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Lesson Posted on 02 Aug Exam Coaching/ICWA Coaching Tuition/BBA Tuition Tuition/BCom Tuition +3 CBSE/Class 11/Commerce Exam Coaching/CA Coaching CBSE/Class 11/Commerce/Accountancy less

Valuation of Goodwill

Gayatri D.

I am an experienced, qualified Chartered Accountant and tutor having teaching experience of 7 years in...

This is one of the introductory chapters at the graduation level as well as in professional exams. The brief notes on methods and calculation of goodwill in easy steps are presented below: Methods of Valuation of Goodwill Average Profits Method Super Profits Method Annuity Method Capitalisation... read more

This is one of the introductory chapters at the graduation level as well as in professional exams.

The brief notes on methods and calculation of goodwill in easy steps are presented below:

Methods of Valuation of Goodwill

  1. Average Profits Method
  2. Super Profits Method
  3. Annuity Method
  4. Capitalisation Method
    1. By Average Profits Method
    2. By Super Profits Method

Let us discuss each method in detail.

  1. AVERAGE PROFITS METHOD

STEPS for calculation

  1. Adjusted average annual profits (See note 1)
  2. Number of years of purchase (given in question)
  3. Value of Goodwill= Adjusted average annual profits multiplied by the number of years of purchase

Note :

  • If several years of purchase for goodwill valuation are not given in the question, then the number of years for which data of profit or loss are provided should be taken.

Calculation of Adjusted average annual profits:

Steps for calculating it are as follows:

  • Calculation of Adjusted profits OR Adjusted Future profits OR Future Maintainable Profits

Particulars

Rs.

Profits   (given in Question)

---

Add: All expenses and losses not likely to occur or incur in future (e.g. extraordinary salary of a person, loss from fire or theft, abnormal losses, capital expenses etc.)

---

Add: All profits likely to come in the future

(e.g. profit due to new line of business)

---

Less: All expenses and losses likely to occur in future (e.g. salaries on new appointments etc.)

---

Less: Profits not likely to occur

---

ADJUSTED PROFIT /FUTURE PROFIT

---

  • Calculation of Adjusted average profits

There are two methods:

Simple average method

(If there is fluctuation in the profits for given periods with no specific trend, then use this method). The formula is

 Total adjusted profits of all the given years divided by the number of years.

Weighted average method

(An increasing or decreasing trend in the profits for periods given in the question then use this method). The format for calculating it is as follows.

Profits

weights

Product

(profits for all years

(greater weightage for recent years and less weightage for earlier or past years)

(profits multiplied by weights)

 SUPER PROFITS METHOD

STEPS for calculation

  1. Adjusted average annual profits (See Note below)
  2. Average Capital Employed (See Note below)
  3. Expected Rate of Return (given in question)
  4. Regular Profits = Average Capital Employed multiplied by Normal Rate of Return
  5. Super Profits = Adjusted average annual profits less Normal Profits
  6. Value of Goodwill = Super Profits multiplied by the number of years of purchase

Note

  • Calculation of Adjusted average annual profits (as discussed earlier)
  • Calculation of Average Capital Employed

           There are two ways to ascertain Average Capital Employed. 

Particulars

rupees

Assets (other than non-trading assets , intangible assets and fictitious assets) at market value

---

Less: Liabilities to outsiders at revised values

---

CAPITAL EMPLOYEDAT THE END OF THE YEAR

---

Less: Half of the profit earned during the year

---

AVERAGE CAPITAL EMPLOYED FOR THE YEAR

---

 

Liabilities Based Approach

Particulars

rupees

rupees

Equity Share Capital

 

---

Preference Share Capital

 

---

Reserves and Surplus

 

---

Profit on Revaluation of Assets and Liabilities

 

---

 

 

---

Less: Goodwill at book value

---

 

Accumulated Losses and expenses not yet written off

---

 

Loss on Revaluation

---

---

CAPITAL EMPLOYEDAT THE END OF THE YEAR

 

---

Less: Half of the profit earned during the year

 

---

AVERAGE CAPITAL EMPLOYED FOR THE YEAR

 

---

 ANNUITY METHOD 

STEPS for calculation

  1. Super Profits (Refer Super Profits method )
  2. Annuity Value (given in question)
  3. Value of Goodwill = Super profits multiplied by Annuity Value
  1. CAPITALISATION METHOD

By Average Profits Method

STEPS for calculation

  1. Adjusted average annual profits (See Note below)
  2. Expected Rate of Return (given in question)
  3. Total Value of Business = (Adjusted average annual profits divided by Normal Rate of Return) multiplied by 100
  4. Value of Goodwill = Total Value of Business Less Capital Employed

 Note: Capital Employed = Assets minus Liabilities

By Super Profits Method

 STEPS for calculation

  1. Super Profits (Refer Super Profits method )
  2. Average Rate of Return (given in question)
  3. Value of goodwill = (Super Profits divided by NRR) multiplied by 100
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Lesson Posted on 02 Aug Tuition/BBA Tuition Tuition/BCom Tuition CBSE/Class 11/Commerce/Accountancy +2 Exam Coaching/ICWA Coaching Exam Coaching/CA Coaching less

Preparation of Final Accounts From Incomplete Records or Single Entry System:

Gayatri D.

