section 10(23EA) Income earned through an IPF
Section 10(23EB) Income received by the Credit Guarantee Trust for Small Industries
Section 10(23ED) Income exemption of IPF
Income exemption of specified income received by Venture Capital Firms, Funds or

Section 10(23DFB)
Businesses
Section 10(24) Income earned by authorised trade unions
Section 10(25) Income earned via provident funds and superannuation funds
Section 10(25A) Income earned via Employee’s State Insurance Fund
Section 10(26), 10(26A) Income earned by Schedule Tribe Members
Section 10(26AAN) Income earned by an individual of Sikkimese origin
Section 10(26AAB) Marketing regulation with regards to agricultural produce
Income earned by corporations established for the upliftment of backward tribes and
Section 10(26B)
classes
Section 10(26BB) Income earned by corporations established for the protection of Minority interests
Section 10(26BBB) Income earned by corporations established for former servicemen
Income earned by cooperative societies established for protection of scheduled castes

Section 10(27)
and tribes interests
Section 10(29A) Income received by Community Boards
Section 10(30) Income earned in the form of subsidies via the Tea Board
Section 10(31) Income earned in the form of subsidies via the concerned Board
Section 10(32) Income earned by a child in accordance with Section 64 of the Income Tax Act
Section 10(33) Income earned through Unit Trust of India capital asset transfer
Section 10(34) Income earned in the form of dividends through an Indian firm
Section 10(34A) Income earned by a shareholder through the buyback of unlisted companies
Income received through the sale or transfer of Unit Trust of India units as well as
Section 10(35)
other mutual funds
Section 10(35A) Income from a securitization trust that is exempt
Section 10(36) Income received on the sale of shares under specific conditions
Any capital gains made on the mandatory acquirement of land in relation to urban
Section 10(37)
agriculture
Any long term capital gains made from share and security transfers that fall under the
Section 10(38)
purview of Security Transaction Tax
Section 10(39) Any income received from any international event or function relating to sports
Any income acquired in the form of a grant from a company deemed to be a

Section 10(40)
subsidiary of the parent company
Any income received on any asset transfer of a company or project that conducts
Section 10(41)
power distribution, generation and transmission
Any income earned by any authority that has been established by more than one
Section 10(42)
country
Section 10(43) Any income in relation to reversal of mortgage
Section 10(44) Income generated through the NPS Trust
Section 10(45) Any allowance or perks granted to the chairman or any member of the UPSC
Any income that comes under the category of ‘specified income’ with regards to
Section 10(46)
specific authoritative bodies
Section 10(47) Any income that is exempt under the category of infrastructure debt fund
Section 10(48) Any income earned by a foreign firm or company due to crude oil sales within India
Section 10(49) Any income earned by the NFHC (National Finance Holdings Company)
Unit-29 Deduction Under Different Sections

Income Tax Deductions Under Section 80
Taxpayers can claim several income tax deductions under subsections of Section 80 of the Income Tax
Act. The following table will help you understand the tax deduction limits and your eligibility to claim
them.
Income
Tax Act Income Tax Deduction Limit Who Can Claim?
Section
Section
Maximum of upto ₹1.5 lakh (aggregate of 80C, 80CCC, and 80CCD) Individuals, HUFs
80C
Section
Maximum of up to ₹1.5 lakh (aggregate of 80C, 80CCC, and 80CCD) Individuals
80CCC
• Employee Contribution under Section
80CCD(1): Maximum of upto 10% of salary (for employees)
or 20% of gross total income (for self-employed individuals).
The limit is capped at ₹1.5 lakh (aggregate of 80C, 80CCC,
and 80CCD)
• Self Contribution under Section 80CCD(1B): Individuals
Section can claim an additional deduction of ₹50,000 (available to both
Individuals
80CCD salaried and self-employed individuals) for contributions
towards NPS. With this, the maximum deduction available
under Section 80C increases to ₹2 lakh.
• Employer’s Contribution under Section
80CCD(2): Additional deduction up to 10% of an employee’s
salary for employer’s contributions towards NPS.
Deductions under this section were specific to the Rajiv Gandhi Equity
Savings Scheme (RGESS).
Was available to
Section The deduction allowed under RGESS is 50% of the total amount Individuals with
80CCG invested and is capped at ₹50,000. income less than
₹12 lakh
Note: Deduction under section 80CCG has been discontinued starting
from April 1, 2017.
Deduction for health insurance premium and medical expenses for
senior citizens is allowed under this section.
Section
Individuals, HUFs
80D
Individuals below 60 years can claim up to ₹25,000; whereas senior
citizens can claim up to ₹50,000.
Income
Section
Individuals and
₹75,000 for those with 40%-80% disability;
Section HUFs with a
80DD handicapped
₹1.25 lakh for severe disability (80% or more)
dependent
Deduction can be claimed for medical treatment of a dependent who is
suffering from a specific illness (explained in the article below).
The amount allowed as deduction is as follows:

Section Individuals and
80DDB • A maximum of ₹40,000 or amount paid, whichever is less (for HUFs
individuals under 60 years)
• A maximum of ₹1 lakh or amount paid, whichever is less (for
senior citizens and super senior citizens)
Deduction is provided only on the interest part of the education loan.

