This document contains a presentation on accounting concepts and principles. It defines accounting and discusses key accounting concepts such as business entity, money measurement, accounting period, cost, dual aspect, matching, realization and full disclosure. It also covers accounting principles including consistency, materiality, conservatism and double entry system. The document concludes with explaining accounting processes such as journal, ledger, trial balance and financial statements including trading account, profit and loss account and balance sheet. It also discusses ratio analysis and different types of ratios to analyze business performance.

1. Presented By:
DEEPSHIKHA
HARITWAL(MCA/25001/18)
MAYANK SETH(MCA/25002/18)
ROOPAK BHAMA(MCA/25003/18)
NIKHIL AGRAWAL(MCA/25004/18)
Presented To:
PRIYANSHU SIR

2. CONTENTS
 Introduction to accounting
 Accounting principles
 Double entry system
 Financial statements
 Ratio analysis
 Case study

3. ACCOUNTING
 Accounting may be defined as the process of
recording, classifying, summarizing and interpreting
the financial transactions and communicating the
results there of to the persons interested in such
information.

4. BUSINESS ENTITY CONCEPT
A business and its owner should be treated separately as
far as their financial transactions are concerned. The
business and its owner(s) are two separate entities
GOING CONCERN CONCEPT
It is assumed that the entity is a going concern, i.e., it will
continue to operate for an indefinitely long period in future
and transactions are recorded from this point of view.

5. MONEY MEASUREMENT
CONCEPT
• Inaccounting, a record is made only of those
transactions or events which can be measured and
expressed in terms of money
• Non monetary transactions are not recorded in accounting
ACCOUNTING PERIOD CONCEPT
Each business chooses a specific time period to complete a
cycle of the accounting process—for example, monthly,
quarterly, or annually—as per a fiscal or a calendar year.

6. COST CONCEPT
• The fixed assets of a business are recorded on the basis
of their original cost in the first year of accounting.
•Subsequently, these assets are recorded minus
depreciation.
•No rise or fall in market price is taken into account.
•The concept applies only to fixed assets.
DUAL ASPECT CONCEPT
•For Every Debit, there is a Credit
•Every transaction should have a two-
sided effect to the extent of same amount

7. Profit is earned when goods or services are
provided/transferred to customers. Thus it is incorrect to
record profit when the order is received or when the
customer pays for the good.
REALIZATION CONCEPT
MATCHING CONCEPT
The matching principle ensures that revenues and
all their associated expenses are recorded in the
same accounting period.

8. MATERIALITY CONCEPT
•Only those transactions, important facts
and items are shown which are useful and
material for the business. The firm need not
record immaterial and insignificant items.
FULL DISCLOSURE PRINCIPLE
•Financial Statements and their notes
should present all information that is
relevant and material to the user’s
understanding of the statements.

9. CONSERVATISM CONCEPT
•Anticipate No Profits but Provide for all Losses.
•Accountant should always be on side of safety.
•Example: making provisions for doubtful debts,
depreciation etc.
CONSISTENCY CONCEPT
•The accounting practices and methods should
remain consistent from one accounting period to
another.
•Whatever accounting practice is followed by the
enterprise, it should be followed on a consistent
basis from year to year.

10. DOUBLE-ENTRY SYSTEM
 Modern Accounting System is based on double entry
system which is based on the fundamental accounting
equation :
Assets=Liabilities + Equity.
 The double-entry accounting system ensures that the
accounting equation always remains in balance.
 Debits must be equal Credits.
 The system is called Double Entry because every
business transaction has dual aspect and affects at least
two accounts. Every transaction must contain at least one
account debited and at least one account credited thus
posted in at least two different ledger accounts.