I am an experienced, qualified Chartered Accountant and tutor having teaching experience of 7 years in...

Preparation of Final Accounts From Incomplete Records or Single Entry System: There are two methods for the preparation of final accounts from single entry books/ incomplete records. Method 1: Under this system, two statements are prepared: Statement of profit and loss and Statement of affairs. Step1... read more

Preparation of Final Accounts From Incomplete Records or Single Entry System:

There are two methods for the preparation of final accounts from single entry books/ incomplete records.

Method 1: Under this system, two statements are prepared:

  1. Statement of profit and loss and
  2. Statement of affairs.

Step1 - Prepare a statement of affairs at the beginning and at the year-end to find out the opening and closing capital, respectively.

Proforma of the statement of affairs:

Statement of affairs as on....(date).

Liabilities Amount (Rupees) Assets Amount (Rupees)
Capital (Bal.fig.) --- Building  ---
Loans, Bank Overdraft --- Machinery ---
Sundry Creditors --- Furniture ---
Bills Payable --- Inventory ---
Outstanding Expenses --- Sundry Debtors ---
    Bills receivable ---
    Loans and advances ---
    Cash and Bank ---
    Prepaid Expenses ---
  ----   ----

Sources to find out details like assets and liabilities of a business enterprise:

  1. Cash Book for cash balance
  2. Bank Passbook for the bank balance
  3. Personal Ledger for Debtors, Creditors, Bills receivable and other current assets/ liabilities etc.
  4. Inventory by actual counting and Valuation
  5. Written down value of Fixed assets from the list prepared by the proprietor disclosing the original cost, the date of purchase and written down value after deducting a reasonable amount of deprecation.

Step2 - Prepare a statement of profit and loss to ascertain the trading profit. It can be prepared either in the statement form or in the form of a ledger. Both the formats are explained below.

Format: Statement of Profit and Loss for the year ended.

  1. In the statement form
Particulars Amount Amount
Capital at the end (a) ---  
   Add : Drawings ---  
   Less: Fresh Capital Introduced ---  
Capital at the beginning (b) ---  
PROFIT /LOSS (a-b)   ----
Less : Adjustments, if any say, Bad debts, Depreciation etc ---  
Net Profit/Loss for the period   ---

    Less : Appropriation items:

  1. Interest on partner’s capital
  2. Partners’ salaries etc.

 

---

---

 

Divisible Profit

  ----

 

 2. In the form of Ledger

Particulars Amount (Rupees) Particulars Amount (Rupees)
    By Balance b/d ---
To Drawings --- By Additional Capital ---
   
By Interest on partner’s capital
---
    By Partners’ salaries ---
To Net Loss (Bal.fig.) --- By Net Profit (Bal.fig.) ---
To Balance c/d ---    
  ----   ----

 

Step3 - Prepare a statement of affairs as at the YEAR-END to show the business’s financial position.

Method 2: Conversion of single entry to double entry

Step1 - various ledger accounts are prepared, e.g. sales, purchases, debtors, creditors, Trading A/c, cash book to locate missing details.

Step2 - Find all the required details from the available information. For example, if we know opening & closing balances in Debtors’ A/c and the cash received from debtors, the balancing figure will indicate sales figures. Similarly, with the opening and closing balances of creditors & credit purchases figures, we can find cash paid to creditors from the creditor’s ledger.

Step3 - Once all these figures required to prepare financial statements are calculated through their respective ledgers, it is easy to prepare the financial statements in regular formats.

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Lesson Posted on 07/09/2020 Exam Coaching/CMA Coaching Exam Coaching/CA Coaching Exam Coaching/ICWA Coaching

Incorporation of Company

Nandhini Nagendhran

I have been handling courses of Accountancy fields for the past 2 to 3 years.

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Lesson Posted on 03/08/2020 Exam Coaching/CA Coaching/CA Final Exam Coaching/Company Secratary (CS) Coaching Exam Coaching

How to clear professional exams in first attempt.

CA. Shailesh Vakharia

I am a qualified chartered accountant with more than fifteen years of industry experience. I am possess...

Professional exams require some extra efforts than non-professional reviews. Following are some handy tips to get through these exams: 1. Yoga/ meditation: Doing yoga or meditation for at least forty five minutes per day will not only improve your health but will also enhance your concentration and... read more

Professional exams require some extra efforts than non-professional reviews. Following are some handy tips to get through these exams:

1. Yoga/ meditation: Doing yoga or meditation for at least forty five minutes per day will not only improve your health but will also enhance your concentration and enable you to focus more deeply into a subject.

