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Monday, December 26, 2011



What is a Term Finance Certificate (TFC)

What is a Term Finance Certificate (TFC) A corporate debt instrument issued by companies to generate short and medium-term funds. Corporate TFCs offer institutional investors, in particular retirement funds and insurance companies, with a viable high yield alternative to the National Saving Schemes (NSS) and bank deposits. TFCs are also an essential complement to risk free, lower yielding government bonds such as PIB. TFCs can be issued both as a fixed or floating rate instrument and may have a call or put option. TFC Rating A TFC must be rated before issuance. The rating reflects, the credit risk of The TFC, i.e. the issuer’s ability and commitment to repay scheduled TFC payments. Currently two rating agencies PACRA and JCR-VIS are operating in Pakistan. Income/Return structure of TFC Like bonds, TFCs are structured to provide regular income in the form of coupons. Unlike a generic bond, a TFCs principal may gradually be redeemed over the tenor of the instrument. TFCs are exempt from Capital gain tax. However, coupons payments are subject to income tax. * Invest only in listed scrips and carries a minimum BBB rating. Salient features of TFC Redeemable capital Monitored by Trustee Return on investment may be fixed or floating

Thursday, December 22, 2011

Types and Classification of Bill of Exchange:

Types of Bill of Exchange on the Basis of Period: On the basis of period bills are of two types: Demand bills Term bills Demand Bills of Exchange: There is no fixed date for the payment of such bill. They become payable at ay time, when they are presented before payee by the holder. Tem Bills of Exchange: These bills are payable after specified period of time. The period after which these bill become due for payment is called tenor. Types of Bill of Exchange on the Basis of Object: On the basis of purpose of writing the bills, the bills can be classified as: Trade Bills Accommodation Bills Trade Bills: These bills are drawn and accepted against the sale and purchase of goods on credit. These are drawn by the seller (creditor) and accepted by the buyer (debtor). Accommodation Bills: Such bills do not involve any sale and purchase of goods, rather they are drawn without any consideration. The purpose of such bills is to help one party or both the parties financially. Classification of Bills of Exchange: The bills can be classified into two classes given as under: Inland Bill: These bills are drawn in a country upon person living in the same country or made payable in the same country. Both drawer and the drawee reside in the same country. Foreign Bills: These bills are drawn in one country and accepted and payable in another country, e.g. a bill drawn in England and accepted and payable in India. Accounting Treatment of Bill of Exchange: In business concerns, numerous bills of exchange are drawn and accepted. Special journals are used to record bills of exchange, called bill receivable journal and bill payable journal. From these two journals the totals are posted to bills receivable account and bills payable account respectively. Every bill has two different aspects. To the drawer who has sold goods and wants to be paid for them, it is a bill receivable, he hopes to receive money on the due date. Such bills are recorded in the bills receivable journal. It is a sort of asset for the drawer and as good as money. To the acceptor of the bill, who has bought goods on credit and has agreed to honor the bill on the due date, it is a bill payable. The acceptor must arrange in due course the funds available to honor the bill when it falls due. Such bills are recorded in the bills payable journal. Explanation with an Example: We can understand the accounting of bills of exchange with the help of an example. Let us suppose, Mr X is a manufacturer of shoes and Mr. Y is a retail trader of shoes. Mr. Y (the buyer) wishes to buy shoes from the manufacturer but has no money. He is agreed to accept a bill of exchange for 90 days, if goods are sold to him on credit basis. So both the parties agreed. Mr. X supplies goods to Mr. Y worth $10,000 for a 90 days credit and draws upon him a bill for the full value of goods for 90 days on 1st Jan. 2005. The illustration given above can be summarized below:
here are three transactions which have taken place: Mr. X sold goods to Mr. Y worth $10,000 on credit basis. Mr. X drew a bill of exchange on Mr. Y for 90 days for $10,000. On the due date the bill was presented to Mr. Y and he honored the bill (met his obligation on the due date) Journal Entries: Now we shall see how these transactions are recorded in journal of Mr. X and Mr. Y. Mr. X's Journal Transaction No.1 Mr. X sold goods to Mr. Y for $10,000 on credit. The journal entry is: 1st Jan. 2005 Y A/c Dr. Sales A/c (Goods sold on credit) 10,000 10,000 Transaction No. 2 Mr. Y drew a bill on Mr. X for 90 days. The journal entry is: 1st Jan. 2005 Bill receivable A/c Dr. Y A/c (Acceptance received from Mr. Y) 10,000 10,000 Transaction No. 3 On the due date acceptor honors the bill. The journal entry is: 4 April. 2005 Cash/Bank A/c Dr. Bill receivable A/c (Received cash on presentation of bill) 10,000 10,000 Mr. Y's Journal Transaction No.1 Bought goods from Mr. X for $ 10,000. The journal entry is: 1st Jan. 2005 Purchases A/c Dr. X A/c (Goods purchased on credit) 10,000 10,000 Transaction No. 2 Acceptance given to Mr. X instead of paying him cash. The journal entry is: 1st Jan. 2005 X A/c Dr. Bill payable A/c (Acceptance given to Mr. X) 10,000 10,000 Transaction No. 3 Acceptance is met (paid of due date). The journal entry is: 4 April. 2005 Bill payable A/c Dr. Cash A/c (Acceptance is paid in cash) 10,000 10,000 Different Uses of a Bill of Exchange: In the above illustration, we just discussed only one use of a bill of exchange i.e., the drawer retained the bill with himself till due date and then presented to the acceptor, who honored the bill (paid cash to the drawer). Every drawer or receiver of a bill has three options for him. He can retain the bill till the due date. (As discussed above). He can send the bill to his bank for collection. Bank will present the bill before drawee on due date and will collect the amount for drawer. View accounting treatment for this option on "Bill of Exchange Sent to Bank for Collection" page He can endorse the bill to one of his creditors in settlement of his own debts. View accounting treatment for this option on "Endorsement of Bill of Exchange" page He can discount it with his bank if he is in need of money and cannot wait till the due date. View accounting treatment for this option on "Discounting of a Bill of Exchange" page In the same way every acceptor has four possibilities. He may pay the amount of bill on presentation. (As discussed above). He may refuse to honor the bill. It is called dishonor of a bill of exchange. Read Dishonor of Bill of Exchange He may request the drawer to renew the bill (extending the period of payment). Read Renewal of Bill of Exchange He may get the bill retired. (paying his obligation before the due date). Read Retiring a Bill of Exchange Under Rebate.

Saturday, December 17, 2011



24/12/2011 ISLAMIAT PART 1
28/12/2011 STATISTICS PART 1
29/12/2011 B.COMM PART 2
30/12/2011 I.T.B PART 1
31/12/2011 MANAGEMENT PART 2
02/01/2012 ACCOUNTING PART 1
04/01/2012 ENGLISH PART 1
05/01/2012 BUSINESS LAW PART 2
06/01/2012 PAK STUDIES PART 1
07/01/2012 OPTIONAL PART 2
09/01/2012 ECONOMICS PART 1

Friday, December 16, 2011

Accounting for Bills of Exchange

No business wants to sell goods on credit to his customers who may prove unable or unwilling to pay their debts. Today, however, in every field of retail trade it appears that sales and profits can be increased by selling goods on credit basis. The manufacturers and the wholesalers sell goods mostly on credit. Credit is a very powerful instrument to promote sales, so most of the business transactions, in most business concerns, are carried on credit basis. A bill of exchange is a method of payment used between businessmen which has certain advantages over other methods of payment. Definition and Explanation of Bill of Exchange: "An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to the bearer".

 You should keep in mind the following points to understand the definition: The person who writes out the order to pay is called the drawer. The person upon whom the bill of exchange is drawn (who is ordered to pay) is called the drawee. The drawee may "accept" the bill. This is a special use of the word accept because it means that he accepts to pay the amount payable expressed in the bill, i.e. if he accepts the obligation to pay he writes "accepted" across the face of the bill and signs it. From that time on he is know as the "acceptor" of the bill and has absolute liability to honor the bill on the due date. The amount of money must be mentioned clearly. For example, I cannot make out a bill requiring someone to pay the value of my car or house. That is an uncertain sum. It must say "five thousand dollars or ten thousand dollars" etc. The time must be fixed or at least be determinable.

