Accountancy Part II

Accounting for Share Capital in CBSE Class 12 Accountancy covers the nature of a joint stock company, types of share capital, kinds of shares, and the complete accounting treatment for issue, forfeiture, and reissue of shares.

• 1A company has seven distinguishing features: body corporate, separate legal entity, limited liability, perpetual succession, common seal, transferability of shares, and the capacity to sue or be sued.
• 2Companies are classified by liability into limited by shares, limited by guarantee, and unlimited; and by membership into public, private, and one person companies (OPC).
• 3Share capital has seven categories: authorised (nominal/registered), issued, subscribed, called-up, paid-up, uncalled, and reserve capital. Paid-up capital equals called-up capital minus calls in arrears.
• 4A company can issue two classes of shares — preference shares (preferential right to dividend and capital repayment) and equity shares (residual rights; dividend varies year to year).
• 5Shares are issued in instalments: application money (minimum 5% of face value), allotment money, and calls; each call must not exceed 25% of face value with at least one month between calls.

Issue and Redemption of Debentures is Chapter 2 of CBSE Class 12 Accountancy Part II. It covers the meaning, types, and accounting treatment for issuing debentures and the four methods of redemption including lump sum payment, instalments, open market purchase, and conversion into shares.

• 1A debenture is a written instrument acknowledging a debt under the common seal of a company; the word derives from the Latin 'debere' (to borrow); under section 2(30) of the Companies Act, 2013, it includes debenture stock, bonds, and any other securities whether or not they create a charge on assets.
• 2Debentures are classified by security (secured or unsecured), tenure (redeemable or irredeemable/perpetual), convertibility (convertible or non-convertible), coupon rate (specific coupon rate or zero coupon rate), and registration (registered or bearer).
• 3Debentures are issued at par when issue price equals face value; at a premium when issue price exceeds face value (premium credited to Securities Premium Reserve); and at a discount when issue price is below face value (debited to Discount on Issue of Debentures, written off against Securities Premium Reserve or profits).
• 4Debentures issued for consideration other than cash are given to vendors in lieu of payment for assets purchased; they may be issued at par, premium, or discount. Debentures issued as collateral security are treated either by a note below the loan in the balance sheet or by debiting Debenture Suspense Account.
• 5Six combinations of issue and redemption terms exist: at par/at par; at discount/at par; at premium/at par; at par/at premium; at discount/at premium; at premium/at premium. When debentures are redeemable at premium, the premium on redemption is debited to Loss on Issue of Debentures and shown as a non-current liability until redemption.

Chapter 3 of CBSE Class 12 Accountancy Part II covers Financial Statements of a Company, including the meaning, nature, and objectives of financial statements, the prescribed formats for Balance Sheet and Statement of Profit and Loss under Schedule III of the Companies Act 2013, and their uses and limitations.

• 1Financial statements — comprising the balance sheet, statement of profit and loss, and cash flow statement — are the end products of the accounting process and serve as formal annual reports communicating financial information to shareholders and external parties.
• 2The nature of financial statements rests on four elements: recorded facts at historical cost, accounting conventions (e.g., valuing inventory at cost or market price, whichever is lower), postulates (going concern, money measurement, realisation), and personal judgements on depreciation, provisions, and inventory valuation.
• 3Six objectives of financial statements include providing information on economic resources and obligations, earning capacity, cash flows, management effectiveness, social activities of the business, and significant accounting policies followed.
• 4The Balance Sheet under Schedule III follows a vertical format with two sides — Equity and Liabilities (shareholders' funds, share application money pending allotment, non-current liabilities, current liabilities) and Assets (non-current assets and current assets) — with mandatory current and non-current bifurcation.
• 5Reserves and Surplus are classified into capital reserve, capital redemption reserve, securities premium reserve, debenture redemption reserve, revaluation reserve, share options outstanding account, other reserves, and surplus (balance in statement of profit and loss); a debit balance in the statement of profit and loss is shown as a negative figure under surplus.

