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A journal does not replace but precedes the ledger. A proforma of a journal is given in illustration 1 1. June Particulars Rs. It is prepared to ensure that the mechanics of the recording and posting of the transactions have been carried out accurately. If the recording and posting have 20 been accurate then the debit total and credit total in the Trial Balance must tally thereby evidencing that an equality of debits and credit has been maintained.

It also serves as a basis for preparing the financial statements. In this connection it is but proper to caution that mere agreement of the debit and credit totals in the Trial Balance is not conclusive proof of account recording and posting. There are many errors which may not affect the agreement of Trial Balance like total omission of a transaction, posting the right amount on the right side but of a wrong account etc.

The points which we have discussed so far can very well be explained with the help of the following simple illustration Illustration 2 January 1 � Started business with Rs. January 21 � Delivered goods and received cash Rs.

January 1-Started business with Rs. Cash, an asset increases and hence it has to be debited. Owners' equity, a liabili ty also increases and hence it has to be credited. January 2-Bought goods worth Rs. Cash balance decreases and hence it is credited and goods on hand, an asset.

Increases hence it is to be debited. Since it is a credit transaction receivables increase asset and hence is to be debited. January 15 -Received order for remaining half of goods. No entry. Since cash is realised, the cash balance will increase and hence cash accounts is to be debited.

Since the stock of goods becomes Nil due to sale. Cash balance Increases and hence it is to be debited and receivables balance decreases and hence it is to be credited. January 31 -Paid Salaries Rs. Salary is an expense and since expense has the effect of reducing owners' equity and as owners' equity account decreases on the debit side, expenses account is to be debited.

January 31 -Received Interest Rs. When journal entries for the above transactions are passed, they would be as follows: Date January-1 Particulars L. A detailed discussion on Profit and Loss account can be had in a subsequent chapter.

The balance in the Profit and Loss account, which is the net income or net loss for the period, is then transferred to the capital account and thus Profit and Loss account is also closed. In the case of corporation, the net Income or net loss is transferred to retained earnings account which is a part of owner's equity. The entries which are passed for transferring these accounts are called as closing entries. The principle of framing a closing entry is very simple.

If an account is having a debit balance, then it is credited and the Profit and Loss account is debited. Similarly, if a particular account is having a credit balance, it is closed by debiting it and crediting the Profit and Loss account. In our example Sales account and interest account are revenues and Purchases account and Salaries account are expenses. Purchases account is an expense because the entire goods have been sold out in the accounting period itself and hence they become cost of goods sold out.

This aspect would become more clear when the reader proceeds to the Chapter on Profit and Loss account. These adjustments are needed for transactions which have not been recorded but which affect the financial position and operating, results of the business. They may be divided into four kinds: two in relation to revenues and the other two in relation to expenses.

An example which frequently cited is insurance paid in advance. Besides the above four adjustments, some more are to be done before preparing the financial statements. They are: 1. Inventory at the end. Provision for Depreciation. Provision for Bad Debts. Provision for Discount on receivables and payables. Interest on capital and Drawings.

Trial Balance The Trial Balance is simply a list of the account names and their balances as on a given time with debit balances in one column and credit balances in another column. A Trial Balance is prepared to ensure equality of debits and credits.

Explain the following: a. A journal b. An Account c. A Ledger 2. Bring out relationship between a journal and a ledger. Explain the significance of Trial Balance. Why adjustments entries are necessary? Narrate the rules of debit and credit. Distinguish nominal accounts from real accounts. Explain the mechanism of balancing an account. How and why closing entries are made?

The left-hand side of any account is called the debit side and the right-hand side is called the credit side. When a business transaction takes place the first record of it is done in a book called journal. The Trial Balance is simply a list of the account names and their balances as on a given time with debit balances in one column and credit balances in another column. Purchases book records: a. All cash purchase b. All credit purchases c.

Credit Purchases of Goods in d. None of the above Trade 2. Ans : C The debts written off as bad, if recovered subsequently are a. Credited to Bad Recovered Account Debts b. Credited to Debtors Account 26 c. Debited to Profit and Loss d. None of the above Account Ans : a 3. Amount realized from the sale of securities Investments purchased earlier is an example of a.

Revenue Expenditure b. Capital Receipt c. Deferred Revenue Expenditure d. Capital Expenditure Ans : b 4. Ledger is also called � a.

