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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTS AND FINANCE FOR LOGISTICIANS

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

SYLLABUS
UNIT I:

Financial Accounting: Meaning of double entry
accounting, Meaning, nature and importance
Accounting cycle, accounting equation. Journal, Ledger
and Trial Balance .Accounting concepts and
conventions, Financial statements- Profit & Loss
account & Balance sheet. Financial statement AnalysisComparative Analysis, Common size & Trend Analysis

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

UNIT II

Financial Statement Analysis - Ratio analysis
Classification of ratios, Advantages & Disadvantages Fund flow statements advantages and disadvantagesMarginal costing Cost Volume Profit analysis Break
Even analysis BEP, P/V ratio, MS

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

UNIT III:
Introduction to Financial Management Nature of
Financial management Objectives of financial
management -Financial Decisions- Organization of
Finance function Agency Problem
Working capital Concepts Types Determinants

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

UNIT IV
Sources of capital -Cost of Capital Meaning and
Significance Components Cost of Equity, Cost of
Debt, Cost of Preferred capital, Cost of retained
earnings and weighted average cost of capital. Capital
budgeting meaning Different methods Payback, Net
Present Value, Internal rate of return, Profitability
index and average rate of return

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

UNIT V

Financial ,Operating and Combined Leverages Meaning
of Capital Structure -Determinants of capital
structure .Dividend decision Dividend policy - Dividend
theories Walter and Gordon modelof dividend
Stability of dividend Share split Buyback of shares.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

REFERENCES


1. I.M.Pandey, Financial Management, Vikas publishing
house Ltd., 9th edition, 2007.
2. Prasanna Chandra, Financial Management Theory and
Practice, Tata McGraw Hill, 7th Edition, 2008.
3. Financial and Management accounting by Reddy and
Moorthy

Vels University

www.velsuniv.org

BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

UNIT 1

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING:
Accounting is the process of collecting, recording,
classifying summarizing and interpreting financial data
for the needs of management.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

CLASSIFICATION (OR) BRANCHES OF


ACCOUNTING
FINANCIAL ACCOUNTING

JOURNAL, LEDGER AND TRIAL BALANCE


FINAL ACCOUNTS
TRADING ACCOUNT
PROFIT & LOSS ACCOUNT
BALANCE SHEET

COST ACCOUNTING

COST SHEET
STANDARD COSTING

VARIANCE ANALYSIS

MANAGEMENT ACCOUNTING
- FINANCIAL STATEMENT ANALYSIS COMPARATIVE, COMMON SIZE, TREND ANALYSIS

CAPITAL BUDGETING
RATIO ANALYSIS
FUND FLOW STATEMENT
MARGINAL COSTING
BREAK EVEN ANALYSIS
P/V RATIO
MARGIN OF SAFETY

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Financial accounting
The main purpose is to ascertain the profit or loss and
to indicate the financial position of the company.
The two important statements prepared in financial
accounting are Profit & loss accounts and Balance
sheet.
Profit & loss accounts to know the profitability of the
company
Balance sheet to know the financial position of the
company on a particular date.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Functions/advantages/need/importance/purpose/objective
s/uses of financial accounting

Book keeping functions


Classification of functions
Preparation of financial statements
Segregating financial transactions
Interpretation of financial data
Reporting of information
Providing accurate and reliable information

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Limitations/disadvantages of financial accounting


Historical data
Financial statements for the enterprise as a whole
It fails to help in price fixation
Not useful in cost control
Evaluation of policies not possible
Actual costs alone are recorded
Does not provide information for strategic decision
making
Complicated and technical subject
Monetary subject
Chances for manipulation or Window dressing

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Cost accounting
The process of accounting for cost from the point at
which expenditure is incurred or committed to the
company of its ultimate relationship with cost centres
and cost units.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Functions/Advantages/need/importance/purpose/objectiv
es/uses of cost accounting

Ascertaining cost
Fixation of selling price
Cost control
Cost reduction
Evaluation of performance

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Limitations/disadvantages of cost accounting


It involves too many forms and statements.
It involves more clerical work
It is costly to introduce and operate
It depends on financial accounting. If any error in
financial accounting will affect cost accounting too.
It is difficult to ascertain the fully reliable cost
Each cost accountant may use different method which
create confusion
Since different companies use different methods, it is
difficult to compare the companies.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Management accounting
Management accounting is the presentation of
accounting information in such a way as to assist
management in the creation of policy and in the day to
day operations of the company.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Functions/Advantages/need/importance/purpose/objectiv
es/uses of Management accounting

