Category: Commerce Notes PPT

The term accounting policies refer to a particular set of rules, conversions and principles which a particular entity introduces in a manner that is rendered to be the correct one. This is done to prepare financial statements and present them to the relevant body. Changes in accounting policies are allowed only if the changes are an outcome of the financial statements which provide information (more reliable and relevant) about the transactions and their effects along with effects of other events on the financial status, financial performance, or cash flows or required by a standard or interpretation.

Reason for Change in Accounting

A comparison of the policies at hand is essential particularly in case of varying accounting periods. These comparisons must be maintained properly also. Whenever changes are bound to happen it must be taken care of that the financial statements comply with those changes. The changes can refer to anything and there is no need for any existing options to be adhered to. 

Change in Accounting Estimate

Often, the amount that an asset or liability carries, needs to be readjusted after much assessment. This is done to estimate the future benefits and obligations that the particular asset or liability is associated with. This modification is known as the change in accounting estimate.

Now, this change is dependent upon two main factors of profit or loss. These are:

• Period of the change, when it affects only the period or duration

• The present period of the change and the future periods, when both are affected simultaneously

Difference between Change in Accounting Policy and Change in Accounting Estimate

Difference between accounting policy  and  accounting estimate is important because modifications in the accounting policies are normally applied retrospectively while changes in accounting estimates are applied prospectively. Therefore it shows its effect on both the trends during the periods and reported outcomes.

Introduction of Errors

It is a must for any entity to take care of the errors occurred prior in the material at hand before a financial statement is authorized and issued. It is one of the general principles of managing errors in accounting policies. This is further impacted by the following:

It is dependent upon whether the error was identified in the early times of the prior period as that would restate the assets’ opening balances and liabilities. The equity presented in the earliest prior period is also of consideration.

Restating the comparative amounts for the prior period(s) presented, in which the error occurred

Now that we know that the accounting policies changes in accounting estimates and errors, let us try to distinguish them further:

IFRS Change in Accounting Policy

For a change in accounting policies, there is a requirement of a change in the existing IFRS/IAS and provision of these standards needs prospective legal notices of a new accounting policy. And in such circumstances, one must take guidance from IFRS as they are the main concerned body. 

The application for the same should be different for different circumstances, transactions and other similar events which contributed to the present policy beforehand.

Difference between Accounting Policy and Accounting Estimate

• Accounting policies consist of principles, bases, conventions, rules and practices and accounting estimates consist of amount or patterns.

• Example of accounting policies changes from historical cost to realizable value and example of account estimate is a change in the useful life of the depreciable asset.

• In accounting policies, accounting treatment is only considered when there is a retrospective change. On the other hand, in an accounting estimate, the accounting treatment is taken into consideration when there is a change in perspective.

Accounting Estimates IFRS

A component that helps in understanding the amount that has been credited or debited is known as Estimate or amount of estimate. There is non-discrete calculation available for the identical, that’s why it is difficult to have a record of it. 

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The term cost means the economic value of expenditures for raw materials, equipment, supplies, services, labour, products, etc. It is an amount that is displayed as an expense classification in bookkeeping records.

Different Types of Cost

Any business requires an investment of capital or money. The investor or owner of the business has to keep a record of the total money he has spent for the various operations in the business. It can be for anything required to start and establish any enterprise up to gaining of the final profit. Under this topic, we will learn and identify various expenditures that are incurred while running any business endeavor. There are also different formats and categories for the classification of all costs.

First classification is in relation to the resources that the money has been spent on. It can be for raw materials, land, labour, transportation, marketing, infrastructure, communication, management, and everything else. However, all these expenses are broadly put under three types such as Labour cost, Material cost, and Expenses. It can be easily recognized by understanding the nature of the commodities obtained through the expenses. Materials are the raw materials used for the production of any final product. It includes all the expenses of packaging and value addition too. The salary and wages paid to the persons working for the manufacturing of the product is termed as Labour cost. It includes both permanent and temporary workers. However, only producing a product does complete the job of running a business. It has to be marketed and transported to the market for getting selled and returning a profit. All these expenses are categorized under expenses.