Principal Book b. Subsidiary Book c. Day Book d. Proper Book Ans : a 2. The following transactions relate to a business concern for the month of March Journalise them, post into ledger accounts, balance and prepare the Trial Balance. March 1 - Started business with a capital of Rs. March 2 - Purchased furniture Rs. March 21 - Delivered goods, cash received Rs. March 31 - Paid wages Rs. This objective is achieved by the preparation of profit and loss account or the income statement.

Profit and loss account is generally considered to be of greatest interest and importance to endusers of accounting information. Whereas the balance sheet enables them to know the financial position of the business enterprise as of a particular date, the profit and loss account enables them to find out whether the business operations have been profitable or not during a particular period.

The important distinctions which one needs to make between the balance sheet and the income statement is that the balance sheet is on a particular date while the profit and loss account is for a particular period. It is for this reason that the balance sheet is categorised as a status report as on a particular date while the profit and loss account as a flow report for a particular period.

Usually the profit and loss account is accompanied by the balance sheet as on the last date of the accounting period for which the profit and loss account is prepared. Gross Profit is difference between net sales and cost of goods sold. A specimen of Trading Account is given below: 28 Particular Rs.

The cost of goods or services sold is called the cost of sales. In manufacturing firms and retailing business it is often called the cost of goods sold. The complexity of calculation of cost of goods sold varies depending upon the nature of the business. The methods of valuation of inventory are explained separately at the end of this chapter. The cost of goods sold as shown in the income statement of the Pondicherry Distilleries would have been calculated as follows: 3.

In the case of multiple -step income statement it is shown as a separate item. Significant managerial decisions can be taken by calculating the percentage of gross profit on sale. This percentage indicates the average mark up obtained on products sold. The percentage varies widely among 29 industries, but healthy companies in the same industry tend to have similar gross profit percentages. Usually operating expenses include administration expenses, finance expenses, depreciation and selling and distribution expenses.

Administration expenses generally include personnel expenses also. However sometimes personnel expenses may be shown separately under the heading 'Establishment Expenses' as is done in the case of Pondicherry Distilleries under Schedule IX. Contribution Gratuity 1,46, 1,48, Pension Employees Welfare Expenses 51, 1,75, 34,14, The important methods of providing depreciation are given in a separate section at the end of this chapter.

Until recently most companies included expenses on research and development as part of general and administrative expenses. But nowadays the amount should be shown separately. This is so because the expenditure on research and development could provide an important clue as to how cautious the company is in keeping its products and services up to date. These expenses are deducted from the income obtained after adding other Incomes to the operating profit.

Other Incomes or miscellaneous receipts have already been explained. The resultant profit is called as profit or earnings before interest and tax EBIT 3. The FASB requires separate disclosure of interest 30 expense.

This item of expense is deducted from income or earnings before interest and tax. The resultant figure is profit or earnings before tax EBT 3. As per the corporate tax laws the amount of tax payable is determined not on the basis of reported net profit but the net profit arrived at has to be recomputed and adjusted for determining the tax liability.

That is why the liability is always shown as a provision. Net profit is reported not only in total but also per share of stock. This per share amount is obtained by dividing the total amount of net profit by the number of shares outstanding. The net profit is usually referred to as profit, or earnings after tax. This profit could either be distributed as dividends to shareholders or retained in the business.

Just like gross profit percentage, net profit percentage on sales can also be calculated which will be of great use for managerial analysis. The reason for this increase is explained in the statement of retained earnings which is a part of income statement. Thus it can be stated that there exists a definite and close relationship between balance sheet and income statement. For example, the in come statement is prepared for a particular accounting period.

Here the concept involved is accounting period concept. Similarly, revenues, are recognised to the period to which goods were sold to customers or to which services were rendered. This is to ac cordance with realisation concept. Another concept which has to be followed is the concept of conservatism. It is because of this concept that provision for bad and doubtful debts, provisions for fluctuation to investments.

It is to accordance with the concept of consistency that material issues are priced on the basis of the same method year by year and so is the case with depreciation methods. In the case of manufacturing concerns raw materials 31 required for production are purchased at different times and at different prices.

They are issued for production as and when required. It is very difficult to find out from which specific purchase the issues are made. Hence the valuation of materials Issued and closing stock of materials becomes difficult. Similarly trading concern buy stock at different prices and at different times. They go on adding their purchases to their current stock while at the same time selling them. It would be impossible to identify the cost price of the commodities sold by pointing out the time of their purchases and the corresponding purchase price.