To help in planning and policy formulation


To help in the interpretation process
To help in decision making
To help in controlling performance
To help in coordinating
To help in organizing
To help in expansion, diversification and strategic business problems
Communication and management policies
To help in motivating employees
Helps in reporting the information
Helps in forecasting
Helps in the achievement of objectives
It uses special tools and techniques

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Limitations/disadvantages of management accounting

Weakness of source records


Consistent efforts
Management accounting is not a substitute
Mixed discipline
Resistance
Costly installation
Developmental stage
Subjectivity

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Users of accounting information


Internal users (Primary Users)of accounting information include the
following:
Management:for analyzing the organization's performance and
position and taking appropriate measures to improve the company
results.
Employees:forassessingcompany'sprofitabilityanditsconsequence
ontheirfutureremunerationandjobsecurity.
Owners:for analyzing the viability and profitability of their
investmentanddetermininganyfuturecourseofaction.
Accountinginformationispresentedtointernalusersusuallyintheform
ofmanagementaccounts,budgets,forecastsandfinancialstatements.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Users of accounting information

External users (Secondary Users)of accounting information include the


following:
Creditors:fordeterminingthecreditworthinessoftheorganization.Termsofcreditare
setbycreditorsaccordingtotheassessmentoftheircustomers'financialhealth.Creditors
includesuppliersaswellaslendersoffinancesuchasbanks.
Tax Authorities:fordeterminingthecredibilityofthetaxreturnsfiledonbehalfofthe
company.
Investors:for analyzing the feasibility of investing in the company. Investors want to
makesuretheycanearnareasonablereturnontheirinvestmentbeforetheycommitany
financialresourcestothecompany.
Customers:for assessing the financial position of its suppliers which is necessary for
themtomaintainastablesourceofsupplyinthelongterm.
Regulatory Authorities:for ensuring that the company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the
interestsofthestakeholderswhorelyonsuchinformationinformingtheirdecisions.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
JOURNAL
LEDGER

-RECORDING
-CLASSIFYING

TRIAL BALANCE

-SUMMARISING

FINAL ACCOUNTS

- INTERPRETING

TRADING ACCOUNT
PROFIT & LOSS ACCOUNT
BALANCE SHEET
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FINANCIAL
STATEMENTS
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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
JOURNAL:
Journal is a daily record of business transactions.
It is also called as day book
The process of recording transactions in the journal called
Journalizing
The entries made in journal called journal entries

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
FORMAT OF JOURNAL

S.No
(Rs.)

Vels University

Date

Particulars

L.F

Debit(Rs.)

Name of the A/c


To Name of the A/c
(Narration)

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Credit

BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
ADVANTAGES OF JOURNAL:

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It reduces the possibility of errors


It provides an explanation of the transaction
It provides a chronological record of all transactions
Journal provides records of all business transactions in one place on the time and date basis.
All transactions are recorded on the basis of receipts or bill, so we can check authenticity of each journal entries
with their bills.
There is minimum chance to avoid any particular transaction because in journal transactions are recorded date
basis.
Accountant writes every journal entrys narration bellow of that journal entry, so other auditor can know what the
reason of that journal entry is.
In journal, every transaction is recorded after deep analysis of two accounts on the basis of double entry system, so
there is minimum chance of mistake in journal.
Journal is the basis of posting in ledger accounts. With making of journal, accountant can not make ledger
accounts.
If there is mistake in ledger, we can rectify it with the help of journal or rectify journal entry in journal.
All opening journal entries , closing journal entries and all other transactions which is not recorded in any other
subsidiary books , will be recorded in journal .
Journal is also needed in every type of accounting software . These accounting software can make auto system of
posting journal entries by their automatic processing , but accountant must feed journal entries in journal and
other specific vouchers of journal .
In journal , there is one column of ledger folio . It is very important for checking reference of each account's
posting with its original journal entry .