Section
It is available only for eight years, starting from the year your loan Individuals
80E
repayment begins or until the interest is fully repaid, whichever is
earlier.
Deduction is provided on the interest part of the residential house
Section property loan availed from a financial institution.
Individuals
80EE
A maximum of ₹50,000 can be claimed under this section.
This section allows a deduction up to ₹1.5 lakh for interest paid by
Section
first-time homebuyers for a loan sanctioned from a financial Individuals
80EEA
institution.
Deduction is provided on donations made towards charity.
Section Individuals, HUF's,
80G Donations of up to 100% or 50% can be claimed as a tax deduction Companies, Firms
under this section.
Indian companies or enterprises can claim tax deductions under this
section for contributions made to a political party or an electoral trust
Section
registered in India. Indian companies
80GGB
They can claim up to 100% tax deduction against the amount donated.
Individuals can claim deductions under this section for contributions
made to political parties.
Section
Individuals
80GGC
The tax deduction claimed can range from 50-100% of the amount
contributed.
Those paying rent for residency can claim a tax deduction of:
• ₹5,000 per month

Section Individuals not
• 25% of total income
80GG receiving HRA
• Rent minus 10% of adjusted gross total income, whichever is
less.
Income
Section
Section Income of up to ₹3 lakh received from royalties is eligible for tax
Resident Indian
80RRB deduction under this section.
Section Income of up to ₹10,000 earned from interest on savings accounts can Individuals and
80TTA be claimed as a tax deduction under this section. HUFs
Section This section allows senior citizens (aged 60 years and above) to claim Senior Citizens
80TTB up to ₹50,000 as a tax deduction from their gross total income. (above 60 years)
Section Deduction of up to ₹75,000 can be claimed for people suffering from a Individuals with
80U disability and up to ₹1.25 lakh for people with severe disability. disabilities
Features of Income Tax Deductions Under Section 80
Let’s take a detailed look at the features of each section we discussed in the table above.
1. Section 80C
Income tax deductions under Section 80C are quite popular among investors. The section allows for a
maximum deduction of up to ₹1.5 lakh every year from the taxpayer’s total income. The benefit of this
section can be availed by individuals and HUFs. However, companies, partnership firms, and limited
liability partnerships (LLP) cannot avail said benefit.
The investments available for tax deductions under this section are as follows:
Unit Linked
Public Provident Equity-Linked Saving Sukanya Samriddhi
Insurance Plan
Fund (PPF) Scheme (ELSS) Yojana (SSY)
(ULIP)
Employees’
Principal amount payment National Saving
Provident Fund 5-year, tax-saving FD
towards home loan Certificate (NSC)
(EPF)
Stamp duty and registration
Senior Citizen Savings
LIC premium charges for purchase of Infrastructure bonds
Scheme (SCSS)
property
Additionally, please note that people choosing to file their ITR using the new income tax regime will not
be able to avail deductions under this section. We have discussed the income tax deductions and
exemptions/allowances eliminated from the new regime in detail going ahead.
2. Section 80CCC
This section provides a tax deduction for an amount paid by taxpayers who have subscribed to an
annuity plan offered by an approved insurance company. Also, the payment has to be to a fund
mentioned in Section 10(23AAB). Please note that HUF is not eligible for availing tax deductions under
Section 80CCC. This facility is available to both residents as well as non-residents.
Additionally, any bonuses received or interest accrued through the annuity plan is not eligible for tax
deduction under Section 80CCC. Proceeds from the policy in the form of pension from annuity or
surrender of annuity are taxed.
3. Section 80CCD
Tax deductions under Section 80CCD are categorised in three subsections:
• Employee Contribution Under Section 80CCD(1): A maximum of upto 10% of salary (for
employees) or 20% of gross total income (for self-employed individuals). The limit is capped at
₹1.5 lakh (aggregate of 80C, 80CCC, and 80CCD).
• Self Contribution Under Section 80CCD(1B): Individuals can claim an additional tax
deduction of ₹50,000 (available to both salaried and self-employed individuals) for contribution
towards NPS. With this, the maximum tax deduction available under Section 80CCD increases
to ₹2 lakh.
• Employer’s Contribution Under Section 80CCD(2): Additional tax deduction up to 10% of an