All in all the expense for producing a final product is known as Production cost. And all other expenses are termed as commercial costs.  Some have also categorized the costs into direct costs and indirect costs. The other classification is Normal cost versus Abnormal cost. Other than that there are several other costs which do not pertain to commercial operations so will be included in the subsequent chapters.

Classification of Costs

Classification of cost in economics is the classification of cost based on various factors which are discussed below. The following will be the types of cost classification.

Classification by Nature

This classification of cost is based on the nature of the expenditure, which are the three broad categories as per this, namely Labor Cost, Materials Cost, and Expenses. This cost makes it easier to classify them on a cost sheet. They help in estimating the total cost and also to estimate the work-in-progress cost.

• Material Costs: These are the costs of any materials that are used in the production of goods. This is further divided into further costs. For instance, we can classify material costs into spare parts, raw material cost, packaging material cost, etc.

• Labour Costs: This cost includes the salary and wages paid to temporary and permanent employees for the manufacturing of the goods.

• Expenses: It includes all other expenses associated with manufacturing and selling the services or goods.

Classification by Functions

This is the classification based on functional costs. The cost classification by function flows the pattern of basic managerial activities. So, this cost is classified as production, administration, selling, etc. 

• Production Costs: These costs are related to the real construction or manufacturing of the goods. 

• Commercial Costs: This cost includes the operation of an enterprise except for the manufacturing costs. It consists of the admin costs, distribution and selling cost, etc.

Classification by Traceability

This cost is classified into direct costs and indirect costs. This classification is classified on the degree of traceability to the final product of the firm.

• Direct Costs: These are the costs that are easily related to a specific cost unit. The most significant examples are the materials used to manufacture a product or the labour involved in the production process.

• Indirect Costs: These costs are used for many purposes, which are between many cost centers or units. So we cannot put them to one specific cost center—for instance, the rent of the place or the manager’s remuneration. We will not be able to identify how to estimate costs to a specific cost unit.

Classification by Normality

This classification is based on the costs as the normal costs and abnormal costs. The normal costs are the costs that happen at a given point of output, under the same set of conditions in which this point of output occurs.

• Normal Costs: The cost of production and also the part of the costing profit and loss. These are the type of costs that the organization incurs at the standard level of output under normal conditions.

• Abnormal Costs: These costs are not normally occurring at a particular level of output in conditions in which normal levels of output happen. These costs are calculated according to the profit and loss account; they are not a part of the production cost.

ERP is an undertaking application. The worldwide economy has incorporated information technology quickly and since this transformation, an ocean of progress has shown up in big business management programming. In such a domain, organizations have considered accounting software and Enterprise Resource Planning (ERP) programming reciprocally.

There are different types of ERP packages. Some of the popular ERP packages are:

• Sage 300

• Microsoft Dynamics NAV

• SAP Business One

• Epicor 9 (formerly Vantage)

• Microsoft Dynamics GP

• Macola ES (Exact Software)

• Sage 100

• Netsuite (updated 8/8/2016)

• SysPro

• Sage X3

Enterprise Resource Planning Meaning

If anyone asks what is meant by ERP, we can say that it is a procedure utilized by organizations to oversee and incorporate the significant parts of their organizations. Numerous ERP programming applications are critical to organizations since they assist them with actualizing asset arranging by coordinating the entirety of the procedures expected to run their organizations with a solitary framework. An ERP software system can likewise coordinate arranging, buying stock, deals, marketing, money, HR, and then some. 

ERP in MIS

MIS or Management Information System is a brought-together database that stores data about the organization’s areas of expertise and permits managers to utilize this data for overseeing work processes, settling on information-driven choices and producing reports. The fundamental idea of MIS is to process information from an association and present it as a report at standard stretches whereas Enterprise Resource Planning meaning can be defined as a large system which allows companies to properly manage their information. In other words, it can be said that ERP in MIS is valid and logical. If anybody asks what is ERP in MIS or if ERP is a part of MIS, we can confirm ERP in MIS to be true and is a subset of MIS.

