Forex Trading Tutorial for Beginner

Forex trading lessons for beginners. Price and Quote. When you trade Forex, you will see Ask and Bid prices. Accounting is a business language. We can use this language to communicate financial transactions and their results. Accounting is a comprehensive system to collect, analyze, and communicate financial information. Forex Trading Tutorial for Beginner

Forex Trading Tutorial for Beginner
Forex Trading Tutorial for Beginner

Audience

This tutorial has been designed to help beginners pursuing education in financial accounting or business management. Any enthusiastic reader with basic mathematics knowledge can comprehend this tutorial. After completing this tutorial, you will find yourself at a moderate level of expertise from where you can take yourself to next levels.

Prerequisites

Before you start proceeding with this tutorial, we assume that you have a basic understanding of commerce.

Forex Trading Tutorial for Beginner

Financial Accounting – Rectification of Errors

Financial accounting deals with recording and maintaining every monetary transaction of an organization. However, sometimes, a few entries might be either incorrect or used at the wrong place. In financial accounting, the process of correcting such mistakes is known as Rectification of Errors.

Types of Errors

Two most common types of errors, which are usually occurred at the time of preparation of Financial Statements are discussed below.

Error which Effect only One Account

  • Omission of posting of balance in a Trial Balance.
  • Error of carried forward of balance.
  • Error of casting and posting.

Error which Effect Two or more Accounts

The nature of errors, which occur during the preparation of Financial Statements are −

  • Error of posting in wrong account.
  • Error of principle.
  • Error of omission.

Methods of Rectification of Errors

There are three types of methods used in rectification of Errors −

Replacing Correct Figure by Striking Off the Wrong Figure

For example, cash payment of Rs. 989 on the account of stationery purchased written as Rs. 998, will be corrected as −

Cash Book

By Stationery A/c998989

Through Journal Entry

Normally, there are three types of errors, which can be rectified by passing Journal Entries −

  • Short credited or debit in one account and excess debit or credit in another account. For example, purchase of stationery for Rs. 989 wrongly debited to purchase of raw material account will be corrected as follows −

Journal Entry

Stationery AccountDr.To Purchase Account(Being Cash purchase of stationery wrongly debited to Purchase account, now rectified)989989
  • If, by mistake one account is debited as well as credited with wrong amount simultaneously. For example, Cash purchase of stationery of Rs. 989 booked with an amount of Rs. 489 will be corrected as follows −

Journal Entry

Stationery AccountDr.To Purchase Account(Being purchase of stationery for Rs. 989 wrongly written as Rs. 489 now rectified)500500
  • If there is an omission of recording a transaction, it can be rectified by passing journal entry to book that omitted transaction. For example, omission of recording transaction of purchase of raw material for Rs. 5000 from Mr. X will be recorded and corrected by passing the following journal Entry −

Journal Entry

Stationery AccountDr.To X Account(Being omitted entry of purchase of Rs. 5000 from Mr. X now recorded and rectified)50005000

If there is a Mistake that Effects Trial Balance

  • Before closing the books and transferring the difference in suspense account and
  • After the agreed difference is transferred into the suspense account, following accounting treatment will be done −
    • Earlier entry debited or credited with fewer amount will be rectified by repeating that entry with difference amount to complete that amount. For example, entry done with Rs. 500 instead of Rs. 5000 will be rectified by doing same entry with an amount of Rs. 4500. In case, where entry wrongly debited or credited to other account may be rectified by doing reversal of old entry to nullify earlier effect.

If expense booked with less amount entry then −

Particular Expense AccountTo Cash/Personal Account(Being wrong amount of posting, rectified with Difference amount Rs. 4,500 (5000-500)Dr4,5004,500

If income is booked with less amount, it will be rectified as −

Cash/Personal accountTo Income Account(Being wrong amount of posting now Rectified. 4500 (5000-500)Dr4,5004,500

If posting done in wrong account that will be rectified as follows −

Stationery AccountDr.**To Office Expenses Account**(Being wrongly debited earlier in office account, now Rectified and posted in stationery account)

In case (ii) where difference has already been transferred to suspense account, further amount will be debited or credited to respective account and correspondingly suspense account will be debited or credited. Thus, these entries would reduce/nil the balance of suspense account.

