Notes follow your Unit 2 syllabus in order. Learn the formulas and the journal-entry logic; practise sums for each topic.

1. Basic accounting principles, concepts and postulates

Accounting equation
$Assets$ $= Liabilities + Capital$
Golden rules: Personal – debit the receiver, credit the giver; Real – debit what comes in, credit what goes out; Nominal – debit expenses and losses, credit incomes and gains.
Concepts: business entity, money measurement, going concern, cost, dual aspect, accounting period, matching, realisation, accrual, conservatism (prudence), consistency, materiality, full disclosure.
Fundamental assumptions (AS-1): going concern, consistency, accrual. Accrual = record when earned or incurred, not when cash moves.
Examples: provision for bad debts → conservatism; expenses recorded with related revenue → matching; goodwill not recorded unless purchased → cost concept.

2. Partnership accounts

(a) Admission

Sacrificing ratio (of the old partners)
$Sacrificing ratio$ $= Old share - New share$
Goodwill brought in by the new partner is credited to the sacrificing partners in the sacrificing ratio.
Revaluation account: profit or loss on revaluation is shared by the old partners in the old ratio. Reserves and undistributed profits also go to old partners in the old ratio.
Eg: A and B share 3 : 2. C is admitted for $\frac{1}{5}$ share. The remaining $\frac{4}{5}$ is shared in the old ratio: A $= \frac{12}{25}$ , B $= \frac{8}{25}$ , C $= \frac{5}{25}$ . Sacrifice: A $= \frac{15}{25} - \frac{12}{25} = \frac{3}{25}$ ; B $= \frac{10}{25} - \frac{8}{25} = \frac{2}{25}$ → sacrificing ratio 3 : 2.

(b) Retirement

Gaining ratio
$Gaining ratio$ $= New share - Old share$
The gaining partners compensate the retiring partner for goodwill in the gaining ratio. The retiring partner's amount is paid in cash or kept as a loan.

(c) Death

Like retirement, plus: share of profit up to the date of death, interest on capital, goodwill, share of reserves; amount goes to the executor's account. A joint life policy gives funds to settle.

(d) Dissolution and insolvency

Realisation account: debit assets at book value, credit outside liabilities; profit or loss shared in the profit-sharing ratio. Settlement order: outside liabilities → partners' loans → partners' capital (Section 48, Partnership Act, 1932).
Insolvent partner (Garner v. Murray): the solvent partners bear the deficiency in the ratio of their last agreed (fixed) capitals, not in profit ratio.

2(e). Goodwill, new ratio and settlement of accounts

Goodwill = value of a firm's reputation and earning power above its net assets. Methods:

Goodwill

= Average profit

\times Number of years' purchase

Super profit

= Average profit

- Normal profit,

Goodwill

= Super profit

\times Years' purchase

Capitalised value

= Average profit

\times \frac{100}{Normal rate of return}

Goodwill

= Capitalised value

- Net assets

Hidden goodwill: when the new partner's capital and share are known, the firm's total capital is worked out and compared with the actual capital.
$Goodwill$ $= Total capital implied$ $- Actual capital$
New profit ratio: on admission, the new partner's share is taken from the old partners (usually in the sacrificing ratio). On retirement the continuing partners gain the retiring partner's share (gaining ratio).
Admission – order of entries: revalue assets and liabilities (Revaluation A/c) → distribute reserves and accumulated profits among old partners → goodwill → new partner's capital → adjust capitals to the new ratio if agreed.
Retirement or death – amount due: capital + share of reserves and undistributed profit + share of revaluation profit + share of goodwill + interest on capital − drawings − share of loss − interest on drawings. On death also add the share of profit up to the date of death and the joint life policy proceeds. The sum is paid or moved to a loan account; for a deceased partner it goes to the executor's account.
Dissolution – steps: (1) Realisation A/c: debit assets (except cash) and credit liabilities; (2) credit sale proceeds; (3) debit realisation expenses; (4) share profit or loss in the profit-sharing ratio; (5) settle partners' loans and capitals; (6) close Cash A/c. Order of payment: outside liabilities → partners' loans → partners' capital.
Insolvency of the firm (Sec 49, Partnership Act, 1932): the firm's property is applied first to the firm's debts; each partner's separate property first pays his separate debts, and any surplus is then available for the firm's debts. When the firm cannot pay its debts a Statement of Affairs and a Deficiency Account are prepared.
Insolvency of a partner (Garner v. Murray): the solvent partners bear the deficiency in the ratio of their last agreed capitals, not in the profit ratio. The insolvent partner's estate pays what it can as a dividend.