As a step towards solving this problem many methods of inventory val uation are developed. First-in-First-out Method: This method is based on the assumption that costs should be charged against revenue to the order in which they were incurred. This method assumes that materials issued or goods sold are those which represent the earliest purchases.

This would mean that the materials or goods which remain in stock, after the issues or sales are those which represent the most recent purchases.

Illustration1 explains the mechanism of this method. January 1 Opening Inventory units Rs. In accordance with the assumption that the inventory is composed of the most recent costs, the cost of units is determined as: Most recent costs December 1 [email protected] Next most recent costs September 30 50 [email protected] units Deduction of the Inventory of Rs. It would follow, therefore, that the goods held in stock represent earlier purchase.

Based on data presented in Illustration 2 the cost of the closing inventory is determined as: Earliest Costs January units Rs. The weighted average unit cost is determined by dividin g the total cost of the materials or goods by the number of units. Continuing the data given in Illustration 1 the weighted average cost of units and the cost of the inventory are determined in the following manner: Weighted average unit cost Rs.

The FIFO method and the weighted average method are perhaps the most extensively used methods. The main argument for FIFO method is that the cost of the goods issued or sold closely reflects the price trend in the markets. Weighted average method is preferred because of the 'smoothing of purchase costs achieved by this method which enables to even out the wide fluctuations in the purchase prices. The LIFO method is followed by a relatively small number of companies as the application of this method is not liked by corporation laws in various countries.

Yet many companies use LIFO method for the purpose of internal reporting. Accordingly, a fraction of the cost of the asset is chargeable as an expense in each of the accounting periods in which the asset renders services.

The accounting process for thi s gradual conversion of capitalised cost of fixed assets into expense is called depreciation. Two factors contribute to the decline in the usefulness of fixed assets: One is deterioration, the other is obsolescence. Deterioration is the physical process we aring out whereas obsolescence refers to loss of usefulness due to the development of improved 33 equipment or processes, changes in style or other causes not related to the physical condition of the asset.

The International Accounting Standards Committee defines depreciation as follows: "Depreciation is the allocation of the depreciable amount of an asset over the estimated useful life". The useful life in turn is defined as: Useful life is the period over which a depreciable asset is expected to be used by the enterprise. Methods of Depreciation: The amount of depreciation of a fixed asset is determined taking into account the following three factors: its original cost.

Out of these three factors the only factor which is accurately known is the original cost of the asset. The other two factors cannot be accurately determined until the asset is retired. They must be estimated at the time the asset is placed in service. The excess of cost over the estimated residual value is the amount that is to be recorded as depreciation expense during the asset's lifetime. There are no hard and fast rules for estimating either the period of usefulness of an asset or its residual value at the end of such period.

Hence these two factors which are inter- related are affected to a considerable extent by management policies. Let us consider the following example: A machine is purchased for Rs. The objective of depreciation accounting is to charge this net cost of Rs.

How much should be charged as an expense each year? To help us in this regard we are having, the following four frequently used methods of computing depreciation. It is not necessary that an enterprise employ a single method of calculating depreciation for all classes of its depreciable assets.

But in accordance with the convention of consistency, once a method of depreciation is selected the same method should be followed throughout.

Straight Line Method: Straight line method assumes that the level of service provided by a fixed asset is even in all the years of its life. Hence this 34 method provides for equal annual charges to expense over the estimated life of the asset.

To illustrate let us assume that the cost of a machine is Rs. The annual depreciation is calculated as follows. The annual percentage is obtained by dividing by the number of years of life. Hence it is widely used. Units � of- Production Method: In this method depreciation calculation are done based on the estimated productive capacity of the asset concerned. Depreciation is first calculated in terms of an appropriate unit of production, such as hours, kilometers or number of operation.

Then annual depreciation is computed by multiplication of the unit depreciation by the number of units used during the period. To continue with the same example if the machine is expected to have an estimated life of 10, hours the deprecation for one hour is calculated as follows: Rs. Diminishing Balance Method: This method results in a diminishing periodic depreciation charge over the estimated life of the asset.

Next book value at a particular point of time is the original Cost less total depreciation accumulated up to that point of time. The rate to be applied to the net book value is usually double the straight line depreciation rate. However, care should be taken to ensure that the asset is not depreciated below its residual value in the last year. Table1 illustrates this method of depreciation.

