Contents of Income Statement

1. Net Sale Invoice Price of Goods Sold (-) Returns Inwards

2. Cost of Goods Produced The cost of goods produced in a particular accounting

year.

3. Cost of Goods Sold [ COGS] The total cost incurred for the manufacturing the goods

sold during the accounting year.

4. Gross Profit Net Sale (-) COGS

5. Operating Expense General Administration Expense (+) Selling & Distribution

Cost (+)Depreciation (+) Rent (+) Insurance (+)……..

6. Operating Profit Gross Profit (-) Operating Expense

7. Non Operating Surplus Gains from sources other than routine business activities such as income from investments , gain from

disposal of assets etc.

8. Profit / Earning Before Interest and Tax [ PBIT/EBIT] Operating Profit (+) Non Operating Surplus

9. Interest Expense on term loans , debentures , public deposits ,

working capital advance.

10. Profit Before Tax [ PBT] PBIT (-) Interest

11. Tax Income tax for the year

12. Profit After Tax [PAT] PBT (-) Tax

13. Dividends Part of profit to be distributed to the shareholders.

14. Retained Earnings PAT (-) Dividends

Contents of Balance Sheet

1. Assets Resources which have value and which help in the conduct of

the business operations.

a) Fixed Assets : land ,building ,plant , machinery , patents , copyrights etc

b) Investments : securities such as equity , bonds , debentures etc

c) Current Assets : cash ,bank, debtors , inventories , pre- paid expense , bills receivable etc d) Loans & Advances e) Miscellaneous Expenditure : preliminary expense , pre- operative salaries etc

2. Liabilities These represent what the business entity owes to others.

a) Share Capital : equity and preference

b) Reserves & Surplus Revenue Reserves : retained earnings, general reserve Statutory Reserves :investment allowance reserve etc Capital Reserve : premium on issue of shares , gain on revaluation of assets c) Provisions : provision for bad debts d) Loans : Long Term ,Medium Term Short Term ;Secured & Unsecured e) Current Liabilities : creditors , B/P , outstanding expenses, overdraft etc

Exercise

Classify the following items and also state the statement in which they should be included :

• Bank• Overdraft• Motor Vehicles• Profit earned on sale of old M/E• Commission paid to sales fleet• Loan given to a friend• Profit on sale of goods• Discount given to customers

Solution

• Bank : current asset – Balance Sheet

• Overdraft : current liability – Balance Sheet

• Motor Vehicles : fixed asset – Balance Sheet

• Profit earned on sale of old M/E : non operating income – Income

Statement

• Commission paid to sales fleet : operating expense - Income Statement

• Loan given to a friend : loans & advances – Balance Sheet

• Profit on sale of goods : operating income - Income Statement

• Discount given to customers : operating expense - Income Statement

Jet Airways Ltd

1. Air Fuel Consumed

2. Employee`s Remuneration and Benefits

3. Deferred Tax Liability

4. Selling and Distribution Expense

5. Purchase of Investments

6. Provision for Leave Encashment and Gratuity

7. Proceeds from Sale of Old Aircrafts

8. Revenue Operating Activities

9. Proposed Dividend

10.Share Capital

Jet Airways Ltd

11.Repayment of Term Loans

12.Interest and Finance Charges

13.Capital Work - in – Progress

14.Inventories

15.Fringe Benefit Tax

16. Aircraft Lease Rental

17.Intangible Assets

18. Interest Income on Fixed Deposits

19. Audit Fee

20. Loans and Advances

21. Landing, navigation and other airport charges

22. Insurance

Solution Jet Airways Ltd

1. Air Fuel Consumed – Operating Expense – Profit and Loss A/c2. Employee`s Remuneration and Benefits - Operating Expense – Profit and

Loss A/c3. Deferred Tax Liability – Liability – Balance Sheet4. Selling and Distribution Expense - Operating Expense – Profit and Loss