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
DISADVANTAGES OR LIMITATIONS OF JOURNAL:
It will be too long if all the transactions are recorded
Difficult to ascertain the balance of each account

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE
LEDGER:
Ledger provides a summary of similar transactions at one
place.
It is a summary statement of complete transactions relating to
an account.
Ledger is considered as main book of accounts
It is considered to be the principal book of accounts which
helps us in attaining the main objective of accounting.
It provides vital information like
Total sales value periodically
Total purchases periodically
Amount due from individual customers
Amount due to individual suppliers
Amount spent on specific items of expenditure etc
Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE...
DIFFERENCE BETWEEN JOURNAL AND LEDGER
JOURNAL
LEDGER

It is a book of original entry

It is a source of secondary entry

All transactions are recorded in a


chronological order

All transactions pertaining to a particular


account appear at one place

It has greater weightage because it is a book


of source of entry

It is the main source of information

Unit of classification of data is transaction

Unit of classification of data is the account

Process of recording transactions in the


ledger is called as posting

Ledger posting can be done according to


convenience
From the ledger, first the trial balance is
drawn and then final accounts are prepared.

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Process of recording financial transactions is


called as Journalising

It is a continuous process day after day

Entries are transferred to the ledger

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE...

DIFFERENCE BETWEEN JOURNAL AND LEDGER

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Journal is the book of prime (first) entry, while Ledger is the book of final entry.
In other words, ledger contains analytical records, while journal contains chronological records.
Narration is required in a journal that is not the case in the ledger.
Transactions are recorded in the sequence of occurrence in the journal, whereas transactions are
classified and recorded in relevant accounts in the ledger.
Data can be classified based on transaction in the ledger, while the basis of classification of data are
accounts in the ledger.
A transaction is firstly recorded in the journal soon after the occurrence of it; it is only then transferred
to the ledger.
Final accounts cannot directly be prepared from journal, but ledgers form the basis for easy
preparation of final accounts.
Accuracy of journal cannot be tested, but accuracy of ledger can be tested to a certain extent using
trial balance.
Journal has two columns for debit and credit, whereas a ledger has two sides of an account one for
debit and the other for credit.
Journals are not balanced at the end of a period, but accounts in the ledger are balanced at the end of
a specific period.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE..
TRIAL BALANCE:
A statement containing the balances of all ledger accounts, as
at any given date, arranged in the form of debit and credit
columns placed side by side and prepared with the object of
checking the arithmetical accuracy of ledger postings.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE..
IMPORTANCE OR SIGNIFICANCE OF TRIAL BALNCE:

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Summary of various accounts


Proof of double entry
Ensuring of arithmetical accuracy
Trial balance facilitates preparation of final accounts.
Trial Balance acts as the first step in the preparation of financial statements. It is a
working paper that accountants use as a basis while preparing financial statements.
Trial balance ensures that for every debit entry recorded, a corresponding credit entry has
been recorded in the books in accordance with the double entry concept of accounting. If
the totals of the trial balance do not agree, the differences may be investigated and
resolved before financial statements are prepared. Rectifying basic accounting errors can
be a much lengthy task after the financial statements have been prepared because of the
changes that would be required to correct the financial statements.
Trial balance ensures that the account balances are accurately extracted from accounting
ledgers. Trail balance assists in the identification and rectification of errors
It provides a complete picture of each account in the ledger
It supplies in one place ready reference of all the balances of the ledger accounts.
It helps to locate the errors

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ACCOUNTING CYCLE..
LIMITATIONS OF TRIAL BALANCE:
Trial Balance only confirms that the total of all debit balances
match the total of all credit balances.
Trial balance totals may agree in spite of errors. An example
would be an incorrect debit entry being offset by an equal
credit entry.
Likewise, a trial balance gives no proof that certain
transactions have not been recorded at all because in such
case, both debit and credit sides of a transaction would be
omitted causing the trial balance totals to still agree.
Types of accounting errors and their effect on trial balance are
more fully discussed in the section on Suspense Accounts.
If avoucheris completed omitted to be entered in a day book
then it will not affect the total of the trial balance.
Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Accounting principles (or) Accounting concepts


Accounting principles are the set of rules and guidelines for the
preparation of financial statements and reports
The accounting concepts are
Business entity concept
Going concern concept
Money measurement concept
Accounting period concept
Dual aspect concept
Cost concept assets in historical cost
Matching concept revenue and expenses matched to know profit
Revenue recognition concept - Inflow and outflow equal
Accrual concept revenue or expenses incurred not received or
paid
Objective evidence concept everything based on evidence
auditor

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Accounting conventions
Convention of full disclosure
All information should be revealed

Convention of consistency
Rules, practices and concepts should be used

Convention of materiality
Only required and important items in financial items.
Unimportant should ne left out or merged.

