Bhagya

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 12 Biotechnology students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 12 Biotechnology

Biotechnology-

1. Biotechnology is defined as ‘the development and utilization of biological forms, products or processes for obtaining maximum benefits to man and other forms of life.
2. The term biotechnology was first used by Karl Ereky in 1919 to describe a process for the large-scale production of pigs.
3. According to OECD (Organization for Economic Cooperation and Development, 1981) -‘Biotechnology is the application of scientific and engineering principles to the processing of materials by biological agents to provide goods and service to the human welfare’.
4. Two phases of the development of biotechnology in terms of its growth :

• Traditional or old biotechnology: Based on fermentation technology using microorganisms as in the preparation of curd, ghee, soma, vinegar, yogurt, cheese making, winemaking, etc.
• Modern or new biotechnology: Based on –
  • The use of rDNA technology, polymerase chain reaction (PCR), microarrays, cell culture, cell fusion, and bioprocessing to develop specific products.
  • Ownership of technology and its socio-political impact.

Principles and Processes of Biotechnology-

1. Two core techniques of modem biotechnology :

(1) Genetic engineering :

(a) Manipulation of genetic material towards the desired end and in a directed and predetermined way, using in vitro process.

(b) Definition of genetic engineering (By Smith): ‘The formation of a new combination of heritable material by the insertion of nucleic acid molecule produced by whatever means outside the cells, into any virus, bacterial plasmid or another vector system so as to allow their incorporation into a host organism in which they do not occur naturally but in which they are capable of continued propagation.

(c) Genetic engineering is also called recombinant DNA technology or gene cloning, as it involves alterations in DNA.

(2) Chemical engineering: Maintaining a sterile environment for manufacturing of useful products like vaccines, antibodies, enzymes, organic acids, vitamins, therapeutics, etc.

2. Different techniques and instruments (devices) for gene cloning/r-DNA technology :

(1) The techniques used in rDNA technology, on the basis of molecular weight: Gel
permeation, osmotic pressure, ion-exchange chromatography, spectroscopy, mass spectrometry, electrophoresis, etc.

(2) Electrophoresis :

• It is used for the separation of charged molecules like DNA, RNA, and proteins, by application of an electric field.
• Different types of electrophoresis: Agarose gel electrophoresis, PAGE, SDA PAGE.

(3) Polymerase chain reaction (PCR) :

• It was discovered by Kary Mullis in 1985.
• Uses of PCR : In vitro gene cloning or gene multiplication to produce a billion copies of the desired segment of DNA or RNA, with high accuracy and specificity, in few hours.
• Requirements of PCR : Thermal cycler, DNA containing the desired segment to be amplified, deoxyribonuclueoside triphosphates (dNTPs), excess of two primer molecules, heat stable DNA polymerase and appropriate quantities of Mg⁺⁺ ions.
• Three essential steps : Denaturation, annealing of primer and extension of primer.

3. Biological tools for gene cloning/r-DNA technology :
(1) Enzymes :

• Lysozymes, Nucleases (exonucleases, endonucleases, restriction endonucleases), DNA ligases, DNA polymerases, alkaline phosphatases, reverse transcriptases, etc.
• Nucleases : They cut the phosphodiester bonds of polynucleotide chains.
• Types of nucleases :
  • Exonucleases : They cut nucleotides from the ends of DNA strands.
  • Endonucleases : They cut DNA from within.

Restriction endonucleases or restriction enzymes :

• They are the molecular scissors which recognize and cut the phosphodiester back bone of DNA on both strands, at highly specific sequences.
• The 4 to 8 nucleotide long sites recognized by them are called recognition sequences or recognition sites.
• Types of restriction enzyme :
  • Type I : They fuction simultaneously as endonuclease and methylase e.g. EcoKI.
  • Type II : They have separate cleaving and methylation activities e.g. EcoRI, Bgll. They cut DNA at specific sites within the palindrome.
  • Type III : They cut DNA at specific non-palindromic sequences e.g. Hpal, MboII.
• Restriction cutting may result in DNA fragments with blunt ends or cohesive or sticky ends or staggered ends (having short, single stranded projections).

Table : Source and recognition sequences of various restriction enzymes :

(2) Cloning vectors (vehicle DNA) :

• Vectors are DNA molecules that carry a foreign DNA segment and replicate inside the host cell.
• Examples of vectors : Plasmids (e.g. Ti plasmid of Agrobacterium tumejaciens, pBR 322, pUC), bacteriophages (e.g. M13, lambda virus), cosmid, phagemids, BAC (bacterial artificial chromosome), YAC (yeast artificial chromosome), transposons, baculoviruses and MACs (mammalian artificial chromosomes).

(3) Competent host: e.g. bacteria like Bacillus Haemophilus, Helicobacter pyroli and E. coli.

Methodology for r-DNA technology-

1. The steps involved in gene cloning :

• Isolation of DNA (gene) from the donor organism.
• Insertion of desired foreign gene into a cloning vector (vehicle DNA).
• Transfer of r-DNA into suitable competent host or cloning organism.
• Selection of the transformed host cell.
• Multiplication of transformed host cell.
• Expression of the gene to obtain desired product.

2. Gene library :

(1) Gene library is a collection of different DNA sequences from an organism where each sequence has been cloned into a vector for ease of purification, storage and analysis.

(2) Types of gene library :

• Genomic library : It is a collection Of clones that represent the complete genome of an organism.
• c-DNA library : It is a collection of clones containing cDNAs inserted into suitable vectors like phages or

Applications of Biotechnology-

1. Healthcare Biotechnology :

(1) It involves unique, targeted and personalized therapeutic and diagnostic solutions for organ transplant, stem cell technology, genetic counselling, forensic medicine, gene probes, genetic fingerprinting and karyotyping.
(2) Human insulin production using r-DNA technology.
(3) Vaccine production :

• Recombinant vaccines, naked DNA vaccines, viral vector vaccines and plant- derived vaccines are found to be most effective against various diseases.
• Modern diagnostic test kits include rickettsial, bacterial and viral vaccines along with radio-labelled biological therapeutics for imaging and analysis.
• Oral Vaccines.

2. Agriculture :

(1) Application of biotechnology in agriculture : Genetically modified organisms, Bt Cotton, pest resistant plants, improvement in the agricultural productivity.
(2) Applications of tissue culture :

• Micropropagation i.e. large-scale propagation of plants in very short durations.
• Storage of germplasm and maintaining clone of plants which produce recalcitrant seeds or highly variable seeds. Recalcitrant seeds are those whose survival and viability gets affected because of dehydration and freezing.

3. Gene therapy :

(1) Gene therapy is the treatment of genetic disorders by replacing, Elitering , or supplementing a gene that is absent or abnormal Eind whose absence or abnormality is responsible for the disease.

(2) Genes can be delivered by three ways, viz. Ex vivo delivery, in vivo delivery and use of virosomes (Liposome + inactivated HIV) and bionic chips.

(3) Forms of gene therapy :

• Germ line gene therapy and
• Somatic cell gene therapy.

4. Genetically Modified Organisms (GMOs) :

(1) Genetically modified orgEinisms are those whose genetic material has been artificially manipulated in a laboratory through genetic engineering to create combinations of plant, animal, baetericil and virals genes that do not occur in nature or through traditional crossbreeding methods.

(2) Transgenic Plants : Transgenic plants have been developed for :

• Insect pest resistance : e.g. Bt cotton and Transgenic tobacco.
• Biofortification : Improvement in quantity and quality of vitamin, proteins, oil and iron.

• Tolerance to abiotic stresse and herbicides.
• Resistance to various diseases.
• Improvement in post-harvest characteristics : e.g. Flavr savr tomatoes.

(3) Plants are potential factories or bioreactors for :

• Biochemicals (starch, sugar, lipids and proteins) and biopharmaceuticals (hormones, antibodies, vaccines, drugs or enzymes) isolated from transgenic plants.
• Fine chemicals, perfumes and adhesive compounds.
• Industrial lubricants.
• Biodegradable plastic.
• ‘Renewable’ energy crops to replace fossil fuels.
• ‘Superglue’
• Edible vaccines

(4) Transgenic animals : Transgenic animals are the animals in which there has been a deliberate modification of the genome and such animlas are used in various fields such as medical research, toxicology, molecular biology and in pharmaceutical industry.

• Transgenic mice : Used in cancer research.
• Transgenic fish : Developed for increased cold tolerance and improved growth.

Transgenic farm animals :

(i) The main objectives for developing transgenic animals are to improve quality and quantity of milk, meat and wool, to increase egg production, to develop disease resistant animals, production of low-cost pharmaceuticals and biologicals.

(ii) Transgenic farm animals include transgenic cattle (developed for food production and human therapeutic production), transgenic sheep (developed for production of better quality and quantity of wool and meat. They are also used as bioreactors), transgenic pigs (developed for improved meat production, as bioreactors and they are useful in human transplants – xenotransplantation) and transgenic chicken (developed for having traits like lower levels of fat and cholesterol, high protein containing eggs, in vivo resistance to viral and coccidial diseases, better feed efficiency and better meat quality).

Bioethics-

Ethics deals with the matters related to socially acceptable moral duty, conduct and judgement. It helps to regulate the behaviour of community by certain set of standards.

1. Bioethics helps to study moral vision, decision and policies of human behaviour in relation to biological phenomena or events.
2. It deals with wide range of reactions on new developments like :

• r-DNA technology, cloning, transgenics and gene therapy.
• In vitro fertilization, sperm bank, prenatal genetic selection and eugenics.
• Euthanasia, death, maintaining those who are in comatose state.
• Use of animals causes great sufferings to them.
• Violation of integration of species caused due to transgenosis.
• Transfer of human genes into animals and vice versa.
• Indiscriminate use of biotechnology poses risk to the environment, health and biodiversity.

3. Bioethical concerns related to GMO :

• The effects on non-target organisms,
• Insect resistance crops,
• Gene flow
• The loss of diversity as well as the issue on
• Modification process disrupting the natural process of biological entities.

4. Ethics in biotechnology also includes the general subject of what should and should not be done in using recombinant DNA techniques.

Effects of Biotechnology on the Environment-

1. Herbicide Use and Resistance :

• Unintended hybrid strains of weeds and other plants can develop resistance to these herbicides through cross-pollination, thus negating the potential benefit of the herbicide.
• E.g. Crops of Round Up-ready soybeans have already been implemented into agricultural practices, possibly conferring Round Up resistance to neighbouring plants.

2. Effects on Untargeted Species :

• Bt corn has adverse effects on untargeted species like Monarch butterfly.
• GM plants can also have unintentional effects on neutral or even beneficial species.

Effects of Biotechnology on Human Health-

• Allergies : e.g. Transgenic soyBean containing a gene from the Brazil nut to increase the production of methionine, has caused allergic reactions in those with known nut allergies (Biotech SoyBeans).
• Long-Term Effects : GMO technology is a recent development and its long-term effects on health cannot be anticipated now.
• New Proteins : Proteins which were never ingested before, can have potential effects which are not yet known.
• Food Additives : The use of GMOs may create antibiotic and vaccine-resistant strains of diseases.
• The Indian Government has set up the Genetic Engineering Approval Committee (GEAC) to make decisions regarding the validity of research involving GMOs and addresses the safety of GMOs introduced for public use.

Biopatent and Biopiracy-

Patent is a special right granted to the inventor by the government.
A patent consists of three parts – grant (agreement with the inventor), specification (subject matter of invention) and claims (scope of invention to be protected).

1. Biopatent :

• Biopatent is a biological patent awarded for strains of microorganisms, cell lines, genetically modified strains, DNA sequences, biotechnological processes, product processes, product and product applications.
• Biopatent allows the patent holder to exclude others from making, using, selling or importing protected invention for a limited period of time.
• First biopatent : Genetically engineered bacterium ‘Pseudomonas’ used for clearing oils spills.

2. Biopiracy:

(1) Biopiracy is defined as ‘theft of various natural products and then selling them by getting patent without giving any benefits or compensation back to the host country’.
(2) It is unauthorized misappropriation of any biological resource and indigenous knowledge.
(3) Examples of Biopiracy :

• Patenting of Neem (Azadirachta indica)
• Patenting of Basmati
• Patenting of Haldi (Turmeric)

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 3 Reconstitution of Partnership (Admission of Partner) students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 3 Reconstitution of Partnership (Admission of Partner)

Meaning of Reconstitution of Partnership-

To reconstitute means to form or create it again. Accordingly reconstitution of partnership means to change the earlier relationship and form a new relationship between or among the partners. It refers to the change in the form of partnership due to making of new agreement by the partners. Such reconstitution of partnership takes place on account of admission of a new partner or retirement or death of existing partner.

Different forms of reconstitution : The different forms of reconstitution of partnership are stated
below :

(1) Change in profit-sharing of existing partner : Sometimes due to certain circumstances, existing partners may decide to change their profit and loss ratio. If one of the partners purchases certain profit sharing ratio from another partner, the old partnership deed may get terminated and new agreement comes into force stating the new profit sharing ratio.

(2) Admission of a new partner : If need arises a new person may be admitted into the partnership firm with the consent of all the existing partners. On admission, new partner becomes a new owner of the firm. He is required to bring in his share of capital and goodwill and is entitled to share in future profit. Hence, partnership agreement changes.

(3) Retirement of existing partner : On account of old age, continuing ill health or by sweet will an existing partner may retire from the partnership firm. He is called outgoing partner. Partnership firm is required to pay all his dues on retirement. The profit sharing ratio of continuing partners increases due to reduction in the number of partners.

(4) Death of partner : When a partner dies, he no more remains as partner of a firm. On natural ground he ceases to be partner of a firm. On death of a partner, the profit sharing ratio of continuing partners get changed and old partnership agreement gets terminated.

Admission of a Partner-

As per the Section 31(1) of the Partnership Act, 1932, if need arises, with the consent of all the i
existing partners a new person can be admitted in the partnership firm. Such a partner is called incoming
partner. :

Meaning and Need of admission of a partner:

Meaning : Admission of a partner refers to a process in which a new person is taken into the existing partnership firm as a partner as per certain terms and conditions of partnership deed.
On admission, a new partner brings in cash for his share of capital and goodwill, skill, services, experience, etc. into the existing partnership business and in exchange he gets certain share in future profit of the firm and right in the assets of the firm.

Need : The need of admission of a partner is stated as follows :

• To increase the capital resources of the firm and :
• To secure the advantages of the new person’s skill, experience and business connections to develop efficiency of the business.

Capital brought in by new partner : At the time of admission, new partner is required to bring .
in cash or/and other assets, if any, as his capital, to get rights in the assets and definite share in the future profit of the firm.

When a new partner brings in cash towards his share of capital, the following journal entry is passed :

In case a new partner brings in other assets towards his capital the following journal entry is ;
passed :

New profit sharing ratio : In all cases of admission of a partner, the new partner gets the agreed share in the future of profit whereas all the old partners together get the remaining share. As a result profit sharing ratio of existing (old) partners changes and newly constituted firm is required to calculate new profit sharing ratio for all the partners including new partner. Such new ratio is used by the firm to write off goodwill and to make adjustments in Capital Accounts of the Partners.

New Ratio is calculated by using following formula :
Assume that total profit be 1, The Balance of 1 = (1 – share given to new partner).
New Ratio = (Balance of 1) x Old Ratio.
If sacrifice ratio of old partners is given along with old ratio, the new ratio can be calculated as
→ New Ratio = Old Ratio – Sacrifice Ratio.

Sacrifice ratio : Sacrifice ratio is the ratio in which two or more old partners surrender or give up their shares in the future profit in favour of a new partner of the firm. Sacrifice ratio is calculated by using the following formula :
Sacrifice Ratio = Old Ratio-New Ratio

Meaning of Goodwill-

It is often observed that some business firms are in a position to earn higher profit in comparison to other firms dealing in the similar line of products. This extra earning capacity of a business firm is called goodwill. In other words, Goodwill is the monetary value of the reputation of a firm as measured in terms of its expected future profits. In the words of Lord Macnaghten, Goodwill is “the benefits and advantages of the good name, reputation and connections of the business.

According to Institute of Chartered Accountants of India, Goodwill is “an intangible asset
arising from business connection or reputation or trade name of an enterprise. ” Goodwill is built up slowly and gradually by a business concern through great efforts over a long period of time.
The factors on which the value of goodwill depends are : (1) monopoly enjoyed by the business (2) its continued prosperity (3) its reputation, location and connections with leading parties (4) its trade mark, brand name and patents (5) its high profit earning capacity and (6) good and cordial relations with all including customers, employees etc.

Goodwill is an intangible asset because its existence cannot be verified by our senses. It is an asset that cannot be expected to realise or converted into cash unless it is sold along with the business. Goodwill is valued and recorded in the books of accounts by the partnership firm on the following occasions : (1) Sale or purchase of a firm as a going concern (2) Admission of a partner (3) Retirement or death of a partner (4) Change in the profit and loss ratio of the partners.

Methods of Valuation of Goodwill : As prescribed in the syllabus, the value of goodwill as on a ,
particular date is ascertained by using any one of the following methods : ‘
(A) Average Profit Method and (B) Super Profit Method.

(A) Average Profit Method : Under this method, goodwill is valued at certain number of years’ .
purchases of the average profit of the firm. To compute the value of Goodwill as per this ,
method the following formulae are used :

1. Total Profits = Profits of the given number of years-losses, if any.
2. Average Profit = \(\frac{Total Profits of given no. of years}{No. of years given}\)
3. Goodwill = Averge Profit x No. of years’ purchases

Steps to calculate goodwill : Following steps are required to be taken for calculating goodwill :

1. Calculate total profit by giving plus sign to profits and minus sign to losses.
2. Calculate average profit by dividing total profit by given number of years.
3. Calculate the value of goodwill by multiplying average profit by given number of years’ purchases.

(B) Super Profit Method : Under this method, goodwill is valued at certain number of years’ •; purchases of the super profit of the partnership firm. In order to understand the formulae used for computing the value of goodwill under super profit method, the following concepts need to be understood :

(1) Super Profit : Super profit is the profit earned by the business concern over and above the normal profit or return earned on capital exmployed. Super profit is calculated by using the following formula :
Super Profit = Average Profit – Normal Profit.

(Normal Profit or Normal Return on Capital Employed : Normal profit or normal return on capital employed refers to a reasonable profit earned by a business concern to survive in the industry after meeting all its business expenses.
It is ascertained by using the following formula :
Normal Profit or Normal Return on Capital Employed = Capital Employed x Normal Rate of Return.)

(2) Capital Employed : Capital employed is the total amount of capital used by the business concern to run and maintain its business activities. Capital employed is made of fixed assets other than goodwill plus current assets minus current liabilities.

(3) Normal Rate of Return : Normal rate of return is the return or profit normally expected on the capital employed by considering the returns or profit actually earned by other firms in the same industry. This is the average rate of return or profit earned in the industry. Normal rate of return depends on the nature of business and element of risk involved therein.

(4) Goodwill: Super Profit x Number of years’ purchases.

Accounting Treatment of Goodwill: As new partner gets certain share in future profit of the firm from old partners who sacrifice their profit sharing ratio in favour of him, for which they (old partners) must be compensated for such a loss. Therefore, new partner is required to bring in certain amount for goodwill in addition to the amount to be brought in by him towards his share of capital. At the time of admission, goodwill may be given treatment in one of the following two methods, viz.
(A) Premium Method and (B) Valuation Method.

(A) Premium Method : Under premium method following possible cases are considered : Journal entries are shown as follows :

(i) When a new partner brings his share of goodwill in cash which is retained in the business :

(ii) When a new partner brings Goodwill In cash but it is withdrawn by the old partners:

(iii) When a new partner pays amount of Goodwill to old partners privately :
No accounting entry is to be passed in the books of the partnership firm as amount of goodwill is paid privately by a new partner to old partners, business firm as such is not at all benefited and therefore, there is no necessity of recording any entry for goodwill in the books of a partnership firm.

(B) Valuation Method : if the new partner does not bring in his share of goodwill in cash, a new Goodwill A/c may be opened and it may be treated in the following manner :

(i) If goodwill does not appear in the books of accounts :

(ii) If goodwill already appears In the books of accounts:

(a) If on revaluation, the revised value of goodwill Is found to be lower than Its existing value which already appears In the books : (Entry is to be passcd only for difference in the value of goodwill)

(b) If on revaluation, the revised value of goodwill is found to be greater than Its existing value which already appears in the books : (Entry is to be passed only for difference In the value of goodwill)

Revaluation of Assets and Liabilities : Just before the admission of a new partner, it is usual practice to revalue the assets and liabilities of the existing firm. The profit or loss which arises due to changes in their values is shared by the old partners alone. To record such changes in the values of assets and liabilities, a separate account is opened and operated. Such an account is called “Profit and Loss Adjustment A/c” or “Revaluation A/c”. It is a nominal account showing the expenses or losses on the debit side and incomes or gains on the credit side.

A decrease in the value of the assets and an increase in the amount of the liabilities are shown on the debit side of this account, while an increase in the assets or a decrease in the liabilities are shown on the credit side of this account. So also this account is debited for recording an outstanding expense and creating a provision for bad and doubtful debts and credited for recording incomes receivables, prepaid expenses and creating a provision for discount on creditors. Any balance of this account is then transferred to old partners’ capital/current accounts in their old profit sharing ratio.

Debit balance of Profit and Loss Adjustment A/c or Revaluation A/c indicates loss incurred on revaluation of assets and liabilities, while credit balance of this account shows profit earned on revaluation of assets and liabilities.