ERP Full Form in Accounting

The ERP full form in accounting is Enterprise Resource Planning referring to the use of software to manage day-to-day business activities like accounting, project management, procurement, risk management and supply chain operations. ERP full form in accounting is the acronym.

ERP in Management Science

Enterprise Resource Planning (ERP) is characterized as the capacity to convey a coordinated set-up of business applications. ERP tools meaning is sharing a typical procedure and information model, covering expansive and profound operational start to finish forms, for example, those found in the account, HR, manufacturing, distribution, administration and the supply chain. 

ERP applications mechanize and bolster a scope of regulatory and operational business forms over various ventures, including the line of business, client confronting, authoritative and the asset management parts of an undertaking. ERP arrangements are intricate and costly undertakings, and a few associations battle to characterize the business benefits. 

Search for business benefits occurs in four regions: an impetus for business development, a stage for business process productivity, a vehicle for process normalization, and IT cost investment funds. Most undertakings centre on the last two zones, since they are the least demanding to measure; be that as it may, the initial two zones regularly have the most critical effect on the endeavour.

ERP in Computer

ERP frameworks are planned around a solitary, characterized information structure (pattern) that regularly has a typical database. This guarantees the data utilized over the undertaking is standardized and dependent on basic definitions and client encounters. These core builds are then interconnected with business forms driven by work processes across business divisions (for example fund, human resources, marketing, engineering, and operations), interfacing frameworks and the individuals who use them. ERP is the vehicle for incorporating individuals, procedures, and innovations over a cutting edge undertaking.

According to Section 4 of the Indian Partnership Act 1932, a partnership is a relation between two or more parties who mutually agree to carry on a business and share the profits, liabilities, and other responsibilities of a firm. The formal proceedings to establish a partnership firm require registration with the Registrar of Firms.

 

Registration of a partnership firm means the incorporation of a firm officially. It brings the business to existence. The process of firm registration is detailed under Sections 58 and 59 of the Indian Partnership Act.

 

However, unlike English law, registration of a partnership firm to start operating is not compulsory in India. But there are certain effects of the non-registration of partnership firms. Non-registration of a firm simply means that the business skips the formalities of incorporation and ceases to exist in the eyes of the law. Section 69, under the Partnership Act, enlists these limitations and consequences.

 

A firm could end up facing persuasive pressure owing to the various consequences of the non-registration of partnership. Due to its non-registration, a firm could come across immediate or long-term consequences in business as well as legal aspects.

Effects of Non-registration of Partnership Firm

A partnership firm operating without registering itself can have certain advantages. But the limitations of it are far greater in number. Its working would also vary from that of a registered firm. Here are the different consequences of non-registration of a partnership firm:

1. No Suit in a Civil Court Against a Third Party or Co-partner

A partnership firm does not own the right to sue a third party until and unless the firm itself is registered. Any partner or person on behalf of the firm cannot file a complaint against that party either. As a consequence of the non-registration of the firm, a partnership firm cannot approach the legal authorities for help in case of any dispute or breach of contract. To do so, the firm or the concerned partner has to have its name registered with the Registrar of Firms. The case of Jagat Mittar Saigal vs Kailash Chander Saigal can be cited as an instance of this effect of non-registration of the firm.

2. No Relief Partners for Set-off Claim

Section 69(3) under the Indian Partnership Act specifies the set-off claims and other proceedings. A set-off claim is an equitable defence to the whole or a part of a plaintiff’s claim. Here, the debtor has the right to balance mutual debts with the concerned creditor. Set-off claims also include arbitration proceedings.

 

However, an unregistered firm cannot file these claims. As a consequence of the non-registration of partnership firms, if any suit to enforce the arbitration agreement is filed by a non-registered firm, it would be considered invalid. The Supreme Court would reject the suit on the same grounds. If you are to state the effect of the non-registration of a partnership firm in this context, you can mention the Jagdish Chandra Gupta vs Kajaria Traders (India) Limited case.

