ACCOUNTING FOR MANAGERBOOK KEEPING• Recording of business transactions which take place during Accounting Period• Accounting Period-Commences on 1st April and Ends on 31st March every year unless otherwise specifically mentioned• Guiding and controlling the business activities• To analyze and interpret the financial results to the management, so that management can understand what is happening to the business and what is going to happen in future•What must happen in the interest of the business concern
• Accounting to furnish information to the needy that is to the management, investors, government agencies etc• Accounting consists of financial accounting, cost accounting managerial accounting• Financial accounting provides information to external users• External parties are investors, prospective investors, creditors bankers, government agencies etc
• Accounting is basically an information system• It is involved in the process of converting inputs into outputs• It processes business transactions (inputs) to produce the desired reports, statements etc (outputs)• Business transaction- dealing between two or more parties that is seller and buyer• Transaction means business transaction expressed in monetary terms or capable of expressing in monetary terms• Internal users means proprietor or partners or board of directors
• Functional Managers such asPurchase ManagerProduction ManagerMarketing Manager or Sales ManagerFinance Manager/Financial controller• External parties are two types1. Users with direct financial stake or interest2. Users with indirect financial stake or interest
1. users with direct financial stake or interest are:• Shareholders present or prospective•Debenture holders present or prospective• Suppliers of input• Lending financial institutions• Employees2. Users with indirect financial stake or interest:• Customers and consumer groups•Tax authorities•Regulatory bodies
• Financial analysts and advisors• Brokers and other financial intermediaries•Trade unions•Press• General publicAbove persons/institutions/tax authorities/regulatory bodies needaccounting information from their business concerns for variousreasons and purposes• Basically they need information to take appropriate decisions• both individual and institutional investors consists of shareholders
• debenture holders etc need information1. To asses the risk involved and return expected in relation to their investment2. Whether they should continue to invest in the business or dispose of or3. Invest in financial instruments which promise higher return with lower risk4. Whether the business is capable of paying dividends/interest regularly5. Whether there is any scope of capital appreciationThe above said groups needs detailed information such as1) Rate of growth in sales, volumes, etc2) Profit-gross profit margin, operating profit, net profit, contribution, divisible profits etc3) Investment –amount of capital invested, cost price of assets owned
4) return on investment (ROI)5) Earnings per share6) Market price of the equity (Ordinary shares )7) Financial institution (which lend money to the business organizations (banks and other institutions) require information from the borrowing organization to know -whether it is capable of paying the interest regularly - whether it is capable of paying installment principal regularlySo they need relevant accounting information to know liquidity positionof the borrowing unit that is short term liquidity and long term liquidity
• Suppliers of the different inputs who supply inputs on credit information from buying organization to evaluate short term liquidity of the organization so that the business is able to pay their dues when it falls dues• Employees and trade unions require information from their organization to evaluate the stability and continuing profitability of the organization interested in assessing the ability of the employer organization pay them periodically (like salaries, bonus, etc promotional prospects capable of maintaining pension fund and retirement benefits• Government is providing number of facilities to the business units (such as subsidy concessions of power, water, etc), hence it is the responsibility of the government to protest the interest of all sections of the society• Government wants to know whether business enterprises are remitting various taxes duties etc to the exchequerFor the above said reasons government and its agencies require accounting informationGENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)• Accounting principles are in the form of guidelines and or rules which are used as standards for recording business transactions in the books of accounts and their fair presentation in the Financial statements.
• Financial Statement means: 1. Trading and Profit and Loss Account for the accounting period ended on (in case of trading organizations –buying and selling Manufacturing and profit and loss account (in case of manufacturing units 2. Balance Sheet as at 31/03/2011 3. Cash flow statements for the period 4. Accounting policies 5. Accounting Standards 6. Notes forming part of accounts• ACCOUNTING ASSUMPTIONS1. Money Measurement : Record of transaction is made only those events which can be measured and expressed in terms of money . Transactions are recorded value of money (at the time the transactions are recorded)2. Going Concern : Going concern concept means that a business concern that a business concern will continue to operate for a fairly long period, from this point of view its business transactions are recorded in the books of accounts
3. : The Business Entity: Every business undertaking whether it is a sole trading concern or a partnership firm or a limited company is considered as different entity from the person who owns it , hence all the transactions are recorded in the business concerns and not in the books of owners.• ACCOUNTING CONCEPTS1. Accounting Period Concept: According to going concern assumption a business concern likely to continue for an indefinitely long period of time, for the purpose of reporting to outsiders like creditors, investors, banks, financial institutions, etc financial performance and financial position is required to be ascertained yearly.2. Objectivity Concept: This concept specifies that all entries of business transactions which take place during accounting period should be supported by the evidences such as invoices (for sales), bills/invoices (for purchases), documents, deeds, vouchers, which are objective and subject to verification.3. Dual-Aspect Concept: For each transactions there are two effects one Debit the other is credit. Evert business transaction involves dual or double aspects of equal value for example if an asset is increased corresponding increase in liability or capital
In the books of any business concern at any moment of time , the followingequation holds goodASSETS=LIABILITIES+CAPITAL ORASSETS-CAPITAL=LIABILITIES• ACCOUNTING PRINCIPLES1. Cost Principle : An asset acquired by a business concern is recorded in the books of accounts at cost(Historical Cost) that is the value actually paid for acquiring the asset.2. Accrual Principle: The accrual principle suggests that when a transaction has been entered into its consequences will certainly follow. So all transactions must be recorded in the books of accounts whether paid or not. It implies that “revenues accrue in that year in which they are earned, and not in the year in which year they are actually received. Similarly expenses will accrue in the year in which they are incurred and not in the year in which they are actually paid.