(a) Pro Forma journal entries on revaluation of assets and liabilities are given below :

(b) Pro Forma Profit and Loss Adjustment Account/Revaluation Account :

Adjustment of Accumulated Profits and Losses:
(1) Different type of Reserve Funds : Every year part of the profit, kept aside in a separate account by the partners to meet the loss, if any that may arise due to unforeseen contingencies like flood, fire, theft, sudden fall in prices of firm’s products, etc. is called as General Reserve. The credit balance in General Reserve, Reserve Fund, Workmen’s Compensation Fund, Investment Fluctuation Fund, Joint Policy Reserve, etc., are created out of past profit, the balance of the those reserves entirely belong to old partners and therefore new partner has no right to get any share in those reserves. Hence on admission of a new partner, entire balance in the above mentioned reserves is required to be transferred to old partners’ capital accounts or current accounts in their old profit sharing ratio. The following journal entry is required to be passed for transfer of balance in various reserves :

(2) Accumulated Profit/Loss : Every year part of the profit, which remains undistributed among the old partners, is carried forward to next year. Such undistributed profit accumulated over many years is shown in the Balance Sheet on liabilities side under the heading “Profit and Loss A/c”. Similarly, part of the losses unadjusted among the partners is carried forward to next year. Such unadjusted losses if any, accumulated over many years are shown on the Assets side of the Balance Sheet under the heading “Profit and Loss A/c”. At the time of admission of a new partner, entire balance of such accumulated profits or losses is transferred to old partners’ capital/current accounts in their old profit sharing ratio. The following entries are required to be passed for transfer of accumulated profit/losses :
(a) Transfer of accumulated profit:

(b) Transfer of accumulated loss :

Adjustment of Capitals: At any time when the partners so desire (and especially after admission of a new partner), they may make their capitals proportionate to their new profit ratio either through their Current or Loan A/cs or by actually bringing in or withdrawing cash.

The capital accounts of all the partners are usually adjusted by taking new partner’s capital as the base and then adjust the capital of other partners. Adjusted new capital balance of each old partner is then compared with his actual capital balance to find out deficit or surplus of capital. Ultimately, the deficit or surplus of capital of partners is adjusted either through partners’ current account or his loan account or through cash.
The following journal entries are passed for adjustment of partners’ capitals as mentioned above :

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 6 Plant Water Relation students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 6 Plant Water Relation

Introduction-

1. Types of substances required by the plant from its surroundings

• Water
• Minerals
• Nutrients
• Food (for parasites)
• Gases from the atmosphere : (A) O₂ for respiration (B) CO₂ for photosynthesis

2. Water is absolutely necessary for all vital activities. Hence referred to as elixir of life.
3. Role of water :

• Major constituent of protoplasm (90-95%)
• Helps in maintaining the turgidity of cells and their shape.
• It is a transporting medium.
• Water affects productivity of plants.

Properties of water-

1. Important properties of water.

• Liquid form at room temperature.
• Best solvent for various solutes.
• Inert inorganic compound.
• Neutral pH (i.e. pH = 7) of pure water.
• High specific heat.
• High heat of vaporization.
• High heat of fusion.

2. Due to these properties water is best transporting medium, best medium for biochemical reactions and acts as a thermal buffer.
3. Hydrogen bonding occurs in liquid water which is mainly responsible for these properties.
4. Good adhesive and cohesive forces exist in water molecule.
5. Owing to high surface tension and these forces, it can rise in capillaries.
6. Water is a molecule that connects or is a link between physical factors and biological processes.

Water absorbing organ-

1. Root system – Chief organ of water and mineral absorption.
2. Terrestrial plants absorb liquid water from soil with root hairs while epiphytes like orchids, have special hygroscopic tissue velamen that absorbs water vapour from atmosphere.
3. Regions of root – four zones.
Root cap is situated at tip behind it is

• zone of meristematic region
• zone of elongation
• zone of absorption or root hair zone and
• zone of maturation.

4. In zone of absorption, thin, delicate, unicellular hair like extensions i.e. root hairs develop from epidermal cells.
5. Structure of root hair : It is cytoplasmic extension, tube like, colourless, unbranched and short lived (ephemeral) structure.
6. Root hair has large central vacuole, thin cytoplasm, plasma membrane and double layered wall of pectin and cellulose.
7. Freely permeable cell wall while selectively permeable plasma membrane.

Water available to roots for absorption-

1. Rhizosphere : Microenvironment surrounding the root, constitutes rhizosphere from which plants absorb water.
2. Soil is the main source of water for plants.
3. Water present in soil is in following forms namely :

• Gravitational water percolated deep in soil due to gravity.
• Hygroscopic water held tightly around soil particles, adsorbed or adhered water on fine particles.
• Combined water present as hydrated oxides of silicon, aluminium, etc.
• Capillary water present in the fine spaces or capillaries between soil particles.

4. Plants readily absorb capillary water from soil.

Absorption of water by roots from soil-

When water is absorbed by plant, all the three physical processes occur simultaneously at root hair.

1. Imbibition :

• Swelling up of hydrophilic colloidal substances.
• Water is adsorbed on the surface.
• Imbibant : Substance that adsorbs.
• Imbibate : Substance that gets imbibed.
• In root hair double layered cell wall of cellulose and pectin is imbibant.
• Water is tightly adsorbed on the surface till the equilibrium is reached.

2. Diffusion :

• Movement of ions/atoms/molecules of a substance from region of high concentration to that of their low concentration.
• Movement results due to kinetic energy.
• It takes place till equilibrium is reached.
• In root cell, diffusion occurs through freely permeable cell wall.
• Diffusion pressure created is directly proportional to number of diffusion particles.
• Pure water has more diffusion pressure (D.E) than solvent in solution.
  Diffusion results in diffusion pressure. D.ED. can be considered as thirst of cell, capacity which absorbs water from surrounding of adjacent cell.
• D.ED. (Diffusion Fressure Deficit = S.E (Suction Fressure)
• Difference in D.E of pure solvent (i.e. water) and solvent in solution is termed D.ED.
• D.ED. is capacity to absorb water from surrounding.
• Cell sap has less D.E than water around cell wall. Thus, water diffuses inside.
• It is significant in absorption of water and minerals, transport of food, exchange of gases and conduction of water upwards against gravity.

3. Osmosis :

•  A process by which water actually enters root hair (cell interior).
• Special type of diffusion.
• Involves movement of solvent through a semipermeable membrane.
• Cell sap inside the cell is concentrated (minerals, sugars) while solution outside cell is weaker. Hence solvent (water) from outside enters the cell passing through semipermeable plasma membrane.
• In root cell, at interphase of cell wall and plasma membrane, water enters by osmosis.
• Type of solutions based on concentration
  
• Two types of osmosis
  
• Turgor pressure (T.P.) : Pressure exerted by turgid cell sap on cell membrane and cell wall.
• Fully turgid cell has D.ED. = 0 (zero)
• Wall pressure (W.P.) : Cell wall exerts pressure on inner cell sap i.e. counterpressure. Hence T.P = W.P but it is in opposite direction.
• Osmotic pressure (O.P.) : Pressure exerted due to osmosis so as to stop entry of water (solvent) inside.
  • Pressure of solution in opposite direction.
  • To check entry of water (solvent molecules) inside cell.
• D.RD. (thirst of cell) demand or ability to gain water by cell = O.P – T.P and T.P = W.P
  ∴ D.ED. = O.P – W.P (Osmotic pressure minus wall pressure)
• In flaccid cell T.P is 0 (zero) . .D.RD. = O.E In turgid cell D.PD. is 0 (zero) ..T.R = O.R

Facilitated diffusion :

• Passive absorption of solutes (no expenditure of energy)
• Takes place with the help of carriers (special proteins – porins)
• Diffusion through cell membrane
• Lipid soluble components can easily pass but hydrophilic components need carrier.
• Requirement of concentration gradient for diffusion.

Membrane proteins – aquaporins and ion channels are sites of facilitated diffusion.

Water potential ( Ψ )-

• Free energy is needed to do the work and for movement of water, i.e. osmosis )
• Chemical potential : Free energy per molecule in a chemical system.
  Water potential : It is chemical potential of water – Unit bars / pascal (pa) / atmosphere D.RD. is now termed as water potential.
• Water potential of protoplasm is opposite in sign but equal to D.RD. i.e. negative value.
• Pure water has water potential zero. When some solute is added there is decrease in water potential (t//) i.e. negative.
• Flow of water is from less negative potential to more negative potential, i.e. from higher water potential to lower.
• In adjacent cells, plasmodesmata connections are concerned with movement of water.

Factors affecting water absorption :

• Types of water-presence of capillary water.
• Soil temperature-favourable range 20 to 30°C.
• Concentration of solutes in soil water – High solute concentration reduces rate of absorption.
• Soil aeration : If soil aeration is less then there is absorption.
• Rate of transpiration : With increase in transpiration, there is increase in absorption of water.

Plasmolysis-

1. Exosmosis that occurs in living cells upon placing in hypertonic (concentrated) solution is termed plasmolysis.

• Shrinkage of protoplasm
• Separation from cell wall forms a gap between cell wall
• Flaccid nature due to removal of water.

2. Turgor pressure (T.R) is zero in plasmolysed cell.
3. Deplasmolysis : When flaccid cell is kept in hypotonic solution endoosmosis takes place and thus it becomes turgid.
4. In fully turgid cell T.R = O.P and D.RD. is zero, (no absorption of water by cell)

Path of water across the root (i.e. from epiblema up to xylem in the stelar region)-

1. Root hair cell : Absorption of water takes place from rhizosphere by process of imbibition then diffusion and finally osmosis.

2. In turgid cells (root hair) due to absorption of water → Increased turgor pressure (T.P) and lowered D.PD. →adjacent cell (Cortical cell) → more D.PD. more osmotic pressure (O.R) → adjacent cell will take water from turgid root ha.i → root hair cell thus becomes flaccid → absorb water from soil.

3. A gradient of D.PD. or suction pressure (S.R) is formed from root epidermis till the region of cortical cells.

4. Movement of water is from root hair → epidermis → loosely arranged cortical cell → passage cells of endodermis → pericycle → protoxylem

5. Due to continuous absorption of water hydrostatic pressure is developed, i.e. root pressure → Helps in transfer and conduction further in xylem of root.

6. The movement of water from root hair to xylem takes place along two different pathways, viz. apoplast pathway and symplast pathway.

7. Pathway for water across roots:

8. Additional apoplast pathway :

• Direct pathway leading to xylem.
• Secondary roots originate at pericycle inside endodermis.
• Bypass endodermis having Casparian strip. Hence allow direct entry in vascular system.

9. In normal apoplast pathway, suberised layer forces shift to symplast in order to enter xylem.

10. Symplast pathway is transmembrane pathway through plasmodesmatal connections in living cells of cortex. The plasmodesmata interconnect the cytoplasm of cells forming cytoplasmic network called symplast.

Learn this as well :

• Vacuoles in the root cells are interconnected to form intercellular connections.
• Intervacuolar connections are formed between the cells.
• Cytoplasmic connections are towards the periphery of cell.
• Tonoplast, the membrane of vacuole is differentially permeable membrane which allows the passage of certain solutes but not all along with solvent.

Mechanism of absorption of water-

Translocation of water-

1. Ascent of sap : Transport of water along with dissolved minerals from root to aerial part against gravity is called translocation or ascent of sap.
2. Ascent of sap occurs through lumen of xylem tracheids and vessels. Physical forces and activity of living cells is required for ascent of sap. Complex tissue xylem as a path of water is proved by ringing experiment.
3. Root pressure theory (Vital theory) by J. Pristley :

• Living cells of root are responsible for translocation of water.
• Xylem sap exuding out from cut end of stem above the soil indicates existence of root pressure.
• As water is absorbed by root hair constantly and continuously, hydrostatic pressure is set in root cortical cells.
• Owing to this root pressure, water with dissolved minerals is pushed into xylem and also conducted upwards.
• Root pressure is an osmotic phenomenon, develops due to absorption of water.
• Oxygen, moisture, temperature and salt content of soil affect root pressure, Root pressure of +1 to +2 bars is sufficient to carry water upwards to 10 to 20 metres.

Objection to this theory :

• Not applicable to tall plants.
• Ascent of sap occurs even if root system is absent.
• Some tall plants have zero root pressure (Gymnosperms).
• Root pressure is absent in actively transpiring plants.
• Xylem sap shows negative hydrostatic pressure as it is under tension in normal condition.

4. Capillarity theory (Physical force theory) By Bohem :

• Physical forces and dead cells (xylem with lignified wall) are responsible for translocation.
• Water is raised to certain level due to capillarity.
• Capillarity is due to surface tension, cohesive and adhesive forces of water.
• Water conducting elements have lignified walls and are with lumen (xylem vessels and tracheids)
• Combined cohesive forces of water and adhesive forces of water with xylem wall form continuous water column.
• Owing to capillarity, water is conducted upwards against gravity.

Objection to capillarity theory :

• Continuous capillary tube is essential but tracheids have thickened, tapering closed end walls.
• Lower end of capillary tube not in direct contact with soil water.
• Tall trees show wide lumen in xylem vessels. Narrower the capillary tube, higher level of water column is raised.

5. Cohesion – Tension theory (Transpiration pull theory) By Dixon and Joly :

• Widely accepted theory of ascent of sap.
• Based on cohesion and adhesion with transpiration pull developed.
• Strong force of attraction of water molecules : Cohesive force
• Strong force of attraction of water molecules and lignified walls of xylem : Adhesive force
• Water loss is in the form of water vapour, mainly through stomata is transpiration.
• Owing to combined action of cohesive and adhesive forces, a continuous water column is maintained through xylem.
• Transpiration pull developed due to water loss in leaf vessels is transmitted downwards towards root.
• Water lost from stomata causes increased D.RD. of mesophyll cells which in turn takes water from xylem of leaf.
• A gradient of suction pressure or D.ED. is set in, due to transpiration, which causes tension or pull. Owing to this, water column is pulled upwards through xylem.
• It is passive pull of water against gravity which results in ascent of sap.

Objections to transpiration pull theory :

• Formation of gas bubbles due to temperature fluctuations may not keep water column continuous.
• Vessels as tabular structure are much evolved and efficient in conduction but this theory assumes trachieds are more efficient.
• If transpiration is checked due to some artificial means like application of Vaseline, then also ascent of sap occurs, (clogging of stomata due to application of Vaseline)
• Ascent of sap occurs in plants which are deciduous, (leaf fall)

Transport of mineral ions-

• Minerals are elements which play an important role in vital processes in metabolism. Thus they are essential elements for plants.
• Elements required in large amount, Macro elements : e.g. N, P C, H, O, etc.
• Elements are required in small amount, Micro elements : e.g. B, Cu, Mn, Co, etc.
• Soil is a chief source of minerals and they are absorbed in dissolved (ionic) form through root system.
• Minerals are absorbed by plants from their surrounding environment (atmosphere – C, H, O) and soil (inorganic materials).
• Absorption of minerals is independent of that of water.
• Minerals are transported with ascent of sap. Hence root is source and they get lodged at the required organ.
• Unloading of the transported material is by diffusion from veins and cells uptake them.
• Minerals can be remobilized inside plant body from older leaves to young leaves, e.g. R S, N, K, etc. But those parts of structural framework are not disturbed, e.g. Ca.
• Nitrogen in inorganic ion form and amino acids, amides in organic form are transported through xylem.
• Some exchange of material takes place between xylem and phloem.

Transport of food-

• Food is synthesised in chloroplast containing cells.
• Part of plant where food is synthesised is source (leaf) and where it is utilized is sink e.g. root.
• Translocation of food occurs from source to sink through phloem. The movement or transport of food from one part to other part is called translocation of food.
• Sieve tubes (phloem) and vessels (xylem) are ideal for vertical or longitudinal transport. Sieve tubes for downward transport.
• The lateral or horizontal translocation occurs through medullary rays (parenchyma) from phloem to pith or cortex.
• Food is translocated in soluble form sucrose along concentration gradient set from sink.
• Vertical translocation – (longitudinal transport)
  From leaves i.e. source to sink (root) in downward direction or growing point (stem) and seed germination, corm, bulbil germination in upward manner.
• Lateral translocation – occurs in root and stem.
  • Radial translocation from phloem to pith.
  • Tangential translocation from phloem to cortex.

• Phloem transport is bidirectional. Phloem sap has sucrose, and water with other sugar, amino acids and hormones.
• Mechanism of sugar transport through phloem – Mass Flow hypothesis or Munch’s Pressure flow theory is – most widely accepted concept.
• Other theories are diffusion, activated diffusion, electro osmosis, protoplasmic streaming.
• Ernst Munch theory : Glucose synthesised in photosynthesis which increases osmotic concentration of photosynthetic cell → Endo osmosis → water absorbed from adjacent cells and xylem → Turgidity of cell →Increased turgor pressure → sugar from photosynthetic cell forced into sieve tube → This is vein loading.
• Root cell (sink) → utilization of sugar → polymerisation of sugar to starch → osmotic concentration lowered. Exosmosis → hence water lost to adjacent cells → decrease in turgidity → Turgor pressure lowered → Turgor pressure gradient is set → Translocation of food passively along concentration gradient → This is vein unloading.
• Sugar is used at the sink or stored and excess water transported to xylem.

Objections of theory –

• Bidirectional flow is not explained.
• Pressure flow is a physical process.

Transpiration-

• From the constant absorption of water 5% is utilized and 95% surplus water is lost through aerial parts in the form of mainly water vapour.
• Guttation : Loss of water in liquid form (1%), occurs from water stomata or hydathode.
• Transpiration : Water lost in the form of water vapour mainly foliar transpiration.
• Types of Transpiration
  

Structure of stomatal apparatus-

• Stomatal apparatus has guard cells, stoma and accessory cells.
  
• The elliptical pores (opening – stoma) are bounded by two guard cells, either kidney shaped or dumbbell shaped cells.
• Guard cells are modified epidermal cells, nucleated cells with uneven thick wall – Inner wall thick and inelastic, outer wall is thin and elastic, with chloroplasts.
• Accessory cells/Subsidiary cells –
  Specialized epidermal cells that surround guard cells. They are reservoir of K⁺ ions.
• Opening and closing of stomata Is controlled by turgidity of guard cells.
• During daytime → Thrgld guard cells due to endoosmosls → ExertIon of T.P on outer thin wall → elastic wall stretch out → Thick walls pulled apart → stoma opens.
• During night-time → flaccid guard cells due to exosmosis → outer elastic wall relaxes → Inner thick walls pushed → stoma closes.
• Diurnal changes In osmotic potential are responsible for flaccidity and turgidity of guard cells.
• As per starch-sugar hypothesis → DurIng day time starch gets converted to sugar by enzyme phosphorylase → Increase osmotic potential → entry of water
  Reverse reaction during night → stoma close

As per proton pump theory — Transport of H⁺ and K⁺ ions

• During daytime – starch converted to malic acid → dissociation into malate and protons (H⁺) → H⁺ in subsidiary cells → K⁺ ions from subsidiary cells to guard cells → open stomata Potassium malate → Increase osmotic potential → endoosmosis (turgidity)
• At night → uptake of K⁺ and Cl^– ions is checked by abscissic acid – change In permeability, osmotic potential → Hypotonic guard cells → exosmosis → flaccid → stoma close

Advantages of Transpiration:

• Removal of excess water
• Helps In absorption of water
• Cooling effect
• Helps in gaseous exchange
• Maintains turgor of cells
• Ascent of sap

Disadvantage – Excessive transpiration causes wilting injury and that may lead to death of plant.

Transpiration : A necessary evil – (By Curtis)

• During daytime stomata remain open thus help in gaseous exchange – for respiration and photosynthesis
• Productivity is adversely affected if stomata remain closed
• When stomata are open transpiration cannot be avoided.

Know the scientists :
Scientists — Their theories/discoveries

1. B.S. Meyer – Coined the term Diffusion Pressure Deficit D.RD.
2. Atkins and – Osmotic absorption Pristley theory
3. Kramer and – Non-Osmotic absorption Thimann theory
4. J. Pristley – Root pressure theory
5. Bohem – Capillarity theory
6. Dixon and Joly – Cohesion Tension theory
7. Munch – Pressure flow theory
8. Steward – Starch-sugar interconversion theory
9. Levitt – Proton transport theory
10. Curtis – Transpiration as ‘a necessary evil’
11. S. Hales – Term root pressure

By going through these Maharashtra State Board 12th Science Chemistry Notes Chapter 14 Biomolecules students can recall all the concepts quickly.

Maharashtra State Board 12th Chemistry Notes Chapter 14 Biomolecules

Biomolecules: Biomolecules are lifeless molecules that combine in a specific manner to produce life or control biological reactions. Examples: They are carbohydrates, lipids, proteins, nucleic acids. They play
an important role in the functions of organisms.

Carbohydrates: Carbohydrates are optically active polyhydroxy aldehydes or ketones or compounds that can be hydrolyzed to polyhydroxy aldehydes or polyhydroxy ketones.

Classification of Carbohydrates:

Preparation of glucose: Glucose is prepared either from cane sugar or from starch.

Reactions:

Glucose can be represented by Fischer projection formulae and cyclic structure by Haworth projection formulae. Fructose is ketohexose and is made by the isomerization of glucose. It is laevorotatory and belongs to the D series. Fructose can be represented by Fischer projection formulae and cyclic structure by Haworth projection formulae. Disaccharides are sucrose, maltose, cellobiose, lactose, etc. Polysaccharides are starch, cellulose, glycogen, etc.

Proteins: Proteins are naturally occurring polymeric nitrogenous organic compounds containing 16% nitrogen and peptide linkages. Proteins are classified into fibrous proteins (keratin, hair, skin, nails) and globular proteins (hemoglobin, thyroglobulin). The structure of a protein can be studied at different levels called primary, secondary, tertiary, and quaternary. Proteins on hydrolysis give a mixture of α-amino acids .
Amino acids are classified into three types-basic, acidic, and neutral amino acids.
Peptide linkage (-CONH) in an amide formed between -COOH and -NH₂ group by elimination of water molecule.

Enzymes: Enzymes are biological catalysts for various chemical reactions in living organisms. Enzymes are required in small quantities. They act as catalysts and reduce the activation energy for a particular reaction. In many industrial processes, specific reactions are carried with the use of enzymes extracted from organisms.

Nucleic acids: Nucleic acids are esters of phosphoric acid with sugar. They control the synthesis of proteins and are also responsible for storing the genetic information of living organisms and passing the information from one generation to another.
Chromosomes contain two types of nucleic acids: Ribonucleic acid RNA and deoxyribonucleic acid DNA Nucleoside: A base-sugar unit
Nucleotide: A base-sugar-phosphoric acid unit. Nucleotides are monophosphates of nucleosides.