Convention of conservatism
Playing safe. To have accounting alternative for transactions.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Difference between Book keeping and Accounting


Bookkeepingis
the
process
of
recording,
in
chronological order, the daily transactions of a business
entity. It forms part of the accounting information
system.
On the other hand,accountingis an information system
includes the process of recording, classifying,
summarizing, reporting, analyzing and interpreting the
financial condition and performance of a business in
order to communicate it to stakeholders for business
decision making.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Systems of book keeping


Single entry system
Double entry system

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Single entry system


For every transaction there should be one debit and one
credit. This has to be recorded in the journal.
Eg: If Rs. 2000 worth of raw materials purchased by the
company , then Rs. 2000 will be going out of the
company and Rs. 2000 worth of raw material coming in
to the company.
Single entry system is always a incomplete double entry

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Single entry system


It does not record the two fold effect of each and every
transaction.
In this single entry, sometimes the business transactions
are recorded in an unsystematic manner by recording only
single aspect, sometimes two fold aspect and sometimes
omitting both.
So, it is called as Single entry double entry or no entry
The accounts maintained in the single entry is not reliable
With this single entry system of accounting, profit & loss
account and balance sheet can not be prepared.
This system is followed in small business

Eg: Sole proprietorship


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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Double entry system


In double entry system, in every transaction, there will
be one debit and one credit.
An Italian merchant named Luco Pacioli invented the
double entry system of book keeping in 1494 AD.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Advantages of double entry system


It reveals the detailed information
Helps in determining profit & loss
Gives information about financial position
It is based on dual aspect concept ie for every debit
one credit will be there. The information provided in
the double entry system will be accurate.
It helps in preventing frauds and errors.
It satisfies the tax authorities.
It helps in the evaluation of results.

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Difference between single entry and double entry system


of book keeping.

Single entry is an incomplete and unscientific method of


book keeping where as double entry is a complete and
scientific method of book keeping.
In single entry system, debit and credit do not agree
where as in double entry system, dual aspect concept is
used.
In single entry, only personal and cash accounts are
maintained where as in double entry, Personal account,
real account and nominal account are maintained.
In single entry, Profit and loss and balance sheet cannot
be prepared where as in double entry it can be
prepared.
Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

Debit and Credit


Debit:

(Dr)

Benefit receiving aspect

Credit: (Cr)
Benefit giving aspect
In Ledger, Trial balance and Profit & Loss account, the left
hand side is known as debit side and right side know as credit
side.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ALL THE FINANCIAL TRANSACTIONS HAVE TWO ASPECTS


DEBIT BENEFIT RECEIVING ASPECT
CREDIT BENEFIT GIVING ASPECT

DOUBLE ENTRY SYSTEM

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Executive
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NATURE OF ACCOUNT
PERSONAL ACCOUNT
EG: RAMU A/C, GANESH A/C, BANK A/C, RS & CO A/C ETC

REAL ACCOUNT
TANGIBLE ASSETS
EG: MACHINE, LAND, STOCK ETC

INTANGIBLE ASSETS
EG: GOODWILL, PATENTS ETC

NOMINAL ACCOUNT
EXPENSES
EG: SALARY A/C, RENT A/C

INCOME
EG: INTEREST RECEIVED

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BIM

Executive
Placement 2003
School of Management
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GOLDEN RULE OF ACCOUNTS

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NATURE OF
ACCOUNT

DEBIT (DR)

CREDIT (CR)

PERSONAL
A/C

THE
RECEIVER

THE GIVER

REAL A/C

WHAT
COMES IN

WHAT GOES
OUT

NOMINAL
A/C

EXPENSES
INCOME AND
AND LOSSES GAINS
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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

FINANCIAL STATEMENTS
PROFIT AND LOSS ACCOUNT
BALANCE SHEET

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

PROFIT AND LOSS ACCOUNT

Profit & loss account is prepared to ascertain the net profit or net loss of the company in an
accounting period

It is an account into which all gains and losses are collected in order to ascertain the excess of
gains over the losses or vice versa

The left side of the profit and loss account is the debit side (dr) where all the operating and
non operating expenses are mentioned.

The right side of the statement is called as credit side (Cr) where all the operating and non
operating income are mentioned

If income is more than the expenses, then company gets Net profit

If income is less than the expenses, then it is Net loss.

