Finanacial Accounting Unit 5/8

Departmental Accounts

Accounts relating to the several departments or sections of a business drawn up to ascertain their individual performance.

Department

A distinct area, division, or branch of an enterprise over which a manager has authority for the performance of specified activities; a combination of similar activities grouped for specialization and division of labor.

Departmentation/Departmentalization

The process of creating departments, or specialized units, within an organization for purposes of administration.

Branch

A separate division of an organization located at a different place than the head office, often classified based on geographical location.

Departmental Accounting

Computing business transactions of each department individually for ascertaining the profit or loss of the whole organization.

Separate Departmental Accounting

A method of departmental accounting where accounts of each department are maintained independently, suitable for large organizations.

Columnar Books Departmental Accounting

A method of departmental accounting where a common book of accounting is used to record transactions of every department, suitable for small businesses.

Cost Allocation

The process of identifying, aggregating, and assigning costs to cost objects, used for financial reporting purposes and to spread costs among departments or inventory items.

Expense Allocation

Assigning indirect costs to cost objects, often when expenses cannot be directly attributed to a particular department.

Royalty

Consideration received by business entities or individuals who sell their creations to a third party for use.

Lessor

The person who creates or owns the asset and provides the right of using such an asset to the third party.

Lessee

The person who uses the asset of the creator or the owner in lieu of a consideration for using such an asset.

Copyright

Provides the right to the author or owner of assets like a book, artwork, or music composition to claim royalty from the publisher based on sales.

Patent Royalty

Paid by the user to the owner and is based on the number of items produced.

Mining Royalty

The user or the lessee pays royalty to the owner or the lessor based on the output produced.

Minimum Rent

A guaranteed minimum amount received by the lessor, irrespective of the number of goods produced or sold by the lessee.

Short Workings

The amount by which the minimum rent is more than the actual royalty.

Excess Working

The amount by which actual royalty is more than the minimum rent.

Recoupment of Short Workings

Allows carrying forward of short workings to adjust the same in future against the excess royalty amount.

Fixed Right

The lessee can recover short working from the lessor within a particular period from the date of lease of the asset.

Fluctuating Right

The lessee can recover short workings for any period during the subsequent period or periods.

Insolvency

The inability of a debtor to pay his debts when they are due, or liabilities exceeding assets resulting in a court order for adjudication.

Insolvency Acts

Laws providing shelter for heavily indebted individuals, exempting them from debts and selling properties under court-appointed supervision for distribution among creditors.

Indian Insolvency Laws

Two acts governing insolvency in India: The Presidency Towns Insolvency Act, 1909, and The Provincial Insolvency Act, 1920, and The Insolvency and Bankruptcy Code (IBC) 2016

Law of Insolvency

Social legislation providing relief to honest debtors unable to pay debts due to unforeseen circumstances, securing equitable distribution of assets among creditors, and releasing debtors from liabilities under certain conditions.

Objective of the Insolvency and Bankruptcy Code

To consolidate and amend laws relating to re-organisation and insolvency resolution of corporate persons, partnership firms, and individuals, supporting credit market development, entrepreneurship, and ease of doing business.

Doctrine of Relation Back

Starts from a date earlier than the date of adjudication passed by the court.

The Presidency Towns Insolvency Act, 1909

Applicable in the Presidency towns of Mumbai, Chennai, and Kolkata.

The Provincial Insolvency Act, 1920

Applies to the whole of India except the Presidency towns of Mumbai, Chennai, and Kolkata.

Objectives of Bankruptcy Laws

Improved handling of conflicts, procedural certainty, setting limits between business failure, flexibility for efficient solutions.

Common practices of loss allocation

Taxes, inflation, currency depreciation, expropriation, wage or consumption suppression.

Presidency Towns Insolvency Act Commencement

Insolvency is deemed to commence at the time when the act of insolvency is committed on which the order of adjudication is made.

Provincial Insolvency Act Commencement

Insolvency commences on the presentation of the petition.

Property Not Available for Distribution

Properties held by the insolvent as a trustee, bailee, or in a fiduciary capacity and certain essential personal items.

Fraudulent Preference

Debtor favors one creditor, paying them more than they would receive in a proportional distribution.

Voluntary Transfer

Transfer of property without consideration, void if within two years of adjudication order under the Presidency Towns Insolvency Act.

Official Receiver

A legal professional appointed by the court to manage the insolvent's assets and distribute them to creditors under the Provincial Insolvency Act.