For example, "sixty days after date" is quite easily determinable. If the bill is made out on first July, it will be 29th august. The person who is entitled to receive the money from the acceptor is called the "payee". It is usually the drawer who is supplying goods to the value of the bill, and wants to be paid for them. If the drawer decides, the bill can be made payable to someone else by endorsing it. That is why the definition says, to pay..... to, or the the order of, a specified person. A bill can be made payable to a bearer, but it is risky, since any finder of the bill or any thief, can claim the money from the acceptor. Format of Bill of Exchange: Now read the definition again and see the format of the bill of exchange below:

Important Points: This bill is drawn by the peter & Co., so the drawer of the bill is peter & Co. The bill is drawn upon William & Co., so they are drawee of the bill. They have not yet accepted the bill, and so are not liable to pay it at maturity. The bill is an unconditional order in writing. It says "pay ten thousand dollars to Peter & Co." it does not say "provided you are in funds". It just says "pay!". It is addressed by one person (Peter & Co.) to another (William & Co.) and is signed by the person giving it (Peter & Co.). The date is easily determinable it is 90 days after first July, which is 29 September, 20.... The sum of money is very certain, ten thousand US dollars. The bill is payable to, or to the order of, Peter & Co. How a Bill of Exchange Works? A person who wants to purchase goods but has no money, may agree to accept a bill of exchange drawn upon him at some future date for the value of the goods he wants to purchase. For example, Mr. B (a retail trader) wishes to purchase furniture from a furniture manufacturer (Mr. A) but has no money. Mr. A is agreed to sell furniture for a 90 days credit worth $10,000. The drawer (Mr. A) draws a bill for $10,000 on the customer (Mr. B), the drawee, who accepts it (thus becoming the acceptor of the bill) and returns it to the drawer. The drawer delivers the furniture and has a 90 days bill for $10,000. He can keep the bill till due date and present it on the due date before the acceptor. When a drawee (the acceptor) acknowledges the obligation in the bill he is bound by law to honor the bill on the due date. If he is a reputable person the bill is as good as money, and any bank will discount it. There are special kinds of banks which do this job and they are called discount houses. What do the discount houses do? They cash the bill by giving the drawer the present value of the bill. Present Value = Face value of the bill - Interest at agreed rate for the time the bank has to wait So the drawer who discounts the bill with the bank gets less than the face value. On the due date the bank will present the bill to the acceptor, who honors it by paying the full value. The bank has earned the amount of interest it deducted when it discounted the bill. Where does the acceptor get the money to honor the bill? The answer is that he was given 90 days to sell the goods at profit, and therefore, he is liable to honor the bill. Now it is hoped that you will be able to follow what is happening in the following diagrams:
You can understand the figure above with the help of the following notes: Business activities cannot proceed because the retail trader (Mr. B) has nothing to sell and has no money to buy goods. We need a system by which retailer can purchase goods without paying for them at the moment and which enables the manufacturer (Mr. A) to be paid immediately. Since a bill of exchange from a reputable trader is almost as good as money, it will be acceptable to banks. They have plenty of money to lend out to reliable customers so, they will advance money to the holder of bills of exchange. Now look at the following figure and note how bill of exchange can increase the business activities.
The result is that a bill of exchange is a useful instrument to increase business activities, and is beneficial to all the parties.

Wednesday, December 14, 2011

Introduction to cash flow statement:

Three major financial statements are ordinarily required for external reports―an income statement, a balance sheet, and a statement of cash flows. The purpose of the statement of cash flow is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance. Managers focus on cash for a very good reason―without sufficient cash balance at the right time, a company may miss golden opportunities or may even fall into bankruptcy. The cash flow statement answers questions that cannot be answered by the income statement and a balance sheet. For example a statement of cash flows can be used to answer questions like where did the company get the cash to pay dividend of nearly $140 million in a year in which, according to income statement, it lost more than $1 billion? To answer such questions, familiarity with the statement of cash flows is required. Tag Cloud Business Opportunity Accounting Jobs Government Jobs Internet Marketing Accountant Get the cash The statement of cash flows is a valuable analytical tool for managers as well as for investors and creditors, although managers tend to be more concerned with forecasted statements of cash flows that are prepared as a part of the budgeting process. The statement of cash flows can be used to answer crucial questions such as the following: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to repay its debts? Will the company be able to pay its usual dividends? Why is there a difference between net income and net cash flow for the year? To what extent will the company have to borrow money in order to make needed investments? For the statement of cash flows to be useful to managers and others, it is important that companies employ a common definition of cash. It is also important that a statement be constructed using consistent guidelines for identifying activities that are sources of cash and uses of cash. The proper definition of cash and the guidelines to use in identifying sources are discussed in coming paragraphs. Definition of Cash: In preparing a statement of cash flows, the term cash is broadly defined to include both cash and cash equivalents. Cash equivalents consist of short term, highly liquid investments such as treasury bills, commercial paper, and money market funds that are made solely for the purpose of generating a return on temporary idle funds. Instead of simply holding cash, most companies invest their excess cash reserves in these types of interest bearing assets that can be easily converted into cash. These short term liquid investments are usually included in marketable securities on the balance sheet. Since such assets are equivalent to cash, they are included with cash in preparing a statement of cash flows Sections of cash flow statement: The cash flow statement is usually divided into three sections: Operating, investing and financing activities.
Operating Activities: Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisition of inventory and expenses Investing Activities: Investing activities generally involve long term assets and include (a) making and collecting loans (b) acquiring and disposing of investments and productive long lived assets. Financing Activities: Financing activities involve liability and stock holder's equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them with a return on, and a return of, their investment. Below is the typical classification of of cash receipts and payments according to operating, investing and financing activities. Operating Activities: Cash inflows: From sales of goods or services. From return on loans (interest) and on equity securities. dividends Cash outflows: To suppliers for inventories. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Income Statement Items Investing Activities: Cash inflow: From sale of property, plant and equipment. From sale of debt or equity securities of other entities. From collection of principles on loans to other entities. Cash Outflows: To purchase property, plant and equipment. To purchase debt or equity securities of other entities. To make loans to other entities. Generally Long Term Asset Items Generally Long term Liability and Equity Items Financing Activities: Cash inflows: From sale of equity securities. From issuance of debt ( bonds and notes ). Cash outflows: To stock holders as dividends To redeem long term debt or reacquire capital stock.
Some cash flow relating to investing or financing activities are classified as operating activities. For example, receipts of investment income ( interest and dividend ) and payment of interest to lenders are classified as operating activities. Conversely, some cash flows relating to operating activities are classified as investing or financing activities. For example, the cash received from the sale of property plant and equipment at a gain, although reported in the income statement, is classified as an investing activity, and effects of the related gain would not be included in net cash flow from operating activities. Likewise a gain or loss on the payment of debt would generally be part of the cash out flow related to the repayment of the amount borrowed, and therefore it is financing activity. Format of the cash flow statement: The three activities discussed in preceding paragraphs constitute the general format of the statement of cash flows. The cash flows from operating activities section always appears first, followed by the investing section and then financing activities section. The individual inflows and outflows from investing and financing activities are reported separately. That is, they are reported gross, not netted against one another. Thus, cash outflows from the purchasing of property is reported separately from the cash inflow the sale of property. Similarly, the cash inflow from the issuance of debt is reported separately from the cash outflow from its retirement. The net increase or decrease in cash reported during the period should reconcile the beginning and ending cash balances as reported in the comparative balance sheets. The Skelton cash flow statement is presented as follows: This is also called cash flow statement pro forma. Company Name Cash Flow Statement Format Period Covered Cash Flows From Operating Activities: Net income Adjustment to reconcile net income to net cash provided by operating activities: (List of individual items) Net cash flows from operating activities. Cash Flows From Investing Activities: (List of individual inflows and outflows) Net cash provided (used) by operating activities Cash Flows from Financing Activities: (List of individual inflows and outflows) Net cash provided (used) by financing activities Net increase (decrease) in cash Cash at beginning of period Cash at the end of period
The purpose of the statement of cash flows is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance. Managers focus on cash for a very good reason―without sufficient cash balance at the right time, a company may miss golden opportunities or may even fall into bankruptcy. The cash flow statement answers questions that cannot be answered by the income statement and a balance sheet. For example a statement of cash flows can be used to answer questions like where did the company get the cash to pay dividend of nearly $140 million in a year in which, according to income statement, it lost more than $1 billion? To answer such questions, familiarity with the statement of cash flows is required. The cash flow statement is a valuable analytical tool for managers as well as for investors and creditors, although managers tend to be more concerned with forecasted statements of cash flows that are prepared as a part of the budgeting process. cash flow statement can be used to answer crucial questions such as the following: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to repay its debts? Will the company be able to pay its usual dividends? Why is there a difference between net income and net cash flow for the year? To what extent will the company have to borrow money in order to make needed investments?