3. Third Parties Can Sue the Firm

Even if a particular partnership firm is not registered under the law, a third party can file a legal case against the firm. This is, again, an undesirable effect of the non-registration of a firm. While the firm itself is restricted from filing complaints against third parties, the partnership norms do not safeguard the firm from facing third-party suits. An outsider or a third-party entity can sue an unregistered company. But as an effect of the non-registration of the partnership firm, it would not be rejected as invalid.

4. No Legal Action Can be Taken by a Partner against a Co-partner

Co-partners belonging to an unregistered firm cannot file official complaints or take legal action against each other. The effects of the non-registration of a partnership firm prevent them from such rights. This is because partners in an unregistered company are in no position to enforce any right.

 

Apart from all these effects of registration and non-registration of partnership firms, there are also certain exceptions that exist. Here are those five exceptions –

• Suit for dissolution of firms and accounts according to Section 69(3)(a) under the Indian Partnership Act.

• Suit to release the property of an insolvent partner in the firm, as per the Insolvency Act of 1920.

• Any suit in which the claim value does not exceed Rs.100.

• Suit for the enforcement of non-contractual and statutory rights (similar to the Raptakos Brett Company vs Ganesh Property case).

• Suit by any such firm which operates its business out of India or in any place where the Act does not imply.

 

The negative effects of the non-registration of a partnership are thus much more than that of positive ones. Even though registration of a partnership firm is not compulsory as per the law, it is extremely important in order to operate in a secure and legitimate manner.

 

Section 4 of the Indian Partnership Act 1932 states that a Partnership has no independent existence or personality separate from its members. A business organization where two or more persons join together to jointly carry on some business is called a Partnership. According to the new amendment in the act,  the minimum no. of partners required in Partnership firms is 2 and a maximum of 100 members.

In order to establish a Partnership firm, it needs to be formally registered with the registrar of the firms in the respective state. When the registrar of firms is satisfied with the compliance of section 58 of the partnership act, then the firm is considered to be registered. Registration of firms is not mandatory under the law the Partnership Act 1932. However, forming a Partnership deed is beneficial. 

If the firm is not registered then it is going to miss out on certain perks. For a business, trust-building is a very important factor. Other benefits like legal recognition to settle disputes or to avail any kind of finance schemes by the government would not be given to the unregistered ones.

Effects of Non-Registration of a Partnership Firm

Although the firm is not obliged to register itself, the working of a firm without the process of incorporation is subjected to few limitations.

The limitations are listed below:

1. No suit to enforce rights under the Act

A non-registered firm does not have any freedom to file a suit against a third party or a co-partner. Unless the firm is registered it cannot file a suit like other firms. In case of any kind of dispute or breach of contract, it does not have the privilege to approach the legal authorities.

2. No proper relief. The claim above Rs100 cannot be set off by a third party if the firm is not registered, hence the party has no remedy in this regard. Only the registered business can benefit from such a privilege.

3. Partners are not allowed to bring legal cases to each other. An unregistered firm’s dissatisfied partners are unable to take legal action against one another because they lack the legal capacity to file a lawsuit or the authority to enforce any rights.

4. Third parties have the advantage of using the firm. A third party can file a legal complaint against a partnership firm even if it is not registered under the law. This is another unfavorable consequence of a company’s failure to register. While the firm is prohibited from submitting third-party complaints, the partnership rules do not protect the firm from third-party lawsuits. An unregistered firm can be sued by an outsider or a third-party entity. However, it would not be rejected as invalid as a result of the partnership firm’s non-registration.

Aside from all of these consequences of partnership company registration and non-registration, there are a few exceptions. Here are the five exceptions to the rule:

1. Suit for dissolution of firms and accounts under the Indian Partnership Act, Section 69(3)(a).

2. According to the Insolvency Act of 1920, a suit is filed to release the property of an insolvent partner in the firm.

3. Any lawsuit with a claim amount of less than Rs.100.

4. Non-contractual and statutory rights are being enforced through a lawsuit (similar to the Raptakos Brett Company vs Ganesh Property case).