Chapter 4 of CBSE Class 12 Accountancy introduces Analysis of Financial Statements — the process of critically evaluating financial information to assess a firm's profitability, operational efficiency, and financial health using tools such as comparative statements, common size statements, and trend analysis.

• 1Financial Statement Analysis is a judgemental process aimed at estimating current and past financial positions to determine the best possible estimates about future conditions, covering both cross-sectional (inter-firm) and time-series (intra-firm) comparisons.
• 2Analysis means simplification of financial data by methodical classification; interpretation means explaining the meaning and significance of that data. The two are complementary — analysis without interpretation is useless, and interpretation without analysis is difficult or even impossible.
• 3Financial analysis is significant to diverse users: finance managers use it for rational decision-making and financial control; top management assesses overall efficiency; trade payables evaluate short-term liquidity; lenders assess long-term solvency; investors focus on profitability and capital structure; labour unions assess wage feasibility; government agencies use it for price regulation and taxation.
• 4Five commonly used tools of financial analysis are: comparative statements, common size statements, trend analysis, ratio analysis, and cash flow analysis.
• 5Comparative statements show profitability and financial position for different periods in absolute and percentage terms, indicating the direction and trend of financial position. They are also known as horizontal analysis.

CBSE Class 12 Accountancy Chapter 5 covers Accounting Ratios, an important tool of financial statement analysis. It explains the meaning, objectives, advantages, and limitations of ratio analysis, and covers liquidity, solvency, activity, and profitability ratios with their formulae and significance.

• 1A ratio is a mathematical number expressing the relationship between two accounting numbers from financial statements; it can be expressed as a fraction, proportion, percentage, or number of times.
• 2Ratio analysis serves key objectives: identifying problem and bright areas of the business, providing deeper analysis of profitability, liquidity, solvency and efficiency, enabling cross-sectional comparisons with industry standards, and supporting projections and estimates for the future.
• 3Liquidity ratios measure short-term solvency: Current Ratio = Current Assets / Current Liabilities (safe range 2:1); Quick (Acid-Test) Ratio = Quick Assets / Current Liabilities (safe range 1:1), where quick assets exclude inventories and prepaid expenses.
• 4Solvency ratios measure long-term debt-servicing capacity and include Debt-Equity Ratio = Long-term Debts / Shareholders' Funds (safe ratio 2:1), Proprietary Ratio = Shareholders' Funds / Capital Employed, Total Assets to Debt Ratio = Total Assets / Long-term Debts, and Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on Long-term Debts.
• 5Activity (Turnover) Ratios measure efficiency of resource utilisation: Inventory Turnover = Cost of Revenue from Operations / Average Inventory; Trade Receivables Turnover = Net Credit Revenue from Operations / Average Trade Receivable; Trade Payables Turnover = Net Credit Purchases / Average Trade Payable; Fixed Assets Turnover = Net Revenue from Operations / Net Fixed Assets; Working Capital Turnover = Net Revenue from Operations / Working Capital.

Cash Flow Statement is a key financial statement covered in CBSE Class 12 Accountancy that shows inflows and outflows of cash and cash equivalents from operating, investing, and financing activities of an enterprise during a specific period, prepared as per AS-3.

• 1A Cash Flow Statement shows inflows and outflows of cash and cash equivalents from operating, investing, and financing activities and is prepared as per AS-3 under the Companies Act, 2013.
• 2Cash comprises cash in hand and demand deposits with banks; cash equivalents are short-term highly liquid investments readily convertible into cash with a maturity of three months or less and insignificant risk of change in value.
• 3Operating activities are the principal revenue-generating activities of an enterprise; cash from operations indicates the internal solvency level of the company.
• 4Investing activities involve the acquisition and disposal of long-term assets and investments not included in cash equivalents, such as purchase and sale of machinery, furniture, and long-term investments.
• 5Financing activities result in changes in the size and composition of owners' capital and borrowings, including proceeds from issue of shares, debentures, repayment of loans, and payment of dividends.