Class 12 Accounting-II Notes,ACCOUNTING FOR DEBENTURES,Principles of Accounting-II XII
ACCOUNTING FOR DEBENTURES
15) Define Debenture.
Debenture is a medium- to long-term debt instrument used by large
companies to borrow money, at a fixed rate of interest. So, a debenture
represents a debt. The interest rate is pre-determined. The holders of
debenture are called debenture holders. Following are the features of
debentures:
- Written promises: it contains a promise to repay the principal amount after a certain period. Ws a written document of loans issued by a company to its holders. It also contains a promise of periodic payment of interest at a fixed rate.
- Certificate: it is issued by a company and is usually in the form of a certificate which is an acknowledgement of a debt.
16) Difference between Shares and Debentures
|
SHARES DIFFERENCES |
DEBENTURES |
DEBENTURES |
|
The shares are owned by the funds of the company. |
Meaning |
The debentures are the borrowed funds of the
company |
|
Represent the capital of the company |
What is it? |
Represent the debt of the company |
|
Known as shareholder |
Holder |
Known as debenture holder |
|
Owners |
Status of holder |
Creditors |
|
Get the dividend |
Form of return |
Get the interest |
|
No |
Security of payment |
Yes |
17) Convertible and Non-Convertible Debentures
Debentures can be classified as Convertible and Non-Convertible Debentures, on the basis of conversion.- Convertible debentures are a type of debentures that can be converted into equity shares of the company.
- Non-convertible debentures are defined as the type of debentures that cannot be converted into equity shares of the company.
FINAL ACCOUNT OF A COMPANY
18) What is Balance Sheet?
A balance sheet is a financial statement that reports a company's
assets, liabilities and shareholders' equity at a specific point in time.
FINANCIAL STATEMENT ANALYSIS
19) Define Financial Statement
Financial Statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. It mainly includes: a) profit and loss a/c b) balance sheet c) cash flow statement.
20) Objectives of financial statements.
Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, cash flow statement and so on.
The three objectives of financial statement are as follows:
- To predict solvency position: Financial statement facilities to establish the capacity of a business to repay its loan and interest with its own resources.
- To know profitability and business growth: the financial statement clearly shows the Business activities whether it is running at a profit or not.
- To provide liquidity position: the financial statement must represent its financial soundness in the short-term. It can establish whether a business has sufficient current assets to meet its current liabilities or not.
21) Limitation of financial statement
The limitations of financial statement are as follows:- Historical in nature: It is based on historical figures only. They disclose the past result and the position of the entity of the past. So, they fail to provide present position and future prospects of the business.
- Only interim reports: These statements have been prepared on the basis of accounting period concept. So, result and position disclosed by financial statement is interim in nature.
- Record only monetary facts: Financial statement discloses only monetary facts. It does not represent qualitative information like public relation, quality of management etc. which cannot be measured in monetary terms.
- Wrongful Analysis: Sometimes, financial statement analysis can perform wrongful analysis because of biasness and misleading information.
22) Importance of financial statement.
Following are the importance of financial statement:
- It accesses the past and current position of the company.
- If offers valuable information for decision making to top-level management.
- They offer information related to profitability and operation cost.
- They are useful for financial institutions to make loan decision.
23) Objectives of financial statement analysis.
Following are the main objectives of analysis of financial statement:
- To know the profitability/ business growth of the business organization.
- To compare financial and operating efficiency of the organization.
- To know the solvency position of the business organization.
24) Limitation of financial statement analysis.
Following are the main limitation of financial statement analysis:
- Short coming of tools of analysis: There are many tools of analysis available to the analyst, which tools are to be used in a particular situation depends on the expertise of the analyst. If a wrong tool is used, it may give misleading result.
- Ignores the qualitative elements: They provide information relating to past only. They fail to reflect the qualitative elements like efficiency of management. So, the outcome of analysis cannot be taken as final judgments.
- Difficulties in Adjusting Price level changes: The quick changes in the value of money in the present day economy also reduce the validity of analysis. It is only a record of historical facts. So, it cannot represent the current value of the business.
25) Parties interested in Financial Statement of the company.
The parties interested in financial statement of the company are:•
Shareholders
•
Management
•
Lenders
•
Creditors/ Suppliers
•
Government
• Employees
COMMENTS