A/c5. Purchase of Investments - Assets – Balance Sheet6. Provision for Leave Encashment and Gratuity - Liability – Balance Sheet7. Proceeds from Sale of Old Aircrafts- Non Operating Surplus- Profit and

Loss A/c8. Revenue Operating Activities - Operating Income – Profit and Loss A/c9. Proposed Dividend – Liability – Balance Sheet10.Share Capital – Liability – Balance Sheet

Jet Airways Ltd11.Repayment of Term Loans and Subordinated Debts-Reduction in Liability

– Balance Sheet12.Interest and Finance Charges – Operating Expense – Profit and Loss A/c13.Capital Work - in – Progress - Assets – Balance Sheet14.Inventories - Assets – Balance Sheet15.Fringe Benefit Tax - Operating Expense – Profit and Loss A/c16. Aircraft Lease Rental - Operating Expense – Profit and Loss A/c17.Intangible Assets - Assets – Balance Sheet18. Interest Income on Fixed Deposits - Non Operating Surplus- Profit and

Loss A/c19. Audit Fee - Operating Expense – Profit and Loss A/c20.Loans and Advances - Assets – Balance Sheet21. Landing, Navigation and Other Airport Charges - Operating Expense –

Profit and Loss A/c22. Insurance - Operating Expense – Profit and Loss A/c

Capital A/cDrawings A/cBank A/cRam’s A/cCompany’s A/cOutstanding Rent A/cGovt A/c

Personal Non Personal

TYPES OF ACCOUNTS

Real Nominal

Land & Building A/cPlant & Machinery A/cFixtures & Fittings A/cCash A/cStock A/cGoodwill A/c

Wages A/cDiscount A/cInterest Paid A/cRent Paid A/cCommission Received A/cElectricity A/c

Rules of Debit and Credit

1 Personal Account : Debit the Receiver Credit the Giver

2 Real Account : Debit what Comes In Credit what Goes Out

3 Nominal Account : Debit all Expenses & Losses Credit all Incomes & Gains

Assets

Liabilities

Capital

Debit all Increases

Credit all Decreases

Debit all Decreases

Credit all Increases

Debit all Decreases

Credit all Increases

Income & Gains

Expenses & Losses

Credit all Increases

Debit all Decreases

Debit all Increases

Credit all Decreases

JOURNALS

Simple books of accounts in which all the business transactions are originally recorded in chronological order and from which they are posted in ledger accounts.

Sub Division of Journals

1 Purchase Day Book 2 Sales Day Book 3 Purchase Return Book 4 Sales Return Book 5 B/R Book : B/E ; promissory notes and Hundies received by the company 6 B/P Book : B/E ; promissory notes and Hundies issued by the company 7 Cash Book 8 Journal Proper

Sample : Books of M/S Mehta and Sons

Journal Proper

Date Particulars L.F.

Debit (Rs) Credit (Rs)

2013Jan.1

Cash A/c ------------------------DrFurniture A/c--------------------Dr To Capital A/c(being commencement of business with cash and furniture)

1,00,0001,50,000

2,50,000

Jan. 3 Good A/c-------------------------Dr To Cash A/c(being goods purchased on cash basis)

25,000 25,000

Sample: Ledgers in the Books of M/S Mehta and Sons Dr Cash A/c Cr

Date Particulars J.F. Rs Date Particulars J.F. Rs

2013Jan 1

To Capital A/c 1,00,000 2013Jan 5

By Bank A/c 25,000

Jan 7 By Purchases A/c 50,000

Jan 31

By Wages A/c 5,000

Jan 4 To Sales A/c 25,000

31 Dec

By Balance c/d 45,000

1,25,000 1,25,000

Journalize the following transactions in the books of Mohan.

a) Mohan commences business with cash Rs 1,00,000 ; building Rs 5,00,000 ; furniture Rs 20,000

b) He deposits Rs 25,000 in bankc) Purchased office table and chair for Rs 20,000 from Deluxe

Furniture housed) Bought goods for Rs 50,000 for cashe) Paid electricity bill of Rs 2,000 by chequef) Paid wages to Suraj Rs 3,000 and Ramu Rs 2,000g) Sold good for Rs 25,000

Books of Mohan

Journal Proper

Date Particulars L.F.

