FUNDAMENTAL ACCOUNTING FOR ENTREPRENEURS <ul><ul><li>by : </li></ul></ul><ul><ul><li>DR. T.K. JAIN </li></ul></ul><ul><ul><li>AFTERSCHO ☺ OL </li></ul></ul><ul><ul><li>centre for social entrepreneurship </li></ul></ul><ul><ul><li>sivakamu veterinary hospital road </li></ul></ul><ul><ul><li>bikaner 334001 rajasthan, india </li></ul></ul><ul><ul><li>FOR – CSE & PGPSE STUDENTS </li></ul></ul><ul><ul><li>(CSE & PGPSE are free online programmes </li></ul></ul><ul><ul><li>open for all, free for all) </li></ul></ul><ul><ul><li>mobile : 91+9414430763 </li></ul></ul>
My word..... <ul><ul><li>My purpose here is to give an introductory lesson on how to analyse a business case Read business cases and develop your entrepreneurial capabilities. Let us change the society, change the world. Go with positive spirit. Please pass this presentation to all those who might need it. Let us spread knowledge as widely as possible. I welcome your suggestions. I also request you to help me in spreading social entrepreneurship across the globe – for which I need support of you people – not of any VIP. With your help, I can spread the ideas – for which we stand.... </li></ul></ul>
Do you need to calculate goodwill at the time of retirement? Yes
Do you need to calculate goodwill at the time of admission of a partner ? Yes
Ajay joins A and B firm. The combined capital of A and B is 30000 and after the joining of Ajay, it will be 90000. Ajay gets 1/3 rd share. He brings 60000 as his share. How much is his share of goodwill? 30000 answer
a,b,c,d share profit in the ratio : 3,4,2,2,. Now D retires. New ratio of a,b,c is 2,3,3 what is the gaining ratio of C? Gain = new ratio – old ratio new ratio : 3/8 old ratio = 2/11 3/8 -2/11 = 17/88 answer
In the previous question, goodwill account is created and it is immediately deleted after the retirement of D. D gets his share of goodwill. He gets Rs. 11000. What is the impact on C's account ? Solution : 11000 *17/88 C's account will be debited by 2125 answer or you may first credit C's account and then debit.
A,B,C are sharing profits equally. However, their capital are not in the ratio. They decide to bring additional capital or withdraw in order to make it in ratio. As per their balance sheet, their assets are 3 lakhs. And their liabilities are 20000. They revaluate their buildings by 10000 more. Their bad debts (which they had written off earlier – are good one of rs. 10000). What should B do, if his capital now is 12000? B will have to bring 88000 answer
A,B,C are partners. C dies,. A,B gets Rs. 12000 on his insurance. Capital of C is 20000 and his share of goodwill is 10000. How much should C's representative get? 34000 answer
A,B,C are partners they deposit insurance for joint life policy. On 31/12/07 C dies and Joint life policy reserve shows Rs. 12000 and insurance amount received is 40000. How much will c get from this ? 52000/3 = 17333 answer
What are the 3 fundamental assumptions ?: G C A going concern consistency accrual
A bank gives an advertisement, and puts the advertiesement to be divided in 5 years – what type of expense is it and what types of accounting assumptions are there? Expentireu : deferred revenue expenditure assumption : going concern concept
As per accounting equation approach, purchase of machine should have what impact on assets ? No impact equation : assets = capital + liabilities cash will decrease and machines will increase, so there is no impact
Sometimes we divide expenses and put them on yearly basis – what concept are we using ? Matching concept (to match annual income and expenditure)
Why are assets held in the business ? To generate revenue
What is fund ? Working capital (in broad sense) in narrow sense = cash
Is it necessary to disclose significant accounting policies in financial statements? Yes (AS NO. 1 )
Which method of costing are allowed for valuation of inventory? 1. FIFO 2. WEIGHTED AVERAGE METHOD (AS PER AS 2)
WHAT BENEFIT WILL A COMPANY GET BY PREPARING CASH FLOW ? Company will try to improve net cash flow not just profit.
How should the events after 31 march but before adoption of balance sheet be disclosed ? Their impact has to be shown in the balance sheet (although they will appear in the next balance sheet) (as per AS 4)
WHEN IS TRIAL BALANCE PREPARED ? It can be prepared on any date
Which of these cant be shown in trial balance ? Purchase closing stock sales capital answer : closing stock
What are the methods to prepare trial balance ? 1. balance method 2. total and balance method
If you have paid Rs. 3000 by cheque to a customer (who has misplaced this somewhere). What difference will be there in your accounts and in bank's account. How will you reconcile? As per bank's statement, your balance is Dr. 30000? Our balance is 33000 Credit. (because the cheque has not yet been presented in the bank). We have to deduct 3000 from bank's balance. Answer
What are the subsidiary books? Purchase day book sales day book purchase return sales return journal proper bill receivable book bills payable book
Rectify the following mistake ? You paid to Ram Rs. 3000 for goods purchase, however, you also returned the goods back to him. Ram returned back Rs. 3000 to you. You didnt record the last two transactions. Errors are noticed after 3 months.
solution.... Assuming that the cash account has be duly rectified. Suspense a/c debit to purchase return account (if rectification is done in the same accounting year).