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 2 Meaning and Fundamentals of Double Entry Book-Keeping

Meaning and Definition of Double Entry Book-Keeping System-

Meaning:

The Double Entry Book keeping system is scientific, perfect and a complete method of recording business information in the books of accounts. Usually, in every business transaction, we find two accounts, out of which one account is given debit effect and other account is given credit effect. In this system for every debit, there is a corresponding credit and in money term all debits are equal to all credits. If any thing comes into business, an account of that item is to be debited and if any thing goes out from business, an account of that item is to be credited in the books of account, e.g. Ashok purchases goods worth ₹ 5,000 from Kishor by paying cash. Here, Ashok gets goods of ₹ 5,000 and parts with cash of ₹ 5,000. In the books of Ashok, Goods A/c. will be given debit effect to extent of ₹ 5,000 and Cash A/c will be given credit effect to extent of ₹ 5,000. Thus, every business transaction is split up into two parts or two aspects, i.e. debit aspect and credit aspect. Debit effect is posted to the debit side of one Ledger A/c. and credit effect is recorded on the credit side of the other Ledger A/c.

It means every business transaction is recorded in two different accounts at two different places. In this manner, in double entry book keeping system, completed business transactions are first recorded in journal and then in ledgers. At the end of the accounting year, all ledger accounts are closed and balanced. The balance shown by each ledger account is then recorded on a separate sheet in order of debit and credit. This is known as trial balance. When this process is over, the debit column and credit column of trial balance are totalled. The total of debit side always agrees or equals with the total of credit side. It means every debit is given equivalent credit under the double entry book-keeping system.

Thus, double entry book-keeping system seeks to record every business transaction in money or money’s worth in its double aspects viz. debit and credit.

Definition of Double Entry Book Keeping System:

(1) J. R. Batliboi : “Every business transaction has a two fold effect and that it affects two accounts in opposite directions and if a complete record is to be made of each such transaction it would been necessary to debit one account and credit another account. It is this recording of two fold effect of every transaction that has given rise to term Double Entry. ”

(2) William Pickles : “The Double Entry System seeks to record every transaction in Money or Money’s worth in its double aspect – the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the debit of the account receiving and the later to the credit of the account surrendering.’’

Methods of Recording Accounting Information-

Book keeping system is classified as (i) Indian system of recording accounting information and (ii) English system of recording accounting information.

(i) Indian System : Traditional method of recording and keeping the records of accounts in any one of Indian languages like Marathi, Hindi, Gujarati, Urdu, etc. is called the Indian accounting system. It is also called Mahajani / Deshi Nama system. Under this system, transactions are recorded in long books known as Kird or Bahi Khata and it is not based on Double Entry book-keeping system. This system does not have scientific base. This system is still used in India by small business organisations.

(ii) English System: When business informations are recorded in the books of accounts in English language as per modern (advanced) method, it is called. English accounting system. Now-a-days, English accounting system is more advanced and popular and universally followed all over the world. In India, in many large scale business organisations, English system of recording accounting is followed. English accounting system is sub classified as (i) Single entry book-keeping system and (ii) Double entry book-keeping system.

Single Entry Book-Keeping System :

A book-keeping system in which only one aspect of business transaction is considered and systematically recorded in the books of accounts and other aspect is completely ignored is called single entry book-keeping system. Under this system of book keeping only Cash Book and personal accounts are prepared and maintained. It is incomplete and unscientific method of book-keeping. It cannot provide accurate information about the profitability and financial position of the business. It has several drawbacks and defects. It is not as popular as double entry book-keeping system. It is rarely used in the modern business world. This system is suitable for small business organisations.

Double Entry Book-Keeping System :
A book-keeping system in which double or two fold effects of each transaction is recorded systematically is called double entry book-keeping system. In this system one account is debited and another account is credited with equal amount. It is scientific method of recording all business transactions in the books of accounts.

The main principles of double entry system are stated as follows :

In every business transaction minimum two interested parties are involved.
Every business transaction has minimum two aspects or effects viz. one receiving benefit and another giving benefit.
Two aspects or effects of every business transaction are recorded in the books of accounts.
In monetary term every debit has equal credit. It means every debit has corresponding credit of equal amount. Two fold effects of every business transaction are recorded by debiting one account and crediting another account.

Advantages of Double Entry Book – Keeping System-

• Recording double aspects of each transaction in the books of accounts, ensures an arithmetical accuracy of accounts.
• This system is helpful to detect, prevent and reduce the frauds.
• If at all any mistake occurs, it can be easily detected and rectified.
• Exact amount due to us from customers/debtors and other parties, and exact amount payable to creditors/ suppliers by us can be known easily from the records maintained as per this system.
• This accounting system keeps complete, accurate and perfect records of business transactions.
• This accounting system is suitable for all types of business organisations i.e. small scale, medium scale and large scale, public and private business organisations, etc.
• This accounting system is helpful to prepare trial balance and final accounts of the business at the end of the accounting year.
• With the help of this system income statements of the current year can be compared with the income statements of previous years and on the basis of that comparison a businessman gets information about the variations in incomes and expenses. To control expenses, a businessman can adopt different measures.
• As all accounts are prepared independently under this accounting system, item wise detail information can be known easily, e.g. value of assets, amount of expenses, amount payable to other parties, etc.

Conventional System of Accounting-

Conventional system of accounting is an old and traditional method of recording business transactions in the books of accounts. Indian accounting system is one of the finest example of conventional system of accounting. Under this system accounting information are recorded in any one of the Indian languages such as Marathi, Gujarati, Hindi, Marwadi, Urdu, etc.

It is a system of accounting in which businessman or accountant (in local language called ‘munimjV) prepares conventional cash book, Journal i.e. Rojmel and Ledger i.e. Khatavahi to record business transactions. Conventional system of accounting is more suitable and useful for those businessmen whose turnover is small and number of business activities is limited. Even today this accounting system is adopted by many professionals and businessmen.
Left hand side of every ledger account is called Debit i.e. ‘Jama’ and right hand side is called Credit i.e. ‘Udhar’ or ‘Nave’. This system suffers from many drawbacks. It is incomplete system of maintaining accounting records. It is not recognised by law as an accounting system.

Classifications of Accounts-

(i) Account:
(A) Meaning: An account is a list of business transactions falling under the same description for a given period of time. A systematic and summarised record of business transactions with respect to person, property, loss, gain, income or expense is known as account. An account is generally prepared for one complete year. The word ‘Account’ in abbreviation can be written as ‘A/c.’ Accounts are prepared and maintained in the Ledger. Separate Ledger sheet or page is used for one specific account.

According to J. R. Batliboi, “An account is summarised record of transactions affecting one person, one kind of property or one class of gain or loss. ”
An account is divided into two equal parts, viz. left hand side called debit side and right hand side called credit side.

(B) Specimen of an account: The specimen form of an account is given below:

An account is divided into two equal parts by drawing a double line in middle of the account (i.e. T form). The left hand side is called debit side (Debit record) and right hand side is called credit side (Credit record).

(ii) Classification of Accounts :

Classification of accounts means dividing or grouping different accounts into certain well defined classes with certain objectives.
Accounts are classified into two main groups as (i) Personal Account, and (ii) Impersonal Account.

(1) Personal A/c : Account of person or account relating to person with whom a business keeps dealing is called Personal A/c. Therefore, an account of an individual, partnership firm, company, club, institution, local authority, association, State Government and Central Government with which business keeps dealings is called a personal account. From the view point of law, persons are classified as (a) natural or living persons,(b) legal or artificial persons and (c) Representative Persons. The term natural person implies individuals human beings, e.g. Ashok’s A/c, Kishor’s A/c etc. A legal person does not have life, body and soul, but the law recognises it as a person because all business transactions are done in its name.

For instance Bank of India’s A/c is a personal account as Bank of India is a financial institution which deals in money. It is a legal person. Under the title of legal person the following institutions and legal bodies are included, viz. partnership firm, joint stock company, association, clubs, legal, medical, financial, educational and charitable institutions, gram panchayat, district body, State Government, Central Government, etc. Account of Debtor, Account of Creditor, Bank A/c, College’s A/c, Hospital’s A/c, Club’s A/c and Partnership Firm A/c. are called Personal A/cs.

Representative Personal Account represents an account of a group of certain persons with whom business keeps dealings e.g. Sundry Debtors A/c, Prepaid Insurance A/c, Outstanding Salaries A/c , etc.

(2) Impersonal Account : All accounts other than personal accounts are known as impersonal accounts. In other words, all accounts which are not personal accounts are grouped under impersonal account. For instance Cash A/c, Rent A/c, Wages A/c and Furniture A/c. are impersonal accounts. Impersonal accounts are classified as (a) Real A/c. and (b) Nominal A/c.

(a) Real A/c : An account of tangible as well as intangible property or any thing owned and possessed by a business is called Real A/c. In other words Real A/c is that account which relates to tangible as well.as intangible assets, objects, etc. of the business. For example Cash A/c, Furniture A/c, Land and Building A/c, Goods A/C, Goodwill A/c, Patent A/c, Plant and Machinery A/c. are called Real A/c. as they relate to the property of the business. Real A/c is further divided into Tangible Real A/c and Intangible Real , A/c.
Tangible Real assets are those which can be seen, touched, felt and measured. It has physical existence. Accounts of Tangible assets are called Tangible Real A/c. E.g. Cash A/c, Goods A/c etc. Intangible Real assets are those which cannot be seen or touched, but it can be measured in terms of money. Accounts of intangible assets are called Intangible Real A/c., e.g. Goodwill A/c, Patent A/c, Trademark A/c, Copy right A/c etc.

(b) Nominal Account: An account relating to business expense, income, gain and loss is called Nominal account. In other words, an account of business expense, business income, business loss or business gain is called Nominal A/c. For instance Rent A/c. is a Nominal A/c, as rent is an expense if it is paid by business and it is an income if it is received by business. Similarly, Salaries A/c, Interest A/c, CQmmission A/c, Discount A/c., etc are Nominal A/c. Nominal A/c is also called as Fictitious A/c. In the ledger, separate account is prepared and maintained for each head of business expenses, losses, incomes and gains. Nominal A/c represents business incomes, gains, expenses and losses. Thus, a classification of accounts is shown in summarised form as below.

(iii)List of Legal Persons Are Given Below:

Legal Persons:

• Partnership Firm
• Hindu Undivided Family
• joint Stock Company (a) Private Limited Company, (b) Public Limited Company,
• Co-operative Societies,
• Institutions (a) Financial Institutions, (b) Educational Institutions, (c) Medical Institutions, (d) Legal Institutions, (e) Charitable or Welfare Institutions,
• Associations
• Clubs,
• Government Authorities (a) Local-grampanchayat, different kinds of district authorities or bodies, Municipalities (b) State Government, (c) Central Government (d) Government Department.

(iv) Illustrations on Different types of Accounts :

• Anand Agrawal’s A/c.: Mr. Anand Agrawal with whom business deals is a living person. Hence, Mr. Anand Agrawal’s A/c is a Personal A/c..
• Audit Fees A/c.: Audit means to check or to verify an account. The qualified person who does this work of checking is called the auditor. Fees charged by the auditor is called as audit fees. It is an income for auditor and expense for the business. It is a Nominal A/c.
• Bad Debts A/c.: ‘Bad debts’ is a loss that business suffers on account of irrecoverable debts from insolvent debtor. It is an account relating to business loss, hence it is a Nominal A/c. If it is recovered in subsequent accounting year it is termed as Bad Debt Recovery A/c. The same is also included in Nominal A/c. as there is a gain on recovery of bad debts.
• Bank Charges A/c.: Bank charges are the expense for the business and income for the bank, therefore, Bank Charges A/c. is a Nominal A/c.
• Bank of India’s A/c.: Bank of India is a financial institution dealing in money. It is a legal person and so Bank of India’s A/c. is a Personal A/c.
• Mumbai English School A/c.: Mumbai English School is an educational institution. It is a legal person and hence Mumbai English School A/c. is a Personal A/c.
• Building A/c.: Building is an asset of the business. Account of business asset is known as Real A/c. Therefore, Building A/c. is a Real A/c.
• Cash A/c.: Cash in Hand is a business asset and hence Cash A/c. is a Real A/c.
• Carriage A/c.: Expenses incurred to carry goods or raw materials are known as carriage. Carriage is a business expense and hence it is a Nominal A/c.
• Commission A/c.: Commission if received by business, is a business income and if it is paid by business it is a business expense. Commission A/c. thus relates to income or expense of the business, hence it is a Nominal A/c.
• Copy Right A/c.: Copy right is the right given to author by law, in respect of sales of book written by him. Copy right is an asset of author. It is, therefore, a Real A/c.
• Capital A/c.: Capital is provided by proprietor. Proprietor is a living person. Hence, Capital A/c. is a Personal A/c.
• Debtor’s A/c.: Debtor is a person from whom money or money’s worth is receivable by business. Debtor may be natural or legal person. Therefore, Debtor’s A/c. is a Personal A/c.
• Depreciation A/c.: Depreciation is a reduction in value of the fixed asset of the business due to its use, wear and tear or any other similar causes. It is a business expense or notional loss. So Depreciation A/c. is a Nominal A/c.
• Discount A/c.: Discount is an allowance or concession, in money terms received or given by the business. If it is allowed by business it is an expense and if it is received by business it is an income. Hence, Discount A/c is a Nominal A/c.
• Dividend A/c.: Returns on share investment paid by company to shareholders are known as Dividend. Many times, a business invest the surplus money in the shares of company. Thus, dividend is a business income, and hence included in the classification of Nominal A/c.
• Drawings A/c.: Withdrawal in cash or in kind made by a businessman from time to time from business for self use or family’s use is known as drawings. It is an account of proprietor, a living person. Therefore, Drawing A/c is a Personal A/c.
• Freehold Premises A/c.: Premises means building and surrounding area or land attached to it. Premises which is not leased or hired is called ‘Freehold premises’. Freehold premises are an asset of the business and they are covered in Real A/c.
• Furniture A/c.: Furniture of business is a business asset and therefore, Furniture A/c. is a Real A/c.
• Goods A/c.: Goods exhibited or remained in the stock are business assets. So Goods A/c. is a Real A/c.
• Goodwill A/c.: Goodwill is a money value of business reputation earned by business over number of years. It is an intangible asset of the business. It is a Real A/c.
• Investment A/c.: Investment made by the business is a business asset and therefore, Investment A/c. is a Real A/c.
• Interest A/c.: Interest A/c. is an account of expense when it is due or paid by business on debt. Interest is an income if it is received or earned on investment, by business. Thus interest A/c. is a Nominal A/c.
• Insurance Premium A/c.: If business property is insured with insurance against risk of fire or theft, the business has to pay a stipulated amount decided by the insurance company at a regular interval to the insurance company. Such payment is called the insurance premium. It is a business expense. Thus, Insurance Premium A/c. is a Nominal A/c. ‘
• Live Stock A/c.: Stock or collection of animal kept for sale by the business is called Live Stock. It is an asset of the business. It is a Real A/c.
• Loan A/c.: Loan is given by business to debtor or it is taken by business from creditor. Debtor and creditor are persons. Therefore, Loan A/c. is a Personal A/c.
• Loss by Fire A/c.: Loss by fire is a business loss and so it is a Nominal A/c.
• Machinery A/c.: Machinery of business is a business asset and hence Machinery A/c. is a Real A/c.
• Motor Vehicles A/c.: Motor vehicles of business are business assets, so Motor Vehicles A/c. is a Real A/c.
• Patent A/c.: Patent refers to right of manufacturer or business to produce and sell goods or services. It is a business asset and therefore, Patent A/c. is a Real A/c.
• Printing and Stationery A/c.: Amount spent by business on printing and stationery is business expense and so Printing and Stationery A/c. is a Nominal A/c. x
• Prepaid Rent A/c.: Rent which is paid in advance by the business for period yet to exist is called prepaid rent. It is an asset of proprietor. Thus, Prepaid Rent A/c. is a Personal A/c.
  (Note: Outstanding and Prepaid expenses are Personal A/c. e.g. outstanding wages, prepaid insurance premium, outstanding salaries, etc. are Personal A/c.)
• Royalty A/c.: The amount paid to the owner of a copy right or patent right for making use of trade mark of their product is called Royalty. Royalty is a business expense. It is a direct expense of the business. So Royalty Account is a Nominal Account.
• Stock of Goods A/c. or Stock of Stationery A/c.: Total unsold goods or total goods remaining in the godown of the business is called stock of goods. Stationery remaining or unused in the office for daily correspondence is called stock of stationery. Both Stock of Goods A/c and Stock of Stationery A/c. are Real A/cs. as they are the assets of the business.
• Shiv Vaibhav Co-operative Stores A/c: Shiv Vaibhav Co-operative Stores is a legal person (it is recognised by law as person) and hence Shiv Vaibhav Co-operative Stores A/c is a Personal A/c.
• Shares A/c.: Amount invested by business in the company in the form of shares is called as investment in shares. It is an asset of business. Therefore, Shares A/c. is a Real A/c.
• Loose Tools A/c.: Different types of equipments and instruments used by business in manufacturing goods and services are together known as loose tools. It is a Real A/c.

(v) Table Showing Classification of Accounts Into Personal Accounts, Real Accounts & Nominal Accounts :

(vi) Meaning of Debit and Credit:

• Debit: To debit an account means to enter the entry or to write on the left hand side of an account.
• Credit: To credit an account means to enter the entry or to write on the right hand side of an account.

Examples :

(1) Paid ₹ 10,000 to Seema.
In this transaction since Seema is receiver of cash, her account is to be debited i.e. we have to enter this transaction on the debit side of Seema’s A/c. On the other hand as cash goes out from the business, Cash A/c is to be credited i.e. we have to enter the transaction on the credit side of Cash A/c.

(2) Received ₹ 6,000 from Sameer.
In this transaction since cash comes into the business, Cash A/c is to be debited i.e. we have to enter the transaction on the debit side of Cash A/c. On the other hand Sameer is the giver of cash and hence his account is to be credited i.e. we have to enter this transaction on the credit side of Sameer’s A/c.

Rules For Journalisation : (Golden Rules of Accountancy) (Traditional Approach)-

(a) Personal A/c.: Personal A/c. relates to persons with whom a business keeps dealings. A person may be a natural person or a legal person. If a person receives anything from the business, he is called receiver and his account is to be debited in the books of the business. If person gives anything to the business, he is called a giver and his account is to be credited in the books of the business.
Principle of Personal A/c. states that:

Debtt the Receiver of The BenefiT Credit the Giver of the Benefit:

E.g.

• Goods worth ₹ 1,000 sold to Ramesh. In this transaction, Ramesh is the receiver of goods, he is called receiver and his A/c is to be debited in the books of the business.
• Purchased goods worth ₹ 500/- from Kiran. In this transaction, Kiran is the giver of the goods to the business. He is giver and his A/c. is to be credited in the books of the business.
• Paid cash ₹ 500 to Sanjay. In this transaction Sanjay is the receiver. Hence, Sanjay’s A/c is to be debited.

(b) Real A/c.: Real A/c relates to property which may either come into the business or go from the business. If any property or ‘goods’ comes into the business, account of that property or goods is to be debited in the books of the business. If any property or ‘goods’ goes out from the business, account of that property or goods is to be credited in the books of the business. Principle of Real A/c states that:

Debit What Comes in Credit What Goes Out:

E.g. Goods sold on cash for ₹ 1,500/-. In this transaction cash, an asset comes into the business on sale of goods, and therefore Cash A/c is to be debited in the books of business. On the other hand, goods, an asset of the business goes out of the business on sale and therefore Goods A/c. is to be credited in the books of the business.

(c) Nominal A/c.: Nominal account is an account that relates to business expenses, loss, income and gain. If business incurs expense to manage and run business, account of that expense is to be debited in the books of business. When a business earns income by rendering services or hiring business assets, an account of that income is to be credited in the books of business. In the transaction of sale or purchase of goods or assets, if any loss is incurred by the business, account of that loss is to be debited in the books of the business. If in the transaction of sale of goods or asset any profit is earned by the business, then account of that profit is to be credited in the books of the business.
Principle of Nominal A/c. states that:

Debit All The Expenses or Losses
Credit All Incomes, Gains or Profits

E.g.

• Paid ₹ 50/- as commission to our agent.
• Received ₹ 100/- as interest on our fixed deposit.
• Sold old furniture costing ₹ 5,000/- for ₹ 4,000/- and incurred a loss of ₹ 1,000/-.

In the first transaction, commission which is paid to an agent is business expense and it is to be debited in the books of the business. In the second transaction interest which is received is business income and therefore it is to be credited in the books of the business. In the third transaction, the business has incurred a loss of ₹ 1,000/- on account of sale of furniture. The account of loss is to be debited in the books of the business.

Activity II (Given in the Text book to solve)

(I) From the following transactions find out

(1) Two Aspects (2) Two Accounts (3) Classify the Accounts
(i) Started business with Cash ₹ 50,000.
(ii) Purchased Machinery on credit from Avinash ₹ 20,000.
(iii) Purchased goods ₹ 5,000 from Rahul on cash.
Solution :
(1) Two Aspects

(2) Two Aspects and Two Accounts :

(3) Two Aspects, Two Accounts and Classify the Accounts :

Analysis of transaction by applying rules of Debit and Credit
(Traditional Approach)

Table showing various business transactions, two aspects affected, two accounts involved, classification of accounts, rules applicable, account to be debited and account to be credited is given below.

Activity: 02 (Given in Textbook to Solve)
Fill the following table.
Analysis of transaction by applying rules of Debit and Credit
(Traditional Approach)

Rules For Debit And Credit: (Modern approach) :
The chart showing the rules of debit and credit as per modern approach is given below.

Two fundamental rules are followed to record the changes in the accounts are stated below:

(1) For changes in Assets / Expenses.

• Increase (↑) in assets is debited and
  Decrease (↓) in asset side is credited
• Increase (↑) in expenses / losses is debited and
  Decrease (↓) in expenses / losses is credited.