3. Matching Principle: Matching principle has been evolved to help a concern to know its net profit or net loss and the details of all revenues and expenses. To know the net profit or net loss and details of all revenues and expenses every business concern prepares and presents a statement or an account known as Income statement or Profit and Loss Account for the account period. Profit is the result of two factors namely i) revenues and ii) expenses and losses The revenues increases the profit and the expenses and losses decreases the profit. For the determination of profit or loss the two factors are matched and result balance is taken as the net profit or net loss. Matching concept provides a sound basis namely accrual basis for the ascertainment of the correct profit or loss of the business for the accounting period.4. Realization Principle: According to the realization principle, is considered as being earned on the date on which it is realized ( it is not relevant whether cash is received or not) Revenue is considered as being realized: • Not when goods are manufactured • Or order is received • But on the date on which goods or services are transferred to the customer and the customer is legally liable to pay for them
Advantages of this principle• Revenue recognition principle is much of significance for the preparation of Income Statement or Profit and Loss Account• This principle has contributed to the accrual basis of accounting (that means income or expense is to be recorded on the date on which goods or services are transferred/expense is incurred, whether the amount is received or not in the case of income, similarly whether expense is paid or not).• This principle gives objectivity and definiteness to revenue recognition.ACCOUNTING CONVENTIONS1.Conservatism: In accounting records and in the financial statements of a business concern all the anticipated losses (example few debts may become bad), risks and uncertainties should be provided but expected incomes should be ignored even the income sure to arise, to put in simple words Anticipate losses but don’t anticipate losses Based on this convention that provision for doubtful debts, provision for discount on debtors, provision for fluctuation in the prices of investment etc are provided in the books of accounts of a business concern.IT SHOULD NEITHER SHOW ROSY PICTURE BY WINDOW DRESSING NOR WORSEPICTURE BY CREATING SECRET RESERVES
ACCOUNTING RULES1. Materiality Rule:• In accounting a detailed record is made record of business transactions only those business transactions which are Material• No detailed record is made of transactions which are trivial (not important)• In the case of such trivial transactions only a broad view is taken• Minute(small) details of such transactions is not justified by the usefulness of the results• Pencil is required for office, someone will be using the pencil in fact pencil is an asset by using the pencil it will depreciate day by day, we can calculate such depreciation but the cost of such an effort is will be very high hence pencil is taken as used at the time it purchased• The logic behind the materiality rule is that only material and significant transactions are recorded• Materiality is a relative term because what is material to one the same may not be material to other. For example an employee getting a salary of Rs 5,000/- per month if loses Rs 100 it is a material amount lost for him the same is not for a millionaire because it is not material amount for him. For instance cost of small items of tools are material(important) for a small repair workshop but they are not material for a ship builder
2. Disclosure Rule:• Disclosure means all material facts must be disclosed in the financial statements• For example in the case of sundry debtors (or receivables) the disclosure is as below: Total Sundry Debtors Rs 5,000 Debtors considered to be good 4,500 Debtors considered to be doubtful 500 Debtors outstanding less than six months Rs 3,000 Debtors outstanding for more than six months 2,000• The idea behind this rule is that the financial statements are essentially meant for for external users, on the basis of information external users make take decisions
Land, Building, Machinery, Trade Assets Accounts Debtors, cash, Pre- paid expenses Bills Receivables Long term liabilities, trade creditors, Liability Accounts receipts in advance,Classification of bills payableCommonly used Accounts Capital/share capital, Owners’ Accounts reserves & surplus, unpaid dividends, drawings Wages, salaries, Expenses Accounts rent, telephone expenses, interest on loans, etc Sales, interest on Revenue Accounts investment, profit on sale of asset, other income, etc