Name a few adjustment entries ? Outstanding expenses acrued income prepaid expenses Incomes received in advance depreciation sales for approval
Which of these seems to be incorrect ? Patents account debit balance 20000 Capital reserve ac/ credit balance 2000 Provision for bad debt debit balance 2000 sinking fund investment a/c 3000 debit balance answer : (3 rd : provisions have credit balance)
Which of these is revenue expenditure ? 1. a second hand machine was purchased and it was repaired to make workable 2. legal fees for obtaining our patent 3. R & D expenditure on research of a new product, which has been developed this year. 4. Legal fees for defending a case relating to our building 5. licence fees for obtaining 3G licence
Answer Only 4 th all others are capital expenditure
Rectify the mistake : 500 paid to Ram has been shown as 50 paid to Shyam : Ram a/c Dr. 500 To Shyam Credit 50 To cash credit 450 (if there is correct entry in cash, then credit suspense a/c by 450 instead of cash a/c)
Rectify mistake Goods return from Kavi of Rs. 200 posted to his debit. Suspense a/c dr. 400 to Kavi credit 400
Rectify mistake : Sales day book added Rs. 4000 short. Suspense a/c dr. 4000 to sales 4000
Rectify error .. Total of bills receivable of Rs. 500 for 3/1/9 remained unposted. (today is 5/12/9) bills receivable a/c Dr. 500 to suspense a/c
Rectify mistake : Rent of the house of owner posted to Repairs ac/ Drawings a/c debit to Repairs a/c credit
Rectify mistake .. Total of returns inward day book of 2/3/9 was not posted – it was Rs. 500. Today is 5/12/09 solve it : P & L Adjustment ac/ Debit 500 to Suspense a/c credit 500
What will you do in bank reconciliation ? Bank charges levied, but there is no information to the firm : Rs. 500 You have credit balance (Rs. 4000) in bank account in your books what will you do ? Solution : as it is credit balance, we will add it, new balance will be 4500 answre
How will you prepare bank reconciliation : The firm deposited Cheque of Rs. 1000 in bank, but no credit given by bank yet. The balance is Rs. 3000 debit as per firm's accounts. Solution : reduce it : (3000 – 1000) = 2000
A prepared an accommodation bill of Rs. 2000 on B and B prepared an accommodation bill of Rs. 3000 on A. Both are due on 12/12/09. What will happen on due date? A has to pay to B 2000, but B has to pay to A 3000. so on due date, B will pay A Rs. 1000. answer
Gajendra purchased Laptop for Rs. 30000, which has life of 3 years. Using sum of digits method, find depreciation of the first year? Sum of digits : 3,2,1 so total is 6 depreciation will be 1 st year : 3/6 *30000 = 15000 2 nd year : 2/6 * 30000 = 10000 3 rd year : 1/6 * 30000 = 5000
a property of Rs. 3,00,000 is insured for Rs. 2,00,000 and the loss amounts to Rs. 1,50,000 What will be the amount of claim ? It will be reduced in the proportion of reduced insurance 2/3 * 150000 =100000 answer
the percentage of gross profit on cost is given as 25%, What is the percentage on sales ? Let us assume cost = 100 sales price = 125 GP as % of sales price is : 25/125 * 100 = 20% answer
What is AICPA ? American institute of chartered public accountant
RCSAIC stands for functions of accountant, here R= RECORDING, what is C? C=CLASSIFYING S=SUMMARISING A=ANALYSISNG I= INTERPRET C=COMMUNICATING
WHO ARE INTERNAL USERS OF ACCOUNTING INFORMATION? Entrepreneur partners / managers / officers board of directors
WHO ARE EXTERNAL USERS OF ACCOUNTING INFORMATION? Bank government creditors debtors investors lenders
What are the purposes of accounting? To know profit to know about financial position to know about solvency position to keep systematic record of transactions
What is the difference between cash discount & trade discount ? Cash discount is shown in account, but trade discount is not shown Cash discount is calculated on sale price, but trade discount is calculated on print price (list price).
