WHAT YOU MEAN BY CAPITAL MARKET...???

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.

Capital markets help channelise surplus funds from savers to institutions which then invest them into productive use. Generally, this market trades mostly in long-term securities.

Capital market consists of primary markets and secondary markets. Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or previously-issued securities. 

VARIOUS BRANCHES OF ACCOUNTING

Various branches of Accounting are mentioned below.  such as-;

1) Financial Accounting

2) Cost Accounting

3) Management Accounting

1) Financial Accounting

Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. It is concerned with recording of business transactions in the books of accounts in such a way that operating result of a particular period and financial position on a particular date can be known. That is Financial Accounting enable to prepare Profit and Loss Account and Balance sheet which reveals the operating result and finanacial position of business entity of a particular period.

The purpose of finanacial accounting is not to report the value of a company rather it’s purpose is to provide enough information to others to assess the value themselves.

In the case of listed companies , it is mandatory to prepare and publish the financial  statements periodically. So inverstors in various parts of the world getting a chance to assess the operating results and financial position of the company.

In Finanacial Accounting , finanacial statements are prepared based on the the international accounting standards and Generally Accepted Accounting Principles ( GAAP).

In india finanacial statements are prepared based on Ind AS( Indian Accounting standard).

2) Cost Accounting

It relates to collection, classification and ascertainment of the cost of production or job undertaken by the firm. Cost accounting basically deals with determining  cost of units manufactured and service rentered. So it helps  manager to take decisions regarding the price of a prodcuct and  it helps to fix the price of the finished goods. Like wise it helps to ascertain the product wise profitability of a manautacturing unit.

That means with the help of cost accounting ,the managers can measure cost per unit and profit per unit and It enables to  introduce new cost reduction techniques  to minimize the manufacturing cost. Like wise It helps to reduce the cost per unit and increase the profit per unit. Ultimately  helps to reduce the cost of production and improves the profitability of  the entity.

3) Management Accounting

It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision making by the management.

Here managers collect the information by using cost accounting and finanacial accounting techniques and use these information for decision making and policy formulation.

Management accounting enables managers to take decision

WHO ARE THE USERS OF FINANCIAL INFORMATION .....????

The basic objectives of accounting is to communicating financial information about a business entity to it’s users on time,such as shareholders, managers, investors, government and other local bodies etc. Accounting information  basically helps users to make better financial decisions.

All these informations are collected from properly maintained books of accounts and related documents  by way of  preparing some reports such as balance sheet, profit and loss account, cash flow statement, debtors analysis ,creditors analysis etc.

Users of financial information can be classified in to two categories such as-; 

    

     1)   Internal users

     2)   External Users

 Internal users

Internal users are those individuals or groups who are within the organization or business entity like owners, management, employees and trade unions etc. They are the primary users of accounting information.

Now we can discuss in detail regarding these.

  

     a)   Management

     The main duty of management is to take proper business decisions to improve the efficiency and performance of a business entity. Day to day business operations of an entity is under the supervision of various levels of management such as top level, medium level, lower level management etc. Each levels of managers require separate set of information depend on their level of activity. So as to generate such information management  will analyze and interpret the accounting information of the entity and monitor the performance of the entity continuously. In short accounting information helps managers to take proper decision on proper time.

    b)   Owners

Ultimately owners are the investors of the business entity and their interest is to know about the profitability and financial soundness of their business.  They need to know wthether  this business is able to generate profit in future and whether  it’s  eligible  for the  growth potential in future. Owners are ultimately concern about the return on their investment.

    c)    Employees and Trade Union

      Trade union and employees are always look in to the financial position of the business         entity to ensure the job security and ask for  higher remuneration and other benefits in   future.

      Most of the companies declare their bonus to employees depends on the volume of profit in that year. That mean if the company having profit and it reached in a targeted level, then that company will declare bonus to employees.

     But sometimes companies not willing to declare bonus to employees even though they had enough profit,in such cases trade unions will ask for bonus and other employee’s rights  to the management based on the accounting information of that entity.

External Users

External users are those individuals or groups who are outside the organisation like creditors, investors, banks and other lending institutions, present and potential investors, Government, tax authorities, regulatory agencies and researchers etc…. They are the secondary users of Accounting information.

 a) Creditors, Banks other Financial institutions

Before supplying goods to the purchaser, seller  required to verify the credit worthiness of the purchaser. All the credit terms are set by creditors according to the assessment of their customers' financial health and stability.