KINDS OF ACCOUNTS PERSONAL ACCOUNTS KINDS OR TYPES OFACCOUNTS IMPERSONAL ACCOUNTS
Natural Personal Rama’s A/c Accounts Krishna’s A/cPERSONAL Artificial Personal Accounts HMT’s A/c KSFC’s A/cACCOUNTS Representative Outstanding Personal Accounts Expenses A/c Pre-paid Expenses A/c REAL ASSET OR Cash A/c Goods A/c PROPERTY Machinery A/c ACCOUNTIMPERSONAL ACCOUNTS Wages A/c Rent A/c Sales A/c NOMINAL OR Discount FICTICIOUS Received A/c ACCOUNTS
Sl.No. KIND OF DEBIT /”Dr” CREDIT/”Cr” ACCOUNT 1 PERSONAL Receiver of the Giver of the ACCOUNTS benefit benefit 2 REAL What comes in What goes out ACCOUNTS 3 NOMINAL Expenses & Incomes & ACCOUNTS Losses Gains
• NATURAL PERSONAL ACCOUNTS: These accounts are relating to natural persons natural person means a person who is having head, ears, nose, hands etc• ARTIFICIAL PERSONAL ACCOUNTS: Accounts of business concerns and institutions which are recognized as persons in business society or by law example Bank A/c Co-operative Society A/c, Veerasaiva College A/c• REPRESENTATIVE PERSONAL ACCOUNTS: They represent the amount owed to, or by certain persons (that is the persons behind these transactions)• REAL ACCOUNTS: Real accounts are those accounts which we can touch, see, sense or feel• NOMINAL ACCOUNTS: Nominal accounts are those accounts which we can not touch, see, sense or feel
• ACCOUNT It is summarized transactions which have taken place during a particular period• FORMAT OF ACCOUNT An account may be horizontal or vertical• EXAMPLE OF HORIZONTAL ACCOUNT Dr RAMA’S A/c Cr
• DEBIT Means debit side of the account or left hand side of the account• CREDIT Means credit side of the account or right hand side of the account• JOURNAL Journal is derived from a French word Jour which denotes a day, it is also called Day Book where business transactions of a particular day are recorded in this book• This is also called Book of Original Entry or Prime Entry• Dr Means an account is debited• Cr Means an account is credited FOR EVERY BUSINESS TRANSACTION HAS TWO EFFECTS ONE IS “DEBIT” THE OTHER IS “CREDIT” FOR EVERY BUSINESS TRANSACTIONS TWO ACCOUTS ARE INVOLVED ONE ACCOUNT IS DEBITED AND THE OTHER ACCOUNT IS CREDITED WITH THE SAME AMOUNT
• Dr denotes an Account is debited• Cr denotes an Account is credited For example Rama’s Account is debited and Cash Account is credited• By denotes an Account is debited• To denotes an Account is credited Rama’s A/c To Cash A/c Cash A/c By Rama’s A/c
• EXAMPLE OF VERTICLE FORM OF ACCOUNT• Paid cash to Rama Rs 2,00,000 on 01/03/2012 DATE PARTICULARS L.F. DEBIT (Rs) CREDIT (Rs) RAMA’S A/c 01/03/2012 To Cash A/c 15 2,00,000• L.F. Means ledger folio where the debit and credit are posted in their respective ledgers
JOURNALISATION OF TRANSACTIONS• An attempt is made to analyze few business transactions• Rama commenced business with Rs 2 lacs cash• The two accounts involved are 1. Rama’s Capital A/c and 2. Cash A/cDr Cash A/c CrTo Rama’s Capital A/c 2,00,000 Rama’s Capital A/c By Cash A/c 2,00,000
JOURNALDate L.F. PARTICULARS DEBIT(Rs) CREDIT(Rs)01/03/2012 1 By Cash A/c 2,00,000 2 To Rama’s Capital A/c 2,00,000 (Capital introduced by Rama)
• To/By are irrelevant now a days they need not be written• If left hand side of the account is written means the account is debited• Similarly if right hand side of the account is written means the account is creditedNARRATION Means brief description of the transaction
1) Journalize the following transactions in the books of Mr. Anwar 20121. January 1 Anwar commenced business with cash Rs 5,0002. 3 Paid into Bank Rs 1,0003. 4 Bought goods for cash Rs 1,0004. 5 Bought office furniture for cash Rs 5005. 6 Sold goods for cash Rs 6006. 7 Sold goods to Murthy on credit Rs 4007. 8 Bought goods from Narayan on credit Rs 5008. 10 Paid rent to land lord Rs 3009. 12 Paid salary to manager Rs 10010. 15 Sold furniture for cash Rs 20011. 16 Received commission from Suresh Rs 2012. 18 Bought goods Rs 40013. 20 Sold goods Rs 50014. 22 Sold goods to Shenoy Rs 30015. 23 Bought goods from Ramesh Rs 20016. 24 Bought goods from Kamath for cash Rs 50017. 25 Paid carriage Rs 5018. 26 Sold goods to Rajesh for cash Rs 60019. 27 Paid postage Rs 3020. 31 Withdrew cash from office for personal use Rs 200
Date Particulars Debit (Rs) Credit (Rs)01/01/2012 Cash Account 5,000 Anwar’s Capital Account 5,000 (Cash introduced by the proprietor)03/01/2012 Bank Account 1,000 Cash Account 1,000 (Cash paid into Bank)04/01/2012 Purchase Account 1,000 Cash Account 1,000 (Goods purchased for cash)05/01/2012 Office Furniture Account 500 Cash Account 500 (Office furniture bought for cash)