What is deferred revenue expenditure ? Give example ? These expenditure give benefit over a long term example : huge advertisement expenditure
Which of these is against the principle of conservatism ? 1. discount on debtors 2. depreciation 3. reserve on discount on creditors 4. amortisation of patents ANSWER = 3. (to anticipate income from discount from creditors is against conservatism)
Work in progress is based on which accounting principle? Matching principle (match revenue to expenses – since the things are partially ready, show it only partially)
In which method of depreciation, a fixed amount is set aside to a separate fund every year? Sinking fund method
In which method, depreciation will be more out of these two : sinking fund and annuity method ? Annuity method (in annuity method, depreciation is more than the value of assets, but in sinking fund, it is less than the assets price).
As per AS 6, if we want to change the method of depreciation, it has to apply from : Date of purchase of assets
Change in depreciation method is against which accounting principle ? Consistency principle
What is the difference between sale and consignment ? In sale ownership is transferred, but in consignment, the ownership is not transferred (thus risk is borne by the consignor)
What is proforma invoice? Along with consignment – an invoice is sent – this is called proforma invovice – it gives details of the goods consignor sends it to consignee with the goods
What is account sales ? It is prepared by consignee it gives details of the goods sold by the consignee on account of consignor
Which account is maintained by most firms (whether small or large)? Cash book
Why some people still adopt single entry system of accounting ? Single entry is a simple method of recording business transactions. It is mainly suited to small business concerns with limited number of transactions. Under single entry system, accounting records can easily be maintained as their maintenance does not require any adequate knowledge of the principles of book keeping. It is comparatively less expensive than double entry system of book keeping, Ascertainment of profit or loss is much easier. It is ascertained by comparing the financial position of the business at the close of the accounting period with that at the beginning.
Is there any difference in balance sheet of for profit and non-profit organisations? NO The balance sheet of non-trading concerns is prepared on the same lines as that of a trading concerns showing assets on the right hand side and liabilities on the left hand side.
MENTION A FEW ITEMS WHICH COME IN RECEIPT AND PAYMENT ACCOUNT, BUT NOT IN INCOME AND EXPENDITURE ACCOUNT THERE ARE MANY examples : depreciation etc There are some items like depreciation on fixed assets and loss on sale of a fixed asset which will have to be shown in Income and Expenditure Account although they do not appear in Receipts and Payments Account. Surplus or deficit revealed by Income and Expenditure Account is transferred to Capital Fund.
What do we do of profit / loss in the case of non-profit organisation? Profit = surplus loss = deficit The surplus is not distributed as profits rather it is added in the accumulated capital fund. Similarly deficit will be deducted from the accumulated fund.
How to read a case ? In a business case, there are many relevant and many unrelated information. It is important to identify the most important issues from the case. These issue will be in 10% matter of the case. But identification of the important issues is the starting point. Put yourself in decision maker's chair. Take a decision and try to see different possibilities. You put yourself in the position of MD / manager / decision maker.
One reading --- is that all ? NO One reading cant help you. Read the at least 2-3 times to form a basic idea about the real situation. Try to read between the lines. There will be many facts which would be hidden. Try to infer them from the case.
Should there be any assumptions ? No Read the case and draw inferences from the case itself. Dont use information out of the case. You have to limit yourself to the information given in the case material.
Steps in case analysis ? 1. identify the real situation of the company and decision makers – write down it in terms of main points – the SWOT analysis of the company – what are the constraints and what are the expectations ? 2. identify the mission / goal / vision / objectives / strategy of the company and prepare alternative scenarios of the company 3. prepare althernative decisions and see their impacts 4. work out the outcomes of the different possibilities 5. suggest the best course of actions, whith the precautions if any
Remember .... There is no best and final solution to any case Critical analysis helps in improving decision making capabilities of the decision maker Case is a situation – how you will handle it depends on your own background also – so broaden the approach to solving the problems
Example of a case analysis Pawan Baid establish TQM in his company and increase business volume substantially. Profit doubled and sales increase by 150%. His company is now able to get clients from all over the world. His company is able to establish growth in every domain. He now plans to diversify the company from just a BPO company to a consultancy organisation.
Case analysis .... Here it seems that TQM has contributed to the growth of business. It is not clear whether there are other factors also responsible for this growth or not. The company wants to diversify. For this we need a number of data to take a decision. But based on the given information, it seems logical that company must continue its TQM implementation and must continue the present processes – which have enabled it to grow.
What types of cases will you get? The real cases will be very detailed and extensive. They will require lot more analysis. There will be lot of data, tables, charts, graphs and other information. So be careful in data analysis. Dont try to hurry up in case analysis. Pick up every information carefully and see their interrelationship while framing any argument.
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