5. Suit by any such company that conducts business outside of India or in a country where the Act does not apply.

A contract can be entered into by parties for the performance or non-performance of an action or an event. There are primarily two types of contracts: Absolute Contracts and Contingent Contracts. Let us explain contingent contracts in detail.

Contingent Contract Meaning

In a contingent contract, the performance of the promisor is dependent on the fulfillment of certain conditions. These contracts create an obligation on the promisor only if the conditions collateral to the contract are met.

Let Us Define Contingent Contract as Per Section 31 of the Indian Contract Act, 1872

According to the Indian Contract Act, “If two or more parties enter into a contract to do or not do something if an event which is collateral to the contract does or does not happen, then it is a contingent contract.”

Insurance contracts, indemnity contracts, and guarantee contracts are some examples of contingent contracts. 

Contingent Contract Example: A promises to pay B a sum of 20 thousand rupees if there is damage to his house from fire. The payment of the amount is contingent on the house being destroyed by fire. If there is no fire, B cannot claim the amount from A who is not liable to pay since the fire that was the collateral condition, did not happen. 

What Constitutes Contingent Contracts?

There are certain essential elements of a contingent contract as stated under section 31 of the Contract Act.

A contingent contract will be deemed valid only if an event occurs or does not occur and it is collateral to the contract.

The meaning of a contingent contract is that the conditions collateral to the contract must be certain to happen in the future. The presence of a condition is essential for a contract to be contingent. Section 32 and Section 33 of the Contract Act state that the enforcement of a contingent contract is subject to the collateral conditions being fulfilled. 

Example: X agrees to employ Z as an employee if he clears the exams with 85 percent marks or more. X is liable to give the job to Z only when he meets the condition specified of clearing the exams with the required percentage.

A contract will be considered a contingent contract only if the event specified is a future event that may or may not happen. 

A contingent contract is based on the occurrence or non-occurrence of an event. This event must be collateral to the contract and not a part of the consideration mentioned in the contract. The contingency must be an independent event. 

Example: X enters into a contract with Y to pay him 10000 rupees on the delivery of some books. This is not a contingent contract since X has an obligation to pay for an event that is part of the contract and not collateral to it.

Example: X enters into a contract with Y to pay him 10000 rupees if the books are delivered to him by Friday. In this case, delivery by Friday is collateral to the contract and not a part of the consideration. Hence this is a contingent contract.

The event must not be influenced only by the will or wish of the promisor. 

Example: X promises to pay a certain sum to Y if Y leaves for Delhi on 1st June. Going to Delhi is Y’s will but is not an event completely dependent on his will.

Solved Question on a Contingent Contract

Q1. In What Ways a Contingent Contract is Different from a Wagering Contract?

Ans: A contingent contract is different from a wagering contract in the following ways.

• A wagering agreement is a void agreement but a contingent contract is a valid contract.

• In the wagering contract, the occurrence or non-occurrence of an event or action forms the premise of the contract but in a contingent contract, the contingency or the condition is merely collateral.

• The parties of a wagering contract do not have any interest in the event/ condition specified in the contract other than it resulting in the winning or losing of an amount. In a contingent contract, the parties have an active interest in the occurrence or non-occurrence of an event. 

• All wagering contracts are contingent contracts but not all contingent contracts include a wager. 

Q2. What are the Conditions for the Enforcement of a Contingent Contract?

Ans: There are certain essential conditions for the performance of a contingent contract. These are also different types of contingent contracts.

• The contract is contingent on the happening of an event- The contract is not enforceable if the event does not happen.

• The contract is contingent on the non-happening of an event- In case of a contingent contract based on the non-occurrence of an uncertain future event, the promisor is liable for his performance if the event does not happen. In case the specified event takes place, the contract becomes void. 

• The contract is contingent on the conduct of a person whose action makes fulfilling of the condition impossible. 

Example: A promises to pay ten thousand rupees to B if he marries C. In case C marries D, then the event of B marrying C is rendered impossible. A divorce between C and D or the death of D is possible later and only, in such a  case, the contract will become valid.  Otherwise, the contract becomes void.

Rules for the Contingent Contract 

In the Indian Contract Act, sections 32 to 36 define some rules for the enforcement of contingent contracts between parties. These rules are mentioned below.

