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Financial, Cost and ManagementAccounting
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Course outline
o Fundamentals of Accounting
o Mechanics of Accounting
o Financial Statement Analysis
o Introduction to Cost and Management Accounting
Cost Volume profit analysis
o Budgetary Control, Standard costing and Varianceanalysis
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Important Terminology Unit I
Accounting and Book - Keeping
Accountancy
Assets
LiabilitiesAccounting principles and policies
Accounting cycle and process
Accounting Equation
Generally Accepted Accounting Principles ( GAAP)International Financial Reporting Standards ( IFRS)
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Introduction
Accounting is a term as the language of the businessand is a part of accountancy . The basic function of alanguage is to serve as a means of communication. Itcommunicates the results of business operations to
various parties who have some stake in the business.Need for accounting : A person who is runningbusiness must know
i. What he owns?
ii. What he owes?
iii. Whether he has earned a profit or loss of running abusiness?
iv. What is his financial position?
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Accountancy & Book- keeping
refers to a systematic knowledge of accounting.
It tells us why and how to prepare the books ofaccounts and how to summarise the accounting
information and communicate it to the interestedparties.
Book keeping is a part of accounting and is concernedwith record keeping and clerical in nature.
The basic objective is to maintain systematic record ofall financial transactions.
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DEFINITIONS
Accounting is the art of recording, classifying and summarizing insignificant manner and in terms of money, transactions and eventswhich are, in part, at least of a financial character and interpretingthe results thereof.
The function of accounting is to provide Quantitative information,primarily of financial nature, about economic entities, that is neededto be useful in making economic decisions.
Accounting is the process of identifying, measuring and
communicating economic information to permit informed judgmentsand decisions by users of the information.
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FUNCTIONS OF ACCOUNTING
Recording:- This is the basic function of accounting. Itis essentially concerned with not only ensuring that allbusiness transactions of financial character are in factrecorded but also that they are recorded in an orderlymanner. Recording is done in the book journal.
Classifying:- This is concerned with the systematicanalysis of the recorded data, with a view to grouptransactions or entries of one nature at one place.Classification is done in the book termed as Ledger.
Summarising:- This involves presenting the classified
data in a manner which is understandable and useful.This process leads to preparation of the followingstatements. Namely Trial Balance, Income Statementand Balance sheet.
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Functions
Dealing with financial transactions.
Analysing and Interpreting:- This is final function of
accounting. The recorded financial data is analysed andInterpreted in a manner that the end-users can make ameaningful judgement about the financial conditionand profitability of the business operations.
Communicating:- The accounting information afterbeing
meaningfully analysed and interpreted has to becommunicated in a proper form and manner to the properperson.
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Importance & Objectives
Importance of Accounting Information. Proprietors. Managers. Creditors.
Prospective Investors. Government. Employees. Citizen.
Objectives of Accounting.
To keep systematic records. To protect business properties. To ascertain the operational profit or loss. To ascertain the financial position of business. To facilitate rational decision making.
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ACCOUNTING PRINCIPLES
They are a body of doctrines commonly associated withthe theory and procedures of accounting, serving as anexplanation of current practices and as a guide forselection of conventions or procedures where alternativesexist.
It is defined as those rules of action or conduct whichare adopted by the accountants universally while recordingaccounting transaction. It is also termed as AccountingStandards.
Accounting principles are classified into two categories.Namely Accounting concepts and Accounting conventions.
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ACCOUNTING CONCEPTS
The term concepts include those basic assumptions uponwhich accounting is based.
Separate Entity Concept Money Measurement Concept Cost Concept Going Concern Concept
Dual Aspect Concept Realisation Concept Accrual Concept
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ACCOUNTING CONVENTIONS
Customs and traditions which guide theaccountants while preparing the accountingstatements.
Consistency
Full Disclosure
Conservatism
Materiality
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ACCOUNTING POLICIES
Accounting policies refer to specificaccounting principles and the methods ofapplying those principles adopted in the
preparation and presentation of financialstatements. The choice of appropriateaccounting principles in the specificcircumstances of each enterprise calls forconsiderable judgment by the management of
the enterprise
example:-Methods of depreciation
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Accounting Cycle
A complete sequence beginning with the
recording of the transactions and ending withthe preparation of the final accounts.
Jounalising
Posting
Balancing
Trial BalanceIncome Statement
Balance Sheet
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Accounting Process & Equation
o An overview of the steps of cycle,beginning with a transaction andending with the closing of the booksand reversing entries.
o Equation
Assets= Capital+Liabilities or
Shareholders equity= Assets Liabilities
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GAAP
Generally Accepted Accounting Principles :
Standard framework of guidelines for financialaccounting. It includes the standards, conventions ,
and rules accountants follow in recording andsummarising transactions, and in the preparation offinancial statements.