Like wise banks and other lending financial institutions, before granding the loan , required to verify the repaying the capacity of borrower. So as to verify the financial position of the borrower, banks required to verify last few years finanacial statements and other related documents. Moreover most of the bank insisting their borrowers  to submit the finanacial statement on periodical intervals that is say every 6 months, every 3 months or monthly etc.

 b)  Present Investors

Present investors need to know the position, progress and prosperity of the business inorder to ensure the safety of their investment. Investors also considers the rate of return and payback period of their investments

c) Potential Investors

Potential Investors want to make sure that they can earn a reasonable return on their investment before they commit any financial resources to the company. Potential investors also verify the financial position, growth potential  and future viability of that entity. All these analysis are done based on the published accounting information and analysist study. Ultimately based on the accounting information and it’s analysis study, potential investors will decide whether to invest in the business or not. 

      

     d)  Government and Tax Authorities  

                 

     Government and tax authorities required to know the earnings of the business, inorder to assess the tax liabilities of that business. So as per laws of the state ,every company required to submit the income statement and position statement and other related documents prescribed by the prevailing law to the government or  Tax authorities concerned.

     e)    Regulatory Agencies

Every country there is some  regulatory Agencies  Which controls the operations of the business and ensure that all the activities are carried out under the rules framed for this behalf.

Reserve bank of india (RBI), Central Board of Direct Taxes(CBDT),Controller and Auditor General of India (C&AG) etc.. are some of the requlatory agencies in indian.

  

     f)   Researchers

Some of the researchers also using accounting informations for their research work.

HOW TO CLOSE BOOKS OF ACCOUNTS – AT THE END OF AN ACCOUNTING PERIOD

Closing entries are those entries which are made at the end of the period to close the temporary accounts and transfer the balance in to the permanent Account. In other words closing the temporary account and transfer the balance to the permanent Account.

Temporary Account

During the time of closing books of accounts, we need to close all temporary accounts such as income accounts of that period, Expenses Accounts of that period, drawing account of that period or dividend account of that period etc.

Sales - 2015, sales - 2016 ,rent in 2015, telephone- 2016,scrap sales-2016,other income-2015 etc are some of the examples of temporary Accounts.

 Income Summary Account

For closing the books of accounts of particular period , we need to transfer all temporary accounts in to income summary account and balance of income summary account to ‘’Retained Earnings Accounnt’’.

After doing the below mentioned journal entries, only assets and liabilities remain in the books of Accounts.

1)    Journal Entry for transferring sales Account and other income account in to Income summary Account.

                     Sales A/C                         DR                            XXX

                     Other Income                   DR                                                XXX       

                            TO   Income Summary A/C                                               XXX

2)    Journal Entry for transferring Expenses Account in to Income summary Account.

Income Summary A/c                        DR           XXX

                              TO Salary expenses                                      XXX

                     TO Rent Expenses                                                  XXX

    

3)    Balance of income summary Account transferred to Retained Earnings Account.

4)    Journal entry for closing dividend paid Account to Retained Earnings Account.

          Retained Earnings A/c                        Dr              xx

                     TO Divident paid                                                    xxx

PERCENTAGE OF COMPLETION METHOD UNDER CIVIL CONSTRUCTION CONTRACTS

Percentage of completion method is a method used  in civil constrution contract to recognise the revenue of a particular period.  Percentage of contract cost incurred against the total estimated contract cost is base to  determine the percentage of completion.

The percentage-of-completion method is generally the required method of financial and tax accounting of larger construction companies for long-term contracts. Its justification relies largely on the matching principle in accounting, where revenues and expenses are matched in the applicable accounting period.

The percentage-of-completion method attempts to recognize revenues and gross profit in the applicable periods of construction, and not soley in the period when the construction has been completed, as in the completed contract method. 

The degree of completion of the construction, i.e., the percentage-of-completion, is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract, or job.

% complete = Total construction costs to date/Total estimated costs of contract

Total estimated revenues or gross profit is then multiplied by this percentage of completion to derive the total revenues or gross profit that have been earned to date.

Gross profit to date = % complete X Total estimated gross profit

The journal entry required to recognize the current year's revenues or gross profit is the difference between total revenues or gross profit earned to date less revenues or gross profit recognized in prior years.

Current year's gross profit = Gross profit to date - Gross profit in prior years

  

For eg.