Effect of Errors on Agreement of Trial Balance

The errors by which there is no change on both side of trial balance or wrong effect on trial balance with same amount will not lead to effect on agreement of Trial Balance. Errors of omission, error of posting with wrong amount on both side, or Error of principles are the example of such errors. To find out such errors is a challenging job for any book keeper or an accountant.

Effects of Errors on Financial Statements

Effect of error depends on the nature of effected accounts. If errors relate to nominal account, it will either increase or reduce the profit, and rectification will reduce excess profit or Loss. Effect of an error on Trading and Profit account ultimately affect the Balance-Sheet of a company too, because the reduced profit or excess profit ultimately transferred to capital account, which is a part of the Balance Sheet.

There are some errors, which affect the Trading or Profit and Loss account and Balance sheet simultaneously, like the entry of depreciation will affect profit as well as the value of the Fixed Assets.

Some entry may affect on the Balance sheet only like, for instance, the omission of an entry of cash paid to purchase fixed assets will affect the Balance Sheet of a firm only.

Rectification of Errors after Preparation of Final Accounts

To remain unaffected Profit or Loss of the current financial year, the errors, which took place in the last financial years are adjusted and rotated through a Profit & Loss adjustment account. Balance of this account directly transferred to the capital account of the firm without affecting the current year’s profit or loss.

Financial Accounting – Capital and Revenue

One of the major aspects of preparing a correct financial statement is to distinguish revenue and capital in regard to revenue income, revenue expenditure, revenue payments, revenue profits, and revenue losses of the company with capital income, capital receipts, capital profit, or capital losses.

In fact, without differentiating, we cannot think of correctness of a financial statement. Ultimately, it will mislead the end results where no one can conclude anything. As per this principle, a revenue item should be recorded in the Trading and Profit & Loss account and a capital item should be recorded in the Balance-Sheet of respective firm.

Capital Expenditure

Capital expenditure is the expenditure incurred to acquire fixed assets, capital leases, office equipment, computer equipment, software development, purchase of tangible and intangible assets, and such kind of any value addition in business with the purpose to enhance the income. However, to decide nature of the capital expenditure, we need to pay attention on −

  • The expenditure, which benefit cannot be consumed or utilized in the same accounting period, should be treated as capital expenditure.
  • Expenditure incurred to acquire Fixed Assets for the company.
  • Expenditure incurred to acquire fixed assets, erection and installation charges, transportation of assets charges, and travelling expenses directly relates to the purchase fixed assets, are covered under capital expenditure.
  • Capital addition to any fixed assets, which increases the life or efficiency of those assets for example, an addition to building.

Revenue Expenditure

Revenue expenditure is the expenditure incurred on the fixed assets for the ‘maintenance’ instead of increasing the earning capacity of the assets. Examples of some of the important revenue expenditures are as follows −

  • Wages/Salary
  • Freight inward & outward
  • Administrative Expenditure
  • Selling and distribution Expenditure
  • Assets purchased for resale purpose
  • Repairs and renewal expenditure which are necessary to keep Fixed Assets in good running and efficient conditions

Revenue Expenditure Treated as Capital Expenditure

Following are the list of important revenue expenditures, but under certain circumstances, they are treated as a capital expenditure −

  • Raw Material and Consumables − If those are used in making any fixed assets.
  • Cartage and Freight − If those are incurred to bring Fixed Assets.
  • Repairs & Renewals − If incurred to enhance life of the assets or efficiency of the assets.
  • Preliminary Expenditures − Expenditure incurred during the formation of a business should be treated as capital expenditure.
  • Interest on Capital − If paid for the construction work before the commencement of production or business.
  • Development Expenditure − In some businesses, long period of development and heavy amount of investment are required before starting the production especially in a Tea or Rubber plantation. Usually, these expenditure should be treated as the capital expenditure.
  • Wages − If paid to build up assets or for the erection and installation of Plant and Machinery.

Deferred Revenue Expenditure

Some non-recurring and special nature of expenditure for which heavy amount incurred and benefit for the same will spread in up-coming years, to be treated as capital expenditure and will be shown as the assets of the firm. Part of the expenditure should be debited to Profit & Loss account every year. For example, if heavy amount paid for the advertisement of a product, which benefits are expected to be received in next four years, then it should be debited as ¼ of the part in Profit & Loss account as the revenue expenses and balance ¾ will be shown as the assets in the Balance-Sheet.