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7 Ps
o Principle of regularity: Regularity can be defined asconformity to enforced rules and laws. This principle isalso known as the Principle of Consistency.
o Principle of sincerity: According to this principle, theaccounting unit should reflect in good faith the realityof the company's financial status.
o Principle of the permanence of methods: Thisprinciple aims at allowing the coherence andcomparison of the financial information published bythe company.
o Principle of non-compensation: One should showthe full details of the financial information and not seekto compensate a debt with an asset, a revenue with anexpense, etc.
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7 Ps
o Principle of prudence: This principle aims atshowing the reality "as is" : one should not try to makethings look prettier than they are. Typically, a revenueshould be recorded only when it is certain and a
provision should be entered for an expense which isprobable.o Principle of continuity: When stating financial
information, one should assume that the business willnot be interrupted. This principle mitigates the principleof prudence: assets do not have to be accounted attheir disposable value, but it is accepted that they areat their historical value.
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7 Ps
o Principle of periodicity: Eachaccounting entry should be allocatedto a given period, and split accordinglyif it covers several periods. If a clientpre-pays a subscription (or lease,etc.), the given revenue should be
split to the entire time-span and notcounted for entirely on the date of thetransaction
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IFRS
International Financial Reporting Standards are standardsand interpretation adopted by the International AccountingStandards Board (IASB). In April 2001, the IASB adoptedall IAS and continued their development, calling the new
standards IFRS.Assumptions
Accrual basis: The effect of transactions and otherevents are recognised when they occur, not as cash isreceived or paid.
Going concern: The financial statements are preparedon the basis that an entity will continue in operation forthe foreseeable future.
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Mechanics of Accounting
Transaction of a business refers to an event therecognition of which gives rise to an entry in accountrecords.
Account is a summary of the relevant transactions atone place relating to a particular head. It records not onlythe amount of transaction but also their effect anddirection.
Accounts can be broadly classified into Personal
Accounts and Impersonal Accounts.
Impersonal Accounts are further classified into RealAccounts and Nominal Accounts.
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Classification
Personal Accounts:- These are the accounts of persons with whom thebusiness deals. Ex: Sold goods to kumar, paid cash to ravi.
DEBIT THE RECEIVER
CREDIT THE GIVER
Real Accounts :- These are the accounts of tangible objects ie. Assetsowned by an enterprise and carrying probable future benefits.
Ex: cash received from ravi.
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
Nominal Accounts :- These accounts are opened to explain the natureof transactions. Nominal accounts include accounts of all expenses,losses, incomes and gains.
Ex: Paid wages, commission received.
DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL GAINS AND INCOMES
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Meaning and Rules of Debit &
Credit
Debit means to enter an amount of a
transaction on the left side of an account,Credit means to enter an amount of a
transaction the right side on an account.Dr. and Cr. are the abbreviated form of
debit and credit.
Both debit and credit may represent either
increase or decrease depending upon thenature of an account.
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Journal
Journal:- The book in which the business transactions are recorded in achronological order, after analysing them and classifying the benefitsaccording to the principles of debit and credit is called journal.
The transactions in the journal are recorded on the basis of the rules ofdebit and credit.
Debit is that aspect of transaction that causes:
An increase in an Asset, a decrease in Liability
An increase in Expense or Loss, a decrease in Income or Gain
An increase in Drawings, a decrease in Capital
Credit is that aspect of transaction that causes:
A decrease in Asset, an increase in Liability
A decrease in Expense or Loss, an increase in Income or Gain
A decrease in Drawing, an increase in Capital
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Advantages of journal entries
A businessman can find out the information whenrequired, quickly and easily.
When any difference arises with regard to pasttransactions, the trader can satisfy by explaining the
dates and the circumstances of the differences. It helps in the preparation of final accounts at the end
of the year.
Business transactions have been classified into threecategories:
Transactions relating to persons, properties and assetsand to incomes and expenses.
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PROFORMA OF JOURNAL
Date particulars L.F Debit Rs. Credit Rs.
o Date:- The date on which the transaction was entered is recordedhere.
o Particulars:- The two aspect of the transaction are is recorded in
the column i.e., the details regarding accounts which have tobe debited and credited.o L.F:- It means ledger folio .the transactions entered in the journal
are later
on posted to the ledger procedure regarding posting thetransactions in the ledger
o Debit:- In this column, the amount to be debited is entered.o Credit:- In this column, the amount to be credited is shown.
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Problems
1) From the following transactions journalise.
a) Rent paid.
b) Salaries paid.
c) Interest received.
d) Dividends received.
e) Furniture purchased for cash.
f) Machinery sold.
g) Outstanding for salaries.
h) Paid to Suresh.i) Received from Mohan (the proprietor).
j) Lighting.
