ACCOUNTS

last minute revision

CS ABHISHEK OJHA
(CS,M.COM,LL.B.,UGC NET COMMERCE)
(TEACHING EXPRIANCE = 7+ YEARS)
(SLECTED AS JAO IN BSNL- 2ND RANK)

A RAMBAN
FOR
JVVNL AVVNL JDVVNL JR. ACCOUNTANT EXAM

Join our commerce family by subscribing

COMMERCE MERI JAAN

on YouTube

A family only for positive students

Note : Negative people hamari is youtube family s 10 km

dur hi rahe….

1|Page
✓ International accounting standard committee (IASC) who
renamed as Informational financial reporting board set up in 1973
on 23rd June.
✓ Institute of Chartered Accountant of India on 21st April 1977
set up the Accounting Standard board.
✓ Accounting standard are a set of guidelines i.e Generally
Accepted Accounting principles issued by accounting body of
country.
✓ Accounting standard as a code of conduct imposed on an
accountant by custom, law & professional body.

✓ Accounting standard as follows- (SHORT CUT)

AS-1 = Accounting policies

AS-2 = Inventory

AS-3 = cash flow statement

AS-4 = contingencies event

AS-5 = prior period

AS-6 = depreciation

AS-7 = construction

AS-8 = Research & development

AS-9 = revenue recognition

AS-10 = Fixed assets

2|Page
AS-11 = Foreign exchange rate

AS-12 = Government Grant

AS-13 = Investment

AS-14 = Amalgamation

AS-15 = retirement

AS-16 = Borrowings

AS-17 = Segment

AS-18 = Related

AS-19 = Lease

AS-20 = EPS

AS-21 = Consolidated

AS-22 = Tax

AS-23 = Assessment

AS-24 = Continuity

AS-25 = Interim

AS-26 = Intangible

AS-27 = Joint ventures

AS-28 = Impairment

AS-29 = contingent assets & liabilities

AS-30 = Recognition & Measurement

3|Page
 AS-31 = Presentation

AS-31 = Disclosure

✓ Father of Accounts – Lucas Pacioli 1494,

✓ Accounting principles+ concepts+ accounting conventions
commonly known as GAAP (Generally accepted accounting
principles) on the basis of which financial statements are to be
prepared.
✓ Principles of accounting are the general law or rule adopted or
proposed as a guide to action, a settled ground or basis of
conduct or practices.
✓ Accounting concepts are the basic assumptions of fundamental
propositions within which accounting operates.

Concepts are as follows-

1) Going concern- according to this it is assumed that business shall

continue for a foreseeable period and there is no intention to close the
business or scale down its operations. It is because of this concept
that a distinction between capital & revenue expenditure.

2)Consistency assumptions- accounting practices once selected and

adopted should be applied consistency year after year. Change if law or
accounting standard requires, straight line method and written down
value method.

3) Accrual assumptions- A transactions is recorded in the books of

accounts at the time when it is entered into and not when the
settlement takes place. Thus revenue is recognized when it is realized.
The concept is particularly important because it recognizes the assets,

4|Page
liabilities, income and expenses as and when transactions relating to it
are entered into.

4) Accounting entity or business entity- according to business entity

principle business is considered too be separate and distinct from its
owners. Business transactions therefore are recorded in the books of
accounts from the business point of view and not from that of the
owners. The accounting entity principle is a useful principle as from it
responsibility accounting has developed.

5) Money measurement principle- According to the money measurement

principle, transactions and events that can be measured in money terms
are recognized in the books of accounts of the enterprise. Money is
the common denominator in recording & reporting all the transactions.

6) Accounting period principle- According to accounting period principle

the life of an enterprise is broken into smaller periods so that its
performance is measured at regular intervals. The life of the
enterprise is broken into smaller periods which is termed as accounting
period. An accounting period is the interval of time at the end of which
income statement (P & l account or statement of profit & loss in the
case of a companies and balance sheet are prepared to know the result
and resources of the business.

7) Full disclosure principle – there should be complete and

understandable reporting on the financial statement of all significant
information relating to the economic affairs of the entity. Good
accounting practice requires all material and significant information to
be disclosed. Reason for low turnover should be disclosed.

5|Page
8) Materiality concept – It refers to the relative importance of an
item or an event. An item should be regarded as material if there is a
reason to believe that knowledge of it would influence the decision of
an informed investors.