Capital and Revenue Profit

The premium received on issue of shares, and the profit on sale of fixed assets are the major examples of capital profit and should not be treated as revenue profit. Capital profit should be transferred to the capital reserve account, which is used to set off capital losses in future if any.

Capital and Revenue Receipts

Sale of fixed assets, capital employed or invested, and loans are the example of capital receipts. On the other hand, sale of stock, commission received, and interest on investment received are the main examples of revenue receipts. Revenue receipts will be credited to the profit and loss account and on the other hand, capital receipts will affect the Balance-sheet.

Capital and Revenue Losses

Discount on issue of shares and losses on sale of fixed assets are the capital loss and would be set off against the capital profits only. Revenue losses on normal business activity are part of the profit and loss account.

Financial Accounting – Final Accounts

Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives a precise idea of the financial position of the business/organization to the owners, management, or other interested parties. Financial statements are primarily recorded in a journal; then transferred to a ledger; and thereafter, the final account is prepared (as shown in the illustration).

Usually, a final account includes the following components −

  • Trading Account
  • Manufacturing Account
  • Profit and Loss Account
  • Balance Sheet

Now, let us discuss each of them in detail −

Trading Account

Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale and purchase for the particular accounting period.

Study of Debit side of Trading Account

  • Opening Stock − Unsold closing stock of the last financial year is appeared in debit side of the Trading Account as “To Opening Stock“ of the current financial year.
  • Purchases − Total purchases (net of purchase return) including cash purchase and credit purchase of traded goods during the current financial year appeared as “To Purchases” in the debit side of Trading Account.
  • Direct Expenses − Expenses incurred to bring traded goods at business premises/warehouse called direct expenses. Freight charges, cartage or carriage charges, custom and import duty in case of import, gas, electricity fuel, water, packing material, wages, and any other expenses incurred in this regards comes under the debit side of Trading Account and appeared as “To Particular Name of the Expenses”.
  • Sales Account − Total Sale of the traded goods including cash and credit sales will appear at outer column of the credit side of Trading Account as “By Sales.” Sales should be on net releasable value excluding Central Sales Tax, Vat, Custom, and Excise Duty.
  • Closing Stock − Total Value of unsold stock of the current financial year is called as closing stock and will appear at the credit side of Trading Account.closing Stock = Opening Stock + Net Purchases – Net Sale
  • Gross Profit − Gross profit is the difference of revenue and the cost of providing services or making products. However, it is calculated before deducting payroll, taxation, overhead, and other interest payments. Gross Margin is used in the US English and carries same meaning as the Gross Profit.Gross Profit = Sales – Cost of Goods Sold
  • Operating Profit − Operating profit is the difference of revenue and the costs generated by ordinary operations. However, it is calculated before deducting taxes, interest payments, investment gains/losses, and many other non-recurring items.Operating Profit = Gross Profit – Total Operating Expenses
  • Net Profit − Net profit is the difference of total revenue and the total expenses of the company. It is also known as net income or net earnings.Net Profit = Operating Profit – (Taxes + Interest)

Format of Trading Account

Trading Account of M/s ABC Limited(For the period ending 31-03-2014)
ParticularsAmountParticularsAmount
To Opening StockXXBy SalesXX
To PurchasesXXBy Closing StockXX
To Direct ExpensesXXBy Gross Loss c/dXXX
    
To Gross Profit c/dXXX
TotalXXXXTotalXXXX

Manufacturing Account

Manufacturing account prepared in a case where goods are manufactured by the firm itself. Manufacturing accounts represent cost of production. Cost of production then transferred to Trading account where other traded goods also treated in a same manner as Trading account.