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2) Pass journal entries from the following
1.Jul.1,2007,Ajit started business with cash Rs 40,000.
2.Jul.3,he paid into the Bank Rs 2,000.
3.Jul.5,he purchased goods for cash Rs 15,000.
4.Jul.8,he sold goods for cash Rs 6,000.
5.Jul.10,he purchased furniture and paid by cheque Rs 5,000.
6.Jul.12,sold goods to Arvind Rs 4,000.
7.Jul.14,he purchased goods from Amrit Rs10,000.
.
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8.Jul.15,he return goods to Amrit Rs 5,000.
9.Jul.16,he received from Arvind Rs3,960 in full settlement
10.Jul18,he withdraw goods for personal use Rs1,000.
11.Jul.20,he withdraw cash from business for personal use Rs 2,000.
12.Jul.24,he paid telephone charges Rs 1,000.
13.Jul.26,cash paid to Amrit in full settlement Rs4,900.
14.Jul.31, Paid for stationery Rs 200, rent Rs 500 and salaries to staff
Rs 2,000.
15.Jul..31, goods distributed by way of free samples Rs 1,000.
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3) Journalise the transactions given below in the books of Prasad.
April 1 Prasad commenced business with a cash of Rs.30,000.
April 3 Cash sales Rs.4,000.
April 4 Bought Machinery Rs.15,000.
April 7 Sold goods to Raju Rs. 10,000.
April 9 Purchased goods from Ramana Rs.8,000.
April 10 Sold goods to Gupta Rs.5,000.
April 12 Paid for stationery Rs.1,000.
April 14 Carriage expenses Rs.500.
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April 15 Bought furniture for proprietor's residence and paid cash
Rs.7,000.
April 17 Sold goods to Krishna for cash Rs.3,000.
April 22 Received Discount Rs. 800.
April 24 Paid for wages Rs.1,200.
April 26 Sales Rs.15,000.
April 27 Deposited cash with Bank Rs.10,000.
April 28 Received cash from Mahesh Rs.1,500.
April 29 Received Interest on loan from Viswanath Rs.600.
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4) Journalise the following transactions and post them intoLedger
1. Ram started business with a capital of Rs 10,000.
2. He purchased furniture for cash Rs 4,000.
3. He purchased goods from Mohan on credit Rs2,000.
4. He paid cash to Mohan Rs 1,000.
5. He received cash from Suresh Rs 1,000.
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Ledger & Posting
Ledger :- A book containing different accounts
of an entity and facilitates recording of alltypes of transactions related to Personal, Real
and Nominal accounts separately in relatedaccounts.
Posting :- Transferring the debit and credit
items from the journal to the respectiveaccounts in the ledger
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PROFORMA OF LEDGER
Date particulars Amount Rs Date Particulars Amount Rs
Dr CrAccoun
t
Notes:1) It is customary to use words To and By while making posting in the
Ledger.2) The word To is used with the accounts which appear on Debit side
of a Ledger Account.3) Similarly, the word By is used with accounts appear on the Credit sid
of a Ledger Account.
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Trail balance
Trial balance :- It is a statement containing the variousledger balances on a particular date, arranged in the formof debit and credit columns
placed side by side and prepared the object of checkingthe arithmetical accuracy of the ledger postings.
Objects of preparing trail balance:- Checking of the arithmetical accuracy of the accounting
entries. Basis for financial statements. Summarised ledger
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Trial balance Errors
Error of original entry Error of omission Error of reversal Error of commission Error of principle Compensating errors
Transposition error
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Trading Account
This is the first step in preparation of final accounts. It is prepared atthe end of each accounting period to asses the Gross Profit or Gross Loss.
Advantages:-
We can ascertain Gross Profit/Gross Loss.
We can observe the changes in direct expenses.
We can calculate the cost of production.
We can establish the relation between the costs and revenues.
We can analyse the trend in sales.
We can decide the earning capacity of the firm
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PROFORMA OF TRADING ACCOUNT
Particulars Amount
Rs
Particulars Amount
Rs
To Opening stock
To Purchases
Less Returns
To Direct Expenses
TO Gross Profit c\d
BySalesLess Returns
By Closing Stock
By Gross Loss c\d
Dr Cr
Trading Account offor the year ended
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PROBLEMS
From the following ledger balances as on 31-12-2006, prepare Trading Account.
Rs
Stock as on 1-1-2006 2,000
Purchases 38,000Sales56,000
Returns Inward 2,000
Returns Outward 3,000
Closin Stock 12 000
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You are requested to prepare Trading Account from the followinginformation.