Date Particulars Debit (Rs) Credit (Rs)06/01/2012 Murthy’s Account 400 Sales Account 400 (Goods sold to Murthy on credit)08/01/201 Purchases Account 500 Narayan’s Account 500 (Goods purchased from Narayan on credit)10/01/2012 Rent Account 300 Cash Account 300 (Rent paid)
Date Particulars Debit (Rs) Credit (Rs)12/01/2012 Salaries Account 100 Cash Account 100 (Salary paid)15/01/2012 Cash Account 200 Furniture Account 200 (Furniture sold for cash)16/01/2012 Cash Account 20 Commission Account 20 (Commission received)18/01/2012 Purchase Account 400 Cash Account 400 (Goods purchased for cash)20/01/2012 Cash Account 500 Sales Account 500 (Goods sold for cash)
Date Particulars Debit (Rs) Credit (Rs)22/01/2012 Shenoy’s Account 300 Sales Account 300 (Goods sold Shenoy on credit)23/01/2012 Purchases Account 200 Ramesh’s Account 200 (Goods purchased from Ramesh on credit)24/01/2012 Purchases Account 500 Cash Account 500 (Goods purchased for cash)25/01/2012 Carriage Account 50 Cash Account 50 (Cash paid for carriage)
Date Particulars Debit (Rs) Credit (Rs)26/01/2012 Cash Account 600 Sales Account 600 (Goods sold for cash)27/01/2012 Postage Account 30 Cash Account 30 (Cash paid for postage)31/01/2012 Anwar’s Drawings Account 200 Cash Account 200 (Cash withdrawn for personal use of proprietor)
Journalize the following transactions and post them to the various ledgerAccounts and prepare the trial balance as on 31st January 20122012, January. 1 Rao commence business with 5,000 2 Purchased goods for cash 2,500 3 Bought office furniture for cash 500 4 Paid for postages 10 5 Purchased goods from Rajkumar 2,000 7 Sold goods for cash 150 8 Purchased goods from Rahim 400 9 Sold goods to Suresh 40010 Sold goods to Nayak 30011 Purchased goods for cash 35013 Received cash from Nayak 25015 Paid cash to Rahim 40017 Returned goods to Rajkumar 20020 Suresh returned goods 5020 Paid salaries 15025 Sold goods for cash 50026 Rao withdrew for personal use 80027 Paid for stationery 10028 Paid rent 22531 Received commission 50
Date Particulars Debit (Rs) Credit (Rs)01/01/2012 Cash Account 5,000 Rao’s Capital Account 5,000 (Capital brought in by Rao)02/01/2012 Purchases Account 2,500 Cash Account 2500 (Goods purchased for cash)03/01/2012 Office furniture Account 500 Cash Account 50004/01/2012 Postage Account 10 Cash Account 10 (Cash paid for postage)05/01/2012 Purchases Account 2,000 Rajkumar’s Account 2,000 (Goods purchased from Rajkumar on credit)
Date Particulars Debit (Rs) Credit (Rs)07/01/2012 Cash Account 150 Sales Account 150 (Goods sold for cash)08/01/2012 Purchases Account 400 Rahim’s Account 400 (Goods purchased from Rahim on credit)09/01/2012 Suresh’s Account 400 Sales Account 400 (Goods sold to Suresh on credit)10/01/2012 Nayak’s Account 300 Sales Account 300 (Goods sold to Nayak on credit)
Date Particulars Debit (Rs) Credit (Rs)11/01/2012 Purchases Account 350 Cash Account 350 (Goods purchased for cash)13/01/2012 Cash Account 250 Nayak’s Account 250 (Cash received from Nayak on account)15/01/2012 Rahim’s Account 400 Cash Account 400 (Cash paid to Rahim)17/01/2012 Rajkumar’s Account 200 Purchase Returns Account 200 (Goods returned to Rajkumar)
Date Particulars Debit (Rs) Credit (Rs)20/01/2012 Sales Returns Account 50 Suresh’s Account 50 (Goods returned by Suresh)22/01/2012 Salaries Account 150 Cash Account 150 (Cash paid for salaries)25/01/2012 Cash Account 500 Sales Account 500 (Goods sold for cash)26/01/2012 Rao’s Drawings Account 800 Cash Account 800 (Cash withdrawn by Rao for his personal use)
Date Particulars Debit (Rs) Credit (Rs)27/01/2012 Stationery Account 100 Cash Account 150 (Cash paid for stationery)28/01/2012 Rent Account 225 Cash Account 225 (Cash paid for rent)31/01/2012 Cash Account 50 Commission Account 50 (Cash received for commission)
LEDGER: It is the book where transactions of the same nature that is pertaining to aparticular person, thing or service. They are classified and grouped together in oneplace in the form of an account, through a process called POSTINGThis is a process transferring of entries from the journal to the ledgerBALANCING OF A LEDGER ACCOUNT OR STRIKING THE BALANCE PF A LEDGERACCOUNT: It is a process of ascertaining whether a particular account has receivedmore benefits than it has given or has given more benefits than it has received ona particular dateIn other words it is a process of finding out the difference between the total of theDebit side and the total of Credit side of an account . In short it is the act of ascertainingThe difference between two sides of a ledger account