3. Corporate accounting

(a) Issue, forfeiture and reissue of shares

Money is collected on application → allotment → calls. Issue at par or premium (premium goes to Securities Premium, usable only as per Section 52). Shares cannot be issued at a discount (Section 53), except sweat equity.
Calls in arrears = unpaid calls. Calls in advance = paid before due.
Forfeiture (for non-payment): debit Share Capital with the called-up amount; credit Calls in Arrears and Share Forfeiture A/c (amount already received).
Reissue: discount on reissue cannot exceed the forfeiture balance for those shares. After reissue, any remaining forfeiture balance is transferred to Capital Reserve.
Eg: 100 shares of ₹10 forfeited; ₹6 per share received → Forfeiture A/c = ₹600. Reissued at ₹8 per share (fully paid) → discount $= 2 \times 100 =$ ₹200. Capital reserve $= 600 - 200 =$ ₹400.

(b) Liquidation (winding up)

Company is closed and assets sold. The liquidator prepares the Liquidator's Final Statement of Account. Order of payment: secured creditors (from their security) → costs of liquidation → preferential creditors (e.g. workers' dues, taxes) → unsecured creditors → preference shareholders → equity shareholders.

(c) Acquisition, merger, amalgamation, reconstruction

AS-14 / Ind AS 103. Amalgamation in the nature of merger – all assets and liabilities taken over; shareholders of at least 90% (by face value) of the transferor's equity become shareholders of the transferee; consideration paid in equity shares (cash only for fractional shares); business to continue; book values are not changed. Uses the pooling of interests method.
In the nature of purchase – any of the above conditions fails. Uses the purchase method; difference between purchase consideration and net assets taken over = goodwill (or capital reserve).
Purchase consideration methods: lump sum, net assets, net payment, intrinsic value (share exchange). Ind AS 103 uses the acquisition method for all business combinations (common-control combinations use pooling).
Reconstruction: internal (capital reduction, reorganisation of capital) and external (amalgamation or absorption).

3(d). Share capital entries, purchase consideration and liquidation

Event	Journal entry (summary)
Application money received	Bank A/c Dr; To Share Application A/c
Application money transferred	Share Application A/c Dr; To Share Capital A/c (and Securities Premium A/c)
Allotment and calls due	Share Allotment (or Call) A/c Dr; To Share Capital A/c (and Securities Premium A/c)
Money received on allotment or call	Bank A/c Dr (Calls-in-Arrears A/c Dr for unpaid); To Share Allotment (or Call) A/c
Forfeiture	Share Capital A/c Dr (called-up amount); Securities Premium A/c Dr (premium not yet received); To Calls-in-Arrears A/c; To Share Forfeiture A/c (amount received)
Reissue of forfeited shares	Bank A/c Dr; Share Forfeiture A/c Dr (discount allowed); To Share Capital A/c. The balance of Share Forfeiture A/c is then moved to Capital Reserve A/c

Purchase consideration (PC) methods:

Net assets method: P C

= Agreed value of assets taken over

- Liabilities taken over

Net payment method: P C

= Cash + Shares + Debentures

(all paid to the vendor company's shareholders)

Shares to issue = \frac{V_{v} \times N_{v}}{V_{p}}

V_{v}

= intrinsic value per share of the vendor company,

N_{v}

= number of shares of the vendor company,

V_{p}

= intrinsic value per share of the purchasing company.

Lump sum method: PC is a fixed agreed amount. Intrinsic value per share = net assets ÷ number of shares.
$Goodwill (or capital reserve)$ $= P C - Net assets taken over$
(purchase method; positive = goodwill, negative = capital reserve).
Liquidation: the liquidator prepares the Liquidator's Final Statement of Account (receipts: assets realised; payments: liquidation costs, preferential creditors, unsecured creditors, preference then equity shareholders). Overriding preferential payments, liquidator's remuneration and costs of winding up are paid before unsecured creditors.

4. Holding company accounts

Holding (parent) company controls another company, the subsidiary – holds more than 50% of voting power or controls its board (Companies Act, 2013). It prepares consolidated financial statements (AS-21 / Ind AS 110). Ind AS 110: control = power over the investee + exposure to variable returns + ability to use power to affect returns.
Minority (non-controlling) interest = outside shareholders' share in the subsidiary's equity, reserves and profits. Shown in equity under Ind AS.
Pre-acquisition (capital) profits go into cost of control. Post-acquisition (revenue) profits are shared between the holding company and minority.
Cost of control (goodwill)
$Cost of control$ $= Cost of investment$ $- Holding's share of capital$
Holding's share of capital = its share of paid-up capital + capital profits (pre-acquisition profits). A negative value = capital reserve.
On consolidation: remove mutual owings, unrealised profit on inter-company stock, and treat dividends from pre-acquisition profit as a reduction of the investment cost.