(2) For changes in Liabilities / Revenues (Gains)

• Increase (↑) in Liabilities is credited and
  Decrease (↓) in Liabilities is debited.
• Increase (↑) in Revenues (Gains) is credited
  Decrease (↓) in Revenues (Gains) is debited.
• Increase (↑) in Capital is credited and
  Decrease (↓) in Capital is debited.

Activity: 03 : Fill the following table.
Analysis of transaction by applying rules of Debit and Credit (Modern Approach)

Analysis of the Following Transactions and Finding Out Their Effects-

(1) Started business with cash ₹ 50,000.
In this transaction cash comes in and increases (↑) Capital by ₹ 50,000. Hence, Cash A/c is debited by ₹ 50,000. On the other hand Liability of the business viz. Capital is created and increased (t). Hence, Capital A/c is credited by ₹ 50,000.

(2) Deposited ₹ 40,000 into the bank.
In this transaction after depositing Cash ₹ 40,000 into the bank, Bank balance increases (↑) and hence Bank A/c is debited by ₹ 40,000. On the other hand cash balance decreases (4) and hence, Cash A/c is credited by ₹ 10,000.

(3) Purchased goods worth ₹ 6,500 from Sameer on credit.
In this transaction Goods worth ₹.6,500 comes into the business after purchases. Purchases is our expense and it increases (↑). Hence, Purchases A/c is debited by ₹ 6,500. On the other hand Sameer is our Creditor and Liability towards creditor increases (↑). Hence, Sameer’s A/c is credited by ₹ 6,500.

(4) Sold goods worth ₹ 4,000 to Mr. Sawant on Credit.
In this transaction after sale of goods of ₹ 4,000, our revenue increases (↑) by ₹ 4,000. Hence, Sales A/c is credited. Mr. Sawant is our debtor and our assets in the form of cash receivable from debtors increases (↑). Hence, Mr. Sawant’s A/c is debited.

(5) Purchased Furniture for ₹ 25,000 for office use and amount paid by cheque.
In this transaction value of furniture i.e. assets increases (↑) and hence, Furniture A/c is debited by ₹ 25,000. After payment, bank balance i.e. our assets decreased (↓) and hence, Bank A/c is credited by ₹ 25,000.

(6) Received cash ₹ 2,000 from Mr. Sawant.
In this transaction cash comes in and cash balance i.e. assets increases (↑). Hence, Cash A/c is debited by ? 2,000. Amount receivable from Mr. Sawant i.e. debtor (asset) decreases (↓). Hence, Mr. Sawant’s A/c is credited by ₹ 2,000.

(7) Paid cash ₹ 1,500 to Sameer.
In this transaction, Sameer is our creditor and amount payable to Sameer i.e. Liability decreases. Hence, Sameer’s A/c is debited by ₹ 1,500. Cash goes out and cash balance i.e. asset decreases. Hence, Cash A/c is credited by ₹ 1,500.

From the following information prepare a chart showing assets, liabilities, incomes, expenses and capital.

(1) Furnitures and Fixtures
(2) Commission Received
(3) Machinery
(4) Sundry Creditors
(5) Bills Payable
(6) Discount Allowed
(7) Sundry Debtors
(8)  Patents
(9) Royalty
(10) Discount Earned
(11) Bills Receivable
(12) Drawings
(13) Capital
(14) Bank Loan
(15) Bank Balance
(16) Cash in Hand
(17) Salaries Paid
(18) Travelling Expenses
(19) Repairs and Renewals
(20) Goodwill
(21) Depreciation
(22) Bank Overdraft
(23) Prepaid Insurance
(24) Outstanding Salary
(25) Wages
(26) Carriage
(27) Premises
(28) Dividend Received.
Answer:

Accounting Equations :
Accounting equation implies that the total assets of a business are always equal to the total liabilities of a business plus capital i.e. Owner’s equity.

This equation is symbolically expressed as follows:
Assets = Liabilities + Capital OR
A = L + C

Other equations are stated below:
Capital = Total Assets – External Liabilities Total Assets = Total Liabilities Assets = External Liabilities + Capital Assets = Equities
Above fundamental equations provide foundation to Double Entry Book-keeping System.

Equities: The properties owned and possessed by the business are called as Assets. The rights to the properties are called equities. Equities may be sub-divided into two categories viz. the right to creditors and the right to the owners. The equity of creditors represents debts of the business. It is called liabilities. The equity of owner is called as Capital. Proprietor is the debtor of all his expenses and creditor for all his incomes. This relationship is shown in the following diagram.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 7 Bills of Exchange students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 7 Bills of Exchange

Introduction-

When goods are sold on credit, there is an implied promise by the buyer to pay money to the seller on a future date. Similarly, in the case of borrowing or lending of money, borrower/debtor borrows money on oral or implied promise. Such credit sales or lending of money involves risk of recovery of debts in time. In spite of repeated reminders, some borrowers/debtors do not fulfil their promises. So in the interest of seller or creditor, the party to the credit transaction prepares a written document or undertaking giving the details of debts such as person liable to pay debts, person entitled to receive the payment, amount of debts, date of payments, signatures of the parties to the transaction, etc.

This written document or undertaking is called Credit Document or Negotiable Instrument. Bill of Exchange is one of the important credit instruments used to support credit transactions. In India, in ancient days, instrument of credit popularly known as Hundies were used on large extent. Bills of exchange if drafted in any one of the Indian languages such as Marathi, Gujarati, Urdu, Hindi, etc., is called Hundi. Hundies are classified into different types like Shahjog Hundi, Darshani Hundi, Muddati or Miadi Hundi, Namjog Hundi, Dhani-Jog Hundi, Jawabee Hundi, Hukhami Hundi, Firman-Jog Hundi, etc.

Necessity : The necessity of Bills of Exchange is summarised as follows :

• In the Bills of Exchange the debtor gives acknowledgement of the debts which automatically
  creates evidence of debts. ,
• The seller or creditor is relieved from the tension or risk of recovery of the amount or debts.
• The seller or creditor comes to know the exact date of receiving the payment of the bill.
• It is a valuable document which can be discounted with the bank to raise needed finance.
• It can be used or endorsed by its owner in settlement of the debts owed by him / her.

Meaning and definition : Bill of Exchange is a written acknowledgement of debt given by the debtor to the creditor along with a written promise to pay that debt on demand or after a specified period to the creditor or any other person as per his order. Usually bill of exchange is drawn by the creditor on his debtor. It is accepted by debtor.

According to the Negotiable Instruments Act, 1881, Bill of Exchange is defined as, “ an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay on demand, or on a certain future date, or after a certain period of time, a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. ”

Salient features of a Bill of Exchange :

• A bill of exchange must be in writing.
• A stamp of proper value must be affixed on it as per the provisions of Stamp Duty Act, 1889.
• It must be dated.
• It should contain an unconditional order to pay certain sum of money only.
• Such order is given to make payment of certain or definite sum of money only.
• The order is to make payment to a certain person whose name is specified in it or to his order or the bearer.
• The maker of the bill signs the bill of exchange.
• It must be accepted by the drawee i.e. the person on whom it is drawn.
• It must clearly specify when payment is to be made.

Draft, Format of Bills of Exchange-

There are three parties to a bill of exchange viz., the drawer, the drawee and the payee.

(1) Drawer : The person who draws or prepares the bill, gives the order to pay money and signs on it is called Drawer. He is a creditor. He has to receive the amount specified on the bill. Accordingly drawer records all transactions relating to bills under the title or name called “Bill Receivable”.

(2) Drawee : The person on whom the bill is drawn is called Drawee. Every bill drawn by the drawer Is required to be accepted by the drawee. When drawee accepts the bill or agrees to make the payment, he becomes the Acceptor. Since, the amount of bill is payable on due date by drawee and hence for him it is “Bill Payable”.

(3) Payee : The person named in the instrument, to whom the amount of the bill is to be paid is called the Payee. Generally, drawer is the payee, but payee could also be a third person like a creditor to whom the amount is made payable by drawer.

Contents of format of B of Exchange :

•  Date : At the top righ and corner below the address of the drawer, date on which bill is drawn is to be written, which is required to calculate maturity date.
• Term : Term of bill must be mentioned in months or in days.
• Amount: Below the stamp, amount of bill in figure should be mentioned and amount of bill in words are written in the body of bill.
• Stamp : Appropriate value of stamp should be affixed as per Indian Stamp Act 1889.
• Parties : in the bill of exchange names of drawer, drawee and payee and their address must be mentioned.
• For value received : The bill of exchange should be issued in exchange of some benefit received which is legally necessary.
• Acceptance : At per mutual understanding, drawer makes a draft for bills of exchange and sent it to drawee for acceptance. Drawee then signs that draft with his name along with date across the face of the bill with the words ‘Accepted’. On acceptance by drawee, that ‘draft’ becomes bill of exchange.

Pro Forma of a Bill of Exchange :

Acceptance of Bill of Exchange : Acceptance of a bill of exchange means signing the bill of exchange by drawee to give his assent to pay the amount of the bill. Unless the bill is accepted by drawee, he is not liable to pay an amount of the bill. A bill of exchange before its acceptance is called a Draft.

Types of Acceptance : Acceptance of bill of exchange can be of two types viz., (1) Unconditional or General Acceptance and (2) Conditional or Qualified Acceptance.

(1) General Acceptance :if the drawee accepts the bill without putting any condition or making any change in the original terms of the bill, such an acceptance is known as Unconditional or General Acceptance.

(2) Qualified Acceptance : If the drawee accepts the bill by making certain changes in the original terms regarding the time, amount of payment or place of payment, the acceptance is said to be Conditional or Qualified Acceptance.

A qualified or conditional acceptance may be of five types. They are explained below :

• Qualified as to Time : When drawee accepts the bill by making changes in the period of the bill, it is called Qualified as to Time.
• Qualified as to Place : When drawee is not ready to make payment at the place mentioned in the bill and suggests a different place where he is willing to pay the amount of the bill, it is called Qualified acceptance as to Place.
• Qualified as to Amount : When drawee accepts the bill not for entire amount specified on the bill but for part of the amount of the bill, it is called Qualified acceptance as to Amount.
• Qualified as to Parties : When drawee is not ready to pay the amount of bill to the payee as mentioned in the bill, it is called Qualified acceptance as to Parties.
• Qualified as to Condition : When drawee accepts the bill by putting his own conditions, it is called Qualified as to Condition.

Promisory Note: Promisory note is one of the negotiable instrument payable either to order to bearer.

Parties to a Promisory Note :

• Drawer: A person who draws a promisory note, promises to pay a certain amount as specified
  in the promisory note is known as Drawer or Maker of the promisory note. Drawer is also known as the Promiser.
• Drawee : A person in whose favour the promisory note is drawn is known as Drawee or Payee of the promisory note. Drawee is aLIso known as Promisee.

Specimen of Promisory Note:

Terms of Bills of Exchange:

Tenor or Term : Tenor or Term of the bill of exchange refers to a period or duration for which bill of exchange is drawn. It is the period of the bill after which it becomes payable. It may be in number of months or in number of days. If the bill of exchange is drawn for 90 days, the term of the bill of exchange in that case is 90 days.
Draft: A bill which is prepared by drawer and not yet accepted by drawee, then it is called Draft.

Days of Grace : Days of grace refer to three extra days allowed by law to the drawee over and above the period of the bill to enable him to make payment. Legal due date is calculated by adding days of grace to the period of the bill. However, grace days are not allowed for the bill payable on ‘Demand’ or ‘At sight’.

Date of Maturity/Due Date of a Bill: The date of maturity or the due date of a bill is the date on which the amount of the bill is to be paid. In the case of a bills made payable, a specified period after date or after sight, the law allows three days of grace in addition to the period specified in the bill. Formulae to calculate the due dates are given below :

(i) If the bill is payable ‘on Demand’ or ‘At sight’, its due date is that date on which it is presented to the drawee for payment. It does not have definite period of time and grace days are not allowed for this type of bill.

(ii) If the bill is drawn ‘After date’
Due Date = Date of bill drawn + Period of the bill + 3 days of grace.
Period of the bill may be in number of months or in number of days.

(iii) If the bill is drawn ‘After sight’
Due Date = Date of bill accepted or date of bill presented for acceptance + Period of the bill + 3 days of grace.

Types of Due Date :

(a) Nominal Due Date : The date on which the term i.e. the period of a bill of exchange gets expired is called Nominal due date. It is calculated without adding days of grace to the period of the bill. .•. Nominal due date = Date of bill drawn / accepted + Period of the bill.

(b) Legal Due Date : Legal due date is that date which is arrived at after adding 3 days of grace in nominal due date.
∴ Legal due date = Nominal due date + 3 days of grace.

If the due date falls on public holiday or Sunday, the payment of the bill is required to be made on immediate preceding working day, e.g. if the due date falls on 15th August, payment must be made on 14th August. Similarly if the due date falls on 26th January, payment must be made on 25th January. According to the provisions made in the Negotiable Instruments Act, 1881, if in emergency, the Government of India declares a particular date as holiday, then all bills fall due for payment on that date will be paid on very next working date.

However, if due date of a bill falls due on 7th July, 2020 and this day, the Government of India declared emergency public holiday due to heavy rain and flood, then that bill would be paid on 8th July, 2020 provided it is not Sunday.

Holder : Any person who is entitled in his own name to the possession of the bill and to receive or recover the amount due thereon from the concerned parties thereon is called “holder of the bill”. He may be drawer himself or his creditor in favour of whom drawer has endorsed the bill. Somebody in possession of a stolen or a lost instrument i.e., bills of exchange cannot be a holder. The payee of the bill can be a holder. Any person who has received the instrument from the payee or any previous holder can be a holder.

Holder in due course : A person is said to be “holder in due course” if he satisfies the following conditions :

• He is a holder if it is payable to bearer or he is the payee or endorsee, if it is payble to or to the order of the payee.
• He became the holder before the amount mentioned in the instrument became payable i.e. before maturity.
• He became the holder for valid consideration.
• He became the holder without having sufficient cause to believe that any defect existed in the title of the person from whom he received it, though not of any prior party.

Types of Bills of Exchange : The bills of exchange may be classified as :

(1) Trade bill : A bill of exchange which is drawn by a creditor on his debtor for certain valuable consideration is called Trade bill. Only in case of credit and lending and borrowing, transactions Trade bills are used. The different types of trade bills are explained below :

• Inland bill of exchange : A bill of exchange drawn and accepted between the two parties from the same country is called Inland bill of exchange, e.g. a bill of exchange drawn and accepted at Mumbai and made payable at Kolkata, is known as Inland bill of exchange.
• Foreign bill of exchange : A bill of exchange drawn and accepted in one country and made payable in some other country is called a Foreign bill of exchange, e.g. a bill of exchange drawn in India and made payable in Japan is called a Foreign bill of exchange.
• Bills Payable on Demand or at Sight: A bill of exchange which does not have definite period of time and made payable whenever its payment is demanded, is called bill payable on Demand or at Sight. Grace period of 3 days is not allowed on these bills.
• Bills Payable After Date : A bill of exchange in which period of bill is counted from the date of bill drawn, is called Bills Payable after Date. Grace period of 3 days is allowed on these bills.
• Bills Payable After Sight: A bill of exchange in which period of a bill is counted from the date of presentation or date of acceptance whichever is earlier is called Bill Payable after Sight. Grace period of 3 days is allowed on these bills.

(2) Accommodation bill : A bill drawn not against value received, but to raise money on credit and thus meet the temporary financial needs of the parties thereto, is called Accommodation bill. In order to help a friend and for mutual benefits of the parties thereto, this type of bill is drafted and accepted without any consideration.

Classification of bills for Accounting : The two fundamental accounting rules for recording bill transactions are : first, to remember that for the acceptor or drawee, a bill is always a Bills payable as he is required to make payment, while for all other parties, it is a Bill receivable; and secondly, to treat both the Bills Receivable A/c and the Bills Payable A/c as Real accounts, debiting what comes in and crediting what goes out.
Thus, on accepting a bill of exchange, the acceptor will debit the Drawer’s A/c and credit the Bills Payable A/c, and on receipt of this acceptance, the drawer will debit the Bills Receivable A/c and credit the Acceptor’s or Drawee’s A/c.

How using of Bill :

If on the due date of a bill, its drawee or acceptor makes a full payment on it to its holder, the bill is said to be duly met or honoured.

Meeting or honouring a bill, thus, means making a full payemnt on it to the holder on the due date by its drawee. For honouring the bill, the drawer or holder of the bill must present the bill to the drawee on or before due date for payment.
Dishonour of a Bill : If the drawee or acceptor of a bill fails to make payment on it on the due date, the bill is said to be dishonoured. The bill may be dishonoured in two ways :

• When drawee does not accept bill, the bill is said to be dishonoured for non-acceptance.
• When drawee refuses or does not make payment on the due date of the bill, the bill is said to be dishonoured for non-payment.

Legal protection afforded by Bills of Exchange :

(i) Noting of Dishonour : On dishonour of a bill, the holder has to create official proof of dishonour by getting the bill noted. For this he has to approach a Notary Public. Noting of a bill of exchange means recording the facts of dishonour of bill of exchange, date of dishonour, reasons of dishonour, parties to bill, etc. by a Notary Public. The Notary Public also records the facts of dishonour in his official register. Thereafter, the holder generally gives a notice of dishonour to all parties to the bill and seeks to recover from any or all of them the value of the bill plus the noting charges.

(ii) Protesting : Protesting refers to issue of formal certificate bearing a Notary’s seal by notary public, certifying the facts of dishonour of bill of exchange based on noting. Protesting is absolutely necessary in respect of dishonour of foreign bill of exchange. The protest is accepted by the court as evidence of dishonour of a bill of exchange.

Notary Public : An officer appointed by the Government to certify dishonour of bills of exchange is called Notary Public. According to provisions made in the Notaries Act, 1952, he is a public officer whose function is to administer oaths, to attest and certify, by his hand and official seal, certain classes of documents, in order to give them credit and authenticity, to take acknowledgments of deeds and other to conveyances, and certify the same, and to perform certain official acts, chiefly in commercial matters such as the protesting of notes and bills, the noting of foreign drafts, and marine protests in cases of loss or damage. The Notaries Act is administered by the Central as well as State Governments.

Noting Charges : Noting charges refer to fees charged by Notary Public for establishing facts and causes of dishonour of the bill. Drawee or acceptor who is ultimately responsible for dishonour of the bill, has to bear noting charges.

Accounting treatment of Bills of Exchange-

(a) Retaining the bill till due date : Retaining the bill till due date means act of drawer or holder to keep the bill with himself till its due date. On the due date, the drawer or holder of it has to present the bill to the drawee for payment which may be honoured or dishonoured by drawee.

(b) Endorsement of a bill of exchange : When the holder or owner of a bill of exchange signs on its back with the object of transferring its title to somebody else, the signature or the act of signing is called an Endorsement and the bill is said to be Endorsed. The person so signing a note or bill is called the Endorser, while the person to whom it is endorsed is called the Endorsee. The act of endorsement of bill of exchange may continue till its due date.

(c) Discounting of a bill of exchange : A bill is said to be discounted, if before its due date, the holder of the bill, exchanges it for cash, giving away a small part of its face value by way of interest for the unexpired period. Bill is usually discounted with the bank.

While computing the amount of such discount, the students should remember that unless followed biy the words ‘per annum’, the given rate of discount is to be treated as straight or flat, irrespective of the period. Thus, if a three-month bill for ₹ 10,000 is discounted at 5%, the discount will be ₹ 500, but if it is discounted at 5% per annum, the discount will be ₹ 125.

On the due date of the discounted bill, the bank presents the bill before the drawee and recover the entire amount of the bill. In case the bill is dishonoured by the drawee, the bank returns the bill to the drawer and recovers the entire amount from drawer.

Formulae for calculation of discount :

(i) If flat rate of discount is given (i.e. when per annum rate is not given) :

(ii) If discount rate per annum and period in months are given :

(iii) If discount rate per annum and period in number of days are given :

in case of leap year number days will be 366 instead of 365.

(d) Sending the Bills of Exchange to the bank for collection : The drawer of a bill of exchange may deposit the bill with the bank with the instruction that the bill be kept till its maturity and present the same before the drawee on its due date to collect its amount. Accordingly on the due date the bank present the bill before the drawee and collects the amount of the bill. Then the bank credits the proceeds of the bill to the bank account of the depositor (drawer or holder). If bill is dishonoured, the bank will return bill to the depositor. For this service the bank debits the account of the depositor with certain amount of charges.

On depositing the bill with the bank for collection purpose, the drawer opens a separate Account called “Bill sent to Bank for collection Account,” in his books of accounts.

(e) Renewal of a bill of exchange : If the drawee or acceptor of a bill is not in a position to make full payment on it on its due date, he can approach the drawer on or before the due date and request him for an extension of time for payment.

Thus, renewal of a bill of exchange refers to drafting a new bill of exchange in cancellation of earlier bill of exchange by drawer at the request of drawee.

Note that in most cases, the drawer will not agree to a renewal unless a part payment of the amount due is made in cash and the interest on the unpaid balance for extension of time is also taken into consideration. (Such interest is either paid in cash immediately or is included in the amount of the new bill.)

(f) Ways to renew a bill of exchange :

(1) New bill is drawn without interest for extended credit period :

• A new bill is drafted and accepted equal to the amount of old bill for the extended period of credit.
• The drawer or holder of bill accepts the part payment and drafts a new bill for the balance amount for the extended credit period.

(2) New bill is drawn with interest for extended credit period :

• The drawer or holder receives the interest in cash and drafts a new bill for the amount equal to the amount of that old bill for the extended credit period.
• The drawer or holder receives the part payment along with interest on the balance amount in cash and drafts a new bill for the balance amount for the extended credit period.
• The drawer or holder receives only part of the bill amount of bill and drafts a new bill for the balance amount plus interest due thereon for the extended credit period.

The drawer may renew the bill even after its dishonour on maturity. In such a case, noting
charges may be recovered immediately or added to the amount of new bill.