Important Point Related to Manufacturing Account

Apart from the points discussed under the section of Trading account, there are a few additional important points that need to be discuss here −

  • Raw Material − Raw material is used to produce products and there may be opening stock, purchases, and closing stock of Raw material. Raw material is the main and basic material to produce items.
  • Work-in-Progress − Work-in-progress means the products, which are still partially finished, but they are important parts of the opening and closing stock. To know the correct value of the cost of production, it is necessary to calculate the correct cost of it.
  • Finished Product − Finished product is the final product, which is manufactured by the concerned business and transferred to trading account for sale.
  • Raw Material Consumed (RMC) − It is calculated as.
  • Cost of Production − Cost of production is the balancing figure of Manufacturing account as per the format given below.
Manufacturing Account(For the year ending……….)
ParticularsAmountParticularsAmount
To Opening Stock of Work-in-ProgressXXBy Closing Stock of Work-in-ProgressXX
To Raw Material ConsumedXXBy Scrap SaleXX
To WagesXXXBy Cost of ProductionXXX
To Factory overheadxx(Balancing figure)
Power or fuelxx
Dep. Of Plantxx
Rent- Factoryxx
Other Factory Exp.xxxxx
TotalXXXXTotalXXXX

Profit and Loss Account

Profit & Loss account represents the Gross profit as transferred from Trading Account on the credit side of it along with any other income received by the firm like interest, Commission, etc.

Debit side of profit and loss account is a summary of all the indirect expenses as incurred by the firm during that particular accounting year. For example, Administrative Expenses, Personal Expenses, Financial Expenses, Selling, and Distribution Expenses, Depreciation, Bad Debts, Interest, Discount, etc. Balancing figure of profit and loss accounts represents the true and net profit as earned at the end of the accounting period and transferred to the Balance Sheet.

Profit & Loss Account of M/s ………(For the period ending ………..)
ParticularsAmountParticularsAmount
To SalariesXXBy Gross Profit b/dXX
To RentXX
To Office ExpensesXXBy Bank Interest receivedXX
To Bank chargesXXBy DiscountXX
To Bank InterestXXBy Commission IncomeXX
To Electricity ExpensesXXBy Net Loss transfer to Balance sheetXX
To Staff Welfare ExpensesXX
To Audit FeesXX
To Repair & RenewalXX
To CommissionXX
To Sundry ExpensesXX
To DepreciationXX
To Net Profit transfer to Balance sheetXX
TotalXXXXTotalXXXX

Balance Sheet

A balance sheet reflects the financial position of a business for the specific period of time. The balance sheet is prepared by tabulating the assets (fixed assets + current assets) and the liabilities (long term liability + current liability) on a specific date.

Assets

Assets are the economic resources for the businesses. It can be categorized as −

  • Fixed Assets − Fixed assets are the purchased/constructed assets, used to earn profit not only in current year, but also in next coming years. However, it also depends upon the life and utility of the assets. Fixed assets may be tangible or intangible. Plant & machinery, land & building, furniture, and fixture are the examples of a few Fixed Assets.
  • Current Assets − The assets, which are easily available to discharge current liabilities of the firm called as Current Assets. Cash at bank, stock, and sundry debtors are the examples of current assets.
  • Fictitious Assets − Accumulated losses and expenses, which are not actually any virtual assets called as Fictitious Assets. Discount on issue of shares, Profit & Loss account, and capitalized expenditure for time being are the main examples of fictitious assets.
  • Cash & Cash Equivalents − Cash balance, cash at bank, and securities which are redeemable in next three months are called as Cash & Cash equivalents.
  • Wasting Assets − The assets, which are reduce or exhausted in value because of their use are called as Wasting Assets. For example, mines, queries, etc.
  • Tangible Assets − The assets, which can be touched, seen, and have volume such as cash, stock, building, etc. are called as Tangible Assets.
  • Intangible Assets − The assets, which are valuable in nature, but cannot be seen, touched, and not have any volume such as patents, goodwill, and trademarks are the important examples of intangible assets.
  • Accounts Receivables − The bills receivables and sundry debtors come under the category of Accounts Receivables.
  • Working Capital − Difference between the Current Assets and the Current Liabilities are called as Working Capital.

Liability

A liability is the obligation of a business/firm/company arises because of the past transactions/events. Its settlement/repayments is expected to result in an outflow from the resources of respective firm.

There are two major types of Liability −

  • Current Liabilities − The liabilities which are expected to be liquidated by the end of current year are called as Current Liabilities. For example, taxes, accounts payable, wages, partial payments of long term loans, etc.
  • Long-term Liabilities − The liabilities which are expected to be liquidated in more than a year are called as Long-term Liabilities. For example, mortgages, long-term loan, long-term bonds, pension obligations, etc.