Rs
Stock(1-1-2006) 1,000
Purchases 25,000
Sales 35,000
Returns Inward 1,500
Returns Outward 1,000
Direct Wages 2,000
Carriage Inward 3,000
Carriage Outward 1,800Factory Rent 1,000
Office Rent 800
Customs Duty 200
Electricity (motive power) 500
Office Lighting and repairs 700
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PROFORMA OF P&L ACCOUNT
Particulars Amount
Rs
Particulars Amount
Rs
To Gross Loss b/dTo Salaries
To Rent
To Commission
To Advertisement
To Bad Debts
To Discount
TO Net Profit
Transferred to
Capital a/c
By Gross Profit b/dBy DiscountReceived
By Interest on
Drawings
By Profit on Sale of
Assets
By Net Loss
Transferred to
Capital a/c
for the year of ending
Profit and Loss Account of
CrDr
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From the following particulars prepare Profit and Loss Account.
Rs
Gross Profit 2,56,250
Rent6,500
Commission Paid 3,250
Salaries9,750
Taxes 9,750
Trade Expenses 1,625
Bank Charges 1,950
Printing & Stationery 8,125
Packing Charges 1,625
Carriage Outward 6,500
Discount Received 3,250
Discount Allowed 2,112
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From the following Ledger balances of X Ltd, prepare Trading & Profit and LossAccount for the year ended 31st Dec,2006.
Rs
Opening Stock 1,87,500
Purchases 2,71,875
Sales Returns 15,000
Furniture 52,500
Machinery 2,43,750
Carriage Outward 5,625Wages 37,500
Sales 6,90,000
Purchase Returns 9,375
Carriage Inward 7,500
General Expenses 7,500
Salaries 7,500Commission Received 1,875
Discount Allowed 2,750
Bad Debts 1,000
Commission to Agent 1,875
Bank Charges 563
Interest Received 1,125Rent Received 16,875
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Assets- Resources acquired
Circulating/FloatingAssets constantlychange in value throughtransactions that areentered into. These aremeant to be converted into cash at the earliest
opportunity.
Fixed:- these are not meant to be sold but are
meant to be utilized in the firms Business.
Tangible
Which can be seenand felt
Intangible
Which cannot be seen
Fictitious
Assets of which novalue
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Liabilities are claims of the creditors against the enterprise
arising out of past activities that are to be satisfied by thedisbursement or utilisation of corporate resources.
Liabilities
Current
Repayment obligation
Payable within oneyear from the date ofBalance sheet.
Fixed
Other than current
Contigent
Which may arise in
future depending onhappening of anuncertain event.
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PROFORMA OF BALANCE SHEETBalance sheet of
as on-
Liabilities Amount Rs Assets Amount Rs
Capital
Add: Net Profit,
Additional
capital,
Interest on
capital.
Less: Drawings,Int on drawings,Net Loss.
Long term debts
Short term debts
***
***
Fixed Assets :
Good will, Patents,copy right, trade
marks, Land&Buildings, Plant &
Machinery,Furniture & Fittings
etc.
Investments
Current Assets:
Debtors, closing
stock, cash inhand& at Bank
***
***
Permanency Order
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Liabilities Amount Rs Assets Amount Rs
CurrentLiabilities:
Creditors, Bills
payable, BankOverdraft,
OutstandingExpenses,
Income received
in advance.
***
***
Prepaid Expenses
Accrued Incomes
Bills Receivable
***
***
****
PROFORMA OF BALANCE SHEETLiquidity Order
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Liabilities Amount Rs Assets Amount Rs
Current Liabilities:
Outstanding Expenses
Income Received in
AdvanceBills Payable
Bank Overdraft
Creditors
Loans:
Long Term Loans
Short Term LoansCapital:
Capital
ADD: Additional capital
Interest on capital
Net Profit
Less: DrawingsInterest on drawings
***
***
***
Current Assets :
Prepaid Expenses
Accrued Income
Cash in HandsCash at Bank
Bills Payable
Debtors
Investments
Loose Tools
Fixed Assets:Furniture & Fittings
Vehicles
Leasehold Property
Plant & Machinery
Land & Buildings
PatentsTrade Marks
***
***
10)From the following Trial Balance as on 31 Dec 2006 Prepare a Trading and a
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10)From the following Trial Balance as on 31 Dec 2006, Prepare a Trading and aProfit and Loss Account, Balance Sheet.