employee’s salary for contribution towards NPS.
Please note that the money received from NPS on a monthly basis or due to surrender of accounts is
taxable. However, if this amount is reinvested in the annuity plan, then it is entirely exempt from tax.
4. Section 80D
Health insurance is one of the most powerful tax-planning tools. With the announcement of Budget
2021, you can avail several tax benefits along with other financial/medical benefits. Here’s a quick
walkthrough of the same.
Health Insurance Premium Paid for Self, Spouse, and dependent children Parents
No one is above age 60 years Up to ₹25,000 Up to ₹25,000
If you are a senior citizen Up to ₹50,000 Up to ₹50,000
Note: The tax deduction for parents is over and above the maximum deduction allowed for an
individual and his/her family.
Additional Deductions: You can claim an annual tax deduction of up to ₹5,000 on expenses incurred
for health check-ups. This includes the check-up expenses of all family members, including self,
spouse, children, and parents.
5. Section 80DD
The tax deduction under Section 80DD is available to individuals or HUFs for a dependent who is
disabled and wholly dependent on the individual (or HUF) for support and maintenance. They can claim
up to ₹75,000 for those with 40%-80% disability and ₹1.25 lakh for severe disability (80% or more).
Please note that individuals or HUFs can claim tax deduction for a dependent only and not themselves.
6. Section 80DDB
Under Section 80DDB, taxpayers can claim a tax deduction for medical treatment of a dependent who is
suffering from a specific illness. The amount allowed as deduction is as follows:
• A maximum of ₹40,000 or amount paid, whichever is less (for individuals under 60 years)
• A maximum of ₹1 lakh or amount paid, whichever is less (for senior citizens and super senior
citizens)
The list of diseases for which one can claim tax deductions under this section is as follows:
• Neurological diseases where the disability level has been certified to be of 40% and above:
o Dementia
o Dystonia Musculorum Deformans
o Motor Neuron Disease
o Ataxia
o Chorea
o Hemiballismus
o Aphasia
o Parkinson's Disease
• Malignant cancers
• Full-blown Acquired Immuno-Deficiency Syndrome (AIDS)
• Chronic renal failure
• Hematological disorders
o Hemophilia
o Thalassaemia
Please note that before making claims under Section 80DDB, you need to get a certificate from the
concerned specialist. Patients who are seeking treatment at a private hospital do not need to submit any
certificate. However, those receiving treatment at government hospitals have to take the certificate from
any specialist working full-time at that hospital.
7. Section 80E
Education loan taken for higher studies also helps you save on tax. Those who have taken an education
loan or are repaying it, the interest paid on that loan can be claimed as tax deduction under Section 80E.
However, please note that tax deduction is provided only on the interest component of the education
loan. It is available only for eight years, starting from the year your loan repayment begins or until the
interest is fully repaid, whichever is earlier.
8. Section 80EE
Tax deduction under Section 80EE is available to individuals only. It can be claimed on the interest part
of the residential house property loan availed from a financial institution. A maximum of ₹50,000 can be
claimed under this section. Additionally, to claim under Section 80EE, the value of the house should be
₹50 lakh or less and the loan taken for the house must be ₹35 lakh or less.
9. Section 80EEA
Section 80EEA allows first-time homebuyers to claim a tax deduction of up to ₹1.5 lakh for interest paid
on the loan sanctioned from a financial institution. Please note that this deduction is over and above the
₹2 lakh deduction for interest payments available under Section 24 of the Income Tax Act. Hence,
taxpayers can claim a total tax deduction of ₹3.5 lakh for interest on home loan, especially if they meet
the conditions under Section 80EEA.
Additionally, to successfully claim a tax deduction under this section, note that the stamp duty value of
the house property should be ₹45 lakh or less, and the individual taxpayer should not be eligible to claim
a tax deduction under Section 80EE.
10. Section 80G

Those making contributions to relief funds and charitable institutes can claim tax deductions under
Section 80G. However, only the donations made to prescribed funds can be claimed under this section.
Note that any donation made in cash (exceeding ₹2,000) cannot be claimed and taxpayers should use
another mode of payment for the same.
11. Section 80GGB

Under Section 80GGB, only companies or enterprises can claim the contributions made towards any
political party or electoral trusts registered in India as tax deductions equal to the amount donated. The
political party that receives the donation must be registered under Section 29A of the Representation of
the People Act, 1951.
An electoral trust is a non-profit organization created under Section 8 of the Companies Act, 2013, to
enhance transparency in the donation process and reallocate donations to the registered political parties.
Tax deduction of 100% can be claimed against donations made to a registered political party as per
Section 80GGB. No cash donations or contributions are allowed under Section 80GGB.
12. Section 80GGC

Under Section 80GGC, individuals can avail tax deductions on any contributions made to an electoral
trust or a political party registered under Section 29A of the Representation of the People Act, 1951.
Individuals can claim tax deductions in the range of 50%-100% of the donation made towards an
electoral trust or a political party.
Note that companies cannot avail tax deductions under Section 80GGC, only individuals can. No cash
donations or contributions are allowed under Section 80GGC.
13. Section 80GG

Under Section 80GG, self-employed and salaried individuals can claim tax deductions towards rent for
any furnished or unfurnished residence. It should be noted that only individuals who do not receive
HRA from their employer are eligible for a tax deduction under 80GG. The lowest amount from the
following will be considered as the eligible amount of deduction.
• 25% of the total income

• ₹5,000 per month
• Rent less than 10% of income
14. Section 80RRB

Under Section 80RRB, individuals who receive royalty payments can avail a tax deduction of up to
₹3,00,000. If royalty payments received are less than ₹3,00,000, then only that amount will be
considered for tax deduction. Only Indian residents who hold the original patent registered under the
Patent Act, 1970, can claim tax deduction under Section 80RRB.
15. Section 80TTA

Under Section 80TTA, individuals and HUFs can claim a tax deduction on income earned as interest. A
maximum of ₹10,000 can be availed as a tax deduction under this section.
Types of interest income allowed as tax deduction under Section 80TTA:
• Savings account with a bank

• Savings account with a cooperative society that functions as a bank
• Savings account with a post office
Types of interest income not allowed as tax deduction under Section 80TTA:
• Interest earned on fixed deposits

• Interest earned on recurring deposits
• Interest earned on any time deposits
16. Section 80TTB