Grouping of Assets and Liabilities

There may be two types of Marshalling and grouping of the assets and liabilities −

  • In order of Liquidity − In this case, assets and liabilities are arranged according to their liquidity.
  • In order of Permanence − In this case, order of the arrangement of assets and liabilities are reversed as followed in order of liquidity.

Financial Statements with Adjustments Entries and their Accounting Treatment

In order to prepare a true and fair financial statement, there are some very important adjustments those have to be done before finalization of the accounts (as shown in the following illustration) −

Sr.No.AdjustmentsAccounting Treatments
1Closing StockUnsold stock at the end of Financial year called Closing stock and valued at “Cost or market value whichever is lessFirst TreatmentWhere an opening and closing stock adjusted through a purchase account and the value of Closing Stock given in Trial Balance −Closing stock will be shown as adjusted purchase account on the debit side of Trading account and will appear in the Balance Sheet under current Assets.
2Outstanding ExpensesExpenses which are due or not paid called as outstanding expenses.Accounting TreatmentOutstanding expenses will be added in Trading or Profit & Loss account in particular expense account and will appear in liabilities side of the Balance Sheet under the current liabilities.
3Prepaid ExpensesExpenses which are paid in advance are called as Prepaid Expenses.Accounting TreatmentPrepaid Expenses will be deducted from the particular expenses as appear in Trading & Profit & Loss account and will be shown in the Balance Sheet under the current assets.
4Accrued IncomeThe income, which is earned during the year, but not yet received at the end of the Financial Year is called as Accrued Income.Accounting TreatmentAccrued income will be added to a particular income under the Profit & Loss account and will be shown in the Balance Sheet as current assets.
5Income Received in AdvanceAn income received in advance, but not earned like advance rent etc.Accounting TreatmentAn income to be reduced by the amount of advance income in profit & loss account and will appear as current liabilities in the Balance Sheet.
6Interest on CapitalWhere an interest paid on the capital introduced by the proprietor or partner of the firm.Accounting TreatmentDebit Side of Profit & Loss accountAdd to capital account (Credit side of Capital account).
7Interest on DrawingWhere an interest paid on the capital introduced by the proprietor or partner of the firm.Accounting TreatmentCredit Side of Profit & Loss accountReduced from capital account (Debit side of Drawing account).
8Provision for Doubtful DebtsIf there is any doubt on the recovery from Sundry Debtors.Accounting TreatmentDebit Side of Profit & Loss AccountIn a Balance Sheet, provision for the Doubtful will be deducted from the Sundry Debtors’ Account.
9Provision for Discount on DebtorsIf there is any offer of discount to pay the debtors within certain period.Accounting TreatmentDebit Side of Profit & Loss AccountIn a Balance Sheet, provision for the Discount on Debtors will be deducted from the Sundry Debtors Account.
10Bad DebtsUnrecovered debts or irrecoverable debtsAccounting TreatmentDebit Side of Profit & Loss AccountIn a Balance Sheet, Sundry debtors will be shown after deducting the Bad Debts.
11Reserve for Discount on CreditorsIf there is any chance to get discount on the payment of sundry creditors within certain period.Accounting TreatmentCredit Side of Profit & Loss AccountIn a Balance Sheet, Sundry Creditors will be shown after deducting the Reserve for Discount.
12Loss of Stock by fireThere may be three conditions in this caseAccounting Treatment1. If Stock is fully insuredCredit Side of Trading AccountAssets side of Balance Sheet(With full value of loss)2. If Stock is partially insuredCredit side of Trading Account(With Total value of Loss)Debit side of Profit & Loss a/c(With value of loss unrecoverable)Asset Side of Balance Sheet( With value recoverable)3. If Stock is not insuredCredit Side of Trading AccountDebit side of Profit & Loss Account
13Reserve FundAccounting TreatmentDebit side of Profit & Loss AccountLiabilities side of Balance Sheet
14Free Sample to CustomersAccounting TreatmentCredit side of Trading AccountDebit Side of Profit & Loss Account
15Managerial CommissionAccounting TreatmentDebit side of Profit & Loss AccountLiabilities side of Balance Sheet as commission payable
16Goods on Sale or Approval BasisIf there is any un-approved stock lying with the customers at the end of financial year.Accounting TreatmentSales AccountDrTo Debtors A/c(With Sale Price)Stock AccountDrTo Trading Account(with cost price)

Provision and Reserves

Meaning of Provisions

“Any amount written off or retained by the way of providing depreciation or diminution in the value of assets or for providing any known liability of which the amount cannot be determined with substantial accuracy.”