11. CONVENTIONAL VS DOUBLE-ENTRY

12. DOUBLE-ENTRY SYSTEM
 Complete record of
Transactions.
 Check on Accuracy
 Determination of Financial
position
 Scientific System
 Ascertainment of Profit & loss
 Ascertainment of cash Balance
 Prevention of Fraud
 Better control & decision
making
 Comparison of results
 Requires thorough
knowledge
 Increases the volume of
accounting work
 Records historical costs
only i.e does not
consider time value of
money.
ADVANTAGES DISADVANTAGES

13. JOURNAL
 Journal is that book of accounts in which
transactions are originally recorded in a
chronological order, i.e., as they occur.
 It is the first book of account in which the
transactions are recorded.
 An entry made in the Journal is known as a
‘Journal Entry’.
 The process of recording a transaction in a Journal
is known as ‘Journalizing’.
 The transfer of Journal entry to a Ledger account is
known as ‘Posting’.

14. FORMAT OF JOURNAL

15. SUB-DIVISION OF
JOURNAL
Journal is sub-divided into subsidiary Journal books.
These are
 Cash Book
 Purchases Book.
 Purchase Returns Book
 Sales Book
 Sales Returns Book
 Bills Receivable Book
 Bills Payable Book
 Journal Proper

16. LEDGER
A Ledger can be defined as a
“book or register which contains, in
a summarized and classified
form, a permanent record of all
transactions.”
It is an important book of accounts, as
the Trial Balance is drawn from it and
with the help of Trial Balance Final
Account is prepared.

17. LEDGER FORMAT

18. EXAMPLE: RECORD THE FOLLOWING
TRANSACTION OF A & CO IN JOURNAL & PREPARE
NECESSARY LEDGER AC.
 1st Jan,

19.  2nd Jan, bought goods on Credit from P & Co for Rs
2,000.
 3rd Jan, sold goods for Cash to B & Co for Rs 500.
 4th Jan, sold goods to R & Co on credit Rs 1,000.
 5th Jan, received from R & Co amount on 1st Jan Rs
1,900 as full settlement of Rs 2,000.
 6th Jan, payment paid to V & Co by cheque (V & Co
allowed Rs 50 discount).
 8th Jan, old furniture sold for cash (book value Rs 300
at Rs 350).

20. JOURNAL

22. LEDGER

23. TRIAL BALANCE
 It is a statement prepared with the debit and credit
balances of the ledger accounts to test the
arithmetical accuracy of the books.
 It is a list of balances of ledger accounts and cash
book.
 It can be prepared on any date.
 It verifies the arithmetical accuracy of posting of
entries from the journal to ledger.

24. FORMAT
Heads of accounts L.F. Dr. Cr.
Trial Balance
as on…

25. FINANCIAL STATEMENTS
 These are the statements prepared at the end of the
accounting period.
 These are prepared to show the financial performance
during the accounting period and financial position of the
business as on date.
 It includes:
 Trading and profit and loss account
 Balance sheet
 These are also termed as final accounts.

26. IMPORTANCE
 These financial statements helps in:
 Comparing current year’s profit with that of previous
year’s.
 Maintaining reserves
 Calculation of ratios
 Ascertaining financial position
 Determines the net profit or net loss.

27. TRADING ACCOUNT
 It is the first stage in process of preparing the final
accounts.
 Shows the gross profit or gross loss earned during
the accounting year.
 It records only net sales and direct cost of good
sold.
 The gross profit or gross loss is transferred to the
profit and loss account.

28. FORMAT
Particulars Amount Particulars Amount
To opening stock By sales
Less: returns inward
To purchases
Less: return outwards
By closing stock
To wages and salaries By gross loss transferred
to profit and loss
account*
To direct expenses
To carriage inwards
To freight, octroi and
cartage
To gross profit transferred
to profit and loss account*
Dr. Cr.
*Either gross loss or gross profit will appear.
Trading Account
For the year ended….

29. PROFIT AND LOSS ACCOUNT
 Prepared to determine net profit earned or net loss incurred
by business during an accounting period.
 It is the second stage in preparation of final accounts.
 It relates to a accounting period and is prepared at end of
that period.
 Accrual basis of accounting is followed in its preparation.
 Capital of the owner increases(net profit) or decreases(net
loss) by the balance of this account.