Under Section 80TTB, senior citizens can claim a tax deduction of up to ₹50,000 from their gross total
income in a given financial year. Senior citizens eligible for Section 80TTB cannot avail a tax deduction
under 80TTA. Exemptions to Section 80TTB include deposits held by or on behalf of a partnership firm,
an association of persons (AOP), or a body of individuals (BOI).
17. Section 80U
Section 80U offers a tax deduction to individuals suffering from a disability. Any individual who has
been certified by a medical authority of being at least 40% disabled can claim a tax deduction under
Section 80U. A tax deduction of up to ₹75,000 is applicable for individuals with disabilities, and a tax
deduction of up to ₹1,25,000 is applicable for individuals with severe disabilities.
Tax Exemptions/Allowances
One sure-fire way to reduce your tax liability is to be aware of tax exemptions/allowances available
under the Income Tax Act. Under Section 10, you can avail of the tax exemptions on house rent
allowance (HRA), standard deduction, contributions towards EPF and pension, etc. Here is a list of the
major tax exemptions applicable to salaried individuals
• House Rent Allowance: Exemption will be the minimum of:
i) Total HRA received;
ii) 50% of the income (basic + DA) for individuals living in metro cities, or 40% for those living in non-
metro cities;
iii) Rent paid less than 10% of basic salary + DA
• Standard Deduction: All salaried individuals can claim a flat deduction of ₹50,000 as Standard
Deduction. This was increased from ₹40,000 per year to ₹50,000 during the Union Budget 2019.
• Child Education Allowance: Tax exemption/allowance of maximum ₹100 per month for up to
two children only can be availed by employees.
• Hostel Subsidy: Subsidies on hostel expenditure are also tax-exempt up to ₹300 per month for a
maximum of 2 children.
• Interest Paid on Housing Loans: One can avail income tax exemption of ₹2 lakh on interest
paid on home loans, provided the house is currently occupied by the owner or is set to finish
construction within 3 years.
• Leave Travel Allowance: The Income Tax Act also allows for a tax exemption to salaried
employees on travel expenses. However, LTA does not cover all expenses such as food,
shopping, and entertainment. LTA exemption can be used twice in a period of four years and
only covers domestic travel by railway, air travel, or public transport.
Unit-30-Income Tax Calculation

Income tax slab rate applicable for New Tax regime – FY 2020-21.
New Regime Income Tax Slab Rates for FY 2020-21
Income Tax Slab
(Applicable for All Individuals & HUF)
Rs 0.0 – Rs 2.5 Lakhs NIL
Rs 2.5 lakhs- Rs 3.00 Lakhs

5% (tax rebate u/s 87a is available)
Rs. 3.00 lakhs – Rs 5.00 Lakhs
Rs. 5.00 lakhs- Rs 7.5 Lakhs 10%
Rs 7.5 lakhs – Rs 10.00 Lakhs 15%
Rs 10.00 lakhs – Rs. 12.50 Lakhs 20%

New Regime Income Tax Slab Rates for FY 2020-21
Income Tax Slab
(Applicable for All Individuals & HUF)
Rs. 12.5 lakhs- Rs. 15.00 Lakhs 25%
> Rs. 15 Lakhs 30%
How to Income Tax file Return: - Filing income tax returns is no longer the hassle it used to be. Gone
are the long queues and endless anxiety of making the tax-filing deadline
With online filing, also called e-filing, it is convenient to file returns from the confines of your
home/office and at very short notice.
Mentioned below are the broad steps to file your income tax returns online:
Sr
Step Guide To File ITR Online
No.
Log on to the Income Tax Department portal (www.incometaxindiaefiling.gov.in) for

Step
Log on to the filing returns online. Register using your Permanent Account Number (PAN), which
1 portal will serve as the user ID.
Under 'Download', go to e-filing under the relevant assessment year and select the
Step Download
2 appropriate ITR appropriate Income Tax Return (ITR) form. Download ITR-1's (Sahaj) return
form preparation software if you are a salaried individual.
Step Enter details in Open the Return Preparation Software (excel utility) that you have
3 Form 16 downloaded, follow the instructions and enter all details from your Form 16.
Compute all
Step Compute tax payable, pay tax and enter relevant challan details in the tax
relevant tax
4 return. If you do not have a tax liability, you can skip this step.
details
Confirm the details entered by you and generate an XML file, which is automatically
Step Confirm the
5 above details saved on your computer.
Step
6 Submit return Go the ‘Submit Return’ section and upload the XML file.
Step You can digitally sign the file on being prompted. If you do not have a digital
Digital signature
7 signature, you can skip this step
Confirmation A message confirming successful e-filing is flashed on your screen. The
Step
from ITR acknowledgement form – ITR-Verification is generated and the same can be
8
verification downloaded. It is also emailed to your registered email id.
You can e-verify the return through any one of the below six modes: 1) Netbanking,
2) Bank ATM, 3) Aadhaar OTP, 4) Bank Account Number, 5) Demat Account Number,
Step
E-verify Return 6) Registered Mobile Number & E-mail id. E-verification eliminates the need to send a
9
physical copy of the ITR-5 acknowledgement to CPC, Bengaluru
How to Download Income Tax Return?
It is important to how to file ITR on time, to avoid last minute stress and penalties. Once you have filed
your ITR, the income tax verification form is generated by the IT department so that taxpayers can
verify the validity and legitimacy of e-filing. These are applicable only if you have filed your returns
without a digital signature.
The income tax return verification form can be downloaded in easy steps.
1.) Log in to the Income Tax India website https://portal.incometaxindiaefiling.gov.in/e-