Wednesday, November 30, 2011

Maslow's Theory of Motivation - Hierarchy of Needs

In 1943, Dr. Abraham Maslow 's article "A Theory of Human Motivation" appeared in Psychological Review, which were further expanded upon in his book: Toward a Psychology of Being In this article, Abraham H. Maslow attempted to formulate a needs-based framework of human motivation and based upon his clinical experiences with people, rather than as did the prior psychology theories of his day from authors such as Freud and B.F. Skinner, which were largely theoretical or based upon animal behavior. From this theory of motivation, modern leaders and executive managers find means of motivation for the purposes of employee and workforce management. Abraham Maslow's book Motivation and Personality (1954), formally introduced the Hierarchy of Needs.

The basis of Maslow's motivation theory is that human beings are motivated by unsatisfied needs, and that certain lower factors need to be satisfied before higher needs can be satisfied. According to Maslow, there are general types of needs (physiological, survival, safety, love, and esteem) that must be satisfied before a person can act unselfishly. He called these needs "deficiency needs." As long as we are motivated to satisfy these cravings, we are moving towards growth, toward self-actualization. Satisfying needs is healthy, while preventing gratification makes us sick or act evilly.

As a result, for adequate workplace motivation, it is important that leadership understands the needs active for individual employee motivation. In this manner, Maslow's model indicates that fundamental, lower-order needs like safety and physiological requirements have to be satisfied in order to pursue higher-level motivators along the lines of self-fulfillment. As depicted in the following hierarchical diagram, sometimes called 'Maslow's Needs Pyramid' or 'Maslow's Needs Triangle', after a need is satisfied, it stops acting as a motivator and the next need one rank higher starts to motivate as it attain psychological precedence.


Esteem Needs

Social Needs

Safety Needs

Physiological Needs


Self-actualization is the summit of Maslow's motivation theory. It is about the quest of reaching one's full potential as a person. Unlike lower level needs, this need is never fully satisfied; as one grows psychologically there are always new opportunities to continue to grow.

Self-actualized people tend to have motivators such as:

Self-actualized persons have frequent occurrences of peak experiences, which are energized moments of profound happiness and harmony. According to Maslow, only a small percentage of the population reaches the level of self-actualization.

Esteem Needs

After a person feels that they "belong", the urge to attain a degree of importance emerges. Esteem needs can be categorized as external motivators and internal motivators.

Internally motivating esteem needs are those such as self-esteem, accomplishment, and self respect. External esteem needs are those such as reputation and recognition.

Some examples of esteem needs are:

Recognition (external motivator)
Attention (external motivator)
Social Status (external motivator)
Accomplishment (internal motivator)
Self-respect (internal motivator)
Maslow later improved his model to add a layer in between self-actualization and esteem needs: the need for aesthetics and knowledge.

Social Needs

Once a person has met the lower level physiological and safety needs, higher level motivators awaken. The first level of higher level needs are social needs. Social needs are those related to interaction with others and may include:

Belonging to a group
Giving and receiving love
Safety Needs

Once physiological needs are met, one's attention turns to safety and security in order to be free from the threat of physical and emotional harm. Such needs might be fulfilled by:

Living in a safe area
Medical insurance
Job security
Financial reserves
According to the Maslow hierarchy, if a person feels threatened, needs further up the pyramid will not receive attention until that need has been resolved.

Physiological Needs

Physiological needs are those required to sustain life, such as:

According to this theory, if these fundamental needs are not satisfied, then one will surely be motivated to satisfy them. Higher needs such as social needs and esteem are not recognized until one satisfies the needs basic to existence.

Applying Maslow's Needs Hierarchy - Business Management Implications

If Maslow's theory is true, there are some very important leadership implications to enhance workplace motivation, and you don't need a masters in applied psychology, for it to be evident. There are employee motivation opportunities by motivating each employee through their style of management, compensation plans, role definition, and company activities.

Physiological Motivation: Provide ample breaks for lunch and recuperation and pay salaries that allow workers to buy life's essentials.
Safety Needs: Provide a working environment which is safe, relative job security, and freedom from threats.
Social Needs: Generate a feeling of acceptance, belonging, and community by reinforcing team dynamics.
Esteem Motivators: Recognize achievements, assign important projects, and provide status to make employees feel valued and appreciated.
Self-Actualization: Offer challenging and meaningful work assignments which enable innovation, creativity, and progress according to long-term goals.
Remember, everyone is not motivated by same needs. At various points in their lives and careers, various employees will be motivated by completely different needs. It is imperative that you recognize each employee's needs currently being pursued. In order to motivate their employees, leadership must be understand the current level of needs at which the employee finds themselves, and leverage needs for workplace motivation.

Maslow's Theory - Limitations and Criticism

Though Maslow's hierarchy makes sense intuitively, little evidence supports its strict hierarchy. Actually, recent research challenges the order that the needs are imposed by Maslow's pyramid. As an example, in some cultures, social needs are placed more fundamentally than any others. Further, Maslow's hierarchy fails to explain the "starving artist" scenario, in which the aesthetic neglects their physical needs to pursuit of aesthetic or spiritual goals. Additionally, little evidence suggests that people satisfy exclusively one motivating need at a time, other than situations where needs conflict.

While scientific support fails to reinforce Maslow's hierarchy, his thery is very popular, being the introductory motivation theory for many students and managers, worldwide. To handle a number of the issues of present in the Needs Hierarchy, Clayton Alderfer devised the ERG theory, a consistent needs-based model that aligns more accurately with scientific research.

Monday, October 31, 2011

Post-Keynesian Economics

Post-Keynesian Economics Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson. Keynes' biographer Lord Skidelsky writes that the post-Keynesian school has remained closest to the spirit of Keynes' work, particularly in his monetary theory and in rejecting the neutrality of money. Introduction Post-Keynesian economists maintain that Keynes' theory was seriously misrepresented by the two other principle Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s - and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. 

Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes's ideas and insights. However even in the early years in the late 1940s post-Keynesians such as Joan Robinson sought to distance themselves from Keynes himself, as well as from the then emergent neo-Keynesianism. Some post-Keynesians took an even more progressive view than Keynes with greater emphases on worker friendly policies and re-distribution. Robinson, Paul Davidson and Hyman Minsky were notable for emphasising the effects on the economy of the practical differences between different types of investments in contrast to Keynes more abstract treatment. A feature of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. Contrary to a view often expressed, the theoretical basis of this market failure is not rigid or sticky prices or wages (as in New Keynesian economics, which is best regarded as a modified form of neoclassical economics[citation needed]). 

Many post-Keynesians reject the IS/LM model of John Hicks, which was very influential in neo-Keynesian economics. The positive contribution of post-Keynesian economics has extended beyond the theory of aggregate employment to theories of income distribution, growth, trade and development in which demand plays a key role, whereas in neoclassical economics these are determined by the supply side alone. In the field of monetary theory, post-Keynesian economists were among the first to emphasise that the money supply responds to the demand for bank credit, so that the central bank can choose either the quantity of money or the interest rate but not both at the same time. This view has largely been incorporated into monetary policy, which now targets the interest rate as an instrument, rather than the quantity of money. In the field of finance, Hyman Minsky put forward a theory of financial crisis based on financial fragility, which has recently received renewed attention. Strands There are a number of strands to post-Keynesian theory with different emphases. 

Joan Robinson regarded as superior to Keynes’s Michal Kalecki’s theory of effective demand, based on a class division between workers and capitalists and imperfect competition. She also led the critique of the use of aggregate production functions based on homogeneous capital – the Cambridge capital controversy – winning the argument but not the battle. Much of Nicholas Kaldor’s work was based on the ideas of increasing returns to scale, path dependency, and the key differences between the primary and industrial sectors.