1. Contracts contingent on the occurrence of an event

A contingent contract is usually based on the occurrence of some uncertain events. In these cases, the promisor is liable to do or not do something when that event occurs. However, the law cannot enforce the contract until the occurrence of the event. If the occurrence of the event becomes impossible due to any reason, then the contingent contract becomes void. 

2. Contracts contingent when the event does not occur

A contingent contract can also be based on a non-happening event. In this case, the promisor will do or not do something when the event does not occur. Contrary to the above rule, the contingent contract becomes void when the event takes place.

3. When a living person does something to make the occurrence of the event impossible

As per section 32 of the Indian Contract Act, if the contract is contingent depending on the actions of a person, then the occurrence of the event becomes impossible when that person does something to make the event impossible to happen.  

4. Contracts Contingent when the event occurs within a Specific Time

In some contingent contracts, a party promises to do or not do something on the occurrence of an uncertain event within a specific time period. The contract becomes void when the event does not occur or the time period is over.

Generally, when we talk about the cost of any particular asset, we tend to naturally think about the monetary aspects of the asset. However, the cost of assets for calculating depreciation includes several other key attributes as well, other than only money. As a result, there are numerous depreciation calculation methods used to analyse these costs. These costs, therefore, include several other components such as cost price, duties, handling expenses, among others. 

Therefore, through the ways of this article, these methods shall be discussed with respect to the cost of assets and more specifically the accumulated depreciation formula, among others. 

Depreciation Calculation Methods

With regards to calculating the decrease of the value of a company’s assets in a market, there are four primary methods that are used, namely: Straight Line Depreciation, Units of Production Depreciation, Sum of the Years’ Digits Depreciation and Declining Balance Depreciation. Each of these methods serves a distinct purpose whether with regards to calculating depreciation expense or something else. 

Therefore, these methods exist to carry out a number of depreciation formula accounting practices among firms and businesses in terms of their operations. Therefore, the formulas that are used in order to calculate the depreciation of an asset’s value in a market vary differently with the kind of method that is being used to calculate. 

As a result, the depreciation calculation formula is different for different methods. Three of the formulas are:

Straight-Line Depreciation Method= [frac{text{Cost of Asset – Residual Value}}{text{Useful Life of a Particular Asset}}]

Diminishing Balance Method= [frac{text{Cost of Asset * Rate of Depreciation}}{text{100}}]

Unit of Product Method = [frac{text{Cost of Asset – Salvage Value}}{text{Useful Life in the Form of Produced Units}}]

As can be understood, there is no universal depreciable value formula which can be used to calculate the depreciation of an asset’s cost over time. And, similar to this, there are other important aspects to depreciation as well, such as accumulated depreciation, depreciable cost and others. 

Accumulated Depreciation Formula 

In order to calculate accumulated depreciation of a company’s assets, the salvage value or the estimated scrap is subtracted from the asset’s initial cost. Therefore, through the proper implementation of this formula, the accumulated depreciation of an asset’s value in a market is determined. 

Therefore, the formula for the accumulated depreciation of an asset’s value is:

[frac{text{Cost of Asset – Salvage Value}}{text{ Life of Asset}}] * Numbers of Years

Depreciable Cost

While discussing the assets of depreciation calculation, the facet of depreciable cost plays a big role. Defined as an asset’s cost which is susceptible to be depreciated with time it is, in effect, the same as the asset’s acquisition cost, without its salvage value. 

Therefore, the Formula for the Depreciable Cost is:  Original Cost- Salvage Value

Book Value Formula Depreciation 

While discussing assets for depreciation calculation in a stable marketplace, it is imperative to discuss the book value of the asset. The book value is defined as the value of an item (asset) after the depreciation of the asset has been accounted for. Therefore, the significance of the book value of an asset lies with the asset’s allowance of depreciation over time. Similarly, the book value is a significant indicator of a business’s depreciation values and how much of them can be written off on the taxes of the business. Therefore, the book value of an asset is highly dependent on its ability to attract investors. 

 

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