(g) Insolvency of Acceptor / Drawee on or before due date of a bill :A person whose liabilities are greater than his assets and such liabilities he cannot pay in full, is called insolvent or bankrupt person. If the drawee or acceptor of a bill is declared insolvent, his acceptance is deemed to be dishonoured. Thus, as soon as the drawee or acceptor is declared insolvent, all parties to the bill will treat the bill as dishonoured and pass appropriate entries. If insolvent person owns and possesses any property, it is sold by a liquidator appointed by the court and proceeds so obtained is distributed among the creditors as per the ratio of their dues. Thus, drawer or holder recovers part of the amount due from insolvent drawee’s property. The unsatisfied balance which is not recovered is treated as Bad debts and debited to ‘Bad debts Account’ in the books of drawer and credited to ‘Deficiency Account’ in the books of drawee or acceptor.

(h) Retirement of a bill of exchange : If the drawee or acceptor desires to pay the amount of the bill before its due date, he may approach its holder and offer to make an early payment, generally in reborn for a discount or rebate. If the holder of the bill agrees to the proposal, and accordingly drawee makes payment before maturity, the bill is said to be retired.

Retirement of a bill, thus, means its payment by the drawee or acceptor before its due date, generally at a discount or rebate. Such rebate or discount is an expense to the party (i.e. drawer) receiving the payment and gain to the party (i.e. drawee) making the payment.

Pro Forma journal entries with respect to bills transactions in the books of Drawer and Drawee :

Pro Forma ledger accounts :

మృత్యుంజయ స్తోత్రమ్

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 13 Organisms and Populations students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 13 Organisms and Populations

Introduction-

• Ecology : Ecology is a study of the interactions : among organisms and between the organisms and their physical (abiotic) environment.
• E. Haeckel introduced this term. Reiter used the term ecology for the first time.
• Four sequential levels with increasing complexity of ecological (biological) organizations are organism, Populations, Communities and Biomes.
• Organism : Individual which is the basic unit of ecological hierarchy is called organism.
• Population : Organisms of same kind inhabiting a geographical area is called population.
• Community : Several populations of different species in a particular area makes a community.
• Land biome : A large regional terrestrial unit : delimited by a specific climatic zone with typical major vegetation and associated fauna.

Organisms and the environment-

1. In ecology organismic level consists of its physiology, ways of adaptation to the surrounding environment, survival techniques and propagation, etc.

The rotation of earth along with its tilted axis, cause seasons. Due to seasons there are rain and snow which demarcate the major biomes of the earth. E.g. desert, tropical rain forest, temperate forest, coniferous forest, grassland, tundra, etc. are six major terrestrial biomes.

Biomes → Habitats → Biotic components. E.g. plants, pathogens, parasites and predators.

3. Ethology : Study of behaviour of animals in relation to their environment is ethology. The term was coined by Hilaire. Term popularised by W. M. Wheeler.

4. Bionomics : The study of relation between. organisms to their environment is called bionomics. Lankester (1890) coined this term.

5. Environmental biology (Modern ecology) : Study of functional or physiological interrelationships between the organism and their surroundings. G. L. Clarke (1964) and Odum (1969) introduced this term.

6. Biosphere : All the ecosystems on earth constitute biosphere.

7. Habitat and Niche :

• Habitat : Place or area where a particular  species lives is called habitat.
• Factors deciding presence of organisms in a particular habitat : Sunlight, average : rainfall, annual temperatures, type of soil, topographic factors, etc.
• Types of habitats : Arboreal, terrestrial, aerial, aquatic, etc.
• Microhabitat : Small part of the habitat which forms immediate surrounding of an organism.
• Niche : The functional role played by an organism in its environment is called niche. Term given by J. Grinnell. Niche includes various aspects of the life of an organism like diet, shelter, and its link with physical and biological environment.
• Habitat is a postal address while niche is the profession of organism.

(7) Types of niche :

Major Abiotic Factors –

1. Key abiotic factors : Ambient temperature, availability of water, light and type of soil.

(1) Temperature :

(i) Ecologically relevant environmental factors showing seasonal variations.

• Progressive decrease of the temperature from the equator towards the poles and from plains to the mountain tops.
• In polar areas and at high altitude : below zero °C.
• Tropical deserts : more than 50 °C in summer.
• In thermal springs : 80 to 100 °C.
• In deep sea hydrothermal vents : about 400 °C.

(ii) Distribution of animals and plant species is mainly dependent on the ambient temperature. Animals are geographically distributed according to their levels of thermal tolerance.

(iii) Temperature can affect the kinetics of enzymes in the body and thus alter the basal metabolism, organism’s activity and other physiological functions.

(iv) Eurythermal : Organisms that can tolerate and thrive in a wide range of temperature fluctuations are called eurythermal.

(v) Stenothermal : Organisms restricted to a narrow range of temperatures are called stenothermal.

(2) Water :

• Water is the second most important factor influencing the life of organisms.
• Life on earth originated in water and can sustain only due to water.
• Availability of water changes according to geographical regions. It also decides the productivity and distribution of plants.
• Even for aquatic organisms the chemical composition and pH of water are important qualities.

Salinity or the Salt concentration : Unit of salinity is parts per thousand. (%o)

• Inland waters : Salinity is less than 5%o.
• Sea : 30 – 35 %o
• Hypersaline lagoons : 100%o
• Euryhaline : Organisms that can tolerate wide range of salinities.
• Stenohaline : Organisms that Eire restricted to a narrow range of salinity.
• Many freshwater animals cannot live for long in sea water and vice versa because of the osmotic problems they would face.

(3) Light :

• Sunlight is the ultimate source of energy. Photosynthesis depends upon the availability of sunlight. Hence for autotrophs it is a very essential abiotic factor.
• Species of herbs and shrubs growing in forests are adapted to photosynthesis even under very low light conditions because they are constantly under a canopy of tall trees.
• Flowering of plants is dependent on sunlight to meet their photoperiodic requirement of the plants.
• In animals the diurnal and seasonal rhythms are dependent on the sunlight. Foraging, reproductive and migratory activities of animals depend upon photoperiod.
• The availability of light on land is closely linked with that of temperature since the sun is the source for both.
• In oceanic depths (> 500m) the environment is perpetually dark and its inhabitants are well adapted to this dark life. They are carnivorous.

(4) Soil :

• Climate of a place determines the nature and properties of the soil.
• The weathering process, type of soil (sedimentary or transported), pattern of soil development, soil composition, grain size differs from place to place. Therefore, the soil characteristics are also varied.
• The percolation and water holding capacity of the soils depend upon the soil composition, aggregation of particles and grain size.
• The vegetation in many areas is dependent upon soil parameters such as pH, mineral composition and topography. Based on these characteristics the vegetation and the faunal pattern is seen.
• The sediment-characteristics in the aquatic environment, determine the type of resident benthic animals.

2. Types of organisms according to abiotic factors : The abiotic factors change due to diurnal and seasonal variations. For survival, organisms adapt to these variations in the following four ways. By these mechanisms they maintain homeostasis or steady internal state.

Adaptation-

1. Adaptations enable the organism to survive and reproduce in its habitat.
2. Adaptations are of following types :

(1) Physiological adaptations : Thermoregulation and Osmoregulation.
(2) Behavioural adaptations :

• Migration
• Hibernation and aestivation
• Behavioural responses to cope with variations in their environment.
• Desert lizards → bask in the sun and absorb heat when temperature is cold. → move into shade → when the ambient temperature is more.
• Burrowing into the sand for escaping heat.

(3) Morphological adaptations :

• Desert plants : Thick cuticle on leaf surfaces, sunken stomata → minimizing loss of water through transpiration. CAM → Crassulacean acid metabolism pathway of photosynthesis. Modified leaves to spines, flattened green stems performing photosynthesis.
• Mammals from cold climate region : Shorter snout, ears, tail and limbs to minimize the loss of body heat (Allen’s Rule).
• Aquatic polar mammals → thick layer of blubber below their skin → insulator → minimize loss of body heat.

Population-

1. Population : Group of organisms in a well- defined geographical area which shares or competes for similar resources and which potentially interbreed with each other is called population. At the population level natural selection operates and desired traits are evolved.

2. Population ecology : An important area of ecology that links ecology to population dynamics, genetics and evolution.

3. Population attributes : Basic physical characteristics of population are called population attributes.

(1) Natality : Birth rate of a population.

• Crude birth rate : Used for calculating population size (number of births per 1000 population/year).
• Specific birth rate : Used when a specific criterion such as age has to be considered.
• Absolute Natality : The number of births under ideal conditions when there is no competition and resources such as food and water, etc. are abundant.
• Realized Natality: The number of births when environmental pressures are operating on the population.

(2) Mortality : Death rate of a population.

• Absolute Mortality : Number of deaths under ideal conditions when there is no competition and resources, like food and water are abundant.
• Realized Mortality : Number of deaths when environmental pressures are operating on the population.
  Absolute mortality will always be less than realized mortality.

(3) Sex ratio : The ratio of the number of individuals of one sex to that of the other sex is sex ratio. Birth, death, immigration and emigration, etc. affect sex ratio.

Evolutionary stable strategy (ESS) : The males and females of a population should be in a ratio of 1 : 1.

(4) Age distribution and Age pyramid : Age pyramid is the figure plotted for a population to show age distribution. Age distribution is done in following way : Pre-reproductive (0-14 years), Reproductive (15-44 years) and Post-reproductive (45-85+ years).

(5) Population size or population density (N) : Population density is the number of individuals present per unit space in given time. Population’s status in the habitat indicate population size. The biomass is also more meaningful measure of the population size.

(6) Population Growth : The size of a population keeps changing with time, depending on various factors including food, predation pressure and adverse weather.

Density of population in a habitat during a given period, fluctuates due to changes in four basic processes : (i) New births (ii) Immigration (iii) Deaths (iv) Emigration.
Of these new births and immigration increase the population growth while deaths and emigration decrease population growth.

(7) Immigration (I) : Number of individuals of the same species that enter the habitat from elsewhere during specific time period under consideration.

(8) Emigration (E) : It is the number of individuals of the population who leave the habitat during specific time period.

So, if N is the population density at time ‘t’, then its density at time ‘t + 1′ can be calculated
as, Nt + 1 = Nt + [(B + I) – (D + E)]

4. Growth Models :

• Exponential growth.
• Logistic growth
• Verhulst-Pearl Logistic Growth : A plot of N in relation to time (t) results in a sigmoid curve. This type of population growth is called Verhulst-Pearl Logistic Growth.
• Since resources for growth of most animal populations are finite and become limiting sooner or later, the logistic growth model is considered as a more realistic one.

Population Interactions-

1. Interactions are of two types in the living species :

• Intraspecific : Interaction existing between organisms of same species’ population.
• Interspecific : Interaction between members of different species.

2. Classification of population interactions :

(3) Gause’s ‘Competitive Exclusion Principle’ :

• This principle states that two closely related species competing for the same resources cannot co-exist indefinitely and the competitively inferior one will be eliminated eventually.
• The Gause’s principle may be true if resources are limiting, but not otherwise. More recent studies do not support such gross generalisations about competition.

Important information :

• Instrument used to measure the height of forest trees is called hypsometer.
• World Environment day : 5th June
• World Population day : 11th July
• World Earth day : 22nd April
• World Ozone day : 16th September

వందే శివం శంకరమ్

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 1 Introduction to Book Keeping and Accountancy

Introduction-

In the ancient days, in order to satisfy wants, commodities and services were directly exchanged against A other commodities and services. After the introduction of money as a medium of exchange commodities and services were purchased and sold directly for money or money’s worth. Along with civilisation, growth and development of economy, business activities also increased. Later on it became difficult for businessman to remember all the business transactions of the day. Thus, a need was felt to record (i.e. to write) business dealings in a systematic way. This very job of recording or writing the business transactions in a separate book is known as “Book-Keeping”. Book-Keeping records are useful for taking important decisions as to whether the business activities are feasible, profitable and to be continued further or not. The detail information of business and other organisations is also required by the proprietors, managers and other stakeholders like government, customers, employees, researchers, investors to fulfill their different objectives.

Evolution of Accounting:
The system of book keeping was in operation in India, since the time of Chandragupta Maurya. During his regime his minister Kautilya wrote a book called ‘Arthashastra’ in which some references were given regarding the way of recording and maintaining accounting records. This system of recording business transactions in the separate book was known as Deshi Nama.

The person who records the business transactions in the books of accounts is called an ‘Accountant’. In the earlier times of civilisation, accountants were appointed by the wealthy people to keep detailed information of their properties. Accountants used to prepare accounts periodically for the owners of the property. The double entry system of book-keeping was first originated in Italy and developed by Luca De Bargo Pacioli in 1494.

Industrial revolution took place in 18th and 19th century which gave birth to the large scale business organisations such as Partnership firm, Joint stock companies, Cooperative societies, etc. In the large scale business organisations, due to separation of ownership from the management, the need was felt to develop comprehensive accounting information system to provide detail information about the business to the shareholders (owners) and investors.

In the 20th century, a separate branch of accounting called Management Accounting system is discovered and developed to analyses financial information and to provide financial information to the management for decision making.

In the 21st century due to the vast and rapid growth and development in the business activities and business organisations, the individual centric accounting system gradually developed into Social Responsibility Accounting. Thus, in the modern world of business, accounting become the most important aspect of every business organisation.

Meaning And Definition OF Book-Keeping-

(A) Meaning : Book-keeping is an art or system of keeping or maintaining a record of business transactions in a regular and systematic manner. According to R. N. Carter, “Book-keeping is a science and an art of correctly recording in the books of accounts, all those business transactions that result in transfer of money or money’s worth.” In other words, Book-keeping is a science as well as an art of recording pecuniary i.e. financial transactions systematically and in chronological order in a separate set of books.

Book-keeping is a science, because in book-keeping there are a number of well defined rules and principles which we use and follow while recording business transactions. It is a social science because, in book-keeping, we study human behaviour with respect to his earning of money and wealth and spending to satisfy the numerous human wants.

Book-keeping is also considered as an art of recording business transactions, because the writing of accounts in a specific style and format requires education, knowledge, training, skill and experience.
From another point of view, Book-keeping is a continuous process of collecting, analysing, classifying, summarising and recording the different types of business transactions. In brief, book keeping may be defined as “A science as well as an art of collecting, analysing, classifying, summarising and recording all types of business transactions in a significant manner and in terms of money in a separate set of books.

Definition:

• “Book-keeping is a Scientific Method of recording day to day business transactions in words and figures in the books of Accounts so as to show correctly and clearly the financial position of a business.”
• According to J.R. Batliboi, “Book-keeping is an art of recording business dealing in a set of books.”
• Finney and Miller : “Book-keeping is the process of analyzing, classifying and recording transactions in accordance with preconceived plans.”
• L. C. Cropper : “Book-keeping is the art of recording in a suitable form a person’s business dealings, so that, at any time, their nature and effect may be clearly seen.”

Thus, book-keeping involves the following :

• Recording financial business transactions in the main book of accounts called Journal.
• Preparing different accounts in another book of accounts called Ledger. – –
• At the end of the accounting year, balancing all accounts opened and operated in the ledger.
• On the basis of the balance extracted from different accounts, preparing a trial balance for various purposes.

Features of Book-Keeping:

The main features of book-keeping are explained below :

• Book-keeping is process or method of recording business transactions.
• Book-Keeping is a science. This is because the book of accounts is prepared on the basis of some well defined principles and conventions.
• Book-keeping is an art. This is because the preparation of accounts in a specific style and format calls for skill, experience, knowledge and judgement.
• In book keeping only records of monetary (financial) transactions are prepared and maintained.
• Various books of accounts such as journal, subsidiary books, ledger, registers, etc. are prepared to record business transactions.
• The records of business transactions are prepared for specific period of time say one year.
• The records are maintained and preserved for a long period of time. .
• The result of business activities is ascertained on the basis of book-keeping records.

Objectives of Book-Keeping:

The different objectives of book-keeping are given below :

• To keep a complete and accurate records of all financial transactions in a systematic, orderly and logical s, manner.
• To maintain date wise and account wise permanent, correct and complete records of the business transactions . for various purposes.
• Book-Keeping enables the businessman to make permanent record of financial transactions of business
  organisation. This records can be produced in the court of law as an evidence in settlement of any claim or disputes.
• To ascertain the profit earned or loss sustained in the business.
• To know the financial position of the business i.e. capital invested in the business, assets accumulated and acquired and liabilities owed, etc. .
• To know the exact amount due from debtors and the exact amount payable to creditors.
• To know the exact amount of taxes payable to the Government and to do tax planning for the business ventures.
• To detect and prevent errors and frauds committed by others in the business.
• To provide valuable business information to various groups of users.
• To take decisions on significant business matters.
• To know the progress made by the business and to measure the efficiency of business.
• Various laws such as Income Tax, Companies Act, Co-operative Societies Act, Charitable Trust Act, etc. make it mandatory to prepare and maintain books of accounts.

Importance of Book-Keeping :

The importance of book-keeping is explained as follows :

• Record: In this present dynamic world, every day a businessman enters into a number of business transactions with different customers and the nature of each of those transaction is different. It is not possible for a businessman to remember all such transactions, and therefore it is necessary to record these transactions.
• Financial Information: Book-keeping provides valuable and much needed information on profit earned or loss sufferred, balance of assets and liabilities, stock, investments, capital balance, etc.
• Decision making: Owner or top management get valuable information from book keeping records for decision making in the business.
• Controlling: Information obtained from book keeping help the businessman to apply control and check on the expenses and to increase the profitability of the business. Information provided by the accounting system are also of great importance in avoiding wastage and unnecessary expenses. It is also helpful to achieve success in business ventures.
• Evidence: Information recorded in the books of accounts are considered by the court of law as an evidence in settlement of any disputes.
• Comparison: By comparing the financial statements of the past years with the current year and with the financial statements of similar other firms, managements or owners of the business can judge whether the business is making progress or not and accordingly introduce changes in the business planning to increase his profitability.
• Tax Liability: Government authorities can collect taxes like sales tax, income tax and revenue collecting departments can accurately impose and collect taxes from the business firm on the basis of information provided by the books of accounts.

Utility of Book-Keeping :

Utility means usefulness. The utility of book-keeping to different persons and entities is explained as follows : ‘

(1) Businessman or Owner: The businessman or owner who invests his money and assets into his business must know the profitability, financial stability, and solvency of his business concern. This can be ascertained only from the books of accounts. It would not be possible for a businessman to carry-out the business without a systematic record of the business transactions. A businessman can take business decisions more realistically on the basis of the information provided by the books of accounts.

(2) Management: From the Book Keeping records, a manager can provide timely information to the different parties to gain their confidence. Besides this, book keeping records help the management in planning, decision making, controlling and managing the business activities.

(3) Government: On the basis of information provided by the accountant, various departments of the Government will be able to calculate and collect sales tax, income tax and revenues due from business organisations.

(4) Prospective Investors: After studying the book-keeping information, the prospective investors such as
shareholders, debentureholders, creditors, partners can decide whether to invest money into the business or not.

(5) Customers: Book keeping records provide information on the financial capacity and profitability of the business organisations.. This in turn help the customers to find out whether they are being exploited by the businessmen or not.

(6) Creditors & Lenders: Book-keeping has a great utility to creditors and lenders. The creditors get valuable and correct financial informations from the different financial statements published by the business concern. On the basis of such information, they can decide whether to invest further or to extend the credit period or
to recover the amount due from business.

(7) Development: With the help of accounting, businessman can avoid wastages, losses and control the .
expenditure. As a result profitability and revenue earning capacity of the business organisation increase which in turn help the organisation to expand and develop its business.

Difference Between Book-Keeping And Accountancy-

The difference between Book-Keeping and Accountancy is explained as under :

• Meaning: Book keeping refers to the process of recording business transactions in the book of accounts.
  Accountancy refers to the process of summarising and analysing the business transactions and interpreting the effects of those transactions on the business activities.
• Stage: Book-keeping is a first stage of accounting as it involves preliminary work of accountancy. Its work starts immediately after completion of transactions. The work of accountancy starts after the completion of  Book Keeping work. Thus accountancy is the next stage of book-keeping.
• Objectives: The main aim of book-keeping is to provide primary information while the main aim of
  accountancy is to process and interpret profits & losses from the data available in the book-keeping.
• Responsibility: Junior staff or newly recruited staff is responsible for keeping records of business
  transactions. Senior staff is responsible for maintaining accounting records.
• Outcomes: Book-Keeping ultimately results in Journal and Ledger. Accountancy ultimately result in
  preparation of Trading A/c, Profit and Loss A/c and Balance Sheet. .
• Period: Book keeping discloses the day to day details of business transactions whereas accounting gives yearly details of business transactions.
• Scope: Book-keeping is a part and parcel of accountancy and it has a limited and narrow scope whereas accountancy has a vast and unlimited scope.
• Procedure: In book keeping entries for day to day transactions are recorded by following basic principles and rules of double entry book keeping. In accountancy, book keeping information are classified, analysed and summarised to prepare financial statements, reports, ratios etc.
• Principles: To record preliminary information in journal, ledger and subsidiary books elementary knowledge of journalising and posting are required. To prepare accounting statements, reports, final accounts, ratios etc., knowledge of all accounting concepts, principles and conventions are required.

Meaning And Definition Of Accountancy:

Accounting is a broader concept than the concept of Book-Keeping. It refers to the process of summarising and  analysing the business transactions and interpreting the effects of those transactions on the business. The definition of accounting as given by American Accounting Association is stated as follows, “Accounting _ refers to the process of identifying, measuring and communicating economic information to permit informed judgements and decision by the user of accounts.

Kohler’s definition of Accountancy is stated as follows: “Accountancy refers to the entire body of the ‘ theory and process of accounting.”

In brief accounting is a process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the results thereof to the users of such information.

Basis (Methods) of Accounting System :

Accounts are recorded and maintained on various basis.

(1) Cash basis: Under this system income is recorded as and when cash is actually received and expenses are
recorded when they are actually paid in cash or by cheque.