Filing/UserLogin/LoginHome.html?lang=eng
2.) View e-filed tax returns by clicking on 'View Returns/ Forms' option
Select option Income tax returns
Details of all the years for which returns are filed will be displayed
1.) Click on the acknowledgement Number to download the ITR-V.
2.) Begin the download by selecting 'ITR-V Acknowledgment'
3.) To open the downloaded document, enter your password to open the document. The password is
your PAN number in lower letters along with your birthdate.
For example-
PAN - ASIJP2345P Birthdate - 31/12/1980 Password - asijp2345p31121980
• You need to send the printed and signed document to CPC Bangalore within 120 days of the e-filing.
There is also an option of E verification of Income tax return by generating aadhar otp, through net
banking, through ATM etc.
Documents required to fill ITR
It is important to have all the relevant documents handy before you start your e-filing process.
• Bank and post office savings account passbook, PPF account passbook
• Salary slips
• Aadhar Card, PAN card
• Form-16- TDS certificate issued to you by your employer to provide details of the salary paid to you and
TDS deducted on it, if any
Interest certificates from banks and post office
• Form-16A, if TDS is deducted on payments other than salaries such as interest received from fixed
deposits, recurring deposits etc. over the specified limits as per the current tax laws
• Form-16B from the buyer if you have sold a property, showing the TDS deducted on the amount paid
to you
• Form-16C from your tenant, for providing the details of TDS deducted on the rent received by you, if
any
• Form 26AS - your consolidated annual tax statement. It has all the information about the taxes
deposited against your PAN
• a) TDS deducted by your employer
• b) TDS deducted by banks
• c) TDS deducted by any other organizations from payments made to you
• d) Advance taxes deposited by you
• e) Self-assessment taxes paid by you
• Tax saving investment proofs
• Proofs to claim deductions under section 80D to 80U (health insurance premium for self and family,
interest on education loan)
• Home loan statement from bank
How to check ITR status online?
Once you have filed your income tax returns and verified it, the status of your tax return is 'Verified'.
After the processing is complete, the status becomes 'ITR Processed'.
If you wish to know which stage your tax return is after filing it and want to check your ITR status
online, here’s how you can do it in easy steps.
Option One
Without login credentials

You can click on the ITR status tab on the extreme left of the e-filing website.
You are then directed to a new page where you have to fill in your PAN number, ITR acknowledgement
number and the captcha code.
Once this is done, the status of your filing will be displayed on the screen.
Option Two
With login credentials
Login to the e-filing website.
Click on the option 'View Returns/Forms'
From the dropdown menu, select income tax returns and assessment year
Once this is done, the status of your filing (whether only verified or processed) will be displayed on the
screen.
Keeping the Income Tax Department informed about your income and taxability will keep you on the
right side of the law and prevent any blocks in your financial competency. Now that you know whether
or not you compulsorily have to file your ITR, you need to ensure that you complete the process before
the deadline every year.
Different Between e-filing and E-Payment: - E-payment is the process of electronic payment of tax (i.e., by
net banking or SBI’s debit/credit card) and e-filing is the process of electronically furnishing of return of income.
Using the e-payment and e-filing facility, the taxpayer can discharge his obligations of payment of tax and
furnishing of return easily and quickly.
E-filing
For the purposes of this paper we will define e-filing as the transmission of tax information
directly to the tax administration using the internet. Electronic filing options include (1)
online, self-prepared return, using a personal computer and tax preparation software, or (2)
online submission of returns using a tax professional’s computer and tax preparation
software. Electronic filing may take place at the taxpayer's home, a volunteer site, the library,
a financial institution, the workplace, malls and stores, or a tax professional's place of
business.
E-payment
This paper defines e-payment as the transfer of money from a person’s bank account to the
tax administration’s bank account using the internet. E-payments can be made online, at any
time (during and after banking hours), and from any place.
Generally, under an e-filing and e-payment system returns are filed and payments are made
via the internet and the tax administration sends an electronic confirmation acknowledging
receipt of the return and/or payment. In the case of e-payments, the taxpayers also receive a
debit confirmation from their financial institution.
Unit-31 Goods & Service Tax Return Filing

1. What is GST Return?
A GST return is a document containing details of all income/sales and/or expense/purchase which a
taxpayer (every GSTIN) is required to file with the tax administrative authorities. This is used by tax
authorities to calculate net tax liability.
Under GST, a registered dealer has to file GST returns that broadly include:
• Purchases
• Sales
• Output GST (On sales)
• Input tax credit (GST paid on purchases)
To file GST returns or for GST filing, check out gst.cleartax.in website that allows import of data from
various ERP systems such as Tally, Busy, custom excel, to name a few. Moreover, there is option to use
desktop app for Tally users to directly upload data and filing.
2. Who should file GST Returns?

In the GST regime, any regular business having more than Rs.5 crore as annual aggregate turnover has to
file two monthly returns and one annual return. This amounts to 26 returns in a year.
The number of GSTR filings vary for quarterly GSTR-1 filers under QRMP scheme. The number of GSTR
filings online for them is 9 in a year, including the GSTR-3B and annual return.
There are separate returns required to be filed by special cases such as composition dealers whose number
of GSTR filings is 5 in a year.
3. What are the different types of GST Returns?

Here is a list of all the returns to be filed as prescribed under the GST Law along with the due dates.
GST filings as per the CGST Act subject to changes by CBIC Notifications
Return Form Description Frequency Due Date

11th* of the next month with
effect from October 2018
until September 2020.
Monthly
Details of outward supplies *Previously, the due date was
GSTR-1 of taxable goods and/or 10th of the next month.
services affected.
Quarterly
13th of the month succeeding
the quarter.
(If opted under the
Was end of the month
QRMP scheme)
succeeding the quarter until
December 2020)
GSTR-2
Details of inward supplies
15th of the next month.
of taxable goods and/or
Suspended from Monthly
services effected claiming
September 2017
the input tax credit.
onwards
GSTR-3 Monthly return on the basis
of finalization of details of 20th of the next month.
Suspended from outward supplies and Monthly
September 2017 inward supplies along with
onwards the payment of tax.
20th of the next month from
the month of January 2021
onwards^
Simple return in which
summary of outward Staggered^^ from the month
Monthly
supplies along with input of January 2020 onwards
tax credit is declared and upto December 2020.*
payment of tax is affected
by the taxpayer. *Previously 20th of the next
month for all taxpayers.
22nd or 24th of the month
Quarterly
next to the quarter***
^20th of next month for taxpayers with an aggregate turnover in the previous
financial year more than Rs 5 crore or otherwise eligible but still opting out of
the QRMP scheme.
^^ 1. 20th of next month for taxpayers with an aggregate turnover in the previous
financial year more than Rs 5 crore.
GSTR-3B
2. For the taxpayers with aggregate turnover equal to or below Rs 5 crore, 22nd
of next month for taxpayers in category X states/UTs and 24th of next month for
taxpayers in category Y states/UTs
***For the taxpayers with aggregate turnover equal to or below Rs 5 crore,

eligible and remain opted into the QRMP scheme, 22nd of month next to the
quarter for taxpayers in category X states/UTs and 24th of month next to the
quarter for taxpayers in category Y states/UTs
• Category X: Chhattisgarh, Madhya Pradesh, Gujarat, Maharashtra, Karnataka,