Paul Davidson follows Keynes closely in placing time and uncertainty at the centre of theory, from which flow the nature of money and of a monetary economy. Monetary circuit theory, originally developed in continental Europe, places particular emphasis on the distinctive role of money as means of payment. Each of these strands continues to see further development by later generations of economists, although the school of thought has been marginalized within the academic profession. Current work Journals Much post-Keynesian research is published in the Journal of Post Keynesian Economics (founded by Sidney Weintraub and Paul Davidson), the Cambridge Journal of Economics, the Review of Political Economy and the Journal of Economic Issues (JEI). UK There is also a UK academic association, the Post Keynesian Economics Study Group (PKSG). US Kansas City School In America, there is a center of post-Keynesian work at the University of Missouri – Kansas City, dubbed "The Kansas City School", together with the Center for Full Employment and Price Stability, which run a Post Keynesian Conference and Post Keynesian Summer School, together with a group blog, Economic Perspectives from Kansas City. Their research emphasis includes Neo-Chartalism, job guarantee programs, and economic policy. 

Major post-Keynesian economists Main article: List of Post-Keynesian economists See also: Category:Post-Keynesian economists Major post-Keynesian economists of the first and second generation after Keynes include: • Victoria Chick • Paul Davidson • Alfred Eichner • Geoff Harcourt • Nicholas Kaldor • Michał Kalecki • Hyman Minsky • Basil Moore • Luigi Pasinetti • Joan Robinson • G. L. S. Shackle • Anthony Thirlwall • Sidney Weintraub • Jan Kregel • L.Randall Wray • Frederic S. Lee • Fernando Cardim de Carvalho Post-Keynesian theories • Job guarantee, from the Kansas City School • Monetary circuit theory, often associated with post-Keynesian economics • Neo-Chartalism, another post-Keynesian theory of money See also • Keynesian economics • New Keynesian economics Notes 1. ^ There is semantic dispute as to whether there should be a hyphen between Post and Keynesian. The American journal of the same name does not use the hyphen despite its grammatical correctness, and the objection to its use dates back to Paul Samuelson's claim to be a Post-Keynesian. However Harcourt 2006 uses the hyphen, following Joan Robinson's original use of the phrase. 2. ^ Skidelsky 2009, p. 42 3. ^ Financial markets, money and the real world, by Paul Davidson, pp. 88–89 4. ^ Hayes 2008 5. ^ Arestis 1996 6. ^ For a general introduction see Holt 2001 7. ^ Kaldor 1980 8. ^ Minsky 1975 9. ^ Robinson 1974 10. ^ Pasinetti 2007 11. ^ Harcourt 2006, Pasinetti 2007 12. ^ Davidson 2007 Post Keynesian Economics (1970s-80s) What is post keynesian economics Thanks to Samuelson's reconciliation, today neoclassical economics is known as microeconomics and Keynesian economics has become largely known as macroeconomics the twin pillars of mainstream or orthodox economic thought. However, because this reconciliation clearly disavowed many of Keynes's original ideas that were not held to be compatible with neoclassical economics, many critics have sought to revive some of them and to combine them with theories of scholars such as Michael Kalecki, Joan Robinson, and Piero Sraffa to form a new school of economic thought known as "post-Keynesian Economics" (see Eicher, 1979). Post-Keynesians are highly concerned with short-term economic growth as induced by aggregate demand and, unlike neo-classical economists, are concerned with real world variables that exist in a very concrete historical situation. For them, the adjustment process of the economy to equilibrium conditions is not so "automatic" as neoclassical economist's claimed because it largely depends on the economic agent's interpretation of both the past and expectations for the future all in the midst of a decision making setting involving complex interdependencies and unforeseen factors. As a result of these beliefs, post-Keynesians essentially deny relevance of conventional equilibrium analysis. Moreover, reliance on the role of uncertainty has created some problems for post-Keynesians because it has made it nearly impossible for them to devise any viable theory for long-term growth. It has further prevented them from developing a formal economic model that they all agree upon. According to Professor J. A. Kregel (1976), one of the most distinguished post-Keynesian economists, "post-Keynesian theory can be viewed as an attempt to analyze various different economic problems, e.g., capital accumulation, income distribution, etc., through the methodology of Keynes." Keynes's methodology, then, was to confront "the analysis of an uncertain world was in terms of alternative specifications about effects of uncertainty and disappointment." Using this approach while adopting theories of both Keynes and Kalecki, post-Keynesians have analyzed the relationship between income distribution and economic growth. One of the most significant conclusions of post-Keynesian economics is that for a given level of investment and an economy at equilibrium where savings equals investment, the lower the capitalist's propensity to save, the higher will be their share of national income and the lower will be the worker's share. This assertion is significant because it contradicts the claim by neoclassical economists that capitalists enjoyed a high income due to the pain that is necessary for them to save. This result of the post-Keynesians is founded in their belief that saving is passively linked to changes in level of income, and investment is highly correlated with capitalists' expectations for the future. If optimistic, investment increases, growth occurs, and capitalists' share of income increases as well. As their income rises, capitalists save more bringing savings back in line to a new level of Keynesian equilibrium where savings and investment equate. What this means is that if capitalists are frugal (i.e. save more), or if they are abstemious (i.e. abstain from consuming), they lower their share of the national income. This, of course, directly violates Nassau Senior's assertion that the high income of capitalists was morally justified by their painful abstinence of personal consumption and willful propensity to reinvest their profits into the growth of capital. Another area where post-Keynesians have divergent economic thought from orthodoxy has to do with their belief in the endogenity of money. For them, post-Keynesians stress the fact that real commodity and labor flows are expressed in the economy as monetary flows. They also assume that money possesses a negligible elasticity of substitution with any other medium of exchange and therefore has the unique capacity to be able to be used by financial institutions as a tool to mitigate the effects of exogenous economic system shocks.

Monday, October 17, 2011



1. A and B each carrying on business as a sole trader decided to combine as on January 1,2002 when their individual Balance Sheets were as follows.
Creditors 30,000 25,000 Cash 14,000 8,000
Bank Overdraft 20,000 15,000 Debtors 50,000 40,000
Capital 62,000 31,000 Stock 18,000 11,000
Machinery 20,000 12,000
National war
_______ ______ Bonds 10,000 -____
1,12,000 71,000 1,12,000 71,000 _

The following revaluations were to be made before the firms were amalgamated:
(a) A provision of 5% is to be made against debtors.
(b) Stock was to be reduced in case of A by 10% and in case of B by 5%.
(c) Machinery is to be reduced by 20%.
(d) Each partner is to be credited with goodwill of Rs.20,000.
(e) The bank overdraft of B is to be paid off by him.
(f) National war bonds of A were not take over.

B should introduce cash to make his capital equal of that of A.
You are required to pass the necessary journal entries to close the books of A and B and the opening entries in the books of the new firm. Prepare also the Balance Sheet of the new firm.

2. M/S A and Co., having A and B as equal partners, decided to amalgamate with C and Co., have C and D as equal partners on the following terms and condition:
1. The new firm to take investments at 10% depreciation, land at Rs.80,000, premises at Rs.45,000, machinery at Rs.9,000 and to take over only the trade liabilities of both the firms, the debtors being taken over at book value including provision.
2. The new firm to pay Rs.12,000 to each firm for Goodwill.
3. Typewriters at the written off value of Rs.800, belonging to C and Co., and not appearing in the B/S was also not taken over by the new firm.
4. It was also agreed that the furniture belonging to both the firms be not taken over by the firm.
5. All the four partners in the new firm to bring in Rs.1,60,000 as capital in equal shares.
The following were the Balance Sheets of both the firms on the date of amalgamation;
Balance Sheets
Liabilities A & Co,. C & Co,. Assets A & Co, C & Co,.
Rs. Rs Rs. Rs
Sundry Creditors 20,000 10,000 Cash at Bank 15,000 8,000
Bills Payable 5,000 Investment 10,000 8,000
Bank Overdraft 2,000 10,000 Rs.
A’s Loan 6,000 Debtors 10,000

Capitals: Less: Provision 1,000
A 35,000 9,000 8,000
B 22,000 Furniture 12,000 6,000
C 36,000 Premises 30,000
D 20,000 Land 50,000
General Reserve 8,000 3,000 Machinery 15,000
Investment Goodwill 9,000
Fluctuation Fund 2,000 1,000 _______ _______
1,00,000 80,000 1,00,000 80,000_

Pass journal entries in the books of both the firms and prepare a Balance sheet of the new firm.