Trail Balance on 31 Dec 2006
Debit Amount
Rs
Credit Amount
Rs
Cash
Purchases
Traveling Expenses
Carriage
Discount Allowed
Audit fees
Debtors
Furniture
Trade Expenses
General Expenses
Legal Expenses
Penalties
Salaries
Opening Stock
Carriage Outward
Postage
Telephone
Goodwill
Commission
Wages
Drawings
Loose Tools
Interest on Overdraft
1,740
2,69,320
10,510
86,580
1,800
2,746
68,440
2,180
3,250
9,950
2,540
4,300
25,200
5,200
43,810
2,790
1,930
21,270
3,370
13,230
20,340
14,870
1,720
Profit on sales of Assets
Recovery of Bad Debts
Bank Overdraft
Creditors
Commission
Bills Payable
Capital
Purchase Returns
Sales
Interest Received
2,130
1,440
24,420
52,290
3,450
17,780
40,656
1,320
4,72,290
1,310
6,17,086 6,17,086
Closing Stock as on 31-12-2006 Rs 10,580.
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Adjustment Entries
1. Closing Stock.
2. Expenses Outstanding.
3. Prepaid Expenses.
4. Accrued Incomes.
5. Incomes Received in Advance.6. Depreciation on Assets.
7. Bad Debts.
8. Reserve for Doubtful debts.
9. Reserve for discount on debtors.
10. Reserve for discount for creditors.11. Interest on Capital.
12. Interest on Drawings.
13. Stock lost in Accident.
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1. Closing Stock
Closing Stock A/c ..........Dr
To Trading A/c
a) Given in the adjustmentb) Appearing in the Trial balance
2. Expenses Outstanding
Rent A/c .Dr
To Out Rent A/c
a) Given in the adjustment
b) Appearing in the Trial balance
3. Prepaid Expenses
Prepaid Expens A/c. Dr
To Expense A/c
a) Given in the adjustment
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4) Accrued Income- Income which has been earned duringthe accounting year but which has not yet become due andtherefore has not been received
Accrued Income A/c.DrTo Income A/c
a) Given in the adjustment
b) Appearing in the Trial balance
5) Income Received in Advance.
Income A/c ..DrTo Income Received in Advance
Adjustment
1.Should be deducted from the relevant A/c in the Profitand Loss A/c
2. Shown in the Liabilities side of the Balance sheet.
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6)Depreciation
Depreciation A/c .Dr
To Fixed Asset A/c
a) Given in the adjustment
b) Appearing in the Trial balance7)Bad Debts
Bad Debts A/cDr
To Debtors A/c
a) Given in the adjustment
Bad Debts should be debited to P&L A/cand Should be deducted from Debtors in the assets side of theBalance Sheet.
b) Appearing in the Trial balance
To be shown in the Debit side of the P&L A/c
C) Bad debts were given in the Trial Balance
and
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8. Provision for Bad and Doubtful debts
Profit and Loss A/c Dr
To Prov for Bad debts A/c
a) Given in the adjustment
b) Appearing in the Trial balance
9. Provision for Discount on Debtors
Profit & Loss A/c..Dr
To Dis on Debtors A/c
10. Provision for Discount on Creditors
Prov for Dis on Creditors..Dr
To Profit & Loss A/c
11.Interest on Capital
Int on Capital A/cDr
To capital A/c
12. Interest on Drawings
13 Stock Lost in Accident
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13. Stock Lost in Accident
Adjustment entries:
1.For the Loss sustained by fire accident
Loss on fire accident A/c .Dr
To Trading A/c
2.Claim received from Insurance Company
Cash A/c Dr
To Loss A/c
3.Loss On fire Transferred to P&L A/c
P&L A/c .DrTo Loss A/c
11 From the following Trail Balance As on 31-3-2007 Prepare
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11. From the following Trail Balance As on 31 3 2007, Preparethe Trading Profit & Loss A/c and Balance Sheet.
Trail Balance
Debit Balance AmountRs
Credit Balance AmountRs
Salaries
PurchasesTrade Expenses
Wages
Carriage
Office Expenses
CommissionBad Debts
6,000
26,0001,000
7,800
400
500
6001,200
Capital
SalesDiscount
Creditors
Bills Payable
25,000
47,000200
21,000
6,800
(1) (2) (3) (4)
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Debtors
Furniture
Machinery
Insurance
Bills Receivables
Opening Stock
Cash in HandsCash in Bank
30,000
3,000
10,000
400
2,000
7,000
5003,600
1,00000.1,00,000
Adjustments:1.Closing Stock Rs. 11,000.2.Outstanding Wages Rs.2,000.3.Prepaid InsuranceRs.50.4.Provide Bad Debts Reserve at 5%5.Depreciation on machinery and furniture by 5%.