But since in the last year the asset should not be depreciated below Its residual value, the depreciation for the last year should be Rs. Sum-of-the-Years-Digits Method: Under this method depreciation for each year is computed by applying a fraction to the net cost of the asset. The denominator of the fraction remains constant and it is the, sum of the digits representing the year of life. The numerator of the fraction is the number of remaining years of life and it changes every year.

In our example the fraction to be applied on the net cost of Rs. Hence they are frequently referred to as accelerated method of depreciation. Chart shows the Comparative amounts of annual depreciation charges under straight-line method, diminishing, balance method and sum-of-the-yearsdigits method. Impact of Depreciation Methods on Profit Measurement: Just now we have seen that depending on the method used, we have a different amount of charge for annual depreciation.

It may also be noted that over the entire life of the asset the total amount of depreciation charge cannot be different. The difference is only in the annual depreciation charge.

The impact of annual depreciation charge on profit measurement under various methods of depreciation assuming an annual profit of Rs. Line Diminishing sum-of sum of St. Depreciation 30, Diminishing 25, 26, 2, 4, 2. Only there is difference in the annual profits after depreciation. If the enterprise wants to show hi gher profits in the initial years, it is better the straight line method of depreciation is followed.

Status Report: Position on a particular date 2. Flow Report: Financial position for a particular period 3. Income: Revenues - Expenses 4. Expense: Item of cost applicable to an accounting period 5. Gross Profit: Excess of sales revenue over cost of goods sold Operating Expenses: Expenses incurred for running the business 7.

Operating profit: Gross profit - Operating expenses 37 8. Non-operating expenses: Expenses which are not related to the activities of the business. Net Profit: Amount of profit finally available to the enterprise for appropriation. What is an expenditure? When it becomes an expense? What is income?

Does a su bstantial balance in retained earnings indicate the presence of a large cash balance. Explain the important methods of depreciation. Explain the concepts underlying the preparation of Profit and Loss account. Distinguish the following: 1 Gross Profit. Bring out the relationship between the following: 1 Owners' equity and income. Distinguish between cash discount and trade discount. SUMMARY The profit and loss account or income statement summarises the revenues and expenses of a business enterprise for an accounting period.

The information on the income statement is regarded by many to be more important than information on the balance sheet because the income statement reports the results of operations and enables to analyse the reasons for the enterprises' profitability or lack thereof. A close relationship exists between income statement and balance sheet; the statement of retained earnings which is a concomitant of income statement explains the change in retained earnings between the balance sheets prepared at the beginning and the end of the period.

Purchase Price of Machine Rs. Installation Charges Rs. Uesful life 4 Years. The rate of depreciation under WDV Method is : a. None 38 Correct Answer: b 2. When depreciation is recorded by charging to Provision for Depreciation Account , the asset apears a. Depreciation is a. The beginning stock of the current year is overstated by Rs. The Profit of the current Year will be : a. The adjustments to be made for prepaid expenses is: a. Add prepaid expenses to respective expenses and show it as an asset b.

Deduct prepaid expenses from respective expenses and show it as an asset c. Add prepaid expenses to respective expenses and show it as a liability d. Deduct prepaid expenses from respective expenses and show it as a liability Correct Answer: b 6. If average stock is Rs. Closing stock is Rs. Closing stock will be: a. Bring out a distinction between: 1 Straight line method and Diminishing value methods of depreciation. Gupta and M. Radhaswamy: Advanced Accounts. New Delhi. Grewal: Advanced Accounts.

Chandand Company. Bring out the efficiency of the organisation on this basis. This is achieved by different financial statements prepared by a business enterprise. One of the most Important financial statements is the Balance Sheet. A balance sheet shows the financial position of a business enterprise as of a specified moment of time.

That is why it is very often called a statement of financial position. It contains a list of the asset and liabilities and capital of a business entity as of a specified date.

Usually at the close of the last day of a month or a year. However, the rights to assets have been acquired by the enterprise as a result of past transactions. Liabilities also result from past transactions; they represent obligations which require settlement in the future either by conveying assets or by performing services. Implicit in these concepts of the nature of assets and liabilities is the meaning of owners' equity as the resid ual interest in the assets of the enterprise.