Every transaction in which cash comes into the business or cash goes out of the business is recorded with v its specific purpose. Under this system only cash transactions are recorded. Credit transactions as well as barter transactions are not recorded. This method of accounting system is usually followed (Adopted) by the professionals like Doctors, Lawyers, Chartered Accountant, Actors, etc.

(2) Accrual Basis/Mercantile Basis: Under accrual basis or mercantile basis of accounting system, incomes are recorded as and when they accrues or earned and expenses are recorded as and when they are due or become payable. Under this system both the types of transactions viz. cash transactions and credit transactions are recorded. This system records incomes and expenses in the books of accounts as and when they are earned and incurred and not when they are actually received and paid. This system is also called Mercantile basis of accounting.

Example: Professional fees amounted to ₹ 3,000 is due to Chartered Accounting firm as on 31st March 2019, but received by the firm on 1st May, 2019. The accounting year of the firm ends on 31st March every year. As per cash basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2019-20.
As per accrual basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2018-19.

(3) Mixed or Hybrid basis: Under Mixed or Hybrid basis of accounting the principles of both cash basis and accrual basis are followed in recording business transactions. Under this method of accounting system revenues and assets are usually recorded on cash basis and expenses are generally recorded on accrual basis. In brief it is a mixture (combination) of cash basis and accrual basis of accounting. The laws in India do not permit the organisations to use this method of accounting system.

Qualitative Characteristics of Accounting Information –

Qualitative characteristics of Accounting information are explained as follows :

(1) Reliability of Accounting information : The information provided in the financial statements must be reliable. These information must be free from material errors and bias. The information must be presented in good faith. The reliability of the financial statement is dependent on the following points:

• Completeness or verifiability: The information provided in the financial statements is said to be reliable when it is complete within the limits of materiality and cost. Any omission may cause information to be false or misleading on unreliable in terms of its relevance.
• Neutrality: The information given in the financial statements must be neutral in all respect. Such statements or information are not neutral if by selective presentation of information, may affect the decision making power of the users.
• Faithfulness: The transactions and the other events must be represented faithfully in the information. Many times the financial information provided is subject to some risks and they are not faithfully represented.

(2) Relevance of Accounting information: The information given in the financial statements must be relevant to the decision making requirements of the users. The information provided in the financial statements shoqld have quality of relevance when it creates favourable impact on the decision making power of users by helping them to evaluate past, present or future events. The productive and confirm roles of information are related to each other.

The relevance of information is affected by its nature and materiality. Accounting information is said to be material, if its omission from the financial statement affect the decision making for its users.

(3) Understandability of Accounting information : One of the important qualitative characteristics of Accounting information is that the information given in the financial statements should be readily understandable by the users. The information provided should be as simple as possible. It is assumed that the users are having reasonable knowledge of the business and its accounting activities. It is also assumed that the users are having willingness to study the information given in the financial statements. However, information of complex matters should not be excluded simply on the grounds that they are very difficult for certain users to understand.

(4) Comparability of Accounting information: Every user should have enough knowledge and capability to compare the financial statements to identify trends (ups and down) in the financial position and performance of the business unit over the number of years and also of different business units. This is to evaluate their relative financial position, performance and changes in financial position. This qualitative characteristic requires that there should be consistency in choosing accounting policies. Lack of consistency may not allow the early comparability of the financial statements of different periods and different enterprises.

Basic Accounting Terminologies :

(1) Transaction : In common parlance, transaction is a dealing between two or more persons, in which one person gives something to the other and in exchange of that receives something from the other. It is an exchange of goods and services either for cash or for any other goods or services. In other words, it is a business activity which interprets in money terms what business gives and what business receives in that exchange. To complete the transaction at least two persons are required. Purchase of goods, sale of goods, receipt and payment of cash, borrowing and lending, depositing cash into the bank, withdrawal of cash from the bank, etc. are the examples of business transactions.

Business transactions are broadly classified into two categories viz. (a) Monetary transactions and (b) Non¬monetary transactions.

(a) Monetary transactions : The business transactions in which goods and services are directly
or indirectly exchanged for money or money’s worth are called monetary transactions. Business organisations record only monetary transactions in their books of accounts. Monetary transactions “”v are further classified as (i) Cash transactions and (ii) Credit transactions. ,,

(i) Cash transactions: In cash transaction, goods or services are directly exchanged for cash. When
goods or services are purchased for immediate cash payment, it is known as cash transaction, e.g.
goods purchased against immediate cash payment.

(ii) Credit transactions: In credit transaction, goods or services are exchanged for a certain value to be ,
received or paid in the future. In a credit transaction, goods or services are purchased, but payment is
postponed to a future date e.g. Mr. ‘A’ has purchased goods for ₹ 500/- and agrees to pay the amount after a month. It is a credit transaction.

(b) Non-monetary transactions : The business transactions in which goods and services are directly
exchanged for other goods and services are called non-monetary transactions. In this type of transaction,
money does not play any role e.g. purchase of 5 kgs rice in exchange of 1 metre cloth is a non-monetary transaction. It is also called as barter transaction or money less transaction.

(2) Entry : Recording the summary of business transactions in the form of debit and credit in the journal and
in proper form in subsidiary books and ledger is called an entry.

(3) Narration : A brief or short explanation of an entry written just below the entry in a bracket in the
particulars column of journal is called narration. It is started with a word ‘Being’. Narration should be as
short as possible. It should be easy to understand.

(4) Goods : Any commodity or article which is produced or purchased for sale by a trader is called goods. In
other words, any commodity or article in which a trader regularly deals or carries on trade is called goods
for that business or trader.

Goods have the following features, viz.

• Goods may be any commodity or article which has exchange value.
• Goods must be manufactured or purchased by a trader for sale.
• Goods must be stored and exhibited for sale and not for use. For instance, books and literature are goods for publishers or book sellers. Similarly, clothes are goods for a cloth merchant and different kinds of grains stored or kept for sale are goods for a grocer.
• Goods which are stored and not yet sold are the property of the trader.

(5) Capital and Drawings :

(a) Capital: Total amount of cash, goods, assets, etc. invested by the proprietor into his business from
time to time is called capital. In accounting sense, excess of business assets over business liabilities
is described as capital. It is an asset for a proprietor and long term liabilities for the business. It is
received back by the proprietor only on the dissolution of his business. In the form of equation.

Capital = Business Assets – Business Liabilities

Investments into the business, profit earning capacity, withdrawals from the business by the proprietor for
self use, etc. are the main determinants of capital. The amount of capital may be calculated as follows:

(1) Mr. Kamalakar started business with Cash ₹ 1,50,000, Goods worth ₹ 1,40,000. Building valued at
₹ 4,00,000 and Furniture costing ₹ 45,000. Here Mr. Kamalakar’s capital arrived ₹ 7,35,000/-.

(2) Business information of Mr. Ravikant Sharma shows that his business assets are valued at ₹ 15,00,000
and business liabilities are estimated at ₹ 5,00,000. Here Ravikant Sharma’s capital is computed at
₹ 10,00,000/-. [i.e. ₹ 15,00,000-₹ 5,00,000]

(b) Drawings: Word ‘drawings’ is just the opposite to the word ‘capital’ in meaning. Drawings refer to total amount of cash and/or goods withdrawn by the proprietor from the business from time to time for self (personal) use or family use. Drawings are always adjusted with capital. Heavy withdrawals made by a businessman for self use reduces capital in the business. If the businessman controls his drawings, business can be developed further due to less loss of capital. Withdrawals made by a businessman for business purpose is not treated as drawings.

For example, Mr. Ramesh, a cloth merchant, took away 15 metres of cloth for family use on the occasion of the Diwali Festival without paying any thing to the business. The price of cloth per metre is ₹ 250/-. Here, drawings of Ramesh are computed at ₹ 3,750/-.
[i.e. 250 x 15 mts.].

(6) Debtors and Creditors :

(a) Debtors: Debtor refers to a person br an entity from whom money or money’s worth is receivable to a business enterprise. Debt is a total sum of money due from a person with whom the business has dealings. Accordingly, a person from whom such debt is due to a business, is called the debtor. In other words, the debtor is a person who has already taken a loan or services or goods from the business for which he has not yet paid for. A debtor is always under obligation to make payment to a business or a creditor. The following example will make the above ideas clear. Mr. Ashok sold goods worth ₹ 10,000 to Mr. Kishor on the condition that Mr. Kishor will pay that amount of ₹ 10,000 to Mr. Ashok after 2 months. Here, Mr. Kishor is a debtor to Mr. Ashok till he pays the entire amount to Mr. Ashok.

(b) Creditors: A creditor is a person or an entity to whom the business is under obligation to pay a certain
amount of cash. In other words, a person to whom the business owes or is required to pay some amount of cash is called creditor. A creditor is a person who has given a loan or goods or services to the business and for which he has not yet received any amount of cash, or reward. The business is under obligation to pay money to its creditor. For example, Mr. Anil, a businessman borrows money from the Bank of India for one year period for business purpose. Here the Bank of India is a creditor to Mr. Anil, till Mr. Anil clears his loan. .

(c) Bad debts: A sum of money due from other person is called debts. The debts which cannot he recovered from debtors inspite of repeated efforts are called ‘Bad debts’. It is a revenue loss to the business.

(7) Expenditure : An amount spent or incurred by the business organisation on the purchase of goods and
services or for any other consideration received by the business is called expenditure.; e.g. amount spent on purchase of raw material, electricity bill paid, etc.
Business expenditures are classified as (i) Capital expenditure, (ii) Revenue expenditure and (iii) Deferred
Revenue expenditure.

(a) Capital Expenditure: The expenditures which are incurred (1) on acquisition of an asset (2) in putting a new asset in working condition and (3) for acquiring benefits which will last for a long time are called capital expenditures, e.g. purchase of plant and machinery, wages paid for installation or erection charges of machinery, advertisement paid at a stretch for four years, octroi, freight paid on assets, over-hauling charges, etc. are categorised into the capital expenditure.

(b) Revenue Expenditure: The expenditures which are incurred to acquire the benefits which will last for a short period, are called revenue expenditures. It is normal day to day expenditure which do not
. increase profit earning capacity of an organisation, e.g. salaries, rent, interest paid, repairs and renewals, etc. are the examples of revenue expenditures.

(c) Deferred Revenue Expenditure: Heavy expenditure which is incurred in the current year, but benefit of which may be received or accrued to the business in the following two or more years, is called deferred revenue expenditure, e.g. Heavy amount spent on advertisement and publicity is a deferred revenue expenditure.

(8) Cash Discount and Trade Discount:

(a) Discount: An allowance, benefit or reduction in payment in monetary terms given by the trader to buyer or by a creditor to a debtor at the time of sale or repayment is known as discount, e.g. goods costing ₹ 15,000/- sold by a trader to the buyer and accepts ₹ 14,700 in full settlement. Here the difference of t 300 is considered as discount. Discount may be classified into two categories, viz. (a) Trade discount and (b) Cash discount.

(b) Trade Discount: Discount given by the seller to the buyer to increase sales turnover and to enable the buyer to earn a reasonable profit on resale is called Trade discount. It may be given by a manufacturer to a wholesaler or by a wholesaler to a retailer on bulk purchases. Trade discount is calculated on the catalogue price or list price of the goods. Amount of trade discount is deducted from invoice price. It is not shown in the books of accounts.
For instance if goods of ₹ 5,000 are purchased @5% Trade Discount, the value of goods that will be
recorded will be ₹ 4,750. Here Trade Discount = 5000 x \(\frac{5}{100}\) = ₹ 250
Net value of Goods = Catalogue price – Trade discount
= 5,000 – 250 = ₹ 4,750.

(c) Cash Discount: Discount given by the creditor to the debtor on payment of cash is called cash discount. It is the concession given to encourage prompt payment. It is always recorded in the books of accounts, as it is gain to the buyer and loss to the seller.

(9) Solvent and Insolvent:

(a) Solvent: A person who is capable of paying his past and present debts fully from his business and personal property is known as solvent. His financial condition is sound to pay his business debts. Solvency of the businessman increases the goodwill of the business. A solvent person’s property always A exceeds his business debts.
Example: On revaluation of assets and liabilities, it is found that total assets of Sudhakar, a proprietor is ₹ 9,50,000 and his total obligations (debts) are ₹ 2,50,000. Here financial position of Sudhakar is sound as he can easily pay off his total obligations (debts). He is therefore called solvent person.

(b) Insolvent: A person who is unable to pay his debts, is called insolvent. An insolvent person does not
have sufficient assets to pay his debts. His business debts are much larger than his business and personal
assets. He cannot settle the dues of his creditors fully. Insolvency leads to compulsory dissolution of
the business. . .
Example: Total Assets of the proprietor ‘X’ in the business are worth ₹ 2,00,000 whereas his total , liabilities (obligations) are ₹ 3,50,000 and he does not have any personal property to set off business debts. Here in this case ‘X’ is called insolvent, because he cannot pay off all the liabilities of his business.

If the court is satisfied that he cannot pay debts of the business even from his personal property, he will be declared as insolvent by the court of law.

(10) Accounting year : A period of 12 months is called a year. A year which begins with 1st January and ends with 31st December is called the calendar year. Accounts of the business enterprises are usually prepared
for a period of 12 months i.e. one complete year. The year for which the accounts of the business enterprises are prepared is called the accounting year. In India business enterprises may select one of the following periods as its financial year:

• From 1st January to 31st December.
• From 1st April of one year to 31st March of the next year.
• From 1st July of one year to 30th June of the next year.
• From 1st October of one year to 30th September of next year.

Now for Income Tax purpose an accounting year starts on 1st April and end on 31st March of next year.

(11) Trading concern and Not for Profit concern :

(a) Trading Concern: The enterprises which undertake business activities for earning profit are called
trading concerns. They are also called business organisations. They either manufacture or purchase the
goods for resale for a profit. They may be classified as sole trading concern, partnership organisation, company organisation, state enterprises, co-operative societies, etc.

(b) Not for Profit Concerns / Non-trading Concern: The enterprise which undertakes activities
not for earning profit but to provide services to its members or public at large is called ‘Not for profit
concerns’ or ‘Non-profit organisation’, Cricket Club of India, Mahalaxmi Charitable Trust, Educational Institution, etc. Thebe enterprises prepare income and expenditure account to find out whether income
is just sufficient to meet their expenses.

(12) Goodwill: Money value of a business reputation earned by the business over a number of past few years
is called goodwill. It is nothing but the reputation or name established in the market by the business organisation. It is an extra value attached to the business over and above its value. It is an intangible asset of the business.

(13) Profit or Loss ; Income and Revenue :

(a) Profit: Profit means a gain earned by the businessman by undertaking ventures or risks. In accounting terminology, excess of sales revenue over the expenses is called profit.

Symbolically, Profit = Revenue – Expenses.

If a firm sold goods for ₹ 50,000 and all related expenses incurred by the firm during the said period is ₹ 41,000.

Here, in this case profit earned by the firm is arrived at₹ 9,000.
It is calculated as follow:
Sales revenue = ₹ 50,000 and total expenses = ₹ 41,000
Profit = Sales Revenue – Expenses
= 50,000 – 41,000 = ₹ 9,000

(b) Loss: Excess of expenses or expenditures over revenue or income is called loss. Businessmen incur losses on account of several factors like misuse of resources, abnormal wastage, negligence of proprietor, improper planning, competition, lack of innovation, unfavourable policy of the government, etc. Recurring losses lead to compulsory dissolution of the business.

Symbolically, Loss = Expenses – Revenues

If a firm sold goods for ₹ 30,000 and all related expenses incurred by the firm during the said period is ₹ 36,000.
Here, in this case firm incurs the loss of ₹ 6,000.
It is calculated as follow:
Expenses = ₹ 36,000 and Revenue = ₹ 30,000 ,
Loss = Expenses — Revenue
= 36,000 – 30,000 = ₹ 6,000

(c) Income: Revenue received by the business organisation after rendering services or subletting assets is called income. Symbolically:
Income = Amount received after rendering services or renting owned property. If auditorium of the college is subletted to the Bank for ₹ 45,000 per month, the total rent ₹ 5,40,000 in a year becomes an income of the college authorities

(d) Revenue: Income received by the business organisation from its normal business activities especially from the sale of goods and services to the customers is called Revenue.

(14) Assets, Liabilities and Net Worth :

(a) Assets: Property-of any type or description owned and possessed by a person is known as an asset. Assets are not stored for sale but they are kept for the use of the owner. In other words, economic resources which provide benefits to the enterprise are called assets, e.g. furniture, goods, etc.

Assets possess the following features, viz.

• Assets is a property of any type or economic resource which has an exchange value,
• It is belonged to a person or a user,
• It is always stored for use and not for sale.

For example, land and building, furniture and fixtures, bank balance, unsold goods, cash in hand, etc. are called assets. The classification of assets is shown below:

• Fixed Assets are those assets which are held in the business for a long period of time and are generally used for manufacturing goods and services. For example land & building, plant & machinery, motor vehicles, etc. are the fixed assets of an enterprise.
• Current Assets are those assets which are held in the business for a very short period and they are used for maintaining the liquidity of the business. For example, cash in hand, bank balance, stock of goods in hand, amount receivable from debtors, etc. are current assets of the business enterprise.
• Assets like cash, machinery, stock of goods, furniture, etc. are called tangible assets as they can»be seen, touched and felt.
• Assets which cannot be seen, touched and felt, but can be sold and converted into cash are called intangible assets. Use of intangible assets enables its owner to earn income in the form of royalty. For example goodwill, copy rights, patents, trade marks, services of doctors, teachers, bankers, etc. are called intangible assets.
• Assets which neither represent any tangible thing in existence nor have realisable value in the market are called fictitious asset, e.g. preliminary expenses, discount on issue of shares, etc.

(b) Liabilities: Liabilities refer to the total amount of debts or obligations that a business has to pay or fulfill, in future. In other words ‘liabilities’ mean total amount owed by the business to other persons. In short, liabilities represent the total amount payable to outside parties at different dates. For example, bank overdraft, bank loan, sundry creditors, bills payable, capital, loan taken from financial institution, etc. are called business liabilities. Liabilities may be classified as Fixed Liabilities and Current Liabilities.

(i) Fixed Liabilities: Liabilities which are settled or paid only on winding up or dissolution of the organisation are called fixed liabilities. It may be in the form of owner’s capital, share capital, secured loans like debentures, bonds, loans from banks, loans from financial institutions, etc. Fixed liabilities are refunded only after a long period of time. Fixed liabilities constitute long term sources of finance.

(ii) Current Liabilities: Liabilities which are payable within a year are called current liabilities. Short term obligations or debts which are matured within a year or within a operating cycles are called current liabilities. Current liabilities constitute short term sources of finance. They arise in the regular course of business operations. They are usually unsecured. Bank overdraft, Sundry Creditors, Bills Payable, Outstanding expenses payable are considered as current liabilities.

(c) Net Worth: Worth means value or price. Accordingly, net worth refers to the net value of the business enterprise in terms of its assets and liabilities. It implies the excess of assets over liabilities as disclosed by a firm’s balance sheet, i.e. capital owned by a business. In other words, net worth refers to the value of a business enterprise when its liabilities have been deducted from the value of its assets. In terms, of equation,

Net Worth = Market value of total assets shown in the balance sheet – Current liabilities

Example: Suppose, the total assets of the business is ₹ 7,50,000 whereas the total liabilities of the business is ₹ 3,65,000.
Here, net worth of th business is calculated as follows:
Net Worth = Value of Total Assets — Value of Total Liabilities
= 7,50,000 – 3,65,000 = ₹ 3,85,000

(15) Contingent Liabilities : The contingent liabilities are the liabilities whose occurrence depends upon the happening of a certain events which may or may not take place. Such liabilities may or may not occur in the future. These liabilities are shown in the balance sheet on the liabilities side only in the inner column and their description is written in the foot note. These liabilities are not taken in the balance sheet total. They are considered as probable losses of the business enterprise. E.g. demand of worker for compensation of ₹ 20,000 pending before the court of law.

Accounting Principles-

The basic aims of book-keeping and accountancy are to record the business transactions in a summarised form, systematically and in chronological order in the books of accounts and to prepare various accounting statements and report periodically to communicate the result and financial position of the business to the stakeholders or concerned parties. To achieve these aims, accounting is based on universally accepted and scientifically laid down principles. The basic fundamental truth of accounting or rules of conducts or procedures which are universally accepted and followed by the accountants every where without unreasonable likes or dislikes to record business transactions and to prepare accounts are called accounting principles. Through usage, necessity and experience, these accounting principles are gradually developed over a long period of time.

According to the Institute of Chartered Accountants of India (ICAI), accounting conventions, accounting concepts, accounting principles, accounting postulates, etc. are the basic points of agreement on which financial accounting theory and practice are founded.

Accounting principles are also considered as general laws or precedents for taking decisions and actions in the field of business.

Accounting Concepts-

Concept means the general idea which conveys certain meanings. Accordingly accounting concepts imply general notion or abstract ideas on which accounting is based.

Accounting is the language of the business with the help of which financial information are transmitted to the concerned parties of the business. In order to communicate the business information exactly with the same meaning to all interested parties related to the business, accountants have discovered a number of accounting concepts. Accounting concepts are general guidelines for sound accounting practices.

The different accounting concepts are discussed as follows :

(1) Business entity concept : The business entity concept suggests that a business has a separate entity and has an independent legal existence distinct from the person who owns it. Although a business has no body, soul, life and existence, still the law recognises it as a legal person. This accounting concept enables the accountants to record the transactions of the owner or proprietor separately from the transactions of the business. In the absence of such distinction the private affairs of the proprietor would have mixed up with the affairs of the business. As a result, the true and clear picture of the state of affairs of the business would not have been made available. The concept of business entity is applicable to all forms of business organisations such as sole trader, partnership, joint stock companies, co-operative societies, etc.

Illustration: A proprietor Mr. Ashok has spent ₹ 13,000 from business funds on Travelling and Conveyance. This includes a bill for the amount of ₹ 4,500 spent on personal and family travelling. In this case only ₹ 8,500 should be charged to Profit and Loss Account under the heading of Travelling and Conveyapce and ₹ 4,500 should be considered as drawings and each amount of drawings should be deducted from capital of the proprietor.