12 Prepare Final Accounts of Mr X
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12. Prepare Final Accounts of Mr X
Trial Balance as on 31-12-2006
Particulars Debit Rs Credit Rs
Capital
Drawings
Purchases and Sales
Returns
Debtors, Creditors
Stock (1-1-2006)
Bad debts
Bills Receivable
Bills Payable
Cash in Hand
Office expenses
Sales Van
Expenses of Sales van
Discount
RentTelephone Charges
Postal Charges
Furniture
Commission
Carriage inward
Salaries & Wages
7,500
72,100
1,300
18,200
19,800
3,000
12,000
800
6,210
15,000
1,400
10,700
1,050
3,700
5,000
8,400
3,200
20,000
50,000
95,000
2,700
35,750
23,000
2,910
2,09,360
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Adjustments :
1.Closing Stock Rs61,700.
2.Depreciate Furniture by 10%, Sales van by 20%.
3.Rent Outstanding Rs 900.4.Bad Debts Rs 200.
5.Provide 5% for Bad and Doubtful Debts.
6.!/4 Of salaries and wages belongs to factory.
13 Prepare final accounts
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13. Prepare final accounts.
Debit Balances Amount Rs Credit Balances Amount Rs
Purchases
Furniture
Wages
Machinery
Opening Stock
Sales ReturnsDebtors
Carriage Inward
Salaries
Carriage outward
Rent& Taxes
Cash at bank
25,200
1,600
3,500
20,000
17,525
1,20010,400
200
10,600
503
2,001
8,000
1,00,729
Sales
Capital
Creditors
Purchase Returns
61,604
35,000
3,903
222
1,00,729Adjustments:1. Closing Stock Rs. 16,800.
2. Outstanding Salaries Rs 400: Prepaid rent Rs. 201.
3. Provide 5% to Bad and Doubtful debts on debtors.
4. Depreciation on machinery is 10%.
5. Interest on capital is 5%.
14 Prepare a Trading and Profit &Loss a/c and Balance Sheet
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14.Prepare a Trading and Profit &Loss a/c and Balance Sheet.
Trail Balance as on 31-12-2008
Debit Amount Rs Credit Amount Rs
Drawings
Stock
Bills Receivables
Sales Returns
Purchases
Wages
Salaries
Fixed Deposits
Insurance
Buildings
Furniture
Debtors
Cash in Hand
750
6,920
1,000
300
4,500
70
200
3,000
120
3,000
700
6,000
470
27,030
Capital
Purchase Returns
Bills Payables
Sales
Discount
Creditors
Bank overdraft
15,000
320
1,180
8,300
30
1,300
900
27,030
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Adjustments:
1 Calculate 12% interest on Capital.
2 Insurance Premium Rs 120 was paid for the half year endedwith 31-3-2009.
3 Depreciate buildings and furniture by 10%.
4 Outstanding wages Rs 40.
5 Create provision for bad debts at 10%.also create a provisionfor discount on debtors as well as creditors at 5%.
6 Closing stock as on 31-12-2008,Rs 8,000.
15.Prepare the final accounts of Mr X.
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p
Trial Balance as on 31-3-2009
Debit Rs Credit Rs
Cash in HandGood Will
Purchases
Cash at Bank
Direct Wages
Opening stock
Interest on Loan
Insurance
Carriage on Sale
Carriage on Purchases
Commission
Fittings
Bad Debts
BuildingsPlant & Machinery
Postage
Debtors
Salaries
80040,000
68,000
1,200
2,000
35,000
2,500
900
900
400
500
5,000
200
25,00010,000
500
.25,000
3,000
220900
Sales10% Loan(1-1-2009)
Reserve for Bad Debts
Creditors
Capital
Bills Payable
69,40051,000
500
8,000
90,000
2,000
220900
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Adjustments:
1 Stock as on 31-3-2009 Rs 75,000.
2 Provide 5% for doubtful debts.
3 Provide depreciation 10% on fittings and on Plant & Machinery,5% on Buildings.
4 Mr X has taken Rs 500 worth of stock for his Domestic use.
5 Stock worth Rs 10,000 was destroyed in a fire accident forwhich Insurance company agreed to reimburse Rs 2,000.
SCHEDULE Vl (sec 211)
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( )
Form of Balance Sheet
Balance Sheet of
As at
Liabilities Assets
SHARE CAPITAL
Authorised
Subscribed
Called up
Less Calls unpaid
Add Forfeited Shares
RESERVES AND SURPLUS
Capital Reserves
Capital Redemption reserve
Share premium
Other Reserves
Surplus
Proposed additions to reserves
FIXED ASSETS
INVESTMENTS
In Govt. SecuritiesIn Shares, Debentures or Bonds
Immovable Properties
In the capital of Partnership firms
CURRENT ASSETS,LOANS AND
ADVANCES
A. Current Assets
Stores and spare parts
Stock-in-trade
Work in progress
Liabilities Assets
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SECURED LOANS
Debentures
Loans and Advances from BanksLoans and Advances from
Subsidiaries
Other Loans and Advances
UNSECURED LOANS
Fixed
Deposits
Loans and Advances fromsubsidiaries
Short Term Loans and AdvancesFrom Banks
From others.