In ledger account is ascertaining difference between two sides, such difference is addedto the side which has lesser amount by calling it as TO BALANCE CARRIED DOWN(TO BALANCE C/d ) OR BY BALANCE BROUGHT DOWN (BY BALANCE B/d )Beginning of the next(month) balancing period is written on the opposite side of theaccount TO BALANCE BROUGHT DOWN (FORWARD) OR BY BALANCE BROUGHT DOWNOr To balance b/d or by balance b/dDEBIT BALANCE Debit side of an account exceeds credit side of an accountCREDIT BALANCE Credit side of an account exceeds debit sideTRIAL BALANCE it is a statement where debit balances and credit balances are of variousaccounts are jotted down. The purpose of preparing trial balance is to find out arithmeticalaccuracy while posting transactions from journal to ledger
Trial balance was very essential in case of preparation of books of accounts undermanual system. After advent of different types of computer accounting packagesthere is no scope for arithmetical errors. In computer environment it is relevant toknow what are the types of accounts, number of accounts and their balances for aparticular period
Journalize the following transactions in the books of Viswanath and post them into ledgerand prepare Trial Balance2011, December. Rs1 Viswanath commenced his business with the following Cash in hand 1,500 Cash at Bank 3,500 Goods in hand 3,000 Furniture 2,000 Buildings 10,0002 Gave charity 205 Loan taken from the Bank 5,0006 Purchased Motor Car in exchange for goods Rs2,000 and cheque Rs 3,0008 Cash sales paid into Bank 2,0009 Withdrew cash for petty cash 10010 Introduced further capital 2,00012 Bought shares in the Mangalore Fertilizers Ltd 80013 Paid proprietors life insurance premium 10015 Paid Chitra cash in lieu of cheque 50016 Cash received on sale of shares 30017 Received from Kishen one hundred rupees note and gave him change for it18 Invested in National Savings Certificate 20019 Bought goods from Lakshman on account 2,00020 Sold goods to Bharath on account 1,500
21 Received from Rao Rs 100 advance for goods23 Received a cheque from Ram to be credited to Bharath 50024 Paid tax to the Mangalore Corporation 5025 Commission charged to Raghav for a getting a house for him 10026 Furniture costing Rs 300 was destroyed by fire27 Bank Charges 1028 Bank allowed interest on Deposits 2029 Bank collect interest on investment 1031 Closing stock on hand 1,00031 Interest on loan taken from the Bank 10031 Interest on capital 100
Date Particulars Debit Credit Amount (Rs) Amount (Rs)01 Cash in A/c 1500 Bank A/c 3500 Stock A/c 3000 Furniture A/c 2000 Buildings A/c 10000 Viswanath’s Capital A/c 2000002 Charity A/c 20 Cash A/c 2005 Bank A/c 5000 Bank Loan A/c 500006 Motor Car A/c 5000 Sales A/c 2000 Bank A/c 3000
Date Particulars Debit Amount Credit Amount (Rs) (Rs)25 Raghav’s A/c 100 Commission A/c 10026 Loss by Fire A/c 300 Furniture A/c 30027 Bank Charges A/c 10 Bank A/c 1028 Bank A/c 20 Int. on Bank Depost A/c 2029 Bank A/c 10 Interest on Invest. A/c 1031 Closing Stock A/c 1000 Trading A/c 100031 Interest on Bank Loan A/c 100 100
Date Particulars Debit Amount (Rs) Credit Amount (Rs)31 Interest on Capital 100 Vishwanath’s Capital A/c 100
TRIAL BALANCEParticulars Debit (Rs) Credit (Rs)Lakshman’s A/c 2000Commission A/c 100Bharath’s A/c 1000Rao’s Advance A/c 100Loss by Fire A/c 300Bank Charges A/c 10Int.on Bank Deposit A/c 20Int.On.Investment A/c 10Closing Stock A/c 1000Trading A/c 1000Interest on Bank Loan A/c 100Interest on V.Capital A/c 100 31875 31830
Question: On which side, the increase in the following Accounts will be recorded ? Also mention the nature of account1) Surendra A/c (Proprietor)2) Cartage A/c3) Debtors A/c4) Building A/c5) Bank Account (Overdraft)6) Machinery A/c
1. Surendra A/c--Credit Side---- Personal A/c2. Cartage A/c--- Debit Side---- Nominal A/c3. Debtors A/c--- Debit Side---- Personal A/c4. Building A/c--- Debit Side--- Real A/c5. Bank A/c(Overdraft)--- Credit Side---- Personal A/c
Amortization• Process of writing off the value of intangible assets of a business• Amortization of intangible assets takes place periodically covering the estimated useful economic life of the intangible assets• Intangible assets include intellectual property (Technical Know Ho, copy rights ), incorporation costs in case of a limited company such as preliminary expenses Depletion• Depletion is the process of allocating the depletion cost of natural resources to expense as individual units of the resource are extracted• Depletion costs equals the total cost of natural resource less salvage value after extracting• Depletion expense is calculated using the units-of-activity method
The actual number of units extracted and sold in one year equals the amount ofdepletion expense recorded for the asset during the year• Iron ore deposits in Sandur taken on lease from the Government .