One is clarity and readability; the other is disclosure of significant facts within the framework of the basic assumptions of accounting. Balance sheet classification, terminology and the general form of presentation should be studied with these objectives in mind. According to the American convention assets are shown on the left hand side and the liabilities and the owners' equity on the right hand side. Under the English convention just the opposite is followe d i.

Form of Presenting the Balance Sheet: There are two forms of presenting the balance sheet - account form and report form. It is so called because it is similar to an account. In Illustration 5. When the above balance sheet is prepared in report form Listing of Items on the Balance Sheet: Assets in balance sheet are generally listed in two ways In the order of liquidity or according to time i.

Some assets cannot be easily classified. Investments may therefore be both liquid and semipermanent that is why they are shown as a separate item in the balance sheet.

Liabilities can also be grouped in two ways either in the order of urgency of payment or in the reverse order. In the illustration the order of liquidity has been followed. The entity involved SAU and Sons and the balance sheet pertains to that entity rather than to any of the individuals associated with it.

The statements assume that SA U and Sons is a going concern. The asset amounts stated are governed by cost concept. Thus in the balance sheet the following five accounting concepts are involved: business entity concept, money measurement concept, going concern concept, cost concept and dual-aspect concept. The classifications or group headings will vary considerably depending on the size of the business, the form of ownership, the nature of its operations and the users of the financial statements.

As a generalisation which is subject to many exceptions, the following classification of balance sheet items is suggested as representative.

By operating cycle, we mean the average period of time between the purchase of goods or raw materials and the realisation of cash from the sale of goods or the sale of products produced with the help of raw materials.

Current assets generally consist of cash, marketable securities, bills receivables, debtors, inventory and prepaid expenses. Cash: Cash consists of funds that are readily available for disbursement. It includes cash kept in the cash chest of the enterprise as also cash deposited on call or current accounts with banks. Marketable securities: These consist of investments that are both readily marketable and are expected to be converted into cash within a year. These investments are made with a view to earn some return on cash that otherwise would be temporarily idle.

Account Receivable: Accounts receivables consist of amounts owed to the enterprise by its consumers. This represents amounts usually arising out of normal commercial transactions.

These amounts are listed on the balance sheet at the amount due less a provision for portion that may not be collected. This provision is called as provision for doubtful debts. Amounts due to the enterprise by someone other than a customer would appear under the heading other receivables rather than accounts receivables. If the amounts due are evi denced by written promises to pay, they are listed as bills receivables.

Accounts receivables are expected to be realised in cash. Inventory: Inventory consists of: i goods that are held in stock for sale in the ordinary course of business, ii work-in-progress that are to be currently consumed in the production of goods or services to be available for sale. Inventory is expected to be sold either for cash or on credit to customers to be converted into cash. It may be noted in this connection that inventory relates to goods that will be sold in the ordinary course of business.

A van offered for sale by a van dealer is inventory. A 44 van used by the dealer to make service calls is not inventory;' it is an item of equipment which is a fixed asset. Prepaid expenses: These items represent expenses which are usually paid in advance such as rent, taxes, subscriptions and insurance. This right to occupy is an asset. Since this right will expire within a fairly short period of time it is a current asset. Long Term Investments: The distinction between a marketable security shown under current asset and as an investment is entirely based on time factor.

Those investments like investments in shares, debentures. Fixed Assets: Tangible assets used in the business that are of a permanent or relatively fixed nature are called plant assets or fixed assets. Fixed assets include furniture, equipment, machinery, building and land. Although there is no standard criterion as to the minimum length of life necessary for classification as fixed assets, they must be capable of repeated use and are ordinarily expected to last more than a year.

However, the asset need not actually be used continuously or even frequently. Items of spare equipments held for use in the event of bre akdown of regular equipment or for use only during peak periods of activity are included in fixed assets. With the passage of time, all fixed assets with the exception of land lose their capacity to render services. Accordingly, the cost of such assets sho uld be transferred to the related expense amounts in a systematic manner during their expected useful life.

This periodic cost expiration is called depreciation. While showing the fixed assets in the balance sheet the accumulated depreciation as on the date of balance sheet is deducted from the respective assets.

Intangible Assets: While tangible assets are concrete items which have physical existence such as buildings, machinery etc. They cannot be touched and felt. They derive their value from the right conferred upon their owner by possession. Examples are: goodwill patents, copyrights and trademarks.