Goa, Kerala, Tamil Nadu, Telangana or Andhra Pradesh or the Union territories
of Daman and Diu and Dadra and Nagar Haveli, Puducherry, Andaman and
Nicobar Islands and Lakshadweep.
• Category Y: Himachal Pradesh, Punjab, Uttarakhand, Haryana, Rajasthan, Uttar
Pradesh, Bihar, Sikkim, Arunachal Pradesh, Nagaland, Manipur, Mizoram,
Tripura, Meghalaya, Assam, West Bengal, Jharkhand or Odisha or the Union
Territories of Jammu and Kashmir, Ladakh, Chandigarh and New Delhi.
Statement-cum-challan to 18th of the month succeeding

CMP-08 Quarterly
make a tax payment by a the quarter.
taxpayer registered under
the composition scheme
under section 10 of the
CGST Act (supplier of
goods) and CGST (Rate)
notification no. 02/2019
dated 7th March 2020
(Supplier of services)
Return for a taxpayer
registered under the
composition scheme under
section 10 of the CGST Act
30th of the month succeeding
GSTR-4 (supplier of goods) and Annually
a financial year.
CGST (Rate) notification
no. 02/2019 dated 7th
March 2020 (Supplier of
services).
Return for a non-resident
GSTR-5 Monthly 20th of the next month.
foreign taxable person.
Return for an input service
distributor to distribute the
GSTR-6 Monthly 13th of the next month.
eligible input tax credit to
its branches.
Return for government
GSTR-7 authorities deducting tax at Monthly 10th of the next month.
source (TDS).
Details of supplies effected
through e-commerce
GSTR-8 operators and the amount of Monthly 10th of the next month.
tax collected at source by
them.
Annual return for a normal 31st December of next
GSTR-9 Annually
taxpayer. financial year.
Annual return optional for
filing by a taxpayer Annually until FY 31st December of next
GSTR-9A
registered under the 2017-18 and FY financial year, only up to FY
(Suspended)
composition levy anytime 2018-19 2018-19.
during the year.
Certified reconciliation 31st December of next
GSTR-9C Annually
statement financial year.
Once, when GST Within three months of the
Final return to be filed by a
registration is date of cancellation or date of
GSTR-10 taxpayer whose GST
cancelled or cancellation order, whichever
registration is cancelled.
surrendered. is later.
Details of inward supplies
28th of the month following
to be furnished by a person
GSTR-11 Monthly the month for which
having UIN and claiming a
statement is filed.
refund
How to Registration Under GST: - Step 1 – Go to GST portal. Click on Services. Then, click on the
‘Registration’ tab and thereafter, select ‘New Registration’.
Step 2 – Enter the following details in Part A –
• Select New Registration radio button

• In the drop-down under ‘I am a’ – select Taxpayer
• Select State and District from the drop down
• Enter the Name of Business and PAN of the business
• Key in the Email Address and Mobile Number. The registered email id and mobile number will receive
the OTPs.
• Click on Proceed
Step 3 – Enter the two OTPs received on the email and mobile. Click on Continue. If you have not
received the OTP click on Resend OTP.
Step 4 – You will receive the 15-digit Temporary Reference Number (TRN) now. This will also be sent
to your email and mobile. Note down the TRN. You need to complete filling the part-B details within
the next 15 days.
Step 5 – Once again go to the GST portal. Select the ‘New Registration’ tab.
Step 6 – Select Temporary Reference Number (TRN). Enter the TRN and the captcha code and click on
Proceed.
Step 7 – You will receive an OTP on the registered mobile and email. Enter the OTP and click on
Proceed
Step 8 –You will see that the status of the application is shown as drafts. Click on Edit Icon.
Steps to fill Part-B of GST registration application
Step 9 – Part B has 10 sections. Fill in all the details and submit appropriate documents. The Aadhaar
authentication section was added and the bank account section was made non-mandatory in 2020.
Here is the list of documents you need to keep handy while applying for GST registration-
• Photographs
• Constitution of the taxpayer
• Proof for the place of business
• Bank account details*
• Verification and Aadhaar authentication, if chosen
* Bank account details are non-mandatory at the time of GST registration since 27th December 2018.
Use of GST Portal: - www.gst.gov.in is the government's official GST website and is also known
as the GST Portal /GSTN portal. It facilitates numerous services for taxpayers ranging from obtaining
GST registration, filing of GST returns, application for refunds, to the time a taxpayer applies for
the cancellation of the GST registration.
1. What is an eWay Bill?