5. Cost and management accounting

(a) Marginal costing and break-even analysis

Only variable costs are charged to products.
$Contribution$ $= Sales - Variable cost$
$P / V ratio$ $= \frac{Contribution}{Sales} \times 100$
$BEP (units)$ $= \frac{Fixed cost}{Contribution per unit},$ $BEP (₹)$ $= \frac{Fixed cost}{P / V ratio}$
$Margin of safety$ $= Actual sales - BEP sales$
$Sales for a target profit$ $= \frac{Fixed cost + Target profit}{P / V ratio}$
Eg: Price ₹20, variable cost ₹14, fixed cost ₹7,92,000 → contribution ₹6; P/V = 30%.
$BEP = \frac{₹7,92,000}{0.30}$ $= ₹26,40,000$

(b) Standard costing and variances

Material variances
$Price variance = (S P - A P) \times A Q$ $Usage variance = (S Q - A Q) \times S P$
Labour variances
$Rate variance = (S R - A R) \times A H$ $Efficiency variance$ $= (S H - A H) \times S R$
S = standard, A = actual; P = price, Q = quantity, R = rate, H = hours. Positive = Favourable; negative = Adverse.
Eg: standard price ₹10/kg, actual ₹11/kg, 500 kg bought → $(10 - 11) \times 500 =$ ₹500 Adverse.

(c) Budgetary control

Budget = a plan in figures. Types: fixed, flexible, master, cash, zero-base budgeting (ZBB), performance budget. The principal budget factor (limiting factor) is the one that restricts activity, usually sales.

(d) Process costing

For continuous, standardised production. Normal loss – unavoidable; its cost is absorbed by the good units (scrap value is credited). Abnormal loss – valued like good output and written off. Abnormal gain – the reverse.
$Cost per unit$ $= \frac{Total cost - Scrap value of normal loss}{Input units - Normal loss units}$
$Equivalent units$ $= Units \times % completion$

(e) Activity-Based Costing (ABC)

Cooper and Kaplan. Overheads are assigned on activities, not on volume. Steps: identify activities → make cost pools → find cost drivers → compute rate per driver → assign to products. Useful when overheads are high and products are varied.

(f) Costing for decision-making

Use relevant (differential, future, avoidable) costs; ignore sunk costs. Decisions: make or buy, accept a special order, shut down or continue, product mix. With a limiting factor, rank products by contribution per unit of the limiting factor.

(g) Life cycle, target, kaizen costing and JIT

Life cycle costing: all costs over a product's life – R&D, production, marketing, after-sales, disposal.
Target costing: design the product to meet a target cost (Japan, Toyota).
$Target cost$ $= Target price$ $- Target profit$
Kaizen costing: continuous small cost reductions during production.
JIT (Just-In-Time): produce or buy only what is needed, when needed (Taiichi Ohno, Toyota). Cuts inventory and waste; uses kanban cards.

6. Financial statement analysis

Ratio	Formula
Current ratio (ideal 2 : 1)	$\frac{Current assets}{Current liabilities}$
Quick ratio (ideal 1 : 1)	$\frac{Quick assets}{Current liabilities}$ Quick assets = current assets − inventory − prepaid expenses
Debt–equity	$\frac{Long-term debt}{Shareholders' equity}$
Interest coverage	$\frac{E B I T}{Interest}$
Gross / Net profit ratio	$\frac{Gross (Net) profit}{Net sales}$ $\times 100$
ROCE	$\frac{E B I T}{Capital employed} \times 100$
ROE	$\frac{Net profit - Preference dividend}{Equity}$ $\times 100$
Inventory turnover	$\frac{Cost of goods sold}{Average inventory}$
Debtors turnover	$\frac{Credit sales}{Average debtors}$
EPS / P-E ratio	$E P S$ $= \frac{Earnings for equity}{No. of shares}$ $P / E = \frac{Market price}{E P S}$

Funds flow analysis: "funds" = working capital. It shows sources and applications of funds and has a Statement of Changes in Working Capital.
$Funds from operations$ $= Net profit$ $+ Non-fund expenses (e.g. depreciation)$ $+ Loss on sale of assets$ $- Non-fund gains$
Cash flow analysis (AS-3 / Ind AS 7): three sections – Operating, Investing, Financing. Operating can be direct or indirect method. Indirect sequence: Net profit before tax and extraordinary items → Operating profit before working capital changes → Cash generated from operations → Cash flow before extraordinary items → Net cash from operating activities.
Difference: Funds flow = working-capital basis; Cash flow = cash basis (a narrower, more exact view).