Other Loans and Advances
From Banks
From others
Sundry Debtors
Debts outstanding for a
period
exceeding six months
Other debts-
Less provision
Prepaid expensesCash Balance
Bank Balance-
With scheduled banks and
With others
B. Loans and Advances
Advances and Loans to:
Subsidiaries
Partnership firms
Bills of exchange
Liabilities Assets
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CURRENT LIABILITIES AND
PROVISIONS
A Current LiabilitiesSundry creditors
Unclaimed dividends
Interest accrued but not due
B Provisions
Provision for TaxationProposed Dividends
For pf, Insurance, pension and
similar staff benefit schemes
MISCELLANEOUS EXPENDITURE
(to the extent not written off or
adjusted).
Preliminary expenses
Expenses including commission or
brokerage or underwriting orsubscription of shares or
debentures.
Discount allowed on the issue of
shares or debentures.
Interest paid out of capital during
construction.
Development expenditure notadjusted
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Vertical form of Balance Sheetl
Sources of funds
1. Shareholders Funds
a) Capital
b) Reserves and surplus
2. Loan funds
a) Secured loans
b) Unsecured loans
Total
ll Applications of Funds
1 Fixed assets
a) Gross Block
b) Less: Depreciation
c) Net Block
d) Work in Progress
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2. Investments
3. Current Assets, Loans and Advances
a) Inventories
b) Sundry Debtors
c) Cash and Bank balances
d) Other Current Assets
e) Loans and AdvancesLess: Current liabilities and Provisions
a) Liabilities
b) Provisions
Net Current Assets
4. a) Miscellaneous Expenditure to the extent not written off or
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Provision and Reserve
o A provision is an amount set apart for meetingpossible losses and it is a charge against profit. Itshould be debited to P&L account irrespective of thefact whether there is a profit or not.
o Reserve is an appropriation of profit. If there is noprofit, then no reserve can be made. The purpose isto strengthen the financial position of the business.
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Analysis of Financial Statements
o Meaning of Financial Analysis
refers to the process of determining financialstrengths and weaknesses of the firm by establishingstrategic relationship between the items of the balancesheet, Profit & Loss account and other operative data.q is a process of evaluating the relationship
between component parts of a financial statement toobtain a better understanding of a firms position
and performance.
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Financial Statements
o FS are the sources of information on the basis of whichconclusions are drawn about the profitability andfinancial position of a concern.
o Prepared for the purpose of presenting a periodicalreview of report on progress by the management anddeal with the status of investment in the business andthe results achieved during the period under review.They reflect a combination of recorded facts,
accounting principles and personal judgments.
Comparative and common size
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Comparative and common size
analysis
Statements summarize and present related data for a numberof years, incorporating therein changes in individual items offinancial statements. They help in making inter-period and inter
firm comparisons, and also highlight the trends in performance
efficiency, and financial position.Common-size balance sheet
Balance sheet items are expressed as the ratio of each asset tototal assets and the ratio of each liability is expressed as a ratio
of total liabilities is called common size balance sheet.
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RATIO ANALYSIS
A ratio is a simple arithmetical expression
of the relationship of one number to another.
A ratio is an expression of the quantitative
relationship between two numbers.Ratios are classified as-
Short term solvency ratios. Long term solvency ratios. Turnover ratios. Profitability ratios.
Short term solvency ratios are the ratios which measure the short terml fi i l i i f fi I i di h bili
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solvency or financial position of a firm. It indicates the ability to payits current obligation in time.
Current ratio or Working capital ratio = Current assets/ Current liabilities
Note :
1) Current assets include1.Cash in hand & at Bank.
2.Short term investments.
3.Bills receivable.
4.Sundry debtors.
5.Stocks/ inventories.
6. Prepaid expenses.
7.Work in process.
2) Current liabilities include
1. Outstanding expenses/ accrued expenses.
2. Bills payable.
3.Sundry creditors.4.Short term advances.
5.Income tax , Dividends payable.
6.Bank overdraft.
3) Ratio of 2:1 is considered satisfactory
Quick ratio or Liquid ratio or Acid test ratio
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Quick ratio =Quick assets /Quick liabilities.
Note:1 Quick assets =current assets prepaid expenses.
2 Quick liabilities =current liabilities bank over draft.
3 Ratio of 1:1 is considered as satisfactory.Long term solvency ratios or Leverage ratios or capital structureratios convey firms ability to meet the interest costs and repayment
schedules of its long term obligations. It helps in assessing the riskarising from use of Debt capital.
