Broad Agenda

1 Personal Bal Sheet - your Bal Sheet

2 Personal P&L - your P&L
3 Accounting transaction
4 Accounting equation
5 Illustrative company - several transactions
Company Bal Sheet, P&L
6 Monopoly Game
You play, you generate transactions, you generate your Bal Sheet, P&L
7 Cash Flow Statements
8 Corporate Bal Sheet, P&L
9 Inventories, Depreciation, Taxes, Interest

Two types of numbers

1 Point in time numbers
2 Period of time numbers

How many cell phones do you have Two

Point in time - as of today - 22 June 2018 she has two cell phones

If we had asked her on 22 June 2004, zero phones

If we ask her on 22 June 2044, zero phones

What is your salary Prerna - she says Rs 6 lakhs

What kind of number is this

It is a period of time number - Rs 6 lakhs per annum

Or it could be Rs 6 lakhs per hour (Harish Salve, Jethmalani)

per annum per hour - period of time

Point in time numbers Period of time numbers

Photograph
Balance Sheet
Remain there till disturbed
Statement of Wealth
Wealth is a stock - pool
Video film
P&L
Gets refreshed very period, starts from zero
Statement of Income
Income is a flow - river

Your Balance Sheet as of today - 22 June 2018

Assets (own)
House, Land, Buildings, Mountains
Car, Vehicles
Appliances
Jewelry

Insurance policies
Bank Balances
Stocks and shares, mutual funds
Loans given, Advances given

Total Assets 100.00

Liabilities (owe)

Loans taken - from banks

Loans taken - from friends, relatives, well
wishers, from hither and thither
Expenses outstanding
(rent, school fees, drivers salaries, society
maintenance, many many exps)
Advances received
Total Liabilities 22.00

Capital, Net Worth, Equity, Shareholders

Equity, Shareholders Funds, your
Savings 78.00

Liabilities are your sources of funds

1 Savings 78.00
2 Friends, loans, exps 22.00
100.00

Assets are your application of funds

House, Car, Jewelry, PF 100.00
Assets - measurable in monetary terms, control over, own, potential to generate money,
result of past transactions
You have a donkey that sleeps all day and night - is it an asset ? Yes

Some assets that are questionable

1 Moral values, Immoral values ?? Not measurable, not transferable
2 Clothing ? Most likely an expense in practice
3 Body, Health Not measurable, not transferable
4 Soul Not measurable, not transferable
5 Education Not measurable, not transferable
6 Goodwill Not measurable, not transferable
7 Friends, Relatives Not measurable, not transferable
8 Company registered on your name If you own Shares, that is an asset
9 Brand value Not measurable, not transferable
10 Salary Period of time number, belongs to P&L
11 Trademarks and patents Assets if measurable/transferable

Some assets may be very important, very valuable in social life, human life, but that
stupid accountant does not know how to recognize them
The world of accounting does not recognize ALL your assets
The most important asset is your intellect
The second asset is your people

In the world of accounting, assets need to fulfil two criteria:

a Measurable in rupee naya paisa
b Transferable (sell, puchase, lease, licence, gift, dispose off)

BRAND VALUE (OR ANY ASSET VALUE)

1 Should be measurable
2 Should be transferable

If you say that brand value of Amitabh Bachhan is Rs 250 cr - somebody says - KPMG sa
We all clap and say wah wah
Then they say write that cheque - we all disappear

So AB with his aura / brand charged Kalyan Jewellers Borivli Rs 2 cr for a 20 sec ad
We will be delighted to account for Rs 2 cr - something happened - somebody wrote a
cheque
This is income (not brand value)

Trademarks and Patents and Brands

If you can make any asset measurable and transferable, we are quite happy to recognize
that item as an asset
If you tell me that you can translate a piece of your intellect into a transferable
commodity, then the accountant is too happy to account

Trademarks and patents are intellectual efforts which have been made measurable/
transferable by the innovative legal community
Once they are measurable/transferable I am happy to account for them

If you are Bayer and you bought a patent from Swenska and you paid Rs 5 cr for it,
I will be happy to recognize this patent as an Asset

Are IPL Players assets - are they bought and sold - are human beings assets
Are employees of L&T assets in L&T Bal Sheet
Answer No
People were assets once upon a time in a sector called slavery sector
They were indeed bought and sold

Today they are not

NRN - people, my biggest assets, can walk out of the door, anytime

Chairman - from the podium will say - people are my biggest assets
Off the podium - all these are my biggest liabilities

Do we own them - can we buy them, sell them, lease them, dispose them off ?
Legally speaking no

What about IPL

Do they BUY players
No

They buy their services, rights to play, apply restrictions on those rights
Virat Kohli wants to play gully cricket in his society
Can he play
Yes
Can he play on a beach in Mauritius
Yes

Only with in the IPL framework, he cannot play for other teams for x months

Can he get married

Yes
Those rights are assets (measurable / transferable)