9) Prudence or conservatism principle- Do not anticipate a profit but

provide for all possible losses. It takes into consideration all
prospective losses but not the prospective profit. The financial
statement present a realistic picture of the state of affairs of the
enterprise and do not paint a better picture than what it actually is
conservatism does not record anticipated revenue but provide all
anticipated expenses & losses. It may be used to create secret
reserve.

10) Cost concept or historical concept- According to this asset is

recorded in the books of accounts at the price paid to acquire it and
the cost is the basis for all subsequent accounting of the assets should
be shown in the book of accounts at its book value. Cost concept brings
objectivity in the preparation and presentation of financial statements.
They are not influenced by the personal bias or judgement.

11) Matching concept – It is necessary to match revenues of the period

with the expenses of that period to determine correct profit or loss
for the accounting period. As per this concept adjustments are made
for all outstanding expenses, prepaid expenses, accrued income,
unearned income. The expenses for an accounting period are matched
against related revenues rather than cash received & cash paid.

12) Dual concept or duality- The transactions entered into by an

enterprise has two aspects a debit and a credit of equal amount.

6|Page
For every debit there is a credit of equal amount in one or more
accounts. Capital = assets.

13) Revenue recognition concept- Revenue is considered to have been

realized when a transactions has been entered into and the obligation
to receive the amount has been established.

14) Verifiable objective concept- It holds that accounting should be

free from personal bias. It means all accounting transactions should be
evidenced and supported by business documents. These supporting
documents are cash memo, invoices, sales bills etc and they provide the
basis for accounting & audit.

CAPITAL AND REVEUNE EXPENDITURE

Capital expenditure- It results in addition to an asset accident

expenditure incurred for improving and extending an existing asset is
called capital expenditure. It makes an asset more valuable & increase
their liability. Money spent on repairs to increase the life of an asset.

✓ Expired cost is called expenses

✓ Betterment of fixed assets or improvement of an asset to
produce more to improve its earning capacity or to reduce its
operating expenses or to increase the life of asset.
✓ Examples of capital expenditure are as follows-
1) Purchase of machinery
2) Purchase of land
3) Cost of making additions to building
4) Enlarging the seating accommodation of a college hall
5) Interest on capital paid during the period of construction

7|Page
 6) Expenditure in connection with or incidental to the purchase or
installation of an asset.
7) Additions and extensions to existing assets.
8) Interest and financing charges paid, brokerage and commission
paid.

Revenue expenditure – A revenue expenditure is one that result in

addition to an expense account. Revenue expenditures do not increase
the earning capacity of the asset nor prolong is estimated useful life
but represent normal maintenance cost. Incurred in one period of the
accounting the full benefit of which is enjoyed in that period only. It
includes all expenses which arise in normal course of business.

✓ Examples are selling and distribution expenses incurred for sale

of finished goods e.g. sales office expenses, delivery expenses &
advertisement expenses.

Some examples when revenue expenditure may become capital

expenditure-

1) Repairs are usually revenue expenditure but if we purchase a second

hand machinery and pay for repairs necessary to make it suitable for
our purpose then such repairs become capital expenditure & should be
added to the cost of the machinery.

2) Wages are usually a revenue charges but if we paid to the employees

for the constructions or erection or installation of the fixed assets of
the business then these become be added to the cost of the fixed
assets concerned .

8|Page
3) Legal expenses are usually a revenue charges but if paid for
conveyancing (transferring property) on acquisition of property should
form an additional cost of the asset acquired.

4) Freight and carriage are usually a revenue item but payments made
for transporting newly acquired asset will form additional cost of the
asset this being treated as capital expenditure.

5) Interest on borrowings and capital generally revenue item is allowed

to be treated as capital item if paid during the period of construction.

6) Preliminary expenses- Initial expenses connected with the formation

of a company though revenue in nature are allowed to be capitalized
and can be shown as an asset in the balance sheet.

Deferred Revenue expenditure – It includes those non-recurring

expenses which are expected to be of financial nature, distributed to
several accounting periods of indeterminate total length. Quasi capital
nature, the benefits which extended to number of years are 3 to 5
years. Research & development, heavy advertisements.

PRINCIPLE OF ERROR

Types of error are error of principle and clerical error.

Clerical error includes error of commission, error of omission,

compensating error.