Profit and loss appropriation account isprepared after profit and loss account..It s a account where the profits earned bythe company is brought in from profit andloss account and it s distributed to variousaccounts like interim dividend account,provision for taxation account, generalreserve account etc.....it s a account which shows how the profitsare distributed in an organization
The purpose of the balance sheet is to show acompanys Assets, Liabilities and Equity at a givenpoint in time, usually the companys fiscal yearend. This is as opposed to an Income Statement,for example, which shows earnings throughoutthe year. A balance sheet is as of a given day. itdoes not show activity for a whole year, althoughyou can compare year-to-year balance sheets todeduce some information.
A balance sheet is divided into two sides.On one side is the total assets of theCompany, such as cash, working capital,fixed assets (machinery, land, equipment,autos, etc), and other assets. On the otherside is the Liabilities, such as accountspayable, debt, and other liabilities. Assetsminus liabilitiese equals equity, which isthe remaining ownership in the company -that accorded to shareholders.
What is mercantile basis of accounting Under accrual or mercantile basis accounting,revenues are recognized and earned when they are realized or realizableirrespective of when the cash is received.To put it in different terms, the accrual basis of accounting asks you to take intoconsideration all those incomes/gains and expenses/losses pertaining to theaccounting period for which you are trying to ascertain the profits and lossesirrespective of whether the incomes are received in cash or not and the expensesare paid out in cash or not.
Work in Progress (WIP)Construction Work in Progress is a long-term asset account inwhich the costs of constructing long-term assets are recorded. Theaccount Construction Work in Progress will have a debit balanceand will be reported on the balance sheet as part of a company’sProperty, Plant and Equipment.The costs of a constructed asset are accumulated in the accountConstruction Work in Progress until the asset is placed into service.When the asset is completed and placed into service, the accountConstruction Work in Progress will be credited for the accumulatedcosts of the asset and will be debited to the appropriate Property,Plant and Equipment account.Depreciation begins after the asset has been placed into service
DepreciationBuildings, machinery, equipment, furniture, fixtures,computers, outdoor lighting, parking lots, cars, andtrucks are examples of assets that will last for morethan one year, but will not last indefinitely. Duringeach accounting period (year, quarter, month, etc.)a portion of the cost of these assets is being usedup. The portion being used up is reported asDepreciation Expense on the income statement. Ineffect depreciation is the transfer of a portion of theassets cost from the balance sheet to the incomestatement during each year of the assets life
The calculation and reporting of depreciation is based upon twoaccounting principles:Cost principle. This principle requires that the DepreciationExpense reported on the income statement, and the assetamount that is reported on the balance sheet, should be based onthe historical (original) cost of the asset. (The amounts should notbe based on the cost to replace the asset, or on the currentmarket value of the asset, etc.)Matching principle. This principle requires that the assets cost beallocated to Depreciation Expense over the life of the asset. Ineffect the cost of the asset is divided up with some of the costbeing reported on each of the income statements issued duringthe life of the asset. By assigning a portion of the assets cost tovarious income statements, the accountant is matching a portionof the assets cost with each period in which the asset is used.Hopefully this also means that the assets cost is being matchedwith the revenues earned by using the asset.
Contingent liabilities are liabilities that may or may not beincurred by an entity depending on the outcome of a futureevent such as a court case. These liabilities are recorded in acompanys accounts and shown in the balance sheet when bothprobable and reasonably estimable. A footnote to the balancesheet describes the nature and extent of the contingentliabilities. The likelihood of loss is described as probable,reasonably possible, or remote. The ability to estimate a loss isdescribed as known, reasonably estimable, or not reasonablyestimable.