3. Following were the Balance Sheets of two firms M/s R and S and M/s X and Y as on 31st December, 2001:
M/s R and S
Rs. Rs.
Creditor 3,000 Stock 50,000
Bills payable 6,000 Debtors 30,000
Capitals: 50,000 Premises 20,000
R 50,000 Plant and Machinery 5,000
S 50,000 Bank 1,500
Furniture 500
_______ Investment 2,000
1,09,000 1,09,000

M/s X and Y
Rs. Rs.
Creditor 25,000 Stock 75,000
Bank C/d 10,300 Debtors 45,000
X’s Capitals: 52,500 Plant and Machinery 20,000
Y’s Capitals 52,500 __ Furniture 300____
1,40,300 1,40,300

The two firms decided to amalgamate their respective business from 1st January 2002. For this purpose it was agreed that the premises and plant and machinery belonging to R&S should be taken over by the new firm at Rs.25,000 and Rs.10,000 respectively. X & Y to be credited with Rs.5,000 for certain patent rights they possessed which became the property of the partnership and which were not included in their Balance Sheet. All the other assets were taken over at the values stated in the respective Balance sheets except the investment belonging to R and S which were not take over. Both firms undertook to discharge their own liabilities.

Prepare ledger accounts in the books of the old firms and Balances Sheet of the new firm.

4. Following were the Balance Sheets as at 31st December, 2001 of two firms M/s P & Q and M/s R &S.

P & Q R & S P & Q R & S
Rs. Rs Rs. Rs
Creditors 3,000 25,000 Stock 50,000 75,000
Bills Payable 6,000 - Debtors 30,000 45,000
Bank Overdraft - 10,300 Premises 20,000 - Capitals: Plant and Machinery 5,000 20,000
P 50,000 Bank 1,500 -
Q 50,000 Furniture 500 300
R - 52,500 Defence Bonds 2,000 - S - 52,500 _______ _______
1,09,000 1,40,300 1,09,000 1,40,300

The two firms decided to amalgamate their business from 1st January 2002. For this purpose it was agreed that the premises and plant and machinery belonging to P&Q taken over by the new firm at Rs.25,000 and Rs.10,000 respectively. R & S were to be credited with Rs.5,000 at the value of certain patent rights they possessed which became the property of the partnership and which were not included in their Balance Sheet. All the other assets were taken over a book values. Both firms undertook to discharge their own liabilities and it was agreed that P&Q should introduce cash to make their capital equal to that of R&S
Pass incorporating entries in the books of the new firm and prepare also the Balances Sheet of the new firm.

Wednesday, October 12, 2011

Branch Accounting. Theory & Practice Exercises

Objectives of Branch Accounting

The main object of keeping branch accounts is dependent on the nature of the business and specific need of a particular branch. The objectives of keeping the branch accounts acceptable to all business are (i) To know the profit or loss of each branch separately. (ii) To ascertain the financial position of each branch on a particular date. (ii) To know the cash and goods requirements of the various branches (iv) To evaluated the progress and performance of each branch. (v) To calculate commission for payment to the managers, if based on profits of branch. (v) To know the profitability of each branch and type of business for expansion of the business. (vii) To give concrete suggestions for the improvement in the working of the various branches (viii) To meet the requirements of specific enactments as all branches of a company must keep the accounts for audit purposes.

Treatment of Certain Branch Transactions

1. Branch expenses paid by the branch out of petty cash: Such expenses will be deducted from the branch cash and at the close reduced balance of cash will be shown on the credit side of the branch account as such expenses need not be shown in the branch account.

2. Depreciation of fixed assets: This is not shown in the branch account. But the closing balance of the fixed assets will be shown on the credit side of the branch account after deduction of the amount of depreciation.

3. Credit sale, bad debts, sales returns, allowances and discount allowed pertaining to branch as these are not direct transactions between branch and head office: These items are pertaining to the debtors account and will not be shown in the branch account. However, these items will be taken into consideration while ascertaining the amount of opening or closing balance of debtors or amount received from debtors, which are shown in the branch account.

4. Goods in transit: Goods in transit is the difference between goods sent by head office and received by the branch. Such goods will be shown either on the both sides of the branch account or will be ignored totally while preparing the branch accounts.

Invoice Price Method
When the goods are sent by the head office to the branch at invoice price i.e., cost plus some percentage of profit, the branch manager is required to sell the goods at invoice price only. Goods are marked on invoice price to achieve the following objectives:
(i) In order to keep secret from the branch manager the cost price of the goods and profit made, so that the branch manager many not start a rival and competitive business with the concern; and
(ii) In order to have effective control on stock i.e, stock at any time must be equal to opening stock plus goods received from head office minus sales made at the branch.

I Debtors System

A. When goods are sent to branch at cost

1. From the following particulars relating to Delhi Branch for the year ending 31st march 2001, prepare branch account in the head office books:
Balance as on 1-4-2000 Rs Rs
Stock at the branch 15000 Credit sales during 2001-01 228000
Debtors at the branch 30000 Cheques sent to branch
Petty cash at the branch 300 during the year:
goods sent to branch during the year: 252000 for salaries 9000
Remittance from the branch for rent and taxes 1500
for cash sales 60000 For Petty cash 1100 11600
received from debtor 210000 270000 Balance as on 31-12-2001
Goods returned by the branch 2000 Stock at the Branch on 25000
Petty cash 200
Debtors 48000

2.Sincere Brothers of Delhi opened a branch at Kanpur on January 2000. From the following figures prepare kanpur Branch accounts in the book of sincere brothers for the year ending December 31, 2000&2001.
2000 2001
Goods sent to kanpure Branch 100000 120000
Expenses paid by the head office
Rent 1200 1200
Salaries 6000 6000
Advertisement 600 800
Cash sales at branch 120000 165000
Remittance received from the branch 160500
Remittance made on December 30,still in transit 4000
Expenses paid by the branch:
Carriage 200 250
Petty expenses 300 400
Stock on December 31 20000 30000
Petty cash in hand 200

B. When goods are sent to branch at invoice price

3. A head office in madras has a branch in Delhi to which goods are invoiced by the head office at cost plus 25%. All cash received by the branch is daily remitted to head office. Form the following particulars; show how the branch Account will appear in the H.O. books. Entries are to be made at invoice price

Stock on January 1,2001(at invoice Price) 62500
Debtors on 1-1-2001 60000
Goods Supplied by H.O.(at invoice Price) 200000
Cash sales 80000
Cash received from customers 147500
Goods returned to the head office(at invoice Price) 12000
Cheques received from the H.O.
Wages and Salaries 55000
Rent, Rates and Taxes 15000
Sundry Expenses 2550 72550
Stock on 31-12-2001(at invoice Price) 75000
Debtors on 31-12-2001 112500
Liability for Petty expenses 550

4. Unique shoe stores have an old established branch at Kanpur. Goods are invoiced to the branch at 20% profit on invoice price; the branch having been instructed to send all cash daily to the Head Office. All expenses are paid by the Head Office except petty expenses which are met by the branch manager. From the following the Head Office, i.e. Unique Shoe Stores:
Stock on January 1,2001(at invoice Price) 15000
Sundry Debtors on January 1,2001 9000
Cash in hand on January 1,2001 4000
Office furniture on January 1, 2001 1200
goods Supplied by Head Office (invoice Price) 80000
Goods returned to Head Office 1000
Goods returned by debtors 480
Debtors at the end 8220
Cash sales 50000
Credit sales 30000
Discount allowed 300
Expense Paid by Head Office
Rent 1200
Salary 2400
Stationery and Printing 300 3900
Petty Expenses paid by branch Manager 280
Stockon31-12-2001(invoice Price) 14000
Provide depreciation on furniture @ 10%p.a.