(2) Money measurement concept: This accounting concept states that in the books of accounts, accountant records only those business transactions which are financial in nature and capable to be expressed in monetary terms. It means the qualitative and quantitative aspects which can not be measured in terms of money, are not recorded in the books of accounts.

In India all the accountants records business transactions in Indian Currency i.e. Rupee (₹).
Illustration: A businessman invested the following properties (Assets) into the business: Building with 5 rooms at the cost of ₹ 40,00,000, Cash ₹ 5,00,000 Furniture costing ₹ 40,000 and raw materials 2 tonnes at the cost of ₹ 80,000. Here the total assets of the business is 40,00,000 + 5,00,000 + 40,000 + 80,000 = ₹ 46,20,000. In the books of accounts, the accountant records assets of ₹ 46,20,000 and Capital at ₹ 46,20,000.

(3) Cost concept: According to this accounting concept, an asset of the business is recorded in the books of account at the price paid to acquire or produce it, i.e. at its cost and not at its current market value. The cost at which assets are acquired and recorded, provides the base for the subsequent accounting for that asset. E.g. if a plot of land is bought for ₹ 2,50,000 by a business, it will be recorded in the books of accounts at ₹ 2,50,000 for further accounting. A year later if its market value increases to ₹ 4,00,000 or even more, then no change will be made in the books of account so to reflect this increase in its value. This concept enables the accountant to depreciate assets correctly and show their correct value in the books of accounts. This concept prevents arbitrary value being put on the assets purchased.

(4) Consistency concept : This accounting convention states that once a particular accounting practice, method or policy is adopted to prepare accounts, statements and reports, it should be continued for years together and should not be changed unless unavoidable circumstances force the enterprise to change it. If the change is unavoidable, the change and its effects should be stated clearly. If consistency is maintained in the accounting practice or procedures over many years, a comparison of two different accounting periods may be made easily to draw meaningful conclusions.

Illustration: It would be improper to depreciate the machinery according to one method of depreciation in one year and to switch over to another method in the next year.

(5) Conservatism : This accounting concept suggests that while preparing accounting statements, planning, policies, strategies and budgets, all possible or anticipated losses must be taken into consideration while unrealised, prospective or anticipated profit should be ignored. This is also known as “the policy of playing a safe game.” It is also called “Principle of prudence.” According to this accounting concept, closing stock is valued at the market price or cost price whichever is lower. Similarly, provision for bad and doubtful debts is also permitted and made every year. If this accounting convention is not applied or followed continuously, it may result into an understatement of incomes, assets and overstatement of liabilities and provisions. Illustration: The closing stock of a factory is valued at cost price ₹ 80,000. However, its market value determined at ₹ 86,000. According to conservatism concept, here closing stock is to be valued at ₹ 80,000 which is lower than it market value ₹ 86,000.

(6) Going concern concept: According to this concept, it is assumed that business will be carried out indefinitely for a long period of time in the future and accordingly business transactions are undertaken and recorded. Hence in this concept it is assumed that the business will continue for a long time. It has continuity of life. It is not to be closed at the end of each year. It is assumed that business is permanent. This Concept is also called continuity concept or permanency concept. Fixed assets like plant and machinery, furniture and fixture, land and building, motor vehicles, etc. are purchased on the assumption that a business is a going concern. This accounting concept enables the accountants to make distinction between the capital expenditure and revenue expenditure. Managerial functions like planning, financing, organising, controlling, etc. are performed in every organisation on the basic assumption that the business is a going concern.

(7) Realisation concept: This accounting concept explains that sale is supposed to be completed when the title and possession of goods are passed from the seller to the buyer and in exchange the payment is received by the seller from the buyer. Revenue or income is considered to be earned on the date on which its actual payment is received. In other words, income realised by selling goods or by rendering services during the accounting year should be considered in the income statement of that accounting year. Since accounting is the historical records of transactions, it records what is actually received and paid. In the case of installment sale or hire purchases, the sales are treated to have been completed only to the extent to which the installment are received. Similarly, in the case of contract account, profit is calculated on the basis of work certified.

Illustration: In business there may be a building whose purchase price i.e. cost is shown at ₹ 2,00,000. Now the market price of that building may be ₹ 10,00,000/-. It does not mean that the profit of ₹ 8,00,000 is realised. Such profit should not be recorded in the books of accounts.

(8) Accrual concept: This accounting concept states that revenue is recognised when they are earned and not when they are received. Similarly-, costs are recognised as soon as they are incurred and not when they are paid. This accounting concept enables the accountants to measure the income for a particular period by calculating the difference between the revenue recognised in that period and expenses incurred to earn that revenue. Accrual accounting is a basic accounting concept used in preparation of Trading Account, Profit and Loss Account and the Balance Sheet.

Illustration: A firm has deposited ₹ 5,00,000 with the Bank in Fixed deposit carrying interest @ 12% p.a. on 1st July, 2010 for 5 years. Bank is required to pay interest on maturity along with principal amount, i.e. on 30th June, 2015.

As per the principle of accrual, interest for 9 months i.e. from 1st July 2010 to 31st March, 2011 of ₹ 45,000 is to be shown as “interest accrued” on the credit side of Profit and Loss A/c as on 31st March, 2011. i.e. in the accounting year 2010-11, although interest is not received in cash.

Dual aspect concept: This accounting concept explains that every business transaction has two aspects viz. (i) acquisition or increase in asset of the business and (ii) creation or increase in claims against business. Assets refer to the valuable things owned by the business. Capital refers to the proprietor’s contribution to the business to provide fund to undertake activities. Capital is the owner’s claim against the business, e.g. a capital of ₹ 5,00,000 received in cash by the business from the proprietor has dual aspects viz. business has cash i.e. asset of ₹ 5,00,000 and the proprietor has a claim of ₹ 5,00,000 against the business entity called capital. If you put the same idea in the form of equation, we can state,
Capital (₹ 5,00,000) = Assets (₹ 5,00,000)

A month later, the business has borrowed ₹ 2,00,000 from the bank to meet its increasing requirement. Now, the asset of the business has increased by ₹ 2,00,000 on the one hand and a claim against the business has also increased by ₹ 2,00,000. We can state the above situation in an equation form as follows:
Capital (₹ 5,00,000) + Liabilities (Bank Loan ₹ 2,00,000)
= Assets 7,00,000 (₹ 5,00,000 + ₹ 2,00,000)
The above equation can be restated by interchanging the terms as follows:
Capital (₹ 5,00,000) = Assets (₹ 7,00,000) – Liabilities (₹ 2,00,000)
OR
Liabilities (₹ 2,00,000) = Assets (₹ 7,00,000) – Capital (₹ 5,00,000)
Thus, the accounting system called double entry book-keeping system is set up to record dual aspects of every business transaction in the books of accounts.

(10) Disclosure : According to concept of full disclosure, accounting must disclose all the material facts and information so that interested parties after reading such accounting report can get a clear view of the state of affairs of the business. Accounting statements must be prepared honestly and they should be free from any bias or prejudice. The statements of accounts so prepared by the accountants must neither hide any material information nor exaggerate any facts. Disclosure does not mean leaking out the business secrecy, but to disclose all the significant information and fact keeping in view various accounting assumptions. This accounting concept is more relevant to the joint stock company where there is a divorce between ownership and management. The management of the company must prepare financial statements and reports of the functioning of the company periodically and these statements must disclose the true and fair view of the state of affairs of the company.

(11) Materiality : The term ‘material’ means ‘relatively important’. Accounting information is said to be material, if its omission from the financial statement affects the decision making for its users. According to convention of materiality, accountants must disclose all material facts and information which highlights the financial position and profitability of the business organisation. However, materiality will differ or change with nature, size and tradition of the business. What is material for one organisation may be immaterial
for another organisation.

(12) Matching Cost Concept : This concept suggests that while determining the exact or accurate profit or income, we have to compare or match the revenue of the business with the cost that is incurred to earn that revenue. In other words, only relevant cost or expenses of the period are required to be deducted from the relevant revenue of that year. For instance if in the accounting year 2011-12, the revenue of ₹ 18,00,000 is earned, by way of sales, this entire revenue is not the profit. In order to calculate the profit, we have to deduct cost of goods sold from the sales revenue. In the above example, if the cost of goods sold is ₹ 15,00,000, then the gross profit would be ₹ 3,00,000. The gross profit here is ascertained by comparing and matching the sales revenue with the cost of goods sold.

Importance of Accounting Concepts :

• With the help of accounting concepts accountant can easily prepare reliable financial statements such as cash flow statement, fund flow statement, trading A/c, profit and loss A/c etc. They add the reliability to the financial statements.
• Accounting statements are helpful to keep and maintain uniformity in presentation of financial statement. Uniformity is helpful for comparison of financial statements of two or more business entries and also different periods.
• Accounting concepts provide acceptable basis of measurement.
• They are helpful to provide proper information ahout the business to various interested parties.
• They provide valid and appropriate assumptions for preparation of financial statements and reports.

Accounting Standards (AS) and International Financial Reporting Standard (IFRS)-

(A) Accounting Standards:

(1) Meaning: Accounting standards may be defined as, “Codified Generally Accepted Accounting Principles (GAAP), uniform accounting rules and guidelines to prepare financial statements of different business units in a uniform manner for easy comparison and disclosures of business information to the users.” Standard of Accounting are recommended by the Institute of Chartered Accountants of India (ICAI) and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS). Accounting Standards are written policy document covering the different aspects such as recognition, measurement, treatment and presentation.

Kohler States, “Accounting Standards are codes of conduct imposed by customs, law or professional bodies for the benefit of public accountants and accountants generally.”

(2) Need for accounting standards:

• To promote better understanding of financial statements. Accounting standards reduce confusion about the accounting treatments used to prepare financial statements.
• To facilitate accountants to follow uniform procedures and practices.
• To enable or help the organisation to make meaningful comparison of financial statements of different companies situated at different places.
• To standardise the diverse accounting policies and practices with a view to eliminate the non-comparability of financial statements and add the reliability to the financial statements.
• To fulfil and complete the legal requirements more effectively.

(B) International Financial Reporting Standards (IFRS):
International Financial Reporting Standards (IFRS) are prepared and issued by the International Accounting Standard Board (IASB). IFRS is a set of International Accounting Standards which explain and show how different types of financial transactions and other events should be shown or reported in the financial statements. IFRS are prepared and issued to develop Accounting Standards that would be acceptable world wide and to improve financial reporting internationally.

(C) Accounting Standards in India :
In India, the Council of Institute of Chartered Accountants of India (ICAI) has issued accounting standards. Accounting Standards Board (ASB) was constituted by ICAI on 218t April 1977. ASB recognised the need for Accounting Standards in India and by considering the applicable laws, custom, usage, business environment and International Accounting Standards,framed Accounting Standards to be followed in India. The council of Institute of Chartered Accountants of India has so far issued 31 Accounting Standards. Some of those

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 6 Dissolution of Partnership Firm students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 6 Dissolution of Partnership Firm

Introduction, Meaning and Definition of Dissolution of Partnership Firm-

Introduction : The term ‘dissolve’ means ‘to come to an end or bring to an end.’ Accordingly ‘dissolution’ means termination of a formal or legal relationship such as a business, marriage, etc. There is a difference between the dissolution of partnership and dissolution of partnership firm. Dissolution of partnership refers to severing or discontinuing the relation or connection by one or more partners with other partners without breaking or putting an end to business activities of the partnership firm. In this case, business activities of the firm are continued by remaining partners. Dissolution of partnership firm implies complete closure or breakdown of relations among all the partners and stoppage of all business or trading activities of the firm. Dissolution of partnership firm is a broader concept which also includes dissolution of partnership. Dissolution of partnership is a narrow concept. It does not include dissolution of partnership firm.

Meaning and Definitipn of Dissolution of Partnership Firm : Dissolution of a partnership firm is the end or closure or termination of the firm by break-up of the relation among the partners. In such a case, there is a stoppage of all trading activities. Dissolution has broader meaning in legal terms. A word ‘DISSOLUTION’ comes from the Latin word ‘DISSOLUTION’. According to the provisions of the Partnership Act, 1932, (Section 39) “the dissolution of partnership between all the partners of a firm is called the dissolution of the firm”.

In other words, dissolution of a partnership firm means complete closure of relation among all the partners. In such a case the firm ceases to exist.

Circumstances / Reasons for Dissolution of Partnership Firm –

A partnership firm may be dissolved in various ways. They are as follows :
(A) Dissolution of partnership without court order : A partnership firm may be dissolved :

• When all partners or all partners except one decide to dissolve the firm, or the firm may be dissolved in accordance with an agreement signed previously or initially by all the partners.
• When the period for which the partnership was formed has come to an end.
• When the specific venture or object for which partnership was formed is completed.
• When all partners or all the partners except one are declared insolvent.
• When the business of the firm is declared as illegal or unlawful.
• When the partnership is at will and one of the partners has given a 14 days’ notice in writing to all other partners to dissolve the firm.

(B) Dissolution by court order : The partnership firm will be dissolved by the court if any one of the
partners files a suit i.e. legal application in the court of law. Under the following circumstances the court orders to dissolve the partnership firm :

• When a partner becomes unsound mind / insane or permanently incapable of performing his
  duties.
• When a partner is guilty of misconduct which affects the business of the firm.
• When a partner frequently breaks or violates the partnership agreement.
• Where a partner transfers his interest in the firm to an outsider without obtaining consent of other partners.
• When the business- of the firm cannot be carried on except at a loss.
• Any other reason considered by court as just and equitable.

Difference between Dissolution of Partnership and Dissolution of Firm-

Effects of Dissolution of Partnership Firm –
The effects of dissolution of partnership firm are stated as follows :

• All trading or business activities are closed down.
• All assets of the firm are sold out.
• All liabilities of the firm are paid off or discharged according to the preference of payment.
• If any surplus left, it will be divided among the partners in their profit sharing ratio.

Accounting treatment / Settlement of accounts on Dissolution of Firm –

In order to meet outside liabilities, the partnership firm raises funds by selling its assets. According to the provisions made under Section 48 of Partnership Act, 1932, the liabilities are paid as per the order given below:

• Payment of realisation expenses incurred while selling various assets.
• Repayment of loans and payment to creditors, outstanding expenses, Bank overdraft, Bills payable, Bank loans, Loans from other financial institutions, etc.
• Repayment of loans obtained from partners.
• Repayment of capital balances of partners to the extent possible.
• If any surplus left, it will be divided among the partners in their profit sharing ratio.

Accounting Procedure –

The accounting procedure adopted for dissolution of partnership may be
classified under the following two types :
(A) Simple Dissolution and (B) Dissolution Under Insolvency Situation.

(A) Simple Dissolution : When all partners remain solvent and firm is dissolved due to any reason it is called simple dissolution. On dissolution of the firm the following ledger accounts are opened to record various transactions, viz. (a) Realisation A/c (b) Partners’ Capital A/cs (c) Partners’ Current A/cs (under fixed capital method) (d) Cash or Bank A/c.

(a) Realisation Account : An account which is opened and operated at the time of dissolution by the partnership firm to record the entries of taking over and sale of assets and taking over and payment of liabilities of the firm and to find out profit or loss on realisation of assets and liabilities is called Realisation A/c. After recording all the entries relating realisation of assets and liabilities, this account is closed and balanced. The debit balance of Realisation A/c indicates loss incurred on realisation of assets and liabilities. The credit balance on Realisation A/c shows profit earned on realisation of assets and liabilities. The balance shown by Realisation A/c is transferred to all partners’ Capital Accounts or Current Accounts.

(b) Partners’ Capital Accounts : Capital balances of all partners shown in the last Balance Sheet are transferred to Capital Account of each partner on credit side as ”By Balance b/d”. Usually Partners’ Capital Account show debit balances.

(c) Partners’ Current Accounts : If fixed capital method is followed by the firm, along with Capital Account a Current Account for each partner is opened. Current Account may either show debit balance or credit balance. Entries relating to taken over of assets, payment of liabilities, transfer of Profit and Loss A/c balance, transfer realisation profit or loss, etc. are passed through Current Accounts. At the end, Current Accounts are closed and balances appearing in those accounts are transferred to respective Partners’ Capital Accounts.

(d) Partner’s Loan Account : When partner Loan Account has credit balance, it is not transferred to Credit side of Realisation Account but amount is paid off after paying all third parties due. If Partner Loan Account has debit balance, Partner’s Loan should be debited to Partners’ Capital / Current Account directly.

(e) Cash Account or Bank Account : On the dissolution of partnership firm, Cash A/c or Bank A/c is opened and balance of cash or bank shown in the last Balance Sheet is transferred to this account on debit side as “To Balance b/d.” In case of Bank Overdraft, the balance is shown on the credit side of Bank A/c as “By Balance b/d”, if Bank A/c is opened and operated. In that case cash balance is transferred to Bank A/c on debit side by passing the entry :

All the receipts and payments are recorded in this Account. At the end this Account gets automatically closed.

Accounting entries to close : Under simple dissolution, the accounting procedure may be divided into three stages viz. (A) Transfer Stage, (B) Realisation or Disposal Stage and (C) Distribution Stage.

(A) Transfer Stage : In this stage all the assets except cash balance, bank balance and Profit and Loss A/c (debit) balance, are transferred at book value to debit side of Realisation A/c and all the liabilities except partner’s loan, capitals, reserves, Profit and Loss A/c (Credit) balance are transferred at book value to credit side of Realisation A/c.

Pro forma journal entries :

(1) Transfer of assets : (except cash and bank balance and Profit and Loss A/c debit balance) :

(Being the assets transferred at book values)

(2) Transfer of third party liabilities :

(Being third party liabilities transferred at book values)

(3) Transfer of provisions against assets :

(Being various provisions made to assets transferred to Realisation A/c)

(4) Transfer of accumulated profit and reserves :

(Being accumulated loss and deferred expenses not yet written off transferred to all Partners’ Capital/Current A/cs in their profit sharing ratio)

(5) Transfer of accumulated loss appearing on the assets side of Balance Sheet:

Note : (i) Balance of Cash A/c and Bank A/c and Partner’s Loan A/c should not be transferred to Realisation A/c. In such cases separate A/c for Cash or Bank and Partner’s Loan should be opened and balance shown in the last balance sheet should be transferred to those accounts, (ii) In case of sundry debtors, gross amount of debtors before deducting R.D.D. should be transferred to debit side of Realisation A/c and R.D.D. amount should be transferred to credit side of Realisation A/c.

(B) Realisation or Disposal Stage : In this stage all assets including unrecorded assets are sold out i.e. realised into cash. Assets may be taken over by any partner after adjusting the agreed amount to its Capital/Current A/c. From the collected sales proceeds (cash) liabilities and dissolution expenses are paid. Partner’s loan is also paid off in this stage.

Pro forma journal entries :

(1) Sale of recorded/unrecorded assets :

(Being assets sold and cash received)

(2) Taken over or recorded as well as unrecorded assets by a partner :

(Being assets taken over by a partner)

Note: Against the due amount to creditor, when asset is taken over by a creditor in part or in full payment due, due amount is to be decreased to that extent and balance amount will be paid to him. Here entry for the net payment is mandatory while entry for asset taken over by the creditor is not required.

(3) (a) Payment of recorded as well as unrecorded liabilities by the firm :

(b) Payment of recorded and unrecorded liabilities by a partner :

Note : If nothing is mentioned about the payment of liability, then it is paid at book value.

(4) (a) Payment of realisation expenses :

(b) Payment of realisation expenses by a partner :

(5) Payment of commission given to a partner for realising assets of the firm :

(6) Payment of contingent liability by a firm :

(7) Payment of partners’ loan :

(C) Distribution Stage : In this stage Realisation A/c is closed and balanced. The debit balance i.e. loss or credit balance i.e. profit is transferred to Partners’ Capital or Current Accounts in their profit sharing ratio. Then Current Accounts of the partners are closed and balance appearing thereon is transferred to Capital Accounts of the partners. At the end Capital Accounts of all partners are closed by making payments to or receiving cash from the partners.

Pro forma journal entries :

Treatment of unrecorded (undisclosed) assets and liabilities : On the date of dissolution in the books of accounts, some assets and liabilities are not recorded, so entries of like this assets and liabiliies are not transferred to Realisation account. But entries for like this unrecorded assets and liabilities are recorded in the books when they are realised or paid. Related entries are as follow:

Treatment of Goodwill on Dissolution : When goodwill appears in the books, like other assets, it will be transferred to debit side of Realisation A/c, like all other assets. If goodwill is not appear in the books, wheatever sale amount is received, it will be debited to Cash / Bank A/c and credited to Realisation A/c.

(1) When Goodwill Account appears in the Balance Sheet:

(i) Transfer of Goodwill to Realisation Account:

(ii) When Goodwill is realised on dissolution:

(2) When Goodwill Account does not appear in the Balance Sheet:
Here, no entry for transfer of goodwill require.

(i) When Goodwill is realised on dissolution :

(ii) When partner purchases Goodwill:

Pro forma of Ledger Accounts :

(1) Realisation Account :

(2) Partners’ Capital Accounts : (A) If Fixed Capital Method is followed by the firm :

It is assumed that opening balance of Current A/cs of A and B showed credit balances and that of C showed a debit balance.

(B) If Fluctuating Capital Method is followed by the firm :

(3) Cash/Bank A/c :

(B) Dissolution Under Insolvency Situation : A person whose liabilities exceed his assets is called an insolvent person. A partner whose capital account shows debit balance and who is not in a position to repay the amount of debit balance on his capital account to the firm is called an insolvent partner. In other words, a partner who is unable to meet his capital deficiency even from his private property is called an insolvent partner. A partner who is in a position to meet his capital deficiency is called a solvent partner. The debit balance of capital account of an insolvent partner which he cannot pay is called his capital deficiency. The capital deficiency of insolvent partner represents a loss to the firm. The capital deficiency of insolvent partner is to be borne by solvent partners in their profit sharing ratio.