Examplesoutstanding lawsuitsLegal liabilityLiquidated damagesTortBills Discounted with bankUnliquidated damagesDestruction by Floodproduct warrantyIncome Tax DisputedSales Tax Disputed
Deferred Revenue Expenditure:- In some cases, the benefit of arevenue expenditure may be available for period of two or three oreven more years. Such expenditure is then known as "DeferredRevenue Expenditure" and is written off over a period of a fewyears and not wholly in the year in which it is incurred. Forexample, a new firm may advertise very heavily in the beginning tocapture a position in the market. The benefit of this advertisingcampaign will last quite a few years. It will be better to write off theexpenditure in there or four and not in the first year.When loss of a specially heavy and exceptional nature is sustained,it can also treated as deferred revenue expenditure.But,it should benoted, loss resulting from transactions enterd into, such asspeculative purchase or sale of a large quantity of a commodity,cannot be treated as a deferred revenue expenditure. Only lossarising from circumstances beyond ones control can be so treated.
Straight Line Depreciation MethodThe simplest and most commonly useddepreciation method, straight linedepreciation is calculated by taking thepurchase or acquisition price of an assetsubtracted by the salvage value dividedby the total productive years the assetcan be reasonably expected to benefitthe company (called "useful life" inaccounting jargon).
Reducing Balance Depreciation Method or Declining Balance MethodUnder the declining balance method also known as reducing ordiminishing balance or written down value method, adepreciation percentage rate is applied to the acquisition orconstruction cost at the beginning of the accounting periodrather than the original cost. Under this system, a fixedpercentage of the diminishing value of the asset is written offeach year so as to reduce the asset to its break-up or scrapvalue at the end of its life. Under this method, the annualcharge for depreciation decreases from year to year. The effectis that the initial years take a higher hit of depreciation chargeas compared to the later years. Unlike the straight-line methodwhere the cost of asset is completely written-off, this neverhappens in the reducing balance method. It must be notedthat salvage value is not considered in the calculation ofdepreciation. However, the book value of the asset is neverbrought below its salvage value.
Unit of Production MethodThis method refers to an association betweenthe asset’s ability to do work during its usefullife and the decline in the worth of the asset.Unfortunately, this depreciation method doesnot take into account the expected years of theasset but takes into account the measurableunits of use. The units could be anything,including number of items produced or hoursused for machinery, number of miles traveledby vehicles, etc. Thus, it is calculated by theactual usage of the asset.
Voucher1. A piece of substantiatingevidence; a proof.(Invoice/Bill)2.A written record of expenditure,disbursement, or completedtransaction.(Voucher of Concern)3.A written authorization orcertificate, especially oneexchangeable for cash orrepresenting a credit against futureexpenditures.(Advance payment)
Definition of JournalIn accounting, a first recording offinancial transactions as they occur intime, so that they can then be used forfuture reconciling and transfer to otherofficial accounting records such as thegeneral ledger. A journal will state thedate of the transaction, which account(s)were affected and the amounts, usuallyin a double-entry bookkeeping method.
A ledger is the principal book or computer filefor recording and totaling monetarytransactions by account, with debits andcredits in separate columns and a beginningbalance and ending balance for each account.The ledger is a permanent summary of allamounts entered in supporting journals whichlist individual transactions by date. Everytransaction flows from a journal to one ormore ledgers. A companys financialstatements are generated from summarytotals in the ledgers.
Ledgers include:Sales ledger, records accountsreceivable. This ledger consists of thefinancial transactions made bycustomers to the company.Purchase ledger records money spentfor purchasing by the company.General ledger representing the 5main account types: assets, liabilities,income, expenses, and equity.
TRIAL BALANCE• DEFINITION• IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER.• DEBIT BALANCES ARE ENTERED IN DEBIT COLUMN.• CREDIT BALANCES ARE ENTERED IN CREDIT COLUMN.• HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS.