5. X Company has a branch at Delhi. Goods are invoiced from Head Office at cost plus 33.1/3%. Find out profit at the branch according to debtors system.
Opening balances:
Debtors 10000
Petty cash 1000
furniture 2000
Stock(I.P.) 8000
Cash send by Head Office for Petty expenses 2000
Branch expenses and losses
Freight and advertisement 5600
Bad Debts 50
Depreciation on furniture 80
Petty Expenses 1500
Cash 50000
Credit 36000
Goods Return by Debtors 800
Goods return by branch to Head Office 2000
Cash received from Debtors 20000
Stock at the end at I.P. 7800
Goods invoice by Head Office during the year 88000

6. X and co. of Delhi has a branch at Madras. Goods are sent by the head office at invoice price which is at a profit of 20% on invoice price. All expenses of the branch are paid by the head office. From the following particulars, prepare branch account in the head office books when goods are shown at invoice price:
Rs Rs
Opening balance Goods Returned by Branch at invoice price 300
Stock at invoice Price 11000 Credit sales 22800
Petty cash 100
goods sent to branch at invoice price 20000 Balance at the end:
expenses made by Head Office Stock at invoice price 13000
Rent 600 Debtors at the end 2000
Wages 200 Petty Cash(including miscellaneous income Rs. 25 not remitted) 125
Salary etc. 900 Bad debts 300
Remittances made to head office Allowances to customer 500
Cash sales 2650 Goods returned by customers 700
Cash collected from Debtors 21000

7. Jain Bros. had a branch at Calcutta. Goods are invoiced to the Branch at cost plus 25%. Branch is instructed to deposit cash every day in the head office account in the bank. All expenses are paid by the branch manager. From the following particulars, prepare branch account in the book of head office:
Rs Rs
Stock on 1-1-2001 2500 Furniture purchased by the branch manager 1200
Stock on 31-12-2001 3000 Goods invoiced from the head office 18200
Sundry Debtors on 1-1-2001 1400 Expenses paid by the head office 1640
Sundry Debtors on 31-12-2001 1800 Expenses paid by the branch 120
Cash sales for the year 10800 Head Office sent cash to purchase safe for the branch 1300
Credit sales for the year 7000
Cash remitted to the head office 15000

II Final Account system

8. A Delhi merchant has a branch at Madras to which he charges but the goods at cost plus 25%. The Madras branch keeps its own sales ledger and remits all cash received to the Head Office every day. All expenses are paid from the Head Office the Transactions for the branch during the year 1995 were as follows:
Rs Rs
Stock(1-1-2001) at I.P. 11000 Returns Inwards 500
Debtors(1-1-2001) 100 Cheques sent to branch
Petty Cash(1-1-2001) 100 Rent 600
Cash sales 2650 Wages 200
Credit sales 23950 Salary and other Expenses 900
Goods sent to branch at I.P. 20000 Stock(31-12-2001) at I.P. 13000
Collection on ledger accounts 21000 Debtors(31-12-2001) at I.P. 2000
Goods returned to H.O. at I.P. 300 Petty Cash(31-12-2001) including miscellaneous income Rs. 25
Bad Debts 300 not remitted 125
Allowances to customers 250

Prepare the branch trading and profit & loss account and Branch account for the year ending 31-12-2001

9. Mamta & Co of Hyderabad has a branch at karnool. Goods are invoiced to branches at cost plus 20%. The expenses of the branch are paid from Hyderabad. From the information supplied by the branch prepare trading & profit & loss a/c of the branch for the year ending 31-3-2001 & show the account of the branch as it would appear in the books of the head office:

Opening stock I.P 24,000
Closing stock I.P 18,000
Credit sales 41,000
Cash sales 17,500
Sundry debtors on 31-3-2001 8,500
Goods received from head office 34,000
Goods in transit from H.O as on 31-3-2001 3,500
Expenses paid by the H.O for the branch 10,000
Cash received from debtors 35,000

Independent Branches – Incorporation Enteries

10. A and CO. Limited having its head office at Delhi with branches at Lucknow and Allahabad closes its annual accounts on 31st December, when the following transactions have taken place:

(a) Remittances of Rs. 4500 made by Lucknow branch to its Head Office on 30th December, received by Head Office 5th January(next year).
(b) Goods valuing Rs. 2200 despatched by Allahabad branch on 27th December under instructions form the head office and received by the Lucknow branch on 30th December.
(c) Depreciation amounting to Rs. 1100 on Lucknow branch fixed assets when accounts of such assets are maintained at the Head Office.
(d) Goods worth Rs. 9000 despatched by Head Office to Allahabad branch on 30th December, received by that branch on 7th January (next year).
(e) Lucknow branch paid Rs. 400 dividend to a local shareholder on behalf of the Head Office.
(f) A sum of Rs. 600 being arrears of call money was received by the Allahabad branch from a shareholder in November but was not communicated to the Head Office till 3rd January(next year).
(g) Lucknow branch draw a bill receivable for Rs. 5000 on Allahabad branch which sends its acceptance.
Pass adjusting journal entries in the books of Head Office.

11. Give Journal entries for incorporation of Delhi Branch accounts in the head office and show the branch account in Head Office books after incorporating therein the assets and liabilities.
The trial balance as on 31st December, 2001 is as under:

Dr Cr
Manufacturing Expenses 10000
Salaries 10000
Wages 40000
Cash in hand 2000
Purchases 80000
Goods received from H.O. 15000
Rent 4000
General expenses 5000
Sales 150000
Purchases returns 1000
Opening stock 30000
discount earned 1000
Debtors 15000
Creditors 5000
H.O. account 54000
211000 211000

Closing stock at branch Rs. 30000. Deprecation is to be provided on branch Machinery of Rs. 50000 @ 20 Per cent Branch Furniture of Rs. 3000 @ 15 per cent. Rent outstanding is Rs. 500

12. The Trail Balance of the Madras branch of a company as on 31st March 1995 was as under:
Stock on 1-1-1994 6000
Furniture 2400
Sundry Debtors and Creditors 5600
Goods received from Head Office 16000
Established expenses 2200
Cash at Bank 1400
Cash in Hand 400
Head Office Account 11000
Sales 22800
34000 34000
Stock on 31st March 1995 Rs. 4600.
Prepare Branch Profit and Loss Account and Branch Account in the Account in the books and give the journal entries in the Head Office Books for incorporating the assets and liabilities of the Madras Branch.

13. Following is the Trial Balance of Bangalore Branch as on 31-3-1995:
Rs. Rs.
Furniture 1400
Cash at Bank and on hand 1780
Office expenses 470
Rent 960
Debtors and creditors 3700 1850
Salaries 1500
Gods supplied to Head Office 6000
Sales 38000
Goods received from Head Office 8000
Purchase 18800
Stock, 1St July 1994 6000
Head Office Account 3240
45850 45850
Closing stock was valued at Rs.2700. The Branch Account in the Head Office books on 31-3-1995 stood at Rs.460 (Dr). Goods worth Rs. 2500 sent by Head Office to Branch and remittance of Rs. 1200 sent by Branch to Head Office were in transit.
You are required to incorporate the above trial balance of the Branch in Head Office and give the Bangalore Branch account appearing finally in the Bombay Head Office books

Monday, October 10, 2011


So, far we have assumed that all the assets are realized immediately on the date of dissolution and the accounts of all the partners and the creditors are settled on the same date.
But this assumption is unrealistic in nature, because normally the process of realizing the assets takes a long time and cash is distributed as and when it is realized. In such a case to avoid unpleasant consequences the assets realized are distributed in such way that the unpaid balance of capitals of each partners is left in their profit sharing ratio.

On a gradual realisation of assets, the cash is distributed in the following order:

1. The debts of the firm to the third parties (outside liabilities) must be paid first.
2. After the creditors, have been paid off, the amount due to a partners as loan should be paid. When the loans are due to more than one partner the cash available should be distributed proportionately.
3. After the payment of outside liabilities and loans due to the partners, the capitals of the partner are paid.

There are two methods for distribution of cash under Piecemeal distribution:


If the capitals of the partners are in the ratio of their profit sharing arrangement, then each of them is paid out according to his capital ratio at each distribution. If the capitals of the partners are not in the profit sharing ratio then the first cash available (after making payment of outside liabilities and loans due to the partners) for distribution amongst the partners should be paid to those partners whose capitals are more than their profit sharing ratio so as to bring their capitals to their profit sharing levels. After this the cash available is distributed amongst all partners according to their profit sharing ratio.

The unpaid balance of capital accounts will represent loss on realisation and this loss will be exactly in their profit sharing ratio.


An alternative method of piecemeal distribution amongst partner is to calculate the maximum possible loss on every realisation after the outside liabilities and the partners loan has been paid. The amount available for distribution amongst partners is compared with the total amount of capital payable to the partners and the maximum loss is ascertained on the assumption that in future assets will not realize any amount. The maximum possible loss so ascertained is deducted from the capital balances of the partners in their profit and loss sharing ratio and the balance left in the capital account after deducting the maximum possible loss will be the amount payable to the partner.

If a partner’s share of maximum possible loss is more than the amount standing to the credit of his capital account, he should be treated as insolvent and his deficiency should be debited to the capital accounts of the solvent partners in the proportion of their capitals which stood on the dissolution date as stated under the Garner V/s. Murray Rule. The amount standing to the credit of the partners after debiting their share of maximum loss and their share of insolvent partners deficiency will be equal to the cash available for the distribution amongst the partners.