Total contract price of project A is  AED 1,000,000, Period of contract 3 years starting  from 2015. Estimated total cost AED 800,000. Incurred cost up to 2015  AED 300,000 and up to 2016 AED 700,000. Then

Percentage of completion in  2015 =  300,000/800,000 *100 = 37.50%

So corresponding revenue in 2015 = 1,000,000 *37.50% = AED 375,000

Profit  of 2015  = 375,000 - 300,000 = 75,000

Percentage of completion in  2015 =  700,000/800,000 *100 = 87.50%

So corresponding revenue in 2015 = 1,000,000 *87.50% = AED 875,000

Cumulative  Profit of   = 875,000 - 700,000 =     1,75,000

Less: Profit in 2015                                            =    75000

Profit in 2016 (175,000-75,000)                  =      Aed  100,000/-

UNDER BILLING AND OVER BILLING IN CONSTRUCTION BUSINESS

Under biling and over billing are terms which are popularly used in construction business. Revenue recognition is the base for this under billing and over billing calculation.

Some of the details of Over billing and under billing and it’s Accounting t treatment  are as follows

OVER BILLING

Over billing means billing of the revenue more than that of the revenue  actually earned( from % of completion method) . In construction business , percentage of completion method used for  identify and recognise the revenue for a particular period.

Due to over billing, customers  or client need to pay more cash to contractor(excess billed portion) so contractor get more money and it help to create more liquidity.  

ACCOUNTING TREATEMENT  -  OVER BILLING

For  Eg.  In the case of Project A, monthly billed amount  AED 200,000/- and the actual revenue recognized is  Aed  170,000/- Accounting treatment is as follows-:

1) WHEN RAISING MONTHLY BILLING

PARTY  A/C                                                       DR                    200,000

TO  CONTRACT REVINUE                                                                     200,000

2)WHEN  RECOGNISING REVENUE UNDER PERCENTAGE OF COMPLETION METHOD AND BVALANCE TRANSEFERRED TO EXCESS BILLING A/C

CONTRACT REVENUE A/C                              DR                        30,000

                                                   TO    EXCESS BILLING A/C                                      30,000

 DISCLOSURE OF FINANCIAL STATEMENT

1)Recognised  Revenue for that period showing  as ‘’Contract Revenue ‘’ in P&L A/c.

2)Party A/c  showing as ‘’Debtors’’ under ‘’current asset’’.

3)’’Excess billing’’ amount showing as liability under the head ‘’current Liability’’.

ASSUMPTIONS OF OVER  BILLLING

1)Non booking of cost or less booking of cost will result in to Over billing .

2)Due to over billing, contractor getting more than that of cash which they deserved from the client.

UNDER BILLING

Under billing means billing of the revenue less than that of the revenue actually earned( from % of completion method) . In construction business , percentage of completion method used for  identify and recognise the revenue for a particular period.

Due to under billing, customers  or client only  pay less cash to contractor(less  billed portion) so contractor only get less money than that of deserved.  

ACCOUNTING TREATEMENT  -  UNDER BILLING

For  Eg.  In the case of Project A, monthly billed amount  AED 170,000/- and the actual revenue recognized is  Aed  200,000/- Accounting treatment is as follows-:

1)WHEN RAISING MONTHLY BILLING

PARTY  A/C                                                       DR                    170000

TO  CONTRACT REVINUE                                                                     170000

2)WHEN  RECOGNISING REVENUE UNDER PERCENTAGE OF COMPLETION METHOD AND BVALANCE TRANSEFERRED TO EXCESS BILLING A/C

WORK IN PROGRESS                  DR                        30,000

                                    TO    CONTRACT  REVENUE                                    30,000

DISCLOSURE OF FINANCIAL STATEMENT

1)Recognised  Revenue for that period showing  as ‘’Contract Revenue ‘’ in P&L A/c.

2)Party A/c  showing as ‘’Debtors’’ under ‘’Current asset’’.

3)’Less billing’’ amount showing as Work in progress (WIP)  under the head ‘’current Aset’’.

ASSUMPTIONS OF UNDER  BILLLING

1)Excess booking of cost or variantion work but not certified by client of consultant will result in to underbilling .

2)due to under billing, contractor getting  only less cash  than that  they deserved from the client.

Verification aspects of Undated security cheque with signature verification letter and Bank Guarantees

Most of the business deals , customers required to give advance payment to the suppliers as per the payment term mentioned in the LPO. In these cases, customers will ask for Advance payment bank guarantee or Undated security cheque with signature verification from cheque issuing bank, if such terms are mentioned in the LPO.