2. Try and understand the concept of the chapter in a topic which will help you in answering the most tricky questions at the exams.

3. Don't carry books or notes at the reviews for revision. Always prepare yourself well in advance so that any matter comes to you before a day of the exam is known to you entirely.

4. Feel happy and have some funny moments with your friends just before exams to ease yourself from exam pressure.

5. Don't indulge in any topic related to exam subject just before exam hour. This might demoralize you if the question is unknown to you.

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Answered on 07/12/2019 Exam Coaching/CA Coaching/Crash Course

Lakshmi

Surely you can join, there are two option for you 1. You can register for CA foundation 2.you can directly join for CA intern after completing your graduates.
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Answered on 17/12/2019 Exam Coaching/CA Coaching

Yash

no not necessary u can start CA as fastas u can
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Lesson Posted on 22/10/2018 Exam Coaching/Company Secratary (CS) Coaching/Crash Course Exam Coaching/Company Secratary (CS) Coaching Exam Coaching/CA Coaching +2 IBPS SO/IBPS SO Professional Paper/Law/Types of Companies Exam Coaching/CMA Coaching less

Company Law chapter one - characteristics of company with case law

Krishan Coaching Acdemy

Learh basic to proficient english language with personification and communication development. Especially...

COMPANY LAWCHP - 1 COMPANY = COM + PANIS It is called a body corporate because the persons comprising it are made into a single entity by incorporating it according to the law and clothing it with legal personality. The word ‘corporation’ is derived from the Latin term ‘corpus’... read more

COMPANY LAW
CHP - 1

COMPANY = COM + PANIS

It is called a body corporate because the persons comprising it are made into a single entity by incorporating it according to the law and clothing it with legal personality.

 

The word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person created by a process other than natural birth. It is, for this reason, sometimes called the artificial juridical person. As a legal person, a corporation is capable of enjoying many rights and incurring many liabilities of a natural person.

 

U/s 2(20) COMPANY MEANS INCORPORATED UNDER THIS ACT OR ANY PREVIOUS ACT.

 

Characteristics of company

Corporate personality: So redundant bears own name/ under own name/ separate property from members
incurring debts, borrowing money, employ people, have to Bank a/c.

CASE LAW:
Salomon vs Salomon and Co Ltd. – 1897 (Salomon, four sons, wife & daughter -$ 38782, 20K shares/10K debs secured with floating charge/ 8782 cash, creditors claimed but lordship of the house of lords observed.)

Lee vs Lee Air farming Ltd. - 1961(the same person can be employee & owner)

Kandoli tea Co Ltd. (1882)(transferred TEA estate to claim exemption from ad Valero)

New Horizon Ltd vs Union of India (1994):: Experience of shareholder are generally not consider but in this case ARUN PURIEE & TPI ltd, LMI ltd & WM Ltd + IIP Ltd (Singapore) tender for telephone directory – evaluation committee refused – Delhi HC upheld -=- Supreme court reversed

Artificial Person: enjoy rights & obligation of duties::--Union bank of India VsKhader international construction & Others: indigent Person Order 33 rule 1 CPC1908

Not citizen: Rights of shareholder not impugned with action against the company: RC COOPER vs UOI

Bennet Coleman co vs UOI: SC observed if fundamental rights of a shareholder are impaired by state legislation their power as shareholders are protected.
Has Nationality and Residence: GaaqueVs Inland water revenue commissioners (1940) &
Tulika v Parry & Co (1903) place of registration + residence & domicile
JV company resides where it meets in general presence of persons who represent it.

Limited Liability: Buckley, J in London& globe finance Corporation (1903)observed in last 50 yrs legislation of limited liability has done well to the economy
Exceptions of Limited liability:

Section 3(2)(c) : Unlimited Lia. Co
Section 7(7) : fraudulent doc for incorporation
Section 35(3): Fraudulent Prospectus
Section 75(1): Deposit
Section 224(5): During Investigation by an officer
Section 339(1): During winding up
Section 251(1): Fraudulently removal of the name

Perpetual Succession: LCB Gower ( Hydrogen Bomb)

Separate Property: Member even doesn’t have an insurable interest in property of the company.
Bacha f Guzdar V income tax commissioner(1955)
SC observed that tea company to have 60% exemption in its income but not shareholders
Transferability of shares: re Balia and San Francisco Railway co (1968), Section 44 provides that shares held by members are moveable property in the manner provided by AOA if AOA is silent that by TABLE F Schedule 1.