Error of omission – An error of omission is an error when a

transactions is completely or partially omitted from being recorded in
the books of accounts. When a transactions is completely or partially
omitted to be recorded in books of accounts it is called error of
omission. Goods purchased on credit from Mr. A, this transactions is

9|Page
not recorded in the purchase journal. This is called error of complete
omission.

Error of commission- It is those errors which arise due to wrong

recording, wrong posting, wrong carrying forward, wrong casting
(totaling) of subsidiary books, wrong balancing.

Error of recording- wrong amount

Error of casting- totaling error

Error of carry forward

Error of posting on wrong side

Error of commission results in disagreement of trial balance.

Compensating error- when one mistake nullifies the wrong effect of

another it is called a compensating error. These are two or more error
in number and balance each other. These are generally arithmetical
error.

Error of principle- These are error arising from net observing the
accounting principles correctly eg wages paid for installation of
machinery debited to wages a/c, purchase of fixed assets on credit
recorded in purchase journal. These error will not affect the trial
balance.

✓ Balance sheet prepared on a particular date to determine the

financial position of the concern.

Some important types of Accounting –

1) Inflation accounting- Inflation rate is the percentage of change in

the price level from the previous period. Inflation a/c is to correct the
10 | P a g e
conventional historical cost accounts for the understatement of
inventory and plant used in production i.e the cost of goods sold &
depreciation in order to prevent erosion of capital during inflation.

2) Human resource accounting – It is basically an information system

that tells management what changes are occurring over time to the
human resources of the business.

3) Social Accounting- social accounting and audit is a framework which

allows an organization to build on existing documentation and reporting
and develop a process whereby it can account for its social
performance and draw up an action plan to improve on that
performance and through which it can understand its impact on the
community and be accountable to its key stakeholders.

4) Responsibility accounting- The framework of responsibility

accounting was developed by Prof. AJE Sorgdrager titled
particularization of Indirect cost. Responsibility accounting is a
method of budgeting and performance reporting created around the
structure of the organization. It is designing the accounting system
according to answerability of the managers also called profitability
account and activity account.

RATIO ANALYSIS

✓ Relationship between two figures expressed in arithmetical terms

is called a ratio.
✓ Relationship between two or more variables.
✓ Main objectives of ratio analysis are as follows-
1) Liquidity
2) Leverage/solvency (strength of the firm)

11 | P a g e
 3) Activity ratio(efficiency of assets)
4) Profitability (profit of the firm)

1) Liquidity ratio – ability of firm to meet its current liabilities.

✓ Short term solvency

✓ It includes 3 ratio’s 1-current ratio. 2-liquid ratio. 3-working
capital ratio.

Current ratio

• shows relationship between current assets and current liabilities.

• Its ideal ratio 2:1
• It is susceptible to window dressing
• Current ratio = current assets/ current liabilities

Acid test/ quick ratio / liquid ratio –

• whether the firm is in a position to pay its current liabilities

within a month or immediately.
• Most rigorous test of liquidity
• Ideal ratio 1:1
• Quick ratio = liquid assets/ current liabilities
• Liquid assets include all current assets except stock and prepaid
expenses.

Net working capital ratio = current assets – currents liabilities

2. LEVERAGE OR SOLVENCY RATIO( soundness of the long term

financial policies of the firm)

12 | P a g e
Debt equity ratio –

• desirable 2:1 ,
• relationship between long term loans and shareholders fund or
net worth.

Total assets to debt ratio = total assets/long term loans

• Total assets includes all current as well as fixed assets and

exclude all fictitious assets such as- preliminary expenses,
underwriting commission, share issue expenses, discount on issue,
debit balance of p & l account.

Properitory ratio = equity/ total assets

3. ACTIVITY RATIO OR TURNOVER RATIO

• (it indicates the rapidity with which the resources available to

the concern are being used to produce sales.
• Calculated on the basis of sales or cost of sales.

Inventory turnover ratio/ stock turnover ratio

– relationship between cost of goods sold & average stock

• Cost of goods sold/ average stock

• Indicates whether stock has been efficiently used or not
• Shows the speed with which the stock is rotated into sales or
number of times the stock is turned into sales during the year.
• Higher the ratio better it is
• Ratio can be used for comparing the efficiency of sales policies
of two firms doing same type of business.
• Whose stock turnover is higher will be treated as more efficient.