30. FORMAT
particulars amount particulars amount
To gross loss transferred
from trading account*
By gross profit transferred
from trading account*
To all the expenses and
losses
.
.
.
.
By all the incomes and
items of profit
.
.
.
To net profit transferred to
capital account**
By net loss transferred to
capital account**
*either gross loss or gross profit will appear
**either net profit or net loss will appear
Profit and Loss Account
For the year ended….Dr. Cr.

31. BALANCE SHEET
 A statement which sets out the current assets and liabilities
of a firm or an institution at a particular date.
 Prepared to show the financial position of the business on a
particular date.
 It is prepared at a particular date.
 On the left hand side it contains liabilities of business and on
the right side it contains assets of the business.
 The total of asset side must be equal to the total of liabilities
side.

32. FORMAT
Liabilities Assets
Trade creditors Cash in hand
Bills payable Cash at bank
Bank overdraft Bills receivable
Employees provident fund Sundry debtors
Loans Closing stock
Mortgage Furniture and fittings
Reserves Plant and machinery
Capital
Add: interest on capital
net profit*
Less: drawings
income tax
interest on drawings
net loss*
Land and building
Business premises
Goodwill
Patents /trademarks
Balance Sheet of… as at……

33. OBJECTIVES OF RATIO ANALYSIS
 Locate the weak spots of business which needs
more attention.
 Deeper analysis of liquidity, solvency and
profitability of the business.
 Comparison from different firms dealing in same
business.
 Making comparison of a firm’s present ratios with
past ratios.

34. Advantages
 Simplification of
Accounting Data
 Helpful in comparative
study
 Helpful in locating the
weak spots
 Helpful in analysis of
Financial Statements
 Effective Control
 Window Dressing
 Impact of seasonal
factors
 Limited use of a single
ratio
 Differences in
accounting policies
 Lack of Standards
ADVANTAGES AND LIMITATIONS
Disadvantages

35. CLASSIFICATION OF RATIOS
Ratios
Types
Liquid
Ability to meet current
liabilities
Solvency
Ability to meet long term
liabilities
Turnover
Number of times capital
employed has been
rotated
Profitabilit
yMeasures various
aspects of profitability

36. LIQUIDITY RATIO
Ratio Formula Numerator Denominator Significance
Current
Ratio
Stock (+)
Cash/Bank (+)
Debtors/Receivabl
es (+) Accruals (+)
Short Term Loans
Creditors (+)
Outstanding Exp.
(+) Short Term
Loans (+) Cash
Cr/Overdraft (+)
Provision
Ability to repay
short term
liabilities.
Ideal Ratio 2:1
Quick Ratio Current Assets (-)
Inventories (-)
Prepaid Expenses
Current Liabilities
(-) Overdraft (-)
Cash Credit
Ability to meet
immediate
liabilities.
Ideal Ratio 1:1
Absolute
Cash Ratio
Cash (+) Bank (+)
Marketable
Securities
Current Liabilities Ability to meet
shot term
commitment.
Ratio>1indicate
high liquid
resource leading
to less profits.

37. CAPITAL STRUCTURE OR
SOLVENCY RATIO
Ratio Formula Numerator Denominator Significance
Debt Ratio 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑠
Debentures (+)
Long Term Loans
from Banks (+)
Long Term Loans
from Financial
Institutions etc.
Liability Route
Debt (+) Equity
Assets Route
Fixed Assets (+)
Net Working
Capital
Indicates External
Funds
Ideal Ratio 67%
Equity
Ratio
𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐹𝑢𝑛𝑑𝑠
Share Capital (+)
Reserves and
Surplus (-)
MiscExp (-)
Accumulated
Losses
Total Funds Indicates Long
term solvency.
Ideal Ratio 33%
Debt Equity 𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
Debt Equity Indicates
relationship b/w
Debt & Equity
Ideal Ratio 2:1

38. CAPITAL STRUCTURE OR
SOLVENCY RATIO
Ratio Formula Numerator Denominator Significance
Proprietary
Ratio
𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Equity Net Tangible
Fixed Assets (+)
Total Current
Assets
Shareholder’s
fund used in
financing assets
of business.
Debt to
Total Asset
Ratio
𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Debt Total Funds Shows proportion
of Total Assets
financed with
Debt