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Executive
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School of Management
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PROFIT AND LOSS ACCOUNT


Important expenses
Carriage inwards transport charges paid while bringing the
raw material to the company
Carriage outwards transport charges paid while selling the
products to customers
Bad debts amount which is given as credit but not received
Depreciation
Tax, interest, dividend paid
Salary, wages, rent paid
Discount, commission paid

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BIM

Executive
Placement 2003
School of Management
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PROFIT AND LOSS ACCOUNT


Important income:

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Sales
Interest, dividend received
Rent received
Commission, discount received etc

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School of Management
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PROFORMA OF PROFIT AND LOSS ACCOUNT


EXPENSES

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Purchases
Wages
Salary, rent
Discount
Tax
Interest
Power
Electricity
Carriage inwards
Carriage outwards
Clearing charges
Packing charges
Dock dues
Coal, gas
Factory light

INCOME

Sales
Commission received
Rent received
Interest received
Dividend received
Discount received
Other income

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PROFORMA OF PROFIT AND LOSS ACCOUNT..

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Dividend paid
Trade charges
Manufacturing expenses
Stationary
Insurance
Repair
Office expenses
Sundry expenses
Establishment expenses
Commission paid
Advertise expenses
Selling and distribution expenses
Audit expenses
Depreciation
Bad debts
Travelling expenses

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

BALANCE SHEET
The balance sheet comprises of list of assets and
liabilities of the company on a given date
It presents the financial position of a concern.
It is called as statement of equality.

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Executive
Placement 2003
School of Management
Studies Striving towards Excellence

PROFORMA OF BALANCE SHEET

LIABILITIES

CURRENT LIABILITIES
Creditors
Bills payable
Outstanding expenses
Tax payable
Dividend payable
Bank overdraft
LONG TERM LIABILITIES
EQUITY
Equity share capital
Preference share capital
Reserves & Surplus (Retained Earnings)
DEBT
Debentures
Bank loan

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ASSETS

CURRENT ASSETS
Cash in hand
Cash at bank
Debtors
Bills receivable
Stock
Prepaid expenses
Short term investments
FIXED ASSETS
Land & building
Plant & machinery
Furniture
Loose tools
Motor car
Long term investment
Goodwill
Patents & copyrights

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

CURRENT ASSETS AND FIXED ASSETS


CURRENT ASSETS

The asset which can be converted into cash within one


accounting period
Ex
Debtor company gives credit to customers. Customers
will pay later to the company. Till then the customers
are mentioned as Debtors
Bill receivable Same as debtor. The main difference is
that bills receivable is considered as promissory note.
Even if customer cheats, company can take action
against them
Stock or Inventory It may be Raw material or Work in
progress and Finished goods
Prepaid expenses amount paid by the company in
advance
Short term investment company invest their surplus
cash in short time (for period less than one year)
Cash
Current assets are, therefore, very important to cash
flow management and forecasting, because they are
the assets that a business uses to pay its bills, repay
borrowings, pay dividends and so on,

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FIXED ASSETS

The asset which takes more than one year to


convert into cash
Ex
Land & building
Plant & machinery
Furniture
Long term investment
Loose tools
Motor car
Goodwill
Patents and copyrights
Fixed assets are not held for resale but for the
production, supply, rental or administrative
purposes.
Fixed assets are normally expected to be used for
more than one accounting period which is why
they are part of Non Current Assets of the entity.
Economic benefits from fixed assets are therefore
derived in the long term.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

CURRENT LIABILITIES AND LONG TERM


LIABILITIES
CURRENT LIABILITIES

The liability which has to be paid by the company


within one accounting period
Ex
Creditors credit received by the company from
the suppliers
Bills payable similar to creditors but bills payable
is a promissory note. If company defaults, then
the suppliers will take action against the company
Outstanding expenses expenses not paid by the
company eg: Outstanding rent, outstanding salary
Tax payable
Dividend payable
Bank overdraft company may withdraw more
from their current account above the available
balance and to be repaid within the year

LON TERM LIABILITIES

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The liabilities which can be paid even after one


year by the company is called as long term
liabilities.
Eg
EQUITY
Equity share capital amount received by the
company by issuing equity share. For this company
pays equity dividend to the equity shareholders.
The dividend rate is not fixed
Preference share capital amount received by the
company by issuing preference share. For this
company pays fixed preference dividend to
preference shareholders
Reserves & Surplus (Retained Earnings) unused
last year profit
DEBT
Debentures amount received by the company by
issuing debentures. For this company pays fixed
interest to the debenture holders
Bank loan

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Executive
Placement 2003
School of Management
Studies Striving towards Excellence

FINANCIAL STATEMENT
Financial statements refer to formal and original
statements prepared by a business concern to disclose
its financial information
The two major financial statements are
Profit & loss account
Balance sheet

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

USES OF FINANCIAL STATEMENTS

Prospective investors use financial statements to perform financial analysis, which is a key component in making investment decisions.

