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2. Concept 1
Types of Business Entities
a) A Person can do business as per following forms of
organisation namely.
Sole Proprietorship
Partnership
Company
Charitable Organization
Contd.
3. b) Difference between sole proprietorship &
Partnership firm.
SOLE-PROPRIETORSHIP
1. No registration
required
2. Unlimited liability
3. Used for small
business or by
professionals
4. No separate legal
entity
PARTNERSHIP
1. Registration not
compulsory.
2. Two types:
a. Limited liability
b. Unlimited liability
3. Sharing of profits by
those agreed upon.
4. Governed by Indian
Partnership Act.
Contd.
4. c) Company- Derived from a LATIN word
“COM”=“WITH” or “TOGETHER”; “PANIES= BREAD”
5. d) Meaning of a Company
“An association of persons who took their
meals together”
Legal Formation
An Artificial person
Has a separate legal entity
Has a Perpetual Succession
Company seal
Common capital with transferable shares
Carries limited liability
Democratic management
6. Concept 2
Procedure of Formation
a) Procedure for Incorporating a Company
STAGE I: PRE REGISTRATION PROCEDURE
Obtain a DIN-Director Identification Number.
DSC-Digital Signature Certificate.
STAGE II: NAME AVAILABILITY
Contd.
7. STAGE III: DOCUMENTATION
Preparation of Memorandum & Articles of
Association.
Vetting of Memorandum & Articles, Printing,
Stamping & Signing
Contd.
8. STAGE IV: FILING & REGISTRATION
Form 1 (Declaration)
Form 32 (Details of Directors)
Form 18 (Details of Registered Office of the
company).
Contd.
9. b) OTHER COMPANY’S
Section 25 Companies.
Companies deemed to be public limited.
Holding and subsidiary companies.
Contd.
11. Concept 3
Meaning of Profit Prior to Incorporation.
a) As Incorporation Certificate is the evidence of
formation of a company , So Period Prior to Date of
Incorporation in case of conversion of Existing
Business to a company is named as Pre-
Incorporation Period.
b) Time Period after date of incorporation is named as
post incorporation Period.
Contd.
12. c) All Profits earned by existing Business (Sole
Proprietor/ Partnership Firm) Upto date of
incorporation are named as Pre-Incorporation
Profits, these profits are non – recurring in nature
i.e. capital profits.
d) All profits from date of incorporation Upto end of
year are named as post incorporation profits, these
profits are recurring in nature (Revenue Profits).
e) Dividend as per companies Act 2013 can be
declared out of Post Incorporation Profits only.
Contd.
14. Concept 4
Calculation
a) Following steps may be followed for calculation
Pre-Incorporation Profits:
Step 1- Prepare Trading A/c for whole Accounting
year i.e. 12 months in case Gross Profits has
not been specified in the question.
Step 2- Calculate Time Ratio & Sales Ratio.
Contd.
15. Step 3- Profits & Loss A/c should be prepared into
separate columns of Pre & Post
Incorporation.
Following is format for calculating Pre & Post.
Contd.
16. b) Format of Trading Account
To Opening Stock xxx By Sales xxx
To Raw Material
Purchased xxx By Closing Stock xxx
To D. Lab xxx
To F. O/h xxx
To Gross Profit xxx
(Bal. Fig.)
Contd…
17. c) Time Ratio
Time Period in Pre-
Incorporation
Period
Time period in
post Incorporation
Period
:
Contd.
18. d) Sales Ratio
Sales in Pre-
Incorporation
period
Sales in Post
Incorporation
Period
:
Contd.
23. Concept 5
Interest to vendors son Purchase
Consideration
a) Purchase of existing Business has to pay Purchase,
in case of any delay in payment of PC, Purchaser
has to pay interest to vendors on Purchase
Consideration.
Contd.
24. b) Following is the flow chart.
Beg. Date of Date of End of
of year Purchase payment Year
of of P.C
Business
Contd.
25. c) Interest paid to Vendors on Purchase Consideration
will be divided in new Time Ratio.
i.e. Date of Date of Date of Date of
Purchase incorporation Incorporation payment
of Business to P.C
26. Concept 6
Points to be kept in Mind
a) In Examination some times, sales Ratio is a difficult
task to be calculated so it is better to write all
months & then calculate the sales.
b) Preliminary Expenses / Formation Expenses.
i) Those Expenses incurred in relation to formation of
a company are named as formation/Preliminary
expenses.
Contd.
27. ii) Preliminary expenses can be written off:-
In TO TO
In Equal Installments
iii) If Preliminary expenses are to be written off in
TOTO then only from capital Profits (Pre-
Incorporation Profits)
iv) In case Preliminary expenses are to be written off
in parts, then can e written off from post
incorporation profits (Revenue Profits)