39. PROFITABILITY
Ratio Formula Numerator Denominator Significanc
e
Gross Profit
Ratio
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
Gross Profit as
per Trading
Account
Net Sales Indicates profit
margin.
Higher, the
better
Operating
Profit Ratio
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
Cost of Goods
Sold/Net Profit (+)
Non Operating
Expenses (-) Non
Operating Income
Net Sales Indicates
operating
performance of
business.
Net Profit
Ratio
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠
Net Profit as per
P&L a/c
Net Sales Indicator of
Overall
Profitability

40. TURNOVER / ACTIVITY /
PERFORMANCE RATIO
Ratio Formula Numerator Denominator Significance
Raw
Material
TurnoverRa
tio
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓
𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙
Opening Stock of
RM (+) Purchases
of RM (-) Closing
Stock of RM
(Opening RM +
Closing RM)/2
Indicates how fast
Raw Materials are
used.
Work In
ProgressR
atio
𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝐶𝑜𝑠𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 𝑜𝑓 𝑊𝐼𝑃
Material
Consumed (+)
Wages (+)
Production
Overhead
(Opening WIP +
Closing WIP)/2
Indicate
Production Cycle.
Stock
Turnover
Ratio
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑆𝑜𝑙𝑑
𝐴𝑣𝑔. 𝑠𝑜𝑡𝑐𝑘 𝑜𝑓
𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠
Opening Stock of
FG (+) Cost of
Production (+)
Purchases (-)
Closing Stock of
FG
(Opening FG +
Closing FG)/2
Indicate how fast
inventory is sold.
High T/O means
fast moving, Low
means dead
stock.

41. TURNOVER / ACTIVITY /
PERFORMANCE RATIO
Ratio Formula Numerator Denominator Significance
Debtors
TurnoverRa
tio
Net Credit Sales (Opening BR &
Debtors (+)
Closing BR &
Debtors)/2
Indicates speed of
collection of
debtors
Creditor
TurnoverRa
tio
Net Credit
Purchase
(Opening BP &
Creditors (+)
Closing BP &
Creditors)/2
Indicate speed of
payment.
Working
Capital
Turnover
Ratio
Net Sales Current Assets (–)
Current Liabilities
OR
(Average of both)
Ability to generate
sales per rupee of
WC

43.  Cadbury Schweppes is a major international
company that manufactures, markets and sells
confectionery and non-alcoholic beverages.
 Limited companies (those owned by shareholders)
are required by law to produce Financial
Statements.
 These statements must be published and made
available to shareholders as part of a company
report.
 Cadbury Schweppes aims to produce clear financial
statements that give a valuable insight into the
company's strategy and performance.

44.  The legal responsibility for producing financial
statements that present an accurate picture of the
company's performance over the period lies with the
company's directors.
 These statements must be checked by an external
audit, where the company hires a firm of accountants
to verify that it provides a true and fair record and
complies with legal requirements.
 Cadbury Schweppes, include reports to
shareholders on their success in meeting self-set
financial goals within their financial statements. The
three main Financial Statements are:
 Profit and Loss Account
 Balance Sheet
 Cash Flow Statement.

45. ESTABLISHING FINANCIAL GOALS
 Businesses need to have a clear direction to work
towards, so that their employees know what they are
seeking to achieve and what they need to do.
 The directors of a company establish financial goals
which are used by investors, financial analysts and
other external parties to monitor the performance of a
company.
 Cadbury Schweppes has established three
performance goal ranges for the period 2004-2007.
These are:
 Net Sales Value (NSV) growth of between 3% and 5%. NSV
growth refers to the growth in sales of the company

46.  Operating margin growth of between 50 and 75 basis
points per year. Operating margin growth refers to
making more profit for each $1 of sales made - for
example by buying ingredients and packaging
materials as efficiently as possible.
 Free cash flow of $1.5 billion over the four-year
period.
 Free cash flow reflects how much cash is generated
within the business, for example by increasing profits.
 Free cash flow is important to enable the company to
have the money available to meet its financial
commitments.