This process of maximum possible loss is repeated on each realisation till all the assets are disposed.

Friday, October 7, 2011



An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.

Meaning of Holding Company

Section 4 of the Companies Act, 1956 defines a holding company. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company ie the holding company holds the majority of voting power in the subsidiary company.
2.By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.


The purpose of getting the control over another company may be to gain advantages such as:-
1. To eliminate of competition.
2. To enjoy the economies of large scale of production.
3. To achieve an assured market for the product of the company.
4. To ensure a smooth supply of raw materials.


Under section 212 of the Companies Act, 1956 the following must be attached to the Balance Sheet of a holding company:
1. A copy of the Balance Sheet of the Subsidiary or Subsidiaries.
2. A copy of the Profit & Loss Account.
3. A copy of the Report of its Board of Directors.
4. A copy of the Report of the Auditors.
a. A statement of the holding company’s interest in the subsidiary.
b. The profits of the subsidiary so far as they concern the holding company.

Consolidation of Balance Sheet & Profit & Loss Account

In England, the holding company is required to present, in addition to its normal Balance Sheet, a Consolidated Balance Sheet covering the holding company & its subsidiaries & Consolidated Profit & Loss Account.
In India, the law does not compel a holding company to prepare a consolidated Balance Sheet & Profit & Loss Account. It is only for convenience that these statements are prepared.
Shareholders of a holding company are interested in knowing the affairs of the subsidiary company as part of their money given to the holding company is invested in subsidiary company. So it becomes safe for directors of the holding company to disclose to the shareholders of the holding company the extent to which they are entitled to the net assets of the subsidiary company. By way of consolidated Balance Sheet, the investments of the holding company in the subsidiary company are replaced by assets.
Consolidation of Balance Sheet & Profit & Loss Account means the combining of the separate Balance Sheet & the separate Profit & Loss Accounts of the Holding company & its subsidiary company or companies into Single Balance Sheet & a Single Profit & Loss Account.
The purpose of a Consolidated Balance Sheet & Profit & Loss Account is to show the Financial position & Operating results of a group consisting of a holding company & one or more subsidiaries. The consolidated statement are reports of notional accounting entity which subsist on the view that the holding & subsidiary companies are to be treated as one economic unit. The Financial position & Operating results reported through the consolidated statements are portrayed from the interest of the members of the holding company.

Wholly owned subsidiary company

When all the shares of a subsidiary company are held or owned by the holding company, the subsidiary company is known as a wholly owned subsidiary company.

Partly owned subsidiary company

When a majority of shares, but not all the shares of a subsidiary company are owned by the holding company, the subsidiary company is known as a partly owned subsidiary company.

Elimination of Investments

Where a holding company holds all the shares of a subsidiary or its assets belong to the holding company, which is also liable for all its debts. In other words, the investment by the holding company in the shares of subsidiary company represents excess of assets over liabilities or capital.
While preparing the consolidated balance sheet it is necessary to eliminate investment & its complement of the paid up capital of subsidiary company. Holding company’s investment which its subsidiary’s capital, which in turn is equal to the excess of assets over liabilities of the subsidiary, become internal items in the consolidated balance sheet. Hence, the two are cancelled against each other & substituted by the assets & liabilities of the subsidiary.

Pre Acquisition Period

Pre acquisition period is the period which falls on or before the date on which the shares of the subsidiary company are acquired by the holding company.

Post Acquisition Period

Post acquisition period is the which falls on after the date on which the shares of the subsidiary company are acquired by the holding company.


The profit of the subsidiary may be divide into
1.Capital profit
2.Revenue profit

Pre & Post Acquisition of Profits

a. General Reserve & Profit & Loss Account (credit balance) appearing in the books of the subsidiary company on the date of acquisition are treated as pre – acquisition profits. Since, they were not earned by the holding company in the ordinary course of business they are capitalized & set off against the purchase price of the shares.
b. A pre – acquisition loss appearing in the books of the subsidiary company is treated as a capital loss & debited to goodwill account.
c. Post acquisition profits or losses are those that are made or suffered by a subsidiary company after its shares have been purchased by the holding company. Revenue profits are added to the profits of the holding company if it acquires all the shares of the subsidiary company or to extent of its share holding in the subsidiary company. A post acquisition loss is treated as a revenue loss & deducted from the profits of the holding company.
d. If the date of acquisition is during the course of the year it becomes necessary to make an estimate of pre acquisition & post acquisition periods on time basis so as to apportion profits.

Cost of Control

In practice the holding company may pay more or less than the net worth of the subsidiary company. If the holding company feels that a company the shares of which it wants to acquire enjoys considerable reputation or exceptionary favourable factor it may pay more than the paid up value of shares or net assets.
The excess of acquisition price over net assets represents goodwill or cost of control. If on the other hand the acquisition price is less than the paid up value of shares the difference is again to the holding company & is known as capital reserve.

Minority Interest

When some of the shares in the subsidiary are held by outside shareholders they will be entitled to a proportionate share in the assets and liabilities of that company. The shares of the outsider in the subsidiary is called minority interest.
In the consolidated balance sheet all the assets and liabilities of the subsidiary are consolidated with assets and liabilities of the holding company and the minority interest representing the interest of the outsider in the subsidiary is shown as a liability.

Revaluation of Assets and Liabilities

At the time of acquiring shares in a subsidiary it is usual for the holding company to revalue the assets and liabilities of the subsidiary in order to arrive at a fair price to be paid for the shares.
If the altered values are not taken in the books of subsidiary it is necessary to bring the assets and liabilities into the consolidated balance sheet at the altered values. The difference between the book values and revised values should be adjusted after ascertaining the share of the outsiders.
Where the assets are shown in the consolidated balance sheet at the increase values depreciation provision should be increased and such increase should be deducted from capital reserve and minority interest.
If on the other hand the assets are brought in at reduced value depreciation value should be reduced and such reduction should be added to capital reserve and minority interest.

Treatment of Unrealized Profits

An unrealized inter-company profits exist where the company still holds (at the date of consolidation) stocks sold to it by the other company at a profit.
It is considered that only the holding company share of unrealized profit should be eliminated since for the minority shareholders the profit is nothing but a realized profit. Stock reserve is created whether the goods are sold by the holding company to the subsidiary and vice versa. The amount of unrealized profit (stock reserve) is deducted from the stock on the asset side and also the profit and loss account on the liability side of the consolidated balance sheet.

Example: A subsidiary sells goods to the holding company goods worth Rs 30,000 on which the subsidiary company made 20% profit on selling price (holding company share holds 3000 out of 4000 shares)

Unrealized profit = 20% of 30,000 = 6,000
Holding company’s share = ¾ *6,000 = 4,500.

Inter-Company Balances

1. Internal Debts
When loans are advanced to the subsidiary company by the holding and vice versa the same will appear on the asset side of the lending company’s balance sheet and on the liability side of the borrowing company’s balance sheet.
These being inter-company items they should be eliminated from the consolidated balance sheet.

2.Bills of Exchange
Bills drawn by the holding company on its subsidiary and vice versa appearing as bills payable in one balance sheet and bills recevieables on the other, cancel each other.
However bills discounted cannot get cancelled because of the liability in respect
of bills payable by the accepting company and a contingent liability in the company getting the bills discounted.
a. The company discounting the bill will include the proceeds of the bills in its bank balance and will appear as a note to show the contingent liability.
b. In the consolidated balance sheet the total of bills discounted appear as bills payable representing actual liabilities.

Debentures issued by one of the companies in the group and held as investment
by another in the same group gets cancelled in the consolidated balance sheet and should be eliminated.

4.Contingent Liability
Contingent liability which may or may not materalise into liabilities are shown in the usual way by appending a footnote in the individual balance sheet. For the purpose of consolidation the treatment depends upon whether they are internal or external.
External contingent liability between the company in the group and a third party continue to appear by way footnote.
Internal contingent liability between holding and subsidiary are eliminated without being shown in the consolidated balance sheet.

Dividends paid by Subsidiary Company

(no adjustments need be made in the books of subsidiary company)

Books of Holding Company
1.if the dividends has been paid out of pre-acquisition profits the dividends should be credited by the holding company to investment account but not profit and loss account.
2.on the other hand if the holding company has credited the dividend to profit and loss account then the dividend should be debited to profit and loss account and credited to the investment account.
3.if the dividend has been paid by subsidiary company out of post - acquisition profits the same should be credited by the holding company to its profit and loss account. If it has already credited the dividend to profit and loss account then no adjustment is required.