Clothing ?
There is something called 'materiality'
Don’t sweat about the small stuff
Don’t do PhD on a mosquito
While small stuff might be assets, it may be expensive to treat them as assets
Assets need to be recorded, depreciated, tracked till sold, asset number, physically
verified, all this costs money
If small stuff are not treated as assets, then what are they
They are treated as expenses

An MLA is Pune had a gold shirt - clothing - that would be most likely an asset
But other regular clothing - may be treated as expenses

Some companies have a policy - any asset under Rs 10,000 is expensed

Any asset under Rs 5,000 is expensed

Measurement of Assets
You bott a house in the year 2005 for Rs 20 lakhs and today it is worth Rs 120 lakhs
What would the Balance Sheet show
This is a fight between 'cost' and 'value'
Cost is a fact, a historical event, evidenced by documents
Value is an opinion, no evidence, somebody said so, no event has happened

Accountants know the cost of everything and the value of nothing

We love cost, we love facts, we are terrified of opinions

Most of the Bal Sheet runs on cost

Nowadays some new principles have come in (IFRS, Ind AS) where value has made
in-roads into the Balance Sheet
But for our initial discussions, we will ignore these developments

Your house will appear at Rs 20 lakhs, it may even appear at Rs 16 lakhs

How
Bcoz of something called depreciation

You may say - then the Bal Sheet is old, ancient, unreal, useless
We are happy with all these comments
The other alternative is to allow you to show what you like - 120, 520, 820 - you paid 20
We are anchored in history
Taj Mahal in Shah Jahan's Bal Sheet will appear at Rs 21 lakhs

If you wish to know the current value of those assets, the Bal Sheet is your starting poin
not your final goal - you start with Bal Sheet, you do your research, you do your surveys
you may decide that this house is worth Rs 120, 110, 105 or whatever

The Bombay Dyeing Bal Sheet will have tons of land at Dadar, Parel, Worli, Prabhadevi
all bought in Jinnahs' time in the 1940s - at what cost - some small rupee paisa - today
thousands of crores - that Bal Sheet will still carry those lands at those pennies

LIABILITIES
Most of the time, people mix up liabilities with expenses
Liabilities are point in time Balance Sheet numbers
Expenses are period of time P&L numbers
But they look similar, they may overlap, they cause confusion

You are new to Mumbai and you have taken up acco on rental basis at Rs 9,000 pm
from 1 April 2018. You have entered into a 5 year agreement and your financial year
end is March. You have paid the landlord Rs 5,000 so far and today is 30 June 2018

What is your expense 5 5 5 5 5

What is your liability 22 4 0 10 13

What is your expense 27 5

What is your liability 22 535

Accountants are historians, they record financial history

History means past, actual events - financial events that are called 'transactions'
Which means he cannot 'record' the future - nobody can record the future
We can estimate the future - these are called - budgets, plans, forecasts, estimates, pro
Past - financial statements, Bal Sheet, P&L, etc etc - based on facts

What is past and what is future depends on today's date

If today is 30 June 2018, then anything from 1 July 2018 cannot be 'recorded'
In this case, you can account for numbers from 1 April 2018 to 30 June 2018

My year ending is 31 March 2019

That’s fine
Let that date come - what if dinosaurs come back before that time
I have a 5 year agreement - agreed - but those same dinos ?
Second principle
Principle of 'accrual'
1 Expense is expense whether paid or not
2 Income is income whether recd or not

Most of the time, in our simple personal lives, when we 'incur' an expense, we also 'pay'
Bcoz they happen together most of the time, our brain believes that there is only one ev
In reality, there are two events - incurrence and payment

We may pay in advance, we may pay later, we may pay at the same moment

You consumed chai today for Rs 15

You paid the canteenwala in August

This is expense of when

Today

You booked a train ticket today online for your travel in Diwali for Rs 896
This is expense of when Nov-18
This is payment of when Jun-18

Human brain thinks that expense happens whenever payment happens

But this is wrong thinking

Expense happens independent of payment

Expense may be driven by some actions, some events, passage of time

What is your expense 27,000

What is your liability 22,000

Expense here is driven by two factors

1 You have an agreement whereby you will incur an expense of Rs xxxx per mo
2 Time has passed

1 9,000
2 3
Expense 27,000
Liability is what you owe
I had to pay him Rs 27,000 of which I have already paid him Rs 5,000, so I owe him
Rs 22,000

Variant of this example

Had you paid the landlord Rs 1 lakh

What is your expense 27,000

What is your asset 73,000
What is your liability -

What is rent ? Is it an expense or is it a liability ?

Prima facie it is an expense for the tenant, however, the rent that is not yet paid could
also show up as your liability
In fact ALL EXPENSES that you have incurred, but not yet paid, are your liabilities

A B C D E
Assets 100 100 100 100 100
Liabilities 0 22 72 92 192
Own Capital 100 78 28 8 -92
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