A lending institution will examine the financial health of a person or organization and use the financial statement to decide whether or not to lend
funds.

Philanthropies may use financial statements of a non-profit as a component in determining where to donate funds.

Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid
by a company.

Vendors who extendcreditmay use financial statements to assess the creditworthiness of the business.

Employees also may use reports in making collective bargaining agreements

Managersrequire Financial Statements to manage the affairs of the company by assessing its financial performance and position and taking
important business decisions.

Shareholdersuse Financial Statements to assess the risk and return of their investment in the company and take investment decisions based on their
analysis.

Customersuse Financial Statements to assess whether a supplier has the resources to ensure the steady supply of goods in the future. This is
especially vital where a customer is dependant on a supplier for a specialized component.

Competitorscompare their performance with rival companies to learn and develop strategies to improve their competitiveness.

General Publicmay be interested in the effects of a company on the economy, environment and the local community.

Governmentsrequire Financial Statements to determine the correctness of tax declared in the tax returns. Government also keeps track of
economic progress through analysis of Financial Statements of businesses from different sectors of the economy.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

ESSENTIALS OF GOOD FINANCIAL STATEMENTS

Simplicity:Financial statements should be simple so that concerned individuals can easily understand and interpret them properly. For this, the
statements must be simple and clear.

Right time:These must be prepared at the right time. Any delay in their presentation may decrease their usefulness.

Compliance with legal requirements:Financial statements must be prepared in the form and style as required by the Act. They must have subjectmatter as prescribed and must be presented as stated in the Act.

Adherence of accounting principles:The financial statements must be based on the Generally Accepted Accounting Principles (GAAP) so that they
may have universal acceptance.

Disclosure:The financial statements should disclose all the relevant and material facts. It should be transparent so that the users of accounting
information can draw neat conclusions.

Authentic:The information contained in the financial statements should be authentic supported by evidence.

Relevant to the purpose:Financial statements must be relevant to their purposes. Irrelevant and unnecessary informations should not be included
in these statements.

Complete and accurate informations:Financial statements should include the complete and accurate information about the progress of a business
and its future prospects. Informations should be based on facts. False and incomplete information results in wrong interpretation.

Comparability:Financial statements should be comparable. The comparison can be made between present and past as well as between one business
and the other. It increases the utility of the statements. This can be done when similar accounting principles are adopted for their presentation.

Facilitating the analysis:Decisions can be taken only by proper analysis of the financial statements. Thus, financial statements should be prepared
in such a way that it may facilitate the analysis. For this, the various items should be classified and grouped in a proper manner, so that data can be
obtained easily for analysis.

Systematic arrangement:The information contained in the financial statements should be arranged systematically so that they may be comparable.

Audited:The financial statements should have been presented to the uses after being audited by the competent chartered accountants.

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

LIMITATIONS OF FINANCIAL STATEMENTS

Based on traditions and conventions:Financial statements are prepared and based upon traditions and conventions which allow the usage of personal judgments.

Based on historical data:Financial statements are based on historical data while parties are more interested in knowing the present position and future prospects of
the business enterprise.

Scope of manipulations:Financial statements are sometimes prepared according to the needs of the situation or whims of the management. Management can
manipulate financial statements by under-valuation or over-valuation of inventory, under or over charging of depreciation etc.
Sometimes window dressing is resorted to in order to show better financial position of a concern than its real position. So financial statements are not free from bias.

Influenced by personal judgements:Financial statements are influenced by personal judgements of the account. On many issues more than one methods are
permitted. For example, method of depreciation, valuation of stock, valuation of goodwill etc. all depend upon the personal judgements of the policy-maker of the
enterprise.