13 | P a g e
Debtor turnover ratio =

• net credit sales/ average debtors + average BR

• Credit sales= total sales – cash sales
• Average collection period = number of days in year/ debtor
turnover ratio

Creditors turnover ratio/ payables turnover ratio=

• net credit purchase/ average creditors + average bills payable

• It indicates the speed with which the amount is being paid to
creditors
• It increase the credit worthiness of the firm.
• Average payment period = 365 days / creditors turnover ratio

Working capital turnover ratio

= net sales/ working capital

• Important in non- manufacturing concerns\Shows number of

times working capital has been rotated in producing sales.

PROFITABILITY RATIO/ INCOME RATIO

• The efficiency & success of a business can be measured with the

help of profitability ratio.
• Gross profit ratio = gross profit/net sales *100
• Net sales= sales- sales return
• The margin of profit available on sales, higher the gross profit
better it is.

Operating profit-

14 | P a g e
 • measures the proportion of an enterprise cost of sales &
operating expenses.

Operating profit=

cost of goods sold + operating expenses/net sales* 100

Gross profit= net sales- cost of goods sold

Cost of goods sold= net sales- gross profit

Operating expenses include office & administration expenses +

selling & distribution expenses + discount+ bad debt+ interest on short
term loans.

• Not included non- operating expenses such as loss on sales of

assets, loss from fires, charities, donations, income tax.
• Lower operating ratio is better
• Net profit ratio= net profit / net sales * 100
• Operating profit ratio= operating profit/net sales* 100
• Operating profit = gross profit- operating expenses
• EPS (Earning per share) – its shows the overall profitability of a
company.
• Earnings refer to profit available for equity shareholders.
• EPS= net profit (after tax, dividend on interest)/ no of equity
shares
• This ratio is helpful in the determination of the market price of
equity share of the company.
• The capacity of the company to declare dividends on equity
shares.

15 | P a g e
 CASH FLOW STATEMENT

• It is a statement showing inflows (receipts) and outflows

(payments) of cash during a particular period.
• The term cash here stands for cash & cash equivalent.
• It is also known as statement of changes in financial position.
• For past- cash flow, for future – cash budget.
• Cash flow statement prepared at the end of the year.
• It is useful for short term financial planning.
• Three activities are included in this-
1) operating activities
2) investing activities
3) financing activities.
• There is a possibility of window dressing in cash flow statement
so fund flow statement presents a more realistic picture than a
cash flow statement.
• It ignores the accrual concept
• It is of historical nature

Format of cash flow statement (AS-3)

1) CASH FLOW FROM OPERATING ACTIVITIES

• Net profit before tax& extraordinary items
• Adjustment for depreciation, foreign exchange, loss on sale
of fixed assets, gain on sale of fixed assets, interest paid,
interest received, dividend received.
• Operating profit before working capital changes- ADD (+)
decrease in current assets, increase in current liabilities.
Sub (-) Increase in current assets, decrease in current
liabilities.

16 | P a g e
 • Cash generated from operating activities, Income tax paid
• Net cash from operating activities.

2) CASH FLOW FROM INVESTING ACTIVITIES

• Purchase of fixed assets

• Purchase of fixed assets
• Purchase of Investment
• Sale of Investment
• Interest receive
• Dividend received
• Net cash from investing activities

3) CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from issue of share capital

Proceeds from long term borrowings

Repayment of long term borrowings

Interest paid

Dividend paid

Net cash from financing activities

FUND FLOW STATEMENT

• Depicts various sources of funds & their uses.

• ADD (+) Increase in liability, Decrease in assets. SUB (-)
Decrease in liability, increase in assets.
• Statement of change in financial position
1) working capital basis i.e. fund flow statement.
2) cash basis i.e. cash flow statement
17 | P a g e
• Net working capital = current assets – current liabilities
• Fund flow statement shows the sources & uses of working
capital between two balance sheet dates.
• Fund flow statement is a historical record of where the
funds came from & how these were utilized during the
period.
• When the net effect of a transactions is to increase or
decrease the working capital by affecting any elements of
current assets or current liability affect one current
account & one non- current account.
• Working capital increase when increase in current assets/
decrease in current liability
• Working capital decrease when increase in current
liabilities, decrease in current assets.
• Long term planning
• Based on accrual basis.
• Steps in Fund flow statement
1) Change in working capital
2) Fund from operations
3) Sources of fund includes