Most of these cases customers prefer to collect Advance Payment bank guarantee from the suppliers because in this case the customer can easily and directly raise claims to bank for any  deviation from the LPO terms, such as fails to deliver the goods to customer, goods delivered but it is not as per the terms of the LPO and suppliers not willing to re-supply the goods as per the LPO. Etc. More over collecting Bank guarantee is more authentic than that of collecting Undated security cheque from suppliers.

In the case of undated security cheque , any deviations or discrepencies happens, then the customer can present the cheque to the  supplier’s bank clear the cheque.

Sometimes  supplier’s bank A/c  have no balance or the suppliers bank balance is not enough to honour the cheque, then the bank will dishonor the cheque.In such situation, the customer required to file legal case against the supplier to get the cheque amount and bouncing of cheque with some compensation for the damages.

Verification aspects of undated security cheque

While collecting the undated security cheque with signature verification , Customers required to consider  the following  points to verify the authenticity of the undated security cheque .such as:-

1)Ensure that the cheque is an undated one other wise it’s validity will restricted for a period of 6 months. So always ensure that security cheque should be undated one.

2) Name of the cheque should in the name of the customer who give advanced cash to customer.

3)Verify the signature with the signature letter from the bank.

4)Cheque amount should be  equal to the advance amount paid to the suppliers.

5)Verify the Bank Account and ensure that the said bank A/c is active and valid in all aspects 

           

Verification aspects of undated Bank Guarantee

While collecting the bank guarantee , Customers required to consider  the following  points to verify the authenticity of the bank guarantee such as:

 1) Bank guarantee should addressed to the customer’s name.

          2) Bank Guarantee should mention guaranteed amount.

      3) Bank guarantee should mention the validity date or expiry date of the  guarantee.

      4)Bank guarantee should mention the LPO NO and other document details  relevant for the transaction.
         

              

ELECTRONIC TRANSFER OF FUND – Benefits & Limitation

Electronic payment is an innovative mode of payment to suppliers, subcontractors, others etc. by exploring the capability  of internet and online banking .Electronic payment method fully wipe out the traditional cheque printing and cheque signing method. Electronic payment otherwise we can termed as ‘’Paper less payment‘’

Benefits  of Electronic payment

Some of the important benefits of electronic fund transfer are mentioned below:-

1)   Paperless payment

 Electronic payments are paperless payment so no need to file and keep the paper documents  in the office, instead  can keep all documents in digital format and  can save the office file storage space.     

2)    Quick payment

Distribution of payment is very easy and quick. Because when the payer  initiate and  approve the payment then in the same time the money transferred from the payer bank Account to the payee bank Account and relevant supporting documents of payments are also transferred to payee’s email id as reference.

3)   Better control

In electronic payment, the payer can fix various levels of apparoval such as 1^st approval.2^nd approval, final approval, final release of fund etc. hence payer can exercise better control over payments.

4)   Time saving

Once the payment is approved by the payer , then the same time the  fund will  transfer to the payee’s bank Account. so no required to come and collect the cheque from the payer and deposit in  to bank. Likewise  electronic payment save  the time of  cheque collection and deposit in to bank Account.

Limitations of Electronic Fund Transfer

Some of the important limitations of electronic fund transfer are mentioned below:-

1)   Costly method of payment

Good computers , high speed internet facility and e-banking facility are basic requirements to carry out electronic transfer of funds. That means to get the facility of electronic transfer requires some investment for basic needs so it is costly.

More over bank would charge some additional amount as online banking charges and electronic   fund transfer charges from the payer. So it’s cost comparatively high than the traditional cheque method.

   

2)   Computer & Internet knowledge required

The staff who handling electronic fund transfer require good computer and internet knowledge to carry out the electronic fund transfer.

3)   Technical Fault

 When any technical fault happens on internet, e-banking facility,etc, then electronic transfer is not possible.

DELIVERY ORDER (DO) AND IT’S RELEVANCE

Delivery order ( DO) is a document prepared by the seller as a proof of the physical delivery of goods to the buyer. The seller will handed over the DO to the buyer at the time of real physical  delivery of goods to the buyer and get signature of the buyer or authorized person of buyer in the DO.

DO should be atleast 3 sets one for the buyer one for seller and another for store section.

DO includes the following informations, such as-;

1) Buyer names and address.

2) Local purchase Order No

3) Seller name and address

4) Date of DO

5) Invoice No, If available

6)Name and signature of Receiver with contact no

7)Name and signature of seller’s authorized person.etc