Ignore qualitative aspects:Financial statements show only those facts which can be expressed in money terms. Qualitative aspects of the business units are omitted
from the books, because they cannot be expressed in money terms. Thus, cordial employer-employee relations, efficiency of management, firm?s ability to develop
new products, customer satisfaction, etc. have a vital role in the profitability of the firm, but here ignored and omitted because these are qualitative in nature.

Ignore inflationary effects:Changes in price level make data meaningless. Financial statements record transactions at historical costs. No account is taken of the
present value.

Ignore the interest of other parties:Financial statements are prepared with a view to take care of the interest of proprietors only and ignore the interests of all
other interested parties like creditors, investors, workers, stock exchanges, taxation authorities, economists, researchers, politicians, etc.

Financial statements are only interim reports:Financial statements are essentially interim reports. They cannot be final. The actual profit or loss of a business can
be determined only when the business is ultimately closed. The existence of contingent assets and liabilities, deferred revenue expenses make the statement less
accurate and more subjective.

Artificial view:Financial statements do not reveal a real and correct picture of the worth of assets and their loss of value. The reason is that they are shown on
historical cost. Thus, these statements provide artificial view. Market or replacement value and the effect of the changes in the price level are completely ignored.

Incapable:Financial statements are incapable of showing profitability, operational efficiency, financial soundness, etc. of the business.
These limitations of financial statements can be removed by efficient analysis and interpretation of the financial statements.

Vels University

www.velsuniv.org

BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

TECHNIQUES OR TOOLS FOR FINANCIAL


STATEMENT ANALYSIS

COMPARATIVE STATEMENT ANALYSIS (OR) HORIZONTAL ANALYSIS


Comparative financial statement is aanalysis of financial statementsof the company for two years or of
the two companies of similar types. Horizontal analysis is also regarded asDynamic Analysis. It is an
important method of analysis which is used to make comparison between two financial statements. Being
a technique of horizontal analysis and applicable to both financial statements, income statement and
balance sheet, it provides meaningfulinformationwhen compared to the similar data of prior periods.
The comparative statement of income statements enables to review the operational performance and to
draw conclusions, whereas the balance sheets,presentinga change in the financial position during the
period, show the effects of operations on the assets and liabilities. Thus, the absolute change from one
period to another may be determined.
COMPARATIVE BALANCE SHEET
COMPARATIVE PROFIT AND LOSS ACCOUNT
COMMONSIZE STATEMENT ANALYSIS (OR) VERTICAL ANALYSIS
The figures of financial statements are converted to percentages. It is performed by taking the total
balance sheet as 100. The balance sheet items are expressed as the ratio of each asset to total assets and
the ratio of each liability to total liabilities. Thus, it shows the relation of each component to the whole Hence, the name common size.
COMMON SIZE BALANCE SHEET
COMMON SIZE PROFIT AND LOSS ACCOUNT

Vels University

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BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

TECHNIQUES OR TOOLS FOR FINANCIAL


STATEMENT ANALYSIS...

TREND ANALYSIS
Trend analysis is the analysis of the trend of the financialratiosof the company over the
years. It is an important tool of horizontal analysis. Under this analysis, ratios of different
items of the financial statements for various periods are calculated and the comparison is
made accordingly. The analysis over the prior years indicates the trend or direction. Trend
analysis is a useful tool to know whether the financial health of a business entity is
improving in the course of time or it is deteriorating.

RATIO ANALYSIS
Ratio analysis is the analysis of the interrelationship between two financial figures. The
most popular way to analyze the financial statements is computing ratios. It is an
important and widely used tool of analysis of financial statements. While developing a
meaningful relationship between the individual items or group of items of balance sheets
and income statements, it highlights the key performance indicators, such as,liquidity,
solvency and profitabilityof a business entity. The tool of ratio analysis performs in a way
that it makes the process of comprehension of financial statements simpler, at the same
time, it reveals a lot about the changes in the financial condition of a business entity.

Vels University

www.velsuniv.org

BIM

Executive
Placement 2003
School of Management
Studies Striving towards Excellence

TECHNIQUES OR TOOLS FOR FINANCIAL


STATEMENT ANALYSIS...

FUND FLOW STATEMENT


The objective of this analysis is to extract theinformationrelating to working capital. The
amount of net working capital is determined by deducting the total of current liabilities
from the total of current assets. The statement of changes in working capital provides the
informationin relation to working capital between two financial periods.

CASH FLOW STATEMENT


Cash flow analysis is the analysis of the change in the cash position during a period.

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