47. CADBURY SCHWEPPES PROFIT AND LOSS
ACCOUNT
 A Profit and Loss Account is a table compiled at the
end of an accounting period, to show gross and net
profit or loss.
 A simplified version of Cadbury Schweppes' Profit
and Loss Account for 2004 is shown here:

49.  The Profit and Loss Account shows a summary of
the transactions of the business for a period of one
year.
 The top line shows that the sales revenue from
products such as Dr Pepper, Halls, Schweppes,
Trident and Cadbury Dairy Milk, came to $6,738
million.
 Costs were involved in making these products - the
cost of raw materials such as cocoa, packaging,
transport, staff salaries, advertising, etc. The
production costs added up to $5,668 million. These
are deducted from revenue because they are paid
out. It is common to show negative values in
brackets in financial statements.
 Cadbury Schweppes owns a share of some other
companies - raising additional income.

50.  Cadbury Schweppes has borrowed money, for
example, to buy new companies. It must pay interest
payments on these loans.
 Cadbury Schweppes must pay Corporation Tax to
the government .This is a tax on profits. Once tax
has been deducted the profit for the year is $547
million.
 The profit for the year is the amount of profit after all
external costs are deducted. The profit for the year is
then used to either pay a dividend to shareholders or
is retained by the company in its reserves, for future
use.
 Finally, a calculation is set out of Earnings per Share
- the profit divided by the number of shares in the
company..

51. THE BALANCE SHEET
 To understand the financial position of Cadbury
Schweppes at a moment in time, it is necessary to
'freeze' the values of various financial components.
These values, or balances, are used to set out the
Balance Sheet.
 The chart shows a summarized Cadbury
Schweppes Balance Sheet for 2004.

53.  Fixed assets consist of two main elements.:
 Intangible Assets are ones that help to generate wealth for
the business over time but don't have a physical
presence. For example, a major intangible for Cadbury
Schweppes is the 'goodwill' associated with brands that it
has acquired.
 Tangible assets are those that exist physically; these
include the costs of factories and machinery used to make
the products and the offices that the staff work in around
the world.
 Current assets consist of stock (Inventories), trade
and other receivables, and cash. After production,
supplies of chocolate and sweets are stored for a
short period of time until a customer makes an order
when they are delivered to wholesalers and
supermarket chains

54.  Current liabilities consist of any payments that
Cadbury Schweppes must pay out in the short-term
(typically under a year) such as payments to
suppliers for cocoa and sugar. In addition, it would
include short-term borrowings and overdrafts.
 Non-current liabilities consist primarily of bank
loans, money owed to employees to pay their
pensions, etc.
 The net assets/liabilities figure is then calculated by
deducting the two main types of liabilities from the
two main categories of assets.

55.  The final section of the Balance Sheet shows the
amount of shareholders' funds. This is the price
paid by the shareholders for their initial share capital
and the retained profits made by the company.
 At the end of 2004 the net assets of Cadbury
Schweppes and thus the total equity (shareholders'
capital) was $2,300m

56. RATIO ANALYSIS(PROFITABILITY ANALYSIS)
 Operating profit ratios are determined from a
company's financial information and used for
comparison purposes, e.g. operating profit to sales.
This can be set out in the form-
 Operating Profit : Revenue. Alternatively, it can be set
out as a percentage.

57. CURRENT RATIO
 This ratio shows whether the company owes more
money to its suppliers and bankers than the assets
it holds in the form of stocks, debtors and cash.
 If this number is less than 1, then the company's
short-term or liquid assets are greater then its
short-term liabilities.
 If you refer back to the Balance Sheet, you can see
that the current ratio for Cadbury Schweppes is as
shown in this diagram

58. CONCLUSION
 Cadbury Schweppes prepares financial statements
because:
 As a listed company, it is legally required to do so.
 Cadbury Schweppes wants to communicate a true
and fair picture of the financial state of the company
to its shareowners and external analysts.
 The company values transparency and honesty and
aims to reflect this is all its communications, both
internally and externally.