Fund from operations

Issue of share capital

Issue of debentures

Long term borrowings

Sales of assets / investment

Non-operating income

18 | P a g e
 Profit

Decrease in working capital

4) Application of fund

Loss from operations

Redemption of share capital

Redemption of debenture

Repayment of loan

Purchase of asset/ investment

Payment of dividend

Loss

Increase in working capital

FIANCIAL STATEMENT

Shows the financial performance & financial position

Also called final account prepared from trial balance

Trading account> profit & loss account> balance sheet

In profit & loss account all gains& losses are collected in order to
ascertain the excess of gains over the loss.

Operating profit= net sales- operating cost.

Balance sheet shows the financial position of the business on a

certain date.

19 | P a g e
 A statement which sets out the assets & liabilities of a firm or an
institution as at a certain date.

Manufacturing account > trading account > profit and loss account >
profit & loss appropriation account > balance sheet

GROUPING AND MARSHALLING OF ASSETS & LIABILITIES

Grouping means putting items of a similar nature under a common

accounting head.

Marshalling arrangement of assets & liabilities in a particular order in

the balance sheet.

In order of liquidity (assets which easily converted in to cash)

In order of permanence ( permanently used in the business)

NON PROFIT ORGANIZATIONS

NGO’s are those organizations whose main object is not to earn

profit but render to services to its members & to the society.

Receipts & payments a/c (real a/c) > income & expenditure a/c
(surplus & deficit a/c)> balance sheet.

MERGER AND ACQUISITIONS

MERGER- It refers to a situation when two or more existing firms

combine together and form a new entity.

If a new company incorporated then it is called consolidation or

amalgamation.

If an existing company is merged into another existing company it is

known as absorption.

20 | P a g e
 External reconstruction – it means changing only the name or outer
cover of the company.

Internal reconstruction- Internal reconstruction means to change in

the paid up capital of the company either increase or

decrease after making a settlement with shareholders & creditors for

reducing the paid up capital company has to take a permission

from company law board.

Under sec 80 a company cannot reduce its share capital if it reduce

so then it has to open a new separate a/c capital redemption reserve
a/c but of the revenue reserve a/c for the following purpose-

1) Writing off accumulated losses

2) Writing off preliminary expenses

3) Writing off goodwill

4) Correcting over valued assets

• If any balance left out after this them it has to transfer to

capital reserve.
• When x company takeover y company then x company is known as
purchaser and y Company is known as vendor.
• Purchaser Company has to make a payment to vendor company by
three methods;
1) Net payment method
2) Net assetsmethod
3) Lump sum method

21 | P a g e
 Net payment method – under this method purchase consideration is
discharge in terms of equity share or preference share of new company
against the share & debt of the old company. The assets of the old
company is not to be considered under this method but it is the ratio
of exchange is not given intrinsic value of the two companies are to be
completed.

Intrinsic value = net assets/ number of equity shares.

Net assets method – under this method the net assets of the old
company are to be calculated by subtracting external liabilities the
total assets of the old company & consideration is paid by way of
shares & cash or combination of both.

Lump sum method – under this method a lump sum payment is made to
the vendor company by purchasing company in full settlement of their
assets & liabilities.

• Amalgamation in the nature of merger is known as pooling of

Interest
• Amalgamation in the nature of purchase is known as absorption.
• Conditions to check whether amalgamation is merger or
purchase- : all merger but if any of the condition did not follow
then purchaser-
1) Al the assets & liabilities of the vendor company are to be
taken over by the purchasing company at their original book value.
2) The consideration is discharge by way of shares of new
company only.
3) Atleast 90% shareholders of the vendor company should have
agreed o be the shareholders of the new company

22 | P a g e
 4) The new company should be intended to carry the business of
the old company
5) Any difference in the purchase consideration will be adjusted
by way of general reserve.

HOLDING AND SUBSIDIARY COMPANY

51% stake partially owned

The Company which is taking over is holding & which is being taken
over is subsidiary company.

If x company take over 74% share of y company then remaining

shareholder of y company i.e 26% is called minority interest.

Share which is not taken by holding company is called minority

interest also known as CBS consolidated balance sheet.

Assets and liabilities of subsidiary company are consolidated with

holding company to give a true & fair value to existing shareholders.