– The Institute of Chartered Accountants of India

“Liabilities which can be measured only by using a substantial degree of estimation.”

– AS-29 issued by Institute of Chartered Accountants of India

AS 29 also defines liabilities as “a present obligation of the enterprises arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”

Debiting Profit and Loss account, provisions are created and shown either deducting assets side or on the liabilities side under relevant sub-head of Balance Sheet.

Provision for bad and doubtful debts, Provisions for Repair & Renewals, and Provision for discounts & depreciation are the most common examples.

Meaning of Reserves

“That portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.”

-ICAI

Reserve is an appropriation of profits; on the other hand, Provision is a charge against profit. Reserves are not meant to meet out contingencies or liabilities of a business. Reserve increases working capital of a company to strengthen the financial position.

There are two types of reserves −

  • Capital Reserve − Capital reserve is not readily available for distribution as the dividends among the shareholders of the company, and it creates only out of capital profit of the company. It is like Premium on issue of shares or debentures and Profit prior to incorporation.
  • Revenue Reserve − Revenue reserves are readily available for the distribution of profit as dividend to the shareholders of the company. Some of the examples of this are general reserve, staff welfare fund, dividend equalization reserve, debenture redemption reserve, contingency reserve, and investment fluctuation reserves.

Distinction between Provisions and Reserves

  • Reserve can be made only out of profit and provisions are the charge to profit.
  • Reserves reduce divisible profits and provisions reduce the profit.
  • Reserves, if remain un-utilized for some period can be distributed as dividends, but provisions cannot be transferred to General Reserve for the distribution.
  • Purpose of provision is very specific, but reserve is created to meet out any probable future liabilities or losses.
  • Creation of provisions is legally necessary, but reserves are created to save a concern from the future losses and liabilities.

Secret Reserves

Banking Company, Insurance Company, and Electricity Companies create secret reserves, where the public confidence is required. In this case, to create secret reserve, assets showed at lower cost or liabilities at higher value. Some of the examples of it are as follows −

  • By undervaluing goodwill or stock
  • By excessive depreciation
  • By creating excessive provisions
  • Showing free reserves as creditors
  • By charging capital expenditure to profit and loss account

Advantages of Secret Reserves

Some of the important advantages are given below −

  • Without disclosing to its shareholders, it increases working capital of a concern, which is a clear indication of the sound financial position.
  • With the help of secret reserves, directors can maintain the rate of dividends during the unfavorable time.
  • Non-disclosure of a big profit is useful to avoid an un-due competition.

Limitations of Secret Reserves

Major limitations or objections of secret reserves are as follows −

  • Due to non-disclosure of actual profit, financial statements do not presents true and fair view of the state of affairs.
  • There are lots of chances of misuse of reserves by the directors for their personal benefits.
  • Due to secret reserves, chances for the concealment of worst position of a company are very high.
  • Company will get very lower amount of claim of insurance at the time of loss of stock or other assets, as valuation of the assets are done at very low value to create secret reserve.

General and Specific Reserves

Specific reserves are created and utilized for the purpose only for which they are created, like dividend equalization reserve and debenture redemption reserve.

General reserves are created for any future contingency or to utilize at the time of expansion of a business. Purpose of creation of General reserve is to strengthen the financial position of the company and to increase the working capital.

Sinking Fund

For the purpose to repay of any liabilities or to replace any fixed assets after particular period, sinking funds are created. For this, some amount are charged or appropriated from the profit and loss account every year and invested in any outside securities. Without any extra ordinary burden, replacement of an asset may be done in a systematic manner or pay any known liability on maturity of the sinking fund.

Investment of Reserves

It is a controversial issue, whether a reserve should be invested in outside securities or not. Thus, to decide anything, it is important to study the need and requirement of a firm according to the financial position of a firm. Therefore, investment in outside securities is justified only in a case where company has the extra fund to invest.

Nature of Reserve

In-spite of showing reserves on the liabilities side of a Balance Sheet, reserves are actually not at all any liabilities of a firm. Reserve represents as accumulated profits, which are available to disburse among the shareholders.

also read :- https://blogsjar.com/stocks-trading-strategies-for-beginners/

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