Debt equity ratio= long term debt / share holders fund.Note:1 Long term debt includes mortgage loans , debentures, loansfrom finance corporation.
2 Shareholders funds include Equity share capital +Preference
share capital + Reserves and surplus + profit and loss
account+ share premium preliminary expenses Discount on issue
Fixed assets ratio
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Fixed assets / Long term funds
Notes: 1 This ratio indicates the extent to which the total of fixedassets are financed by long term funds of the firm.
2 Long term funds include long term loans and shareholder funds.
Turnover ratios or Efficiency ratios or activity ratios
1 Stock turnover ratio
Cost of goods sold / averagestock
Note: Cost of goods sold is sales- gross profit.
2 Debtors turnover ratio
Net credit annual sales /average
trade debtorsNote: Trade Debtors include sundry debtors and bills receivable.No provision for bad and doubtful debts be deducted.
3 Creditors turnover ratio
Net annual purchases / average
trade creditors
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Profitability ratios
related to sales.(%)
1. Gross profit ratio
Gross profit/Sales
2. Net profit ratioNet profit/Sales
3. Expenses ratio
Respective particular expense/Sales
Ratios related to Investment1. Earnings per share
Profit after preference dividend/Number ofEquity shares
2 Price earning ratio
Market price per Equity share/EPS
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Problems
Calculate short term solvency ratios from the following.
Rs
Stock 60,000
Sundry debtors 70,000
Cash balances 20,000
Bills receivables 30,000
Pre-paid expenses 10,000
Land and Buildings 1,00,000
Goodwill 50,000
Sundry creditors 20,000
Bills payable 15,000
Tax payable 18,000
Outstanding expn 7,000
2.
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Liabilities Rs Assets Rs
2,000 Equity shares of Rs 100each
1,000 9% pref Shares of Rs 100each
1,000 10% Debentures of Rs100 each
Reserves :General ReserveReserves for
contingencies
Current liabilities
2,00,000
1,00,000
1,00,000
50,000
50,000
1,00,000
6,00,000
Fixed assets
Current assets
4,00,000
2,00,000
6,00,000
Calculate Debt Equity Ratio
3. The comparative balance sheets of a Ltd. Company are given
for the years ending December31 2005 and 2006
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for the years ending December31,2005 and 2006.
2005 2006 2005 2006
Equity Share Capital
Reserve Fund8% Debentures
Mortgage Loan
Sundry creditors
Bills payable
Bank overdraftOutstanding
expenses
Tax liabilities
3,00,000
1,50,0002,00,000
4,00,000
50,000
25,000
40,000
10,000
15,000
11,90,000
4,00,000
2,80,0003,00,000
2,58,000
70,000
35,000
60,000
15,000
20,000
14,38,000
Goodwill
Land& BuildingPlant& machinery
Patents
Stock
Sundry debtors
Bills receivableMarketable
securities
Cash
Prepaid expenses
Sales
Purchases
2,00,000
3,00,0002,50,000
50,000
1,50,000
1,00,000
80,000
18,000
40,000
2,000
11,90,000
5,00,000
3,00,000
2,00,000
4,00,0003,50,000
50,000
2,00,000
80,000
90,000
20,000
45,000
3,000
14,38,000
6,00,000
4,05,000
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Calculate the following for two years.
1 Current Ratio
2 Acid test Ratio
3 Inventory Turnover Ratio
4 Debtors Turnover Ratio
5 Creditors Turnover Ratio
Notes: a) Trade debtors include debtors and bills receivables.
b) Trade creditors include creditors and bills payable.
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Following information is given to you.
Find out 1.Current assets 2. Current liabilities.
i. Current ratio 2.5
ii.
Working capital Rs.90000
Following information is given to you.
Find out 1.Current assets 2. Liquid Assets.3.Inventory
Current ratio 2.5; Acid test ratio 1.5; Current liabilitiesRs.50000
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Given
Current ratio 2.8; Acid test ratio 1.5; Working capital Rs162000.
Find out CA; CL; LA
The ratios relating to Osmos Ltd are given as followsGP ratio 15percent
Stock velocity 6months
Debtors velocity 3months
Creditors velocity 3months
Gross profit for the year Dec31st,2008 amounts to Rs.60000.Closing stock is equal to opening stock.
Find out Sales, Closing stock, Sundry Debtors, Sundry Creditors.
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Your company had the following earnings last year:
Profit before tax Rs 24.46 lakhs.
Tax rate 60%
Proposed dividend 20%
Capital of the company is
9% Preference shares Rs 10 lakhsEquity Shares 30,000 Shares of Rs 100 each Rs 30 lakhs
Reserve in the beginning of the year Rs 22 lakhs.
From the above compute 1 EPS