Fictitious Assets: These items are not at all assets. Still they appear in the asset side simply because of a debit balance in a particular account not yet written off e. Most of current liabilities are incurred in the acquisition of materials or services forming part of the current assets. These liabilities are expected to be satisfied either by the use of current assets or by the creation of other current liabilities. The one-year time interval or current operating cycle 45 criterion applies to classifying current liabilities also.

Current liabilities g enerally consist of bills payable, creditors, outstanding expenses, income -received in advance, provision for income-tax etc. Accounts payable: These amounts represent the claims of suppliers related to goods supplied or services rendered by them to the business enterprise for which they have not yet been paid.

Usually these claims are unsecured and are not evidenced by any formal written acceptance or promise to pay.

When the enterprise gives a written promise to pay money to a creditor for the purchase of goods or services used in the business or the money borrowed then the written promise is called as bills payable or notes payable. Amounts due to financial institutions which are suppliers of funds, rather than of goods or services are termed as shortterm loans or some other name that describes the nature of the debt Instrument, rather than accounts payable.

Outstanding expenses: These are expenses or obligations incurred in the previous accounting period but the payment for which will be made in the nex t accounting period. A typical example is wages or rent for the last month of the accounting period remaining unpaid. It is usually paid in the first month of the next accounting period an4 hence It is an outstanding expense. Income received in advance: These amounts relate to the next accounting period but received in the previous accounting period.

This item of liability is frequently found in the balance sheet of enterprises dealing in the publication of newspapers and magazines. Provision for Taxes: This is the amount owed by the business enterprise to the Government for taxes. It is shown separately from other current liabilities both because of the size and because the amount owed may not be known exactly as on the date of balance sheet. The only thi ng known is the existence of liability and not the amount.

Long term Liabilities: All liabilities which do not become due for payment in one year and which do not require current assets for their payment are classified as long-term liabilities or fixed liabilities.

Long term liabilities may be classified as secured loans or unsecured loans. When the long-term loans are obtained against the security of fixed assets owned by the enterprise they are called as secured or mortgage loans. When any asset is not attached to these loans they are called as unsecured loans.

Usually long-term liabilities include debentures and bonds, borrowings from financial institutions and banks, pu blic debts, etc. Interest accrued on a particular secured long term loan, should be shown under the appropriate sub-heading. Contingent Liabilities: Contingent liabilities are those liabilities which may or may not result in liability.

They become liabilities only on the happening of a certain event. Until then both the amount and the liabi lity are uncertain. If the event happens there is a liability; otherwise there is no liability at all. A very good example for contingent liability is a legal suit pending against the business 46 enterprise for compensation.

If the case is decided against the enterprise the liability arises and in the case of favourable decision, there is no liability at all. Contingent liabilities are not taken into account for the purpose of totaling of balance sheet. The first category called share capital or contributed capital is the amount the owners have invested directly in the business. Share capital is the capital stock pre-determined by the company at the time of registration. It may consist of ordinary share capital or preference share capital or both.

The capital stock is divided into units called as shares and that is why the capital is called as share capital. The entire predetermined share capital called as authorised capital need not be raised at a time.

That portion of authorised capital which has been issued for subscription as of a date is referred to as issued capital. Retained earnings is the difference between the total earning to date and the amount of dividends paid out to the shareholders to date. That is, the difference represents that part of the total earnings that have been retained for use in the business. It may be noted that the amount of retained earnings on a given date is 47 the accumulated amount that has been retained in the business from the beginning of the Company's existence up to that date.

Adjusting items for preparing balance sheet. Outstanding expenditure 2. Dr Shown on liabilities side To Outstanding esp. Accrued income Accrued income. Depreciation a. Provision for discount 8. Shown on liabilities side 48 Illustrations1: 1. Rs 49 The following adjustments are required: 1. Raju gets a salary of Rs. Bad debts provision to be adjusted to 2. It was discovered in April that stock sheet as on You are required to prepare Trading and Profit and loss account for the year ended 31 st march and a balance sheet as at that date.

TrialBalanceason31stMarch Particulars Rs. Partners shares Profit and losses equally. The Closing Stock cost Rs. X 56, Mr. X and Mr. TrialBalanceason31stMarch, Dr. Particulars Stock Partners shares Profit and Losses in the equal ratio. Closing Stock cost price Rs. Uninsured goods worth Rs. Un paid Salary and Wages Rs. Trading Account for the year ended 31st Mar. Particulars Rs. To Sundry Exp. X 37, Mr. Capital Accounts Mr. Credit Rs. Y Adjustments: 1. Partners share Profits and Losses in their capital ratio.