Debit (Rs) Credit (Rs)

a) Cash A/c ------------------------DrBuilding A/c--------------------DrFurniture A/c--------------------Dr To Capital A/c(being commencement of business with cash; building and furniture)

1,00,0005,00,000 20,000

6,20,000

b) Bank A/c-------------------------Dr To Cash A/c(being cash deposited into bank)

25,000 25,000

c) Furniture A/c -------------------Dr To Deluxe Furniture House A/c(being furniture purchased on credit basis)

20,000 20,000

d) Purchases A/c ------------------Dr To Cash A/c(bought goods for cash)

50,000 50,000

e) Electricity A/c -----------------Dr To Bank(electricity bill paid by cheque)

2,000 2,000

f) Wages A/c ---------------------Dr To Cash A/c(wages paid to Suraj - Rs 3,000 ; Ramu- Rs 2,000)

5,000 5,000

g) Cash A/c ----------------------Dr To Sales A/c(goods sold for cash)

25,000 25,000

Ledgers in the Books of Mohan Dr Cash A/c Cr

Date Particulars J.F. Rs Date Particulars J.F. Rs

a To Capital A/c 1,00,000 b By Bank A/c 25,000

d By Purchases A/c 50,000

f By Wages A/c 5,000

g To Sales A/c 25,000

31 Dec

By Balance c/d 45,000

1,25,000 1,25,000

Dr Building A/c Cr

Date Particulars J.F. Rs Date Particulars J.F. Rs

a To Capital A/c 5,00,000 31 Dec

By Balance c/d 5,00,000

5,00,000 5,00,000

Dr Furniture A/c Cr

Date Particulars J.F.

Rs Date Particulars J.F.

Rs

a To Capital A/c 20,000 31 Dec

By Balance c/d 40,000

c To Deluxe Furniture House A/c

20,000

40,000 40,000

Dr Capital A/c Cr

Date Particulars J.F. Rs Date Particulars J.F.

Rs

a By Cash A/c 1,00,000

a By Building A/c 5,00,000

a By Furniture A/c 20,000

To Balance c/d 6,20,000

6,20,000 6,20,000

Dr Bank A/c Cr

Date Particulars J.F.

Rs Date Particulars J.F.

Rs

b To Cash A/c 25,000 e By Electricity A/c

2,000

31 Dec

By Balance c/d 23,000

25,000 25,000

Dr Deluxe Furniture House A/c Cr

Date Particulars J.F. Rs Date Particulars J.F. Rs

c By Furniture A/c 20,000

31 Dec

To Balance c/d 20,000

20,000 20,000

Dr Purchase A/c Cr

Date Particulars J.F.

Rs Date Particulars J.F.

Rs

d To Cash A/c 50,000 31 Dec

By Balance c/d 50,000

50,000 50,000

Dr Electricity A/c Cr

Date Particulars J.F.

Rs Date Particulars J.F.

Rs

e To Bank A/c 2,000 31 Dec

By Balance c/d

2,000

2,000 2,000

Dr Wages A/c Cr

Date Particulars J.F. Rs Date Particulars J.F. Rs

f To Cash A/c 5,000 31 Dec

By Balance c/d 5,000

5,000 5,000

Dr Sales A/c CrDate Particulars J.F. Rs Date Particulars J.F. Rs

31 Dec

To Balance c/d 25,000 g By Cash A/c 25,000

25,000 25,000

TRIAL BALANCE

A Trial Balance is a summary of all general ledgers balances as on a particular date.

Helps in checking the arithmetical accuracy of the books of accounts.

SN Particulars Debit (Rs) Credit (Rs)

1 Capital **

2 Assets **

3 Expenses & Losses **

4 Income & Gains **

5 Liabilities **

Total *** ***

Trial Balance as on 31 Dec, 200…..