Dividends declared by the subsidiary company but not paid will appear as a liability in the balance sheet of the subsidiary company. In the consolidated balance sheet the proportion of unpaid dividend attributable to the holding company will be deducted from liability of subsidiary company & the balance payable to the outside shareholders will appear as a liability of the group.
Any interim dividend paid during the accounting period by the subsidiary company to the holding company should be added to the balance of profit & loss account of the holding company & deducted from the balance of profit & loss account of the subsidiary company if the adjustments has not taken place.

Bonus Shares

When a company issues bonus shares out of its accumulated profits it is necessary to distinguish between pre & post acquisition profits utilized for this purpose. In case bonus shares are issued out of pre – acquisition profits no adjustments are necessary for preparing the consolidated balance sheet because in such a case the holding company’s share of such profits gets reduced & the paid up value of the shares held by it will increase. As such the amount of goodwill remains the same.
Bonus shares issued out of post acquisition profits will reduce the holding company’s share in revenue profits & increase the paid up value of the shares held. Consequently, the amount of goodwill gets reduced.

Monday, September 26, 2011

ENRON Scandal Summary

An ENRON Scandal Summary

The ENRON Scandal is considered to be one of the most notorious within American history; an ENRON scandalsummary of events is considered by many historians and economists alike to have been an unofficial blueprint for a case study on White Collar Crime – White Collar Crime is defined as non-violent, financially-based criminal activity typically undertaken within a setting in which its participants retain advanced education with regard to employment that is considered to be prestigious. The following took place in the midst of the ENRON Scandal:

ENRON Scandal Summary: The Deregulation of ENRON

While the term regulation within a commercial and corporate setting typically applied to the government’s ability to regulate and authorize commercial activity and behavior with regard to individual businesses, the ENRON executives applied for – and were subsequently granted – government deregulation. As a result of this declaration of deregulation, ENRON executives were permitted to maintain agency over the earnings reports that were released to investors and employees alike.

This agency allowed for ENRON’s earning reports to be extremely skewed in nature – losses were not illustrated in their entirety, prompting more and more investments on the part of investors wishing to partake in what seemed like a profitable company

ENRON Scandal Summary: Misrepresentation

By misrepresenting earnings reports while continuing to enjoy the revenue provided by the investors not privy to the true financial condition of ENRON, the executives of ENRON embezzled funds funneling in from investments while reporting fraudulent earnings to those investors; this not only proliferated more investments from current stockholders, but also attracted new investors desiring the enjoy the apparent financial gains enjoyed by the ENRON corporation.

ENRON Scandal Summary: Fraudulent Energy Crisis

In the year 2000, subsequent to the discovery of the crimes listed in the above ENRON Scandal Summary, ENRON had announced that there was a critical circumstance within California with regard to the supply of Natural Gas. Due to the fact the ENRON was a then-widely respected corporation, the general populace were not wary about the validity of these statements.

However, upon retroactive review, many historians and economists suspect that the ENRON executives manufactured this crisis in preparation of the discovery of the fraud they had committed – although the executives of ENRON were enjoying the funds rendered from investments, the corporation itself was approaching bankruptcy.

ENRON Scandal Summary: Embezzlement

An ENRON Scandal Summary of the acts of Embezzlement undertaken by ENRON Executives may be defined as the criminal activity involving the unlawful and unethical attainment of monies and funding by employees; typically, funds that are embezzled are intended for company use in lieu of personal use. While the ENRON executives were pocketing the investment funds from unsuspecting investors, those funds were being stolen from the company, which resulted in the bankruptcy of the company.

ENRON Scandal Summary: Losses and Consequences

Due to the actions of the ENRON executives, the ENRON Company went bankrupt. The loss sustained by investors exceeded $70 billion. Furthermore, these actions cost both trustees and employees upwards of $2 billion; this total is considered to be a result of misappropriated investments, pension funds, stock options, and savings plans – as a result of the government regulation and the limited liability status of the ENRON Corporation, only a small amount of the money lost was ever returned.

Thursday, September 22, 2011

Business SWOT Analysis - Threats is an Opportunity

SWOT Analysis is an abbreviation for Strengths; Weaknesses; Opportunities and Threats. In the application of four factors of SWOT, proper understanding of the differences between them would bring about maximum benefits.

The Four SWOT Factors are also known as the Internal and External Factors. The Internal factors consist of Strengths and Weaknesses, whereas the External Factors consist of Opportunities and Threats.

In normal practice, the four SWOT factors can be clearly categorised based on the findings. Below are some examples:-


Strong financials
vast customer base
positive cash flow

long delivery lead time
high inventory
inconsistent quality

export incentives
acceptance of middle east countries
Good relations with trade ministry

escalating of cost
product substitition
computer virus attack by year 2000

As case study: Every Threats is an Opportunity ?
Every Threats is indeed an opportunity! Take for example: Before Y2K millennium, there was a global threat that the computer system may go burst on the 1st day of year 2000. This Threat was clearly beyond anyones' control, and it was inevitable. During that time, all organizations had 2 choices ie. Do something to overcome the computer threats or do nothing and wait for the worst to happen.

Most big and medium size organizations in Malaysia I contacted chosen to pay a high cost to work on an "enhanced" computer system that supposedly can overcome the computer threats. How did this Y2K threats taken as an opportunity? In fact, those organizations who did something to the computer system took the opportunity to upgrade or enhance their computer system to improve their inventory system while overcome the possible computer threats.

With this example of Threats, you can actually flip the Threats the other way round and turn it into an Opportunity.

Saturday, September 17, 2011

7 Important Principles of Total Quality Management

TQM is a set of management practices throughout the organization, geared to ensure the organization consistently meets or exceeds customer requirements. TQM places strong focus on process measurement and controls as means of continuous improvement.

Before reading more about TQM, it might be helpful to quickly review the major forms of quality management in an organization.

Total Quality Management (TQM) is an approach that organizations use to improve their internal processes and increase customer satisfaction. When it is properly implemented, this style of management can lead to decreased costs related to corrective or preventative maintenance, better overall performance, and an increased number of happy and loyal customers.

However, TQM is not something that happens overnight. While there are a number of software solutions that will help organizations quickly start to implement a quality management system, there are some underlying philosophies that the company must integrate throughout every department of the company and at every level of management. Whatever other resources you use, you should adopt these seven important principles of Total Quality Management as a foundation for all your activities.

1. Quality can and must be managed

Many companies have wallowed in a repetitive cycle of chaos and customer complaints. They believe that their operations are simply too large to effectively manage the level of quality. The first step in the TQM process, then, is to realize there is a problem and that it can be controlled.

2. Processes, not people, are the problem

If your process is causing problems, it won’t matter how many times you hire new employees or how many training sessions you put them through. Correct the process and then train your people on these new procedures.

3. Don’t treat symptoms, look for the cure

If you just patch over the underlying problems in the process, you will never be able to fully reach your potential. If, for example, your shipping department is falling behind, you may find that it is because of holdups in manufacturing. Go for the source to correct the problem.

4. Every employee is responsible for quality

Everyone in the company, from the workers on the line to the upper management, must realize that they have an important part to play in ensuring high levels of quality in their products and services. Everyone has a customer to delight, and they must all step up and take responsibility for them.

5. Quality must be measurable

A quality management system is only effective when you can quantify the results. You need to see how the process is implemented and if it is having the desired effect. This will help you set your goals for the future and ensure that every department is working toward the same result.

6. Quality improvements must be continuous

Total Quality Management is not something that can be done once and then forgotten. It’s not a management “phase” that will end after a problem has been corrected. Real improvements must occur frequently and continually in order to increase customer satisfaction and loyalty.

7. Quality is a long-term investment

Quality management is not a quick fix. You can purchase QMS software that will help you get things started, but you should understand that real results won’t occur immediately. TQM is a long-term investment, and it is designed to help you find long-term success.

Before you start looking for any kind of quality management software, it is important to make sure you are capable of implementing these fundamental principles throughout the company. This kind of management style can be a huge culture change in some companies, and sometimes the shift can come with some growing pains, but if you build on a foundation of quality principles, you will be equipped to make this change and start working toward real long-term success.


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