7. HR accounting, inflation accounting, environmental accounting

Human Resource Accounting (HRA): treats people as assets and measures their value. Approaches: Historical cost (Brummet, Flamholtz & Pyle); Replacement cost; Opportunity cost (Hekimian & Jones); Standard cost (David Watson); Present value of future earnings (Lev & Schwartz).
Inflation accounting: adjusts historical-cost accounts for price changes. Current Purchasing Power (CPP) uses a general price index; Current Cost Accounting (CCA) uses replacement cost. Gain or loss arises on monetary items. Ind AS 29 covers hyperinflationary economies.
Environmental accounting: records environmental costs, liabilities (provisions under Ind AS 37) and benefits; includes natural-resource and carbon accounting. In India, SEBI's BRSR (Business Responsibility and Sustainability Report) is required of the top listed companies.

8. Indian Accounting Standards (Ind AS) and IFRS

IFRS are issued by the IASB (London). Ind AS are converged with IFRS, notified by the Ministry of Corporate Affairs (Companies (Indian Accounting Standards) Rules, 2015) on ICAI's recommendation. NFRA (2018) oversees standards and audit quality. Phased applicability from 2016-17 to larger companies (net worth ₹250 crore and above).

Ind AS	Subject
1	Presentation of Financial Statements
2	Inventories
7	Statement of Cash Flows
12	Income Taxes
16	Property, Plant and Equipment
24	Related Party Disclosures
36	Impairment of Assets
37	Provisions, Contingent Liabilities and Assets
38	Intangible Assets
103	Business Combinations
109	Financial Instruments
110	Consolidated Financial Statements
115	Revenue from Contracts with Customers
116	Leases

9. Auditing

(a) Independent financial audit

Examination of financial statements by an independent person to give an opinion on whether they show a true and fair view. It is compulsory for companies and many entities set up under special Acts.
Companies Act, 2013: Section 139 – appointment (individual auditor: one 5-year term; firm: up to two terms of 5 years; cooling period 5 years). Section 141 – qualifications. Section 143 – powers and duties; the audit report. Section 144 – prohibited services.

(b) Vouching

Examining documentary evidence (vouchers – invoices, receipts, bills, debit and credit notes) for entries in the books. Object: the transaction is genuine, authorised and correctly recorded. It checks transactions – not balance sheet items alone.

(c) Verification and valuation of assets and liabilities

Verification = proving existence, ownership (title), possession, completeness, valuation and disclosure of items in the Balance Sheet. Valuation = checking the correct value; the auditor can rely on experts (not a valuer himself).

(d) Audit of financial statements and audit report

Report under Section 143 in line with Standards on Auditing (SA 700 series). Unmodified (clean) opinion – the statements are prepared in all material respects in line with the reporting framework. Modified opinions: Qualified ("except for"), Adverse (statements misleading), Disclaimer (cannot form an opinion). Emphasis of Matter paragraph (SA 706) draws attention to something without changing the opinion. CARO 2020 adds specified reporting. Also Key Audit Matters (SA 701) for listed companies.

(e) Cost audit

Section 148 of the Companies Act, 2013; Cost Records and Audit Rules, 2014. Applies to specified industries above set turnover limits. Conducted by a Cost Accountant, appointed by the Board; the report is filed in Form CRA-3.

10. Recent trends in auditing

Management audit: evaluates management's efficiency and policies. Not compulsory under any law.
Energy audit: reviews energy use and savings. Energy Conservation Act, 2001; BEE (Bureau of Energy Efficiency); mandatory for notified "designated consumers".
Environment audit: checks compliance with environmental laws and the impact of operations; an annual Environmental Statement (Form V) is required under the Environment (Protection) Rules.
Systems audit (IT audit): reviews information-system controls, security and data integrity.
Safety audit: reviews workplace safety, hazards and compliance (e.g. Factories Act).

Quick revision

$Sacrificing ratio = old - new$ ; $Gaining ratio = new - old$ . Garner v. Murray – last fixed capital ratio.
Merger conditions: 90% of equity; pooling method. Ind AS 103 = acquisition method. Ind AS 110 = consolidation.
$BEP (₹) = \frac{F C}{P / V ratio}$ . $Target cost = target price - target profit$ .
Cash flow sections: operating, investing, financing. Ind AS 7 = cash flows.
Vouching = transactions; verification = balance sheet items. Types of opinion: unmodified, qualified, adverse, disclaimer.