EWay Bill is an Electronic Way bill for movement of goods to be generated on the eWay Bill Portal. A GST
registered person cannot transport goods in a vehicle whose value exceeds Rs. 50,000 (Single
Invoice/bill/delivery challan) without an e-way bill that is generated on ewaybillgst.gov.in.
Alternatively, Eway bill can also be generated or cancelled through SMS, Android App and by site-to-site
integration through API.
When an eway bill is generated, a unique Eway Bill Number (EBN) is allocated and is available to the supplier,
recipient, and the transporter.
2.When Should eWay Bill be issued?

eWay bill will be generated when there is a movement of goods in a vehicle/ conveyance of value more than
Rs. 50,000 (either each Invoice or in aggregate of all invoices in a vehicle/conveyance) –
• In relation to a ‘supply’
• For reasons other than a ‘supply’ (say a return)
• Due to inward ‘supply’ from an unregistered person
For this purpose, a supply may be either of the following:
• A supply made for a consideration (payment) in the course of business

• A supply made for a consideration (payment) which may not be in the course of business
• A supply without consideration (without payment) In simpler terms, the term ‘supply’ usually means a:
1. Sale – sale of goods and payment made

2. Transfer – branch transfers for instance
3. Barter/Exchange – where the payment is by goods instead of in money
Therefore, eWay Bills must be generated on the common portal for all these types of movements. For certain
specified Goods, the eway bill needs to be generated mandatorily even if the value of the consignment of Goods
is less than Rs. 50,000:
1. Inter-State movement of Goods by the Principal to the Job-worker by Principal/ registered Job-
worker***,
2. Inter-State Transport of Handicraft goods by a dealer exempted from GST registration
3. Who should Generate an eWay Bill?
• Registered Person – Eway bill must be generated when there is a movement of goods of more than Rs
50,000 in value to or from a registered person. A Registered person or the transporter may choose to
generate and carry eway bill even if the value of goods is less than Rs 50,000.
• Unregistered Persons – Unregistered persons are also required to generate e-Way Bill. However, where
a supply is made by an unregistered person to a registered person, the receiver will have to ensure all
the compliances are met as if they were the supplier.
• Transporter – Transporters carrying goods by road, air, rail, etc. also need to generate e-Way Bill if the
supplier has not generated an e-Way Bill.
Update as on 23rd Mar 2018:
Until a date yet to be notified, the transporters need not generate the Eway bill (as Form EWB-01 or EWB-02)
where all the consignments in the conveyance:
• Individually (single Document**) is less than or equal to Rs 50,000 BUT

• In Aggregate (all documents** put together) exceeds Rs 50,000
**Document means Tax Invoice/Delivery challan/Bill of supply

Unregistered Transporters will be issued Transporter ID on enrolling on the e-way bill portal after which Eway
bills can be generated.
Who When Part Form
Every Registered person Before movement of

Fill Part A Form GST EWB-01
under GST goods
Registered person is consignor

or consignee (mode of Before movement of
Fill Part B Form GST EWB-01
transport may be owned or goods
hired) OR is recipient of goods
The registered person shall

Registered person is consignor
furnish the information
or consignee and goods are Before movement of
Fill Part B relating to the transporter
handed over to transporter of goods
in Part B of FORM GST EWB-
goods
01
Generate e-way bill on
basis of information shared
Before movement of
Transporter of goods by the registered person in
goods
Part A of FORM GST EWB-
01
1. If the goods are

transported for a distance
of fifty kilometers or less,
within the same
State/Union territory from
the place of business of the
consignor to the place of
business of the transporter
Compliance to be done for further transportation,
An unregistered person under
by Recipient as if he is the supplier or the
GST and recipient is registered
the Supplier. transporter may not furnish
the details of conveyance in
Part B of FORM GST EWB-
01. 2. If supply is made by
air, ship or railways, then
the information in Part A of
FORM GST EWB-01 has to
be filled in by the consignor
or the recipient
Note: If a transporter is transporting multiple consignments in a single conveyance, they can use the form GST
EWB-02 to produce a consolidated e-way bill, by providing the e-way bill numbers of each consignment. If both
the consignor and the consignee have not created an e-way bill, then the transporter can do so * by filling out
PART A of FORM GST EWB-01 on the basis of the invoice/bill of supply/delivery challan given to them.
4. Cases when eWay bill is Not Required
In the following cases it is not necessary to generate e-Way Bill:
1. The mode of transport is non-motor vehicle