The Closing Stock�Cost Rs. Asset: Costs which represent expected future economic benefits to the business enterprise. Liabilities: Represent obligations which require settlement in the future. Current Assets: Assets which are reasonably expected to be realised in cash or sold or consumed during the normal operating cycle of the business enterprise or within one year, whichever is longer.

Operating cycle: The average period of time between the purchase of goods or raw materials and the realisation of cash from the sale of goods 5. Fixed Assets: Tangible assets used in the business that are of a permanent or relatively fixed nature. Intangible Assets: Those assets which have no physical existence. Fictitious Assets: Not assets but appear in the asset side simply because of a debit balance in a particular account not yet written off.

Current liabilities: Liabilities due within an accounting period or the operating cycle of the business. Long Term Liabilities: Liabilities that become due for payment after one year.

Contingent Liabilities: Items which become a liability only on the happening of a certain event. Capital or Owners Equity: This is the residual interest in the assets of the enterprise. Discuss the accounting concepts and conventions. What is dual aspect concept? What do you understand by convention of materiality? What is an accounting equation? Explain the following a. Assets b. Liabilities c. Fictious assets d. Income received in advance e. What are the accounting concepts involved in a balance sheet?

Explain the conceptual basis of a balance sheet. What are the two forms of presenting a balance sheet? Why the joint stock companies follow the order or permane nce while listing the assets and liabilities on the balance sheet? What is meant by operating cycle? What is a contingent liability? Why is it not to be included in the total of the balance sheet? Why investments are neither shown under current assets nor under fixed assets?

Explain owners, equity. How is it to be presented on the Balance Sheet of a concern? Distinguish with suitable examples the following a. Fixed assets and current assets b.

Contingent liabilities and current assets. It lists as on a particular date, usually at the close of the accounting period, the assets and liabilities and capital of the enterprise. An analysis of balance sheet together with profit and loss account will give vital information about the financial position and 59 operations of the enterprise.

The analysis becomes all the more useful and effective when a series of balance sheets and profit and loss accounts are studied. Provisions b. Reserves and Surplus c. Current Liabilities d. Other Liabilities 2. Income Tax Act b. Schedule VI of the Companies Act, c. By CAG d. Which of the following would not appear on a conventional balance sheet?

Give adjustment entries for the following: a income received in advance b prepaid expenses c closing stock d provision for doubtful debts 60 e out standing income f out standing expenses g provision for discounts on debtors. Grewal: 'Advanced Accounts', S. Chand and Company, New Delhi. Its purpose is to convey an understaning of some financial aspects of a business firm.

It may show a position at a moment of time as in the case of a balance sheet, or may reveal a series of activities over a given period of time, as in the case of an income statement. The term financial statement generally refers to two basic statement. The income statement and ii.

Balance sheet. Of course, a business may also prepare iii. A statement of retained earnings and iv. A statement of changes in financial position in addition to the above two statements 5. It explains what has happened to a business as a result of operations between two balance sheet dates. For this purpose it matches the revenues and costs incurred in the process of earn ing revenues and shows the net profit earned or loss suffered during a particular period.

It represents all assets owned by the business at a particul ar moment of time and the claims of the owners and outsiders against those a sets at that time. Statement of retained earnings. The term retained earnings means the accumulated excess of earnings over losses and dividends. The balance shown by the income statement is transferred to the balance sheet through this statement, after making necessary appropriations.

It is thus, a connecting link between the balance sheet and the income statement. Statement of changes in financial position SCFP The balance sheet shows the financial condition of the usiness at a particular moment of time while the income statement discloses the results of operations of business over a period of time. External analysis. The analysis is done by those who are outsiders for the business. The term outsiders includes investors, credit agencies, government agencies and other creditors who have no access to the internal records of the company.

These persons mainly depend upon the published financial statement. Their analysis serves only a limited purpose. The position of these analysis has improved in recent times on account of increasd governmental control over companies and government alregulations requiring more detailed disclosure of information by the companies in their financial statement.

Internal analysis. Such an anlysis can, therefore, be done by ex3ecutives and employees of the organization or by officers appointed for this purpose by the government or the court under powers vested in athem. The analysis is done depending up on the objective to be achieved through this analysis 2. Horizontal analysis. The current years figures are compared with the standared or base year. The analysis statement usually contains figures for tow or more years and the changes are shown regarding each item from the base year usually in the form of percentage.