TRIAL BALANCE• BASIC PRINCIPLE :• SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE, ASSETS AND EXPENSES ARE DEBIT BALANCES LIABILITIES AND INCOMES ARE CREDIT BALANCES. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY
Final AccountsMr.Vishal a retail storekeeper had prepared the following trial balance from hisledger as on 31st March, 2011Particulars Rs RsPurchase and Sales 310000 400000Sock of Goods 50000Cash in hand 2000Cash at bank 25000Mr.Vishal’s Capital 200000Drawings 4000Rates and Taxes 50000Salaries 32000Postage and Telegram 11000Salesmen Commission 20000Insurance 8000Advertising 20000Furniture and Fittings 25000Printing and Stationery 12000
Bad debts 2000Cash discount 4000Carriage Inward 5000Carriage Outward 6000Outstanding Expenses 2000Sundry Creditors 15000Sundry Debtors 22000 615000 615000Prepare Trading and Profit and Loss Account and Balance Sheet
The following is the T/B of King of Kings Ltd., as on 31st March 2009Accounts Rs RsStock on 1St April 2008 675000Sales 3060000Wages 300000Share Capital 1000000Discount 40000 27000Purchases 2400000Carriage 8550Purchase returns 90000Patents and trade marks 50000Salaries 67500Bills payable 73000Mis.Expenses 60000Rent and Taxes 34000Debtors and Creditors 300000 400000
Plant and Machinery 261000Furniture and Fixtures 200000Bank 600000Further Information:1.Outstanding rent amounted Rs 7200 while O/S Salaries Rs 8100 at the end of the year2.Make a provision for doubtful debts amounting to Rs 49503.Stock on 31St March 2009 was valued at Rs 7000004.Provide depreciation on Plant and machinery @ 14% and furniture and fixtures at 18%5.Provide for managerial remuneration @ 10% of PBT6.Provide provision for Income tax @ 33%7.Amortise patents and trademarks @ 5%Required: 1.Findout net profit as on 31-03-2009 2.Profit and Loss Appropriation A/c (31.03.09) 3.Balance Sheet as on 31-03-2009 4.comment the performance of the company
Fixed CostsFixed costs are the ball and chain of the businessworld. You will pay these costs week to week,month to month, year to year. They do notchange based on your level of activity.One of the most traditional examples of a fixedcost is rent of your office space. You will paythat cost according to your lease even if youhave no business operations thatmonth. Conversely, you’ll generally pay thatsame amount if you are running at 200%capacity.
Variable CostsThese are costs that will change based on your levelof activity (or some other business variable).In the manufacturing world, variable costs are oftentied to the number of SS Steel Scale produced. If yourfactory is creating a physical product, there is somelevel of raw material used. If we assume Rs 10 of SSsteel is needed to make a 1 Steel Scale, then we needRs1000 of material for 100 Scales, Rs2000 for 200Scales, and so on. Your cost will vary based on activitylevel, but is still predictable based on your businessplans.
Contribution margin is the amount remaining fromsales revenue after variable expenses have beendeducted. Thus it is the amount available to coverfixed expenses and then to provide profits for theperiod. Contribution margin is first used to cover thefixed expenses and then whatever remains go towardsprofits. If the contribution margin is not sufficient tocover the fixed expenses, then a loss occurs for theperiod. This concept is explained in the followingequations:Sales revenue − Variable cost* = Contribution Margin
P/V Ratio:P/V Ratio (Profit Volume Ratio) is the ratio of contribution to saleswhich indicates the contribution earned with respect to one rupee of sales. It alsomeasures the rate of change of profit due to change in volume of sales. Its fundamental property is that ifper unit sales price and variable cost are constant then P/V Ratio will be constant at all the levels of activities. A changeis fixed cost does not affect P/V Ratio. It is calculated as under: P/V Ratio (or C/S Ratio) = Contribution (c) Sales (s)
Important Formulae of Marginal Costing1. Contribution=Sales x P/V Ratio2. S-V=F+P3. P/V Ratio=Change in Contribution4. P/V Ratio=Change in Profit/Loss Change in Sales5. P/V Ratio=Fixed Cost BEP Sales6. BEP(Sales in Value)=Fixed Cost P/V Ratio
7. BEP (Sales in Value)=Fixed Costs x Total Sales Total Contribution8. BEP (Sales in Value)=Fixed Costs x Selling Price Per Unit Contribution Per Unit9. BEP in Units= Fixed Cost Contribution Per Unit10. Margin of Safety= Profit P/V Ratio11. Margin of Safety= Total Sales-BEP Sales12. Margin of Safety= Profit Contribution13. Margin of Safety (%)= Margin of Safety x 100 Total Sales S= Sales F= Fixed Cost V= Variable Cost C= Contribution P= Profit M/S= Margin of Safety BEP= Break Even Point
Breakeven Analysis is the process of categorizingcosts of production between variable and fixedcomponents and deriving the level of output atwhich the sum of these costs, referred to as totalcosts per unit become equal to sales revenue.The analysis helps to determine the BreakevenPoint from this point of equality of sales revenuewith total costs. At the breakeven point, theproduction activity neither generates a profit nora loss. Breakeven analysis is used in productionmanagement and Management Accounting.
Cost-volume-profit analysis (CVP), orbreak-even analysis, is used to computethe volume level at which totalrevenues are equal to total costs. Whentotal costs and total revenues are equal,the business organization is said to be"breaking even." The analysis is basedon a set of linear equations for astraight line and the separation ofvariable and fixed costs.
Accounting: An excess of acompanys actual sales revenue overthe breakeven sales revenue,expressed usually as a percentage.The greater this margin, the lesssensitive the company to any abruptfall in revenue.