Official Assignee

A legal professional appointed by the court to manage the insolvent's assets and distribute them to creditors under the Presidency Towns Insolvency Act.

Statement of Affairs

Financial position of the debtor on a particular date, including assets and liabilities and their values

Unsecured Creditors as per List A

Creditors without any security from the Insolvent Debtor

Fully Secured Creditors

Creditors who have a claim against the debtor and have obtained a lien, guarantee or possession of some deeds or other securities, with sufficient securities to meet their claims.

Partly Secured Creditors

Creditors who possess security for a lesser value than the amount of their claims; the securities are insufficient to meet the claims fully.

Preferential Creditors

Creditors entitled to priority over other debts of the insolvent; for instance, taxes, rates, wages, salaries are paid in full.

Properties

Includes all the assets of the Insolvent, except Book Debts, Bills Receivable and assets which have not been given as security to Creditors.

Book Debts

All the debtors of the insolvent are shown in this list and Good, Doubtful and Bad debts are shown separately.

Bills of Exchange etc.

This list contains information about Bills Receivable and Promissory Notes.

Deficiency Account

This list shows the deficiency i.e., liabilities of the Debtors over realisable value of their assets.

Deficiency Account

Explains how the deficiency shown in the Statement of Affairs has arisen.

Priority of Payments

Fully secured creditors, in full; Partly secured creditors to the extent they are secured; Expenses of realisation; Preferential creditors; Unsecured creditors

Interest

A creditor is not allowed to claim interest after the date of insolvency. However, if all the claims have been satisfied in full, then till the date of payment, interest of 6% is allowed.

NCLT

National Company Law Tribunal; Applications are made to this to admit the Company (Corporate Debtor as per IBC) into corporate insolvency resolution process.

Interim Resolution Professional

An independent professional placed in management, suspending the board of directors during CIRP.

Moratorium

A suspension of legal proceedings, asset transfers, security interest enforcements, and property recovery during CIRP.

Resolution Plan

Revival plan for the company, approved within 180-270 days from CIRP commencement.

Liquidation

The process where the assets of a company are realised and distributed to satisfy its liabilities. In the event of a surplus after payment of all liabilities plus statutory interest, this will be distributed to the shareholders.

Assets

Property owned by the debtor (either a company or an individual) which will be realised by an office holder to facilitate a distribution to the debtor’s creditors.

Bankrupt

An individual against whom a bankruptcy order has been made.

Official Receiver

An official receiver (OR) is an officer of the court, civil servant, member of the Department for Business Innovation and Skills’ Insolvency Service. The OR deals with bankruptcy and compulsory liquidations although the Secretary of State can appoint a licensed insolvency practitioner as liquidator or Trustee in Bankruptcy as can the creditors.

Statement of Affairs

The document submitted to the office holder by a debtor (where personal insolvency appointment) or by the directors of the company (where corporate insolvency appointment) which details all the assets and liabilities of the debtor/company.

Retirement of a Partner

When one or more partners leave the firm, and the remaining partners continue the business.

Retiring Partner/Outgoing Partner

A partner who leaves the firm during retirement.

Gaining Ratio

The ratio in which the remaining partners acquire the retiring partner's share.

Gain of a Partner

New Ratio - Existing Ratio

Expulsion of a Partner

exclusion of partner from the firm mutually by consent of the partners

Expulsion of a Partner

The exclusion of a partner from a firm, requiring consent and good faith.

Revaluation of Assets and Liabilities

Adjustments made to reflect fair values, with gains/losses shared by all partners.

Treatment of Accumulated Reserves and Undistributed Profit

Distributed among all partners in their old profit-sharing ratio.

Retiring Partner’s Claim

The sum of the credit balance of capital account including share of goodwill, share within the Gain/Profit on Revaluation their share in General Reserve and Accumulated Profit and, Interest on Capital less share within the Loss on Revaluation, Drawings and Interest on Drawings up to the date of retirement, share of any accumulated losses and loan taken from the firm.

Partnership Deed

An agreement between the partners of a firm that outlines the terms and conditions of partnership.

Revaluation

Revaluation of assets and liabilities in partnership is done at the time of change in the profit-sharing ratio among the partners. Assets and liabilities are revalued because of the difference between the actual value and the market value of assets and liabilities.

Goodwill

Goodwill refers to the difference between the fair or market value of the net assets of the partnership and their book value