Accounting procedure under Fixed Capital Method :

(1) Transfer of balance on insolvent partner’s Current A/c to his Capital A/c :

(Being insolvent partner’s deficiency in Current A/c transferred to his Capital A/c)

(2) Amount recovered from insolvent partner’s estate :

(Being cash recovered from the estate of insolvent partner)

(3) Transfer of deficiency on insolvent Partner’s Capital A/c to solvent Partners’ Current Accounts :

(Being insolvent partners’ capital deficiency transferred to solvent partner Current A/c in their profit sharing ratio)

(4) Transfer of balance on solvent Partners’ Current A/cs to their Capital A/cs :

(Being balance on Current A/cs transferred to Capital A/cs)

(5) Final settlement of solvent Partners’ Capital dues :

(Being amount paid to solvent partners in final settlement)

Accounting procedure under Fluctuating Capital Method : Under this method all the adjustments are made through Capital Accounts of the partners.

Transfer of capital deficiency of insolvent partner to solvent partners’ Capital A/cs :

(Being insolvent partners’ capital deficeincy transferred to solvent Partners’ Capital A/cs in their profit sharing ratio)

When all partners are insolvent: If all the partners of a firm become insolvent, it is clear that their capital deficiencies will have to be borne by the outside creditors, who will not be able to recover their claims in full but will get only a part of their dues in terms of a dividend of so many paise in the rupee. The available cash in the firm is first used to pay dissolution expenses. The balance amount is paid to creditors proportionately in the ratio of their respective balances.

Accounting treatment before making distribution of insolvent partners’ capital deficiency :

• Transfer only assets to Realisation A/c at their book values to its debit side.
• Outsiders liabilities should not be transferred to Realisation A/c. Open each liability’s A/c separately.
• Adjust the loss on realisation to Partners’ Current A/cs or Partners’ Capital A/cs as the case may be.
• Close the Partners’ Current A/cs and also the Partners’ Loan A/cs by transferring the balances
  of such accounts to the capital accounts of the respective partners.
• Record the amount of cash recovered from the partners by debiting Cash/Bank A/c and
  crediting related Partners’ Capital A/cs.
• Close the Partner’s Capital A/cs and transfer the capital deficiency of each partner to a separate
  account called ‘Deficiency A/c’.
• Distribute the available cash (i.e. opening balance of cash + cash received on sale of assets + cash received from private estate of partners) to various creditors in the proportion of their dues.
• Close the Various Liabilities A/cs by transferring unpaid balances to ‘Deficiency A/c’.
• Ultimately ‘Deficiency A/c’ is suppose to tally.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 9 Analysis of Financial Statements students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 9 Analysis of Financial Statements

Meaning, Objective and Limitations of Financial Statement Analysis-

Meaning: The statements which are prepared by the business enterprises periodically to ascertain or measure the profitability, operational efficiency, solvency, growth of the business concern and judge the financial strength and status are called financial statements. These statements furnish a complete picture of the firm’s financial conditions and managerial performance. The financial statements are prepared by the profit concerns as well as ‘non-profit’ concerns usually at the end of the financial year. The financial statements of the business enterprises for an accounting period consist of the following :

(1) Balance Sheet/A position statement (2) Profit and Loss A/c/An Income statement.
Financial statement analysis is a study of financial relationship among the various financial items (factors) and the trend revealed in the financial statements. Thus, analysis of financial statements involves collection and a methodical classification of the data given in the financial statement and a comparison of various figures with each other. Financial statement analysis involves two aspects viz.

• Analysis of data which means methodical classification of financial statements and
• Interpretation of data which means explanation of meaning and significance of data. These two aspects are complementary to each other.

Objectives:

• To help in planning:An analysis of financial statements facilitates the business enterprises to understand its financial strength and soundness for future planning.
• To assist in estimating the earnings of business: Analysis of financial statements assist in knowing the earning is satisfactory or reasonable return on its investments is there or not. It also gives the idea of profitability of entire organisation and of every department.
• To assist in investment making decision: Investors are always eager to know liquidity of the business, ability of repayment of loan and its interest on borrowings which depends on the solvency and profitability of business organisation.
• To help management in assessing the efficiency of the organisation: Analysis of financial statements helps the business organisations to know the operational efficiency of its management. It also help to judge whether financial policies adopted by the management are appropriate or not.
• To provide financial information about economic resources: From the accounting data information and financial statements one can know the economic resources of the company.
• To provide information about changes in net resources arising out of business activities: From the financial statements one can know the net resources like payment of salary, wages, bonus and incomes sources.
• To disclose other information that is relevant to the need of the users of the financial statements: Financial statements also disclose other information which may useful to the government, employees, creditors, investors, etc.

Limitations : Analysis of financial statements depends upon the data and information provided by the
organisation.

(1) Qualitative information are ignored : The financial statements consider only the monetary aspects which can be measured. These statements ignores the qualitative, aspects such as development of team of loyal and efficient workers, harmony, reputation, prestige and efficiency of management competition, etc. There are some of the important matters which need to be considered for the business prospects.

(2) Historical cost: The information provided by the financial statements are historical in nature. This is because it considers and uses historical cost and book values of assets. It altogether fails to consider the changes that take place in price level.

(3) Based on ‘accounting concepts and conventions : Financial statements are prepared on the basis of certain accounting concepts and convention, so financial position as disclosed by these statements may not be realistic and their analysis cannot be much useful in practical life.

(4) Influenced by personal judgement : In the analysis of financial statement, many items are left for the personal judgement of an accountant. For instance, selection of method of depreciation, inventory valuation, writing off deffered revenue expenditure, etc. The soundness and reliability of such judgement depend on the competence, experience, ability and honesty of an accountant. However, convention of consistency acts as a controlling factor on making indiscreet personal decisions.

(5) Being uncomparable: Differences in date of preparation, nature of business, age of business, method of accounting, monopolistic market, etc. make the financial statement uncomparable.

(6) Static statement: Financial statements represents absolute figure which are static in nature and do not present the process by which the figures are arrived.

(7) Affected by window dressings : Sometimes management try to show excellent picture of business through financial statements which is not actually acceptable, e.g. To show excellent profit, sales figures may be taken at increased value, closing stock may be overvalued, last moment purchase not disclosed, etc. This is known as window dressing.

From the above discussion one can say that financial statements should not be taken as true indicator of financial strength and weakness of the business and do not take any serious decision based on it.

Analysis of Financial Statements :

Balance Sheet: The Balance Sheet required to be arranged in vertical format which is suitable for further analysis. Its format is given below :

Income Statement: The Profit and Loss Account need to be arranged in a vertical format which is suitable for further analysis. It is also called as Vertical income statement. Its format is given below:

Tools for Financial Statement Analysis : The financial statements provide only figures of assets, liabilities, expenses, revenues, profit or loss of the business. For decision making only presentation and ascertainment of the figures are not sufficient. In order to make decision making easier and meaningful, analysis of financial statement is required. For analysis of financial statement various tools such as (i) Comparative Financial Statements, (ii) Common Size Statements, (iii) Cash Flow Analysis, (iv) Ratio Analysis are used.

(A) Comparative Financial Statements : The financial statements which contain the figures of two or more consecutive accounting periods to give comparative views of the financial performance and position of a business enterprise are called Comparative Financial Statements. In these statements, the figures for two or more successive years are placed side by side to facilitate comparison. Accordingly, horizontal or comparative analysis means a process of calculating in absolute figures or in percentage form, the changes from the comparative statements.
For this purpose following two statements are required : (1) Comparative Balance Sheet and
(2) Comparative Income Statement.

(1) Comparative Balance Sheet : The comparative Balance Sheet contains the figures of liabilities and assets of the current year and the previous years to facilitate easy comparison. Such comparative statements indicate the trend (increase or decrease) of the changes in the financial performance and position of the business enterprises.

Methods of preparing Comparative Balance Sheet:
Comparative Balance Sheet is prepared by comparing the individual items of Assets and Liabilities and finding out absolute and percentage increase or decrease in them.

Steps to prepare Comparative Balance Sheet:

• Enter the details of Assets and Liabilities in the first column.
• In the column number 2 and column number 3 enter the figures of previous year and current year Balance Sheet respectively.
• In column number 4 enter the absolute changes i.e. ‘Increase’ or ‘Decrease’ by comparing the figures of column 2 and column 3.
  Absolute change = Current year – Previous year.
• Record the percentage changes in fifth column.
  Percentage change = \(\frac{\text { Absolute change }}{\text { Amount of previous year }}\) x 100

Example No. 1 : Balance Sheet of ‘X’ Ltd. Co. for the year ending 31st March, 2019 and 31st March, 2020 is given below:

You are required to prepare Comparative Balance Sheet of ‘X’ Ltd. Co. as on 31st March, 2019 and 31st March, 2020.
Solution:
Comparative Balance Sheet of ‘X’ Ltd. Co. as on 31st March, 2019 and 31st March, 2020.

2) Comparative Income Statement: A comparative income statement i.e. Profit and Loss Account contains the figures of expenses and incomes of the current year and the previous year for easy comparision.
Comparative income statement shows increase or decrease in various Trading and Profit and Loss Account.

Steps to prepare comparative income statement:

• Record the amount of Income and Expenditure in first column.
• Record the figures of previous year income statement in second column.
• Record the figures of current year income statement in third column.
• Record the absolute changes i.e. diffrence between current year and previous year in fourth column.
• Absolute change = Current year – Previous year.
• Record the percentage changes in fifth column.

Percentage change = \(\frac{\text { Absolute change }}{\text { Amount of previous year }} \times 100\)

Example No. 2: Income Statement of ‘X’ Ltd. Co. for the year ending 31st March, 2019 and 31st March, 2020 is given below:

You are required to prepare Comparative Income Statement of X Ltd. Co. for the year ended 31st
March, 2019 and 31st March, 2020.
Solution:
Comparative Income Statement of ‘X’ Ltd. Co. for the year ended 31st March, 2019 and 31st March, 2020:

(B) Common Size Statement : Common Size Statement is a type of financial analysis in which the financial statements of the same period are compared and figures of each item are converted into percentage of some common figure or base. In this analysis, the income statement and position statement of two consecutive years of the same organisation or income and position statements of two similar units for the same period are used to draw useful conclusions.

For common size statement analysis, in Income statement usually the sales figure is taken as base, i.e. 100. All the other figures are converted into percentage form to sales. In position statement, the total assets and the total liabilities are taken as base, i.e. 100 each. All the figures on the respective sides are expressed in percentage to the total assets and the total liabilities respectively to draw meaningful conclusions.

Steps to prepare common size statements :

• Write absolute figures of each item of Balance Sheet or of Income Statement for two consecutive years.
• Select (choose) common base (as 100), e.g. in case of income statement sales figure as 100.
• Work out percentage of each item for two periods.

Example No. 3 : Balance Sheet of ‘Y’ Ltd. Co. for the year ending 31st March, 2019 and 31st March,
2020 is given below:

You are required to prepare common size statements for the year ending 31st March, 2019 and 31st March, 2020.
Solution :
Common size statements for the year ending 31st March, 2019 and 31st March, 2020

Working Notes :

Example No. 4 :
Income statements for the year ending 31st March, 2019 and 31st March, 2020 are given below:

Solution:
Common Size Statement for the year ending 31st March, 2019 and 31st March, 2020:

Working Notes :

Here base or aggregate is net sales. In the year ending 31 -03-2019 Net sales ? 10,00,000 is taken as base i.e. 100 % and in the ending 31 – 03 – 2020 Net sales ? 12,00,000 is taken as base i.e. 100 %.
For 31 – 03 – 2019 % of cost of goods sold = \(\frac{\text { Cost of goods sold }}{\text { Net sales }}\) x 100 = \(\frac{5,80,000}{10,00,000}\) x 100 = 58%
For 31 – 03 – 2020 % of cost of goods sold = \(\frac{6,20,000}{12,00,000}\) x 100 = 51.67 %

Benefits or advantages of common size statements :

(1) Common size statements are very useful for comparing the profitability. It gives the different trends in different items of Balance Sheet and Income statement.
(2) It is also useful for inter firm comparison i.e. comparison of income and position statements of two similar units in the organisation for the same period.

(C) Cash Flow Analysis : A statement which shows the inflows (receipts) and outflows (payments) of cash and cash equivalents of a business enterprise over a financial year, is called a cash flow statement. It indicates the different sources from which the cash comes into the business and the different uses to which the cash has been put. It helps the management in assessing the potential of the business enterprise in paying short-term loans. It is prepared month-wise to ascertain the cash available for various business purposes.

Steps to Prepare Cash Flow Statement : In Cash Flow Statenient its ‘inflow’ and outflow of Cash and Cash equivalents are grouped into:

• Cash flow from operating activities
• Cash flow from Investing activities
• Cash flow from financing activities
  This is shown In the following diagram (chart):

Importance of cash flow statement:

• Useful in short-term financial planning and decision making: Cash flow statement provide information on uses of cash and cash equivalents for particular period. It is useful to prepare short-term financial planning and decision making on different areas.
• Helps in analysis of liquidity position : Cash flow statement may be prepared on monthly or quarterly basis. It helps to understand liquidity of the firm in better way. Such analysis of liquidity is useful to bank and financial institutions as it show ability of firm to repay Loans.
• Helps in efficient cash management: Cash flow statement provides information on surplus or defect of cash. If there is surplus, management makes arrangement for its investment and for deficit if any it arranges for short-term credit or loan.
• Helps in comparative study of cash flow statement and cash budget: Cash flow statement and cash budget are compared and cause of difference between them are analysed and necessary corrective measures are taken by the firm to generate or use cash.
• Helps in study of receipts and payments of cash : Cash flow statement gives information of the speed at which cash is collected from debtors, stock and other current assets and the speed at which current liabilities like creditors, Bank overdraft, etc. are paid off. This helps management to find true position of cash in future.
• Helpful in dividend declaration and payment of dividend : From cash flow statement, management ascertains the position of cash for payment of dividend.
• Tools of planning for projecting future investments and financial plans: Cash flow statement is useful to the management for projecting future investing and financial plans for the business.

Presentation of Cash Flow Statement : As per AS – 3 format for presentation of cash from statement
by classifying business transactions of a specific period into three categories viz. Operating, Investing
and Financing is as follows :

Uses of Cash Flow Statement:

• Cash flow statement facilitates the business organisation to know the liquidity position of the business.
• It helps to understand how net profit has increased even though cash balance is decreased.
• It also helps to know how cash balance has increased even though firm incurred net loss.
• It facilitates the business firm to know how the requirements of working capital were met by the fund raised through current operations.
• It helps to know the external sources of raising finance to meet needs of finance.
• It helps the firm to understand whether the firm sells its non-current assets or not.

Meaning, Objectives and Classification of Accounting Ratios-

(1) Meaning : A relationship between two numbers or quantities, when expressed either in number, fraction, proportion or in percentage is called ratio. Accounting ratio expresses the relationship between two accounting figures and measures the ability i.e. financial strength of the business enterprise to pay its liabilities and judge its earning capacity. The use of different types of accounting ratios to evaluate the financial performance of the business enterprise, is called the ratio analysis.

Example : If total sales is ₹ 5,15,500, Sales returns is ₹ 5,500 and Gross profit is ₹ 1,27,500, calculate
Gross Profit ratio.
Solution :
Net sales = Total sales – Sales returns
= 5,15,500-5,500 = ₹ 5,10,000
Gross Profit ratio = \(\frac{\text { Cross profit }}{\text { Net sales }}\) x 100 = \(\frac{1,27,500}{5,10,000}\) x 100 = 25 %
Net sales 5,10,000

(2) Objectives : The objectives of ratios are explained as follows :

• It facilitates easy comparative analysis of profitability, liquidity and solvency of the business.
• It is helpful to know the changes that take place in the business.
• It helps in decision making in vital areas such as operating, investing and financing. It shows how far it is helpful to improve the performance.
• It is helpful to make different types of comparisons like (i) Intra firm comparison i.e. comparison within the firm over number of years and (ii) Inter firm comparison i.e. comparison between two firms when specific standard for the firms or industry is established.

(3) Classification : The classification of ratio is shown in the following chart :

Introduction to Ratios-

(1) Current Ratio : The ratio of current assets to the current liabilities is called Current ratio. This ratio measures the ability of the business enterprise to fulfil the current obligations. It is one of the indicators which judges the financial position of a business enterprise. The current ratio between 2 : 1 to 3 : 1 is considered more satisfactory or ideal. The ratio of 2: 1 indicates that the current assets are twice the current liabilities. The formula for calculating the current ratio is given below:
Current ratio = \(\frac{\text { Current assets }}{\text { Current liabilitles }}\)

(Where the current assets include cash and bank balance, loose tools, bills receivable, sundry debtors, stock of inventories, i.e. raw-materials, semi-finished and finished goods, prepaid expenses, marketable securities, short-term loans and advances given, incomes accrued, disposable investments, etc.

The current liabilities include sundry creditors, bills payable, bank overdraft, dividend and taxes payable, outstanding expenses, debentures payable within a year, short-term loan taken, provision for taxation, proposed and unclaimed dividend, income pre-received i.e. income received in advance, etc.)

(2) Liquid Ratio (Quick Ratio or Acid Test Ratio) : The ratio of quick assets to current libilities is called Quick ratio or Acid test ratio. The assets which can be converted into cash immediately, or at a short notice are called Quick assets. All current assets except stock and prepaid expenses are considered as quick assets. Quick ratio of 1 : 1 is considered as an ideal ratio. It measures the liquidity position of business enterprise.

The formula for calculating liquid ratio is given below :
Liquid or Acid test ratio = \(\frac{\text { Quick assets }}{\text { Current liabilities }}\)
(Where Liquid or Quick assets = Cash + Bankbalance + Debtors + Bills receivable + Marketable securities)
Quick Ratio = \(\frac{\text { Quick assets }}{\text { Quick liabilities }}\)
(Where Quick liabilities = Current liabilities Less Bank overdraft, Advance received and Cash credit.) .

(3) Gross Profit (Turnover) Ratio : Gross profit ratio indicates the relation of the gross profit to the net sales. It is expressed in the percentage form. It is calculated to measure the efficiency of the production department. It is calculated by using the following formula :
Gross Profit ratio = \(\frac{\text { Gross profit }}{\text { Net sales }}\) x 100

[Where

• Gross profit = Net sales – Cost of the goods sold.
• Net sales = Total sales – Sales returns.
• Cost of Goods sold = Opening stock + Purchases + Direct expense – Closing stock]

It shows the gross margin on commodity sold. Higher gross profit ratio shows good position of business.

(4) Operating Profit Ratio : Operating profit ratio measures the relationship between operating profit and net sales.
Operating Profit ratio = \(\frac{\text { Operating Profit }}{\text { Net Sales }}\) x 100

Where Operating Profit = Gross Profit – Operating Expenses.
Net sales = Sales – Return – Allowances
Expenses may be categorised into two parts viz. (i) Operating expenses and (ii) Non-operating expenses.

Operating Expenses: Expenses which are incurred by the business enterprises for routine operation of the business are called operating expenses. They include office expenses, administrative expenses, selling and distribution expenses, etc. When such expenses are deducted from gross profit, we get operating profit.

Non-operating Expenses : Non-operating expenses include depreciation charged on fixed assets, loss incurred on sale of fixed asset or investment, loss by fire, goodwill written off, discount on issue of shares and debentures, preliminary expenses, etc. ‘

(5) Net Profit Ratio : The net profit ratio shows the relationship between the net profit and the net sales. It is expressed in percentage form. This ratio is helpful to measure the over-all efficiency of the business enterprise. The formula to calculate the net profit ratio is given below:

• Net Profit Ratio = \(\frac{\text { Net profit }}{\text { Net sales }}\) x 100
• Net Profit Ratio = \(\frac{\text { Net Profit Before Tax }}{\text { Net sales }}\) x 100
• Net Profit Ratio = \(\frac{\text { Net Profit After Tax }}{\text { Net sales }}\) x 100
  (Where Net profit = Gross profit + Non-operating incomes – Operating expenses – Non-operating expenses.)

Non-operating income includes income from non-trading activities, e.g. interest received, dividend received, any compensation received, refund of tax, profit on sale of fixed assets and investments. For calculating this ratio, Net profit may be taken either before tax paid or net profit after tax paid. The main aim of this ratio is to understand return on investment.

Operating Ratio: The ratio which expresses the relationship between total operating costs and net sales is called operating ratio. This ratio is expressed in percentage form.

Operating Ratio = \(\frac{\text { Cost of Goods Sold + Operating Expenses }}{\text { Net sales }}\) x 100
Where Cost of goods sold = Opening stock + Purchases + Wages – Closing stock

Operating Expenses = Office and Administrative expenses + Selling and distribution
expenses + Finance expenses (excluding interest on Loans and debentures)
Net sales = Sales-Returns-Allowances.

(6) Return On Investment (ROI) : This ratio indicates the relationship between the profit before interest and tax and total investment of the business enterprise. This ratio is computed to measure the over-all efficiency or profitability of the business enterprise. This ratio is computed by using the following formula :

Return On Investment ratio= \(\frac{\text { Profit before interest, tax and dividend }}{\text { Capital employed }} \times 100\)
Where Capital investment or Capital employed = Equity share capital + Preference share capital + Reserve and Surplus + Debenture capital + Other-long term loan. OR We can use the following formula to calculate capital employed
Capital employed = Fixed assets + Current assets – Current liabilities.
This ratio indicates the ability of the company to generate the profit per rupee of capital employed.

(7) Return On Capital Employed (ROCE) i This ratio indicates the relationship between Net profit before interest and tax and Net capital employed by the proprietor. In case of the company net capital employed refers to shareholders’ capital, i.e. the funds supplied by equity shareholders and Preference shareholders. It is computed by using the following formula :
Return On Capital Employed = \(\frac{\text Net profit before interest and tax }{ Net capital employed or equity }}\)
Net Capital Employed = Total assets – Current liabilities
= Fixed assets + Current assets – Current liabilities.
This ratio indicates whether shareholders’ fund is efficiently used or not. As far as possible Return On Capital Employed ratio should be higher than Return On Investment ratio.