Trial Balance as on 31 Dec, 200…..

SN Particulars Debit (Rs) Credit (Rs)

1 Cash 45,0002 Building 5,00,0003 Furniture 40,0004 Capital 6,20,0005 Bank 23,0006 Deluxe Furniture House 20,0007 Purchases 50,0008 Electricity 2,0009 Wages 5,00010 Sales 25,000

Total 6,65,000 6,65,000

Entries for Some Specific Transactions

1. Bad Debts Cash A/c------------------------------Dr Bad Debts A/c ---------------------Dr To Debtor's Personal A/c

2. Bad Debts Recovered Cash/Bank A/c --------------------------Dr To Bad Debts Recovered A/c

3. Cash withdrawn from bank for personal use Drawing A/c ------------------------------Dr To Bank A/c

4. Goods given as Charity Charity A/c -----------------------------Dr To Purchases A/c 5. Distribution of Goods as Free Sample Advertisement A/c -----------------------------Dr To Purchases A/c

6. Cash and Goods withdrawn by Proprietor for Personal Use Drawings A/c --------------------------------------Dr To Cash A/c To Purchases A/c

7. Goods Lost by Fire / Theft [uninsured] Loss by Fire/ Theft -------------------------------------Dr To Purchases A/c [ insured] Insurance Company A/c -----------------------------Dr To Purchases A/c

when claim is recd but not in full :

Bank A/c---------------------------------------------Dr Profit & Loss A/c ---------------------------------Dr To Insurance Company

8. Interest on Capital Interest A/c ---------------------------------------Dr To Capital A/c

9. Interest on Drawings Drawings A/c -----------------------------------Dr To Interest

10. Revenue from Services Cash A/c -------------------------------------------Dr To Revenue from Services

11. Advance Received from a Customer Cash A/c ---------------------------------------------Dr To Advance Received

12. Sales Return Sales Return--------------------------Dr To Debtors

13. Cash Discount to customers Cash A/c -----------------------------------Dr Discount A/c -----------------------------Dr To Debtors

14. Purchase Return Suppliers A/c -----------------------------Dr To Purchase Return

Exercise

1 Sohan is declared insolvent. Recd from his official receiver a first and final settlement of 60 paisa in a rupee on a debt of Rs 4,000.

2 Received cash for a bad debt written off last year Rs 7003 Taken out goods worth Rs 500 for personal use and worth Rs 600 for

free distribution as samples4 Goods worth Rs 3,000 were destroyed by fire , but the General

Insurance Company Ltd accepted to pay 7/10 of the claim amount.5 Provide 5% interest on drawing of Rs 2,000.6 Wizcraft Computer Systems signed an agreement with a client to

design a soft ware. The agreement provided for payment of a fee of Rs 50,000 on completion of the work.

7 Appointed an office secretary for a monthly salary of Rs 10,000/-8 A sale of Rs 1,000 on June 1 is on terms of “2/10 , n/30”.On June 11

the buyer clears the payment.

Solution

1 Cash A/c ----------------------------Dr 2,400 Bad Debts A/c ---------------------Dr 1,600 To Sohan`s A/c 4,000

2 Cash A/c ---------------------------------------Dr 700 To Bad Debts Recovered A/c 700

3 Drawings A/c ---------------------------------Dr 500 Advertisement A/c ------------------------------------Dr 600 To Purchases A/c 1,100

4 General Insurance Co Ltd.----------------------Dr 3,000 To Purchases A/c 3,000

Bank A/c ------------------------------------Dr 2,100 P/L A/c --------------------------------------Dr 900 To General Insurance Co Ltd A/c 3,000

5 Drawings A/c ---------------------------------Dr 100 To Interest on Drawings A/c 100

6 Signing an agreement with a customer is not an accounting transaction since it does not create any asset or revenue.

7 Appointing an employee is not an accounting transaction since it does not create an expense or liability.

8 Cash A/c ----------------------------Dr 980 Discount A/c -----------------------Dr 20 To Debtor 1,000