2. Goods transported from Customs port, airport, air cargo complex or land customs station to Inland
Container Depot (ICD) or Container Freight Station (CFS) for clearance by Customs.
3. Goods transported under Customs supervision or under customs seal
4. Goods transported under Customs Bond from ICD to Customs port or from one custom station to
another.
5. Transit cargo transported to or from Nepal or Bhutan
6. Movement of goods caused by defense formation under Ministry of defense as a consignor or consignee
7. Empty Cargo containers are being transported
8. Consignor transporting goods to or from between place of business and a weighbridge for weighment at
a distance of 20 kms, accompanied by a Delivery challan.
9. Goods being transported by rail where the Consignor of goods is the Central Government, State
Governments or a local authority.
10. Goods specified as exempt from E-Way bill requirements in the respective State/Union territory GST
Rules.
11. Transport of certain specified goods- Includes the list of exempt supply of goods, Annexure to Rule
138(14), goods treated as no supply as per Schedule III, Certain schedule to Central tax Rate notification.
Note:-Part B of e-Way Bill is not required to be filled where the distance between the consigner or consignee
and the transporter is less than 50 Kms and transport is within the same state.
Who Should file GST Return: - In the GST regime, any regular business having more than Rs.5 crore
as annual aggregate turnover has to file two monthly returns and one annual return. This amounts to 26
returns in a year.
The number of GSTR filings vary for quarterly GSTR-1 filers under QRMP scheme. The number of GSTR
filings online for them is 9 in a year, including the GSTR-3B and annual return.
There are separate returns required to be filed by special cases such as composition dealers whose number
of GSTR filings is 5 in a year.
Communication Skills
Unit 1-Basics of Communication Skill: - On the basis of the communication channels, types of
communications are:
A. Verbal
B. Non-Verbal
C. Visual
Verbal
This involves the use of language and words for the purpose of passing on the intended message. In
general terms, Verbal Communication means communication in the form of spoken words only. But, in
the context of types of communication, verbal communication can be in the spoken or the written form.
Thus, the verbal form may be oral or written as discussed below.
• Written Communication: This kind of communication involves any kind of exchange of information in
the written form. For example, e-mails, texts, letters, reports, SMS, posts on social media platforms,
documents, handbooks, posters, flyers, etc.
• Oral Communication: This is the communication which employs the spoken word, either direct or
indirect as a communication channel. This verbal communication could be made on a channel that
passes information in only one form i.e. sound.
You could converse either face to face, or over the phone, or via voice notes or chat rooms, etc. It all
comes under the oral communication. This form of communication is an effective form.
Non-Verbal Communication
In this type of communication, messages are relayed without the transmission of words. The messages
here are wordless messages. This form of communication mainly aides verbal communication. It
supplements it with gestures, body language, symbols, and expressions.
Through these, one may communicate one’s mood, or opinion or even show a reaction to the messages
that are relaying. One’s non-verbal actions often set the tone for the dialogue. You can control and guide
the communication if you control and guide the non-verbal communication. Some of the modes of non-
verbal communication are:
Physical Non-verbal Communication
This is the sum total of the physically observable. For instance, hand gestures, body language, facial
expressions, the tone of one’s voice, posture, stance, touch, gaze, and others. Several researchers have
revealed that physical nonverbal communication constitutes about 55% of our daily communications.
These are subtle signals that are picked up as part of our biological wiring. For example, if you rest your
head on your palms, it will mean that you are very disappointed or angry. Similarly, other subtle hints
will convey your reaction to the presenter or your audience’s reaction to you.
Paralanguage
This is the art of reading between the lines. The main kind of such communication is done with the tone
of one’s voice. This kind of communication amounts to almost 38% of all the communication that we do
every day. Along with the tone of voice, the style of speaking, voice quality, stress, emotions, or
intonation serves the purpose of communication. And, these aspects are not verbal.
Aesthetic Communication
Art is an important means of communication. Through the paintings or other forms of art, an artist can
covey the strongest messages. Several times in the history of the world, art has been used as an effective
form of nonverbal communication.
Appearance
The first impression sets the tone. People will react to your appearance and this is a fact of life. Your
clothes, the color of the fabrics, etc. all determine the reaction of your audience.
Visual Communication
This is communication through visual aids like drawings, placards, presentations, and illustrations, etc.
Formal & Informal Communication
Apart from the above types, we have formal & informal types of communication. Formal
communication is of following types:
• Vertical: The information or data flows up and down the organizational structure.
• Horizontal: This is the communication between two similar levels of the organization.
• Diagonal: This is the communication across the cross-functional levels of employees from various
departments of the organization.
The other form is the informal or casual communication which is the general communication between
random people of the organizations.

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HARTRON SKILL CENTRE

SCF-185 Huda Complex near Zed Global School. Rohtak

DIPLOMA IN COMPUTER AIDED

Ph: 7419488930, 7404288876. https://hartron-rohtak.com

Unit 1-Fundamentals of Accounting 3 Unit 18-Introduction to financial Statements Analysis

Uni-23-Regulatory Authorities (SEBI, RBI) 82

Unit 24-Difference Between Capital & Money Market

Unit 9-Importance of Bank Reconciliation 25

Unit 16-Cash flow/Fund Flow Statement Preparation 51

Unit-17 Introduction to company Accounts 57

Fundamentals of Accounting: - accounting is a cycle or process (Record Keeping /Summary

Who requires accounting?

• Defining & Analyzing Transactions

Unit 2-Principles of Accounting

Unit 3-Golden Rules of Accounting

Transaction Accounts involved Type of Accounts

Bank Account Real Account - Asset account

Purchase Account Nominal Account - Expense account

Sales Account Nominal Account -Income Account

Rent Account Nominal Account

Interest received Nominal Account - Income Account

• Deposit Rs.10,000 in Bank

• Debit what comes into the business

So the entry will be:

Bank A/C Dr. 10,000

To Cash A/C 10,000

• Purchase goods worth Rs.50,000 from Apple Ltd.

• Debit the expense or loss

The entry will be:

Purchase A/C Dr 50,000

To Apple Ltd. A/C 50,000

• Sale of goods worth Rs.35,000 to Melon Ltd.

• Debit the receiver

Thus the entry will be:

Melon Ltd. A/C Dr 35,000

To Sales A/C 35,000

• Pays Rs.12,000 as rent

• Debit the expense or loss

The entry thus will be:

To Bank A/C 12000

• Earn Rs.3,000 as interest on Bank Account

• Debit what comes into the business

Hence the entry will be:

Bank A/C Dr 3,000

To Interest Received A/C 3,000

• Debit what comes in, Credit what goes out

Unit 5-Types of Accounts

1. Personal Account 2. Real Accounts 3. Nominal Accounts

Date Account Debit Credit

XXXX Purchase Account Rs.5000

Gift Shop Rs.5000

The example below is of a furniture purchase worth Rs. 10000 in cash.

Date Account Debit Credit

XXXX Furniture Account Rs. 10000

Cash Account Rs. 10000

XXXX Rent account Rs.12000

Cash Account Rs.12000

All Accounting Terms

• Cash Basis Accounting