Capacity to sue and be sued: TVS Employees Fed. V TVS & Sons Ltd. : workers allowed to realise film of their struggle
LalitSurajmalKanodia v Office Tiger Database India (Pvt) Ltd ( 2006) co not liable for contempt by officers

Contractual Rights: shareholder cannot enforce any contract nor derive benefit not a party to contract, co is not a trustee of shareholders and shareholder cannot be sued for deals by the company.
British Thompson Huston co. v Sterling Accessories Ltd (1924)

Limitation of action MOA AOA

Separate Management:

Voluntary association for profit

Termination of existence
It is the Easiest way to grab the company's characteristics. Just look out for more lessons.

Join my classes and surety if you learn with our way, you 'll never forget company law. Just copy to your mobile and study when in hush in the metro.

I have designed such notes to enable you to understand easily not only mugging.

All the best for your upcoming exams and concentrate on studying ICSI course book.

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Lesson Posted on 11/10/2018 Tuition/BCom Tuition/Financial Accounting Exam Coaching/CA Coaching/CPT Banking

Why Accounting is called as

Venkat

In this article, I am going to explain the accounting in layman terms. Hope you find it useful. Just Observe the following activities. Mr.X Gets salary up on working as software employee of Google. Once salary has been credited he spends it for the purchase of goods and services, Children's education,... read more

In this article, I am going to explain the accounting in layman terms. Hope you find it useful.

Just Observe the following activities.

  1. Mr.X Gets salary up on working as software employee of Google. Once salary has been credited he spends it for the purchase of goods and services, Children's education, Purchase of house etc. Don't you think Mr.X is performing the economic activity? The Answer is yes. He is playing the commercial operation by paying the consideration in the form of Money for acquiring them. Here the benefit is purely Individual.
  2. Have you heard of Hyderabad Metro Rail which recently began it services and well received by the people of Hyderabad. Whether the services rendered by the Hyderabad Metro Rail Limited to the passengers who travelled through it is an Economic Actvitity or not? The answer is Yes. Here in this economic benefit - Who benefitted? It is Public at large - It is a Social Benefit.
  3. So we can draw a concussion from the above two set of activities - Not all the economic activities are run for the individual economic benefit, such economic activity may create a social advantage too. 

So, How these Economic Activities are performed?

Economic Activities are performed through Transaction and Events. Let us understand what a Transaction and Event is.

The transaction is used to mean a Business / Performance of act / An agreement etc., While Event is used to denote a happening, as a consequence of operations, a result.

Let us understand the above two terms with an example.

Imagine Mr X has a business idea of starting a retail shop at the busy location of Hyderabad. He invests 10,00,000 for running a stationery business, and purchases goods worth 8,00,000 and sells for 9,50,000. He pays shop rent of 1,00,000 and finds that he has left goods worth of 1,00,000.

Mr X, In the above case, carries on Economic Activity. It is through some transactions and events. In the end, he eagers to know running a stationery business is profitable or not.

Sales : 9,50,000

Closing Stock : 1,00,000

Total : 10, 50 ,000

Purchases : 8,00,000

Shop Rent : 1,00,000

Total Expenses : 9,00,000

Surplus : 10,50,000-9,00,000 = 1,50,000

Now will see what the events and transactions in the above economic activity are?

1. Having a surplus of 1,50,000 & Closing stock of worth: 1,00,000 are events since they arise as a result of economic activity

2. Purchase of goods, Sale of assets, Investment of amount in the business, Paying shop rent are like Transactions.

Likewise, Every individual wants to keep a record of all transactions and events and to have adequate information to aid in decision making purpose [ Whether it is worth to run a business or not ].

Accounting has been developed to serve the above purpose as it deals with the measurement of economic activities involving inflow and outflow of financial resources, which helps to create useful information for decision making.

Accounting has a universal application for recording events and transactions of family functions to the functions of a national government. For now, concentrate on business activities conducted by companies/firms/ organisations etc.

The growth of the accounting discipline is closely related to the growth of the business world. Imagine for a while when the business of selling goods and rendering of services has stopped for a day around the globe Whether human being can be able to survive the day? The answer is No. So the business activities had hold importance in today's business world and interlinked with the people's well being and survival.

Accounting as a field of study is best identified with recording and summarising economic activities in the form of transactions and events in the books of accounts/records and communication of financial information about business enterprises to the interested users to facilitate decision making.

Accounting aims to fulfil the needs of the rational and sound decision makers. So It acts as a medium for communication of financial information to users. Thus accounting is called a language of the business.

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Answered on 16/06/2018 Exam Coaching/CA Coaching

Rohith Kumar

Tutor

No actually one cannot expect the changes in auditing in respect of standards on ayditing, statutory audit related to taxation , stock markets etc. So my suggestion is to take classes minimum of 6months to 1 year before exams.
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Answered on 06/05/2019 Exam Coaching/CA Coaching

PCA - Professional Careers Academy

It is Maths and Law as students have phobia for maths in general and law being never studied earlier.
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