Such an analysis gives the management considerable insight into levels and areas of strength and weakness. Since this type of analysis is based on the data form year to year rather than on one date, it is also termed as dynamic analysis ii. Vertical analysis. For example, the ratios of different items of costs 63 for a particular period may be calculated with the sales for the period.

Such analysis is useful in comparing the performance of several companies in the same group, or divisions or departments in the same company. Since this analysis depends on the data for one period, this is not very conducive to a proper anal ysis of company financial position. It is also called static analysis as it is frequently used for referring to ratios developed on one date or for one accounting period.

It is to be noted that both analysis � vertical and horizontal � can be done simultaneously also. For example, the income statement of a company for several years may be given. Horizontally it may show the cange in different elements of cost and sales over a number of years. On the other hand, vertically it may show the percentage of each element of cost to sales. In these statemen t figures for two or more periods are placed side by side to facilitate comparison.

Both the income statement and balance sheet can be prepared in the form of comparative financial statements. Common size financial statement Common size financial statements are those in which figures reported are converted into percentages to some common base. In the income statement the sale figure is assumed to be and all figures are expressed as a percentage of this total.

Trend percentages Trend percentages are immensely helpfull in making a comparative study of the financial statements for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year. Funds flow analysis Funds flow analysis has become an important tool in the analytical kit of financial analysts, credit grating institutions and financial mangers. This is because the balance sheet of a business reveals its financial status at a particular point of time.

It does not sharply focus those major financial transactions which have been behind the balance sheet changes. Cost volume profit analysis Cost volume profit analysis is an important tool of profit planning. It studies the relationship between cost, volume of production, sales and profit.

Of course, it is not strictly a technique used for analysis of financial statements. An accounting ratio shows the relationship in mathematical terms between two interrelated accounting figures. The analysis should be used as a starting point and the conclusion should be drawn not in isolation, but keeping in view the overall picture and prevailing economic and political situation Ignores price level changes Financial statements are normally prepared on the concept of historical costs.

They do not reflect values in terms of current costs. Thus, the financial analysis based on such financial statements or accounting figures would not portray the effects of price level changes over the period. Financial statements are essentially interim reports The profit shown by profit and loss account and the financial position as depicted by the balance sheet is not exact..

Accounting concepts and conventions Financial statements are prepared on the basis of certain accounting concepts and conventions. On account of this reason the financial position as disclosed by these statements may not be realistic. For example, fixed assets in the balance sheet are shown on the basis of going concern concepts. This means that value placed on fixed assets may not be same which may be relaised on their sale. On account of convention of conservatism the income statement may not disclose true income of the business since probable losses are considered with probable incomes are ignores.

Influence of personal judgements Many items are left to the personal judgement of the accountant. For example, the method of depreciation, mode of amortization of fixed assets, treatments of deferred revenue expenditure � all depend on the personal judgement of the accountant.

The soundness of such judgement will necessarily depend upon his competence and integrity. However, the convention of consistency acts as a controlling factor on making indiscreet personal judgements Disclose only monitory of facts Financial statement do not depict those facts which cannot be expressed in terms of money.

For example, development of a team of loyal and efficient workers, enlightened management, the reputation and prestige of management with the public. Are matters which are of considerable importance of 4 th business, but hey are nowhere depicted by financial statements 65 5. Comparative financial statements 2. Accounting for Managers Notes can be downloaded in accounting for managers pdf from the below article.

A detailed accounting for managers syllabus as prescribed by various Universities and colleges in India are as under. You can download the syllabus in accounting for managers pdf form. Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof. Some of the accounting for managers questions and answers are mentioned below.

You can download the QnA in accounting for managers and services pdf form. It will help you to understand the question paper pattern and type of accounting for managers and services question and answer asked in MBA 1st year accounting for managers and services exam.

You can download the syllabus in accounting for managers and services pdf form. Below is the list of accounting for managers and services books recommended by the top university in India.

In the above article, a student can download accounting for managers notes for MBA 1st year and accounting for managers notes for MBA 1st semester. Accounting for Managers study material includes accounting for managers notes, accounting for managers books, accounting for managers syllabus, accounting for managers question paper, accounting for managers case study, accounting for managers questions and answers, accounting for managers courses in accounting for managers pdf form.

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