TAKEOVERS

Whenever a company holds another company in between the financial

year dates the profit of the subsidiary company upto the extent of
their share is divided in to two parts.

1) Capital profit 2) Revenue profit

The profit which is related to the pre- acquisitions is known as

capital profit which is adjusted against goodwill or capital reserve.

The profit earned by the subsidiary company after post acquisitions

will be treated as revenue profit and will be added in the

23 | P a g e
profit & loss a/c of holding company.

PARTNERSHIP

Partnership is the relation between persons who have agreed to share

the profit and loss of business carried on by all or any of them acting
for all.

Partnership deed – It contains all terms of agreement. It is also

known as articles of partnership.

Payment of drawings

1) If within 6 months- beginning – 3.5 , end = 2.5, middle= 3

2) In a year = beginning- 6.5 end = 5.5 middle

– 6 month 3) In a quarter – beginning – 7.5, end – 4.5, middle- 6 month

Sacrifice ratio- old ratio – new ratio

Goodwill – good name, reputation earned by hardwork & honesty

Gaining ratio= new ratio- old ratio

Retirement of partner – A partner has the right to retire from the

firm after giving due notice in advance. Old partnership comes to an
end after the retirement of a partner but the firm continues and a new
partnership comes into existence between the remaining partners.

Retiring partners entitled to get –

1) Share in goodwill

2) Share in reserves

24 | P a g e
3) Shares in revaluation of assets and liabilities

4) Share in accumulated profit & losses

5) Share in surrender value of joint life policy

When partner retire or dies then we calculate gaining ratio.

On the admission of a partner we calculate sacrifice ratio.

Dissolution of partnership means that the firm closes down its

business and comes to an end.

On dissolution assets of firm are sold and liabilities are paid off and
out of the remaining amount, the accounts of partners are settled.

Realization a/c is opened for disposing off all the assets of the firm
& making payment to all the creditors.

Revaluation a/c is prepared at the time of admission, death and

retirement.

Realization a/c is prepared at the time of dissolution of a company.

COMPANY

A company is an artificial person created by law, having separate

entity with a perpetual succession and a common seal.

Share is the share in the share capital of the market.

There are two types of shares 1) preference share 2) equity share

Some of the important rights of the preference shareholders-

1) They have a right to receive dividend at a fixed rate before any

dividend is paid on the equity shares

25 | P a g e
2) When the company is wound up, they have a right to the return of
capital before that of equity shares.

3) If any dividend is not paid on these shares in any year, the arrears
of the dividend may accumulate.

4) They do not have voting rights.

5) They do not participate in management of company.

Some of the rights of the equity shareholders are as follows-

1) Rate of dividend on equity shares is not fixed. It may vary from year
to year depending upon the availability of profit.

2) Dividend cannot accumulate

3) Payment of dividend is made after the payment of preference

dividend

4) Equity share capital is paid only when preference share capital is

paid out fully.

5) Equity shareholders enjoy voting rights 6) they have full rights to

participate in managed company.

Authorized registered nominal capital > issued capital > subscribed

capital > called up capital > paid up capital.

Authorized capital – It refers to that amount which is stated in the

memorandum of association. This is the minimum capital for which a
company is authorized to issue share during its lifetime.

26 | P a g e
 Issued capital – It is that part of authorized capital which is offered
to the public for subscriptions.

Subscribed capital- It is that part of the issued capital which has

been subscribed by public.

Called up capital – only a part of the face value of a share may be

called by the directors from the shareholders.

Paid up capital – It is the amount received against the cells made on

the shares

CONTROL RATIO

Activity ratio = actual production in standard hour/ budgeted

production in standard hour * 100

Capacity ratio= Actual hour worked/ budgeted working hour * 100

Efficiency ratio = actual production in standard hour / actual hour

worked * 100

MARGINAL COSTING

Fixed cost also called indirect or supplementary cost.

Variable cost also called direct or prime cost

Mixed cost= fixed cost + variable cost

Segregation of cost means to separate fixed cost & variable cost.

Marginal cost is the amount of cost at any given volume of output by

which aggregate costs are changed if the volume of output is increased
or decreased by 1 unit.

27 | P a g e
 Marginal cost- only variable cost

In marginal costing only variable cost are considered in calculating

the cost of product while fixed cost are treated as period cost which
will be charged against revenue of profit.

Contribution= selling price – variable cost

Selling price= contribution + variable cost

Profit= contribution – fixed cost

In marginal method we take only variable cost but in absorption

method we take both fixed cost and variable cost.

In absorption costing both fixed & variable overheads are charged to

production while in marginal costing only variable costs are charged.
Thus under absorption costing there will be either over absorption or
under absorption of fixed overhead. Whereas in marginal costing the
actual amount of fixed overheads is wholly charged to contribution.

Profit volume ratio= contribution/sales, PV ratio depicts the

soundness of a firm.

Pv ratio can be improved by improving contribution & contribution can

be improved by increasing sales, decreasing variable cost, putting more
effort on those products which have higher ratio.

Break even analysis- no profit no loss

BEP units= Fixed cost/contribution per unit

BEP Rs = Fixed cost/ PV ratio

Valuation of stock in marginal costing is higher.

28 | P a g e
 MOS (Margin of safety) = total sales- BEP (SALES)

STANDARD COSTING

Standard costing is one of the most important tools which helps the
management to plan and control cost of business operations.

A standard which can be attained under the most favorable working

conditions is called Ideal standard.

Standard costing is one of the most important tools which helps the
management to plan and control cost of business operations.

All the costs are pre- determined

Difference between pre-determined cost & actual costs are known as

variance.

Some types of standard are as follows-

1) Basic standard- It is a standard which is established for use over a

long period of time.

It remain constant over a long period of time. Base year is choose for
comparison.

2) Current standard- It is for short period &

current condition.

3) Ideal standard – most favorable conditions, best possible operating

conditions.

4) Normal standard – Achieved under normal operating conditions. This

standard is difficult to set as it requires a significant degree of
forecasting.

29 | P a g e
5) Attainable standard (expected standard) – it shows the potential
that a business is attainable to achieve.

VARIANCE

Variance means the difference between standard cost and

comparable actual cost incurred during a period.

Actual cost < standard cost= unfavorable or adverse variance.

Actual cost > standard cost= favorable variance.

Material variance

1) Direct material cost variance=

(standard cost for actual output- actual cost),
standard cost = standard price * standard quantity for actual
output,
actual cost= actual price * actual quantity.
2) Direct material price variance=
actual quantity (standard price- actual price)
3) Material usage/ quantity variance =
standard price (standard quantity for actual output- actual
output)
4) Material mix variance =
(Revised standard quantity – actual quantity) * standard price

RSQ = Standard quantity for each material/ total standard

quantity for all material * total actual quantity of all material.
Or
ifAQ> RSQ then RSQ = total actual quantity/ total standard
quantity * standard quantity of each material.

30 | P a g e
5) Material yield variance = (actual yield – standard yield) * standard
output price, whereas standard output price is the total standard
material cost per unit of output. Standard yield= actual usage of
material / standard usage per unit of output or total actual quantity/
input/ output, standard material cost per unit of output = standard
cost / output.

Direct labor cost variance – the labor directly engaged in the

production of a product is known as direct labor.

The wages paid to such labor is known as direct wages.

Labor variance arises when actual labor cost are different from
standard labor cost.

1) Direct labor cost variance =

standard labor cost – actual labor cost, standard labor cost=
standard hour* standard rate, actual labor cost= actual hour *
actual rate

2) Labor rate variance= actual hour paid (standard rate- actual rate)

3) Labor time variance or labor efficiency variance = standard rate

(standard hour for actual production – actual hour work)

4) Labor idle time variance= idle hour * standard rate

5) Labor mix variance= (revised standard hour- actual hour worked)*

standard rate

6) Labor revised efficiency variance = standard hour of grade/

standard hour * total actual hour.

31 | P a g e
7) Labor yield variance = (Actual yield – standard yield) standard labor
cost per unit, standard yield = standard output/total actual hour *
actual hour worked, standard labor cost per unit = standard cost/
standard output * standard rate.

LIQUIDATION OF COMPANY LIST A TO H

List A – particulars of every description of property not specifically

pledged.

List B – Assets specifically pledged and creditors fully or partly

succeed

List C – list of preference creditors for rates, taxes, salaries, and

wages

List D – list of debenture holders secured by a floating charge

List E – list of unsecured creditors

List F – list of preference shareholders

List G- list of equity shareholders

List H- deficiency account

All the very best for exam

Share as much you can share

32 | P a g e