Financial and Management

Accounting

MAHENDRA K PATIDAR
PGDMBIF
Institute of Public Enterprise, Hyderabad
 Course outline
 Fundamentals of Accounting

 Financial Statement Analysis

 Introduction to Cost and Management

Accounting

 Cost Volume profit analysis

 Budgetary Control, Standard costing and

Variance analysis
DEFINITIONS
 Accounting is the art of recording, classifying and summarising in
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.

 The function of accounting is to provide Quantitative information,

primarily of financial nature, about economic entities, that is
needed to be useful in making economic decisions.

 Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgementsand decisions by users of the information.
FUNCTIONS OF ACCOUNTING
 Recording:- This is the basic function of accounting.
It is essentially concerned with not only ensuring that
all business transactions of financial character are in
fact recorded but also that they are recorded in an
orderly manner. Recording is done in the book
“journal”.
 Classifying:- This is concerned with the systematic
analysis of the recorded data, with a view to group
transactions or entries of one nature at one place.
Classification is done in the book termed as “Ledger”.
 Summarising:- This involves presenting the classified
data in a manner which is understandable and useful.
This process leads to preparation of the following
statements. Namely Trial Balance, Income Statement
and Balance sheet.
Functions
 Dealing with financial transactions.

 Analysing and Interpreting:- This is final function of

accounting. The recorded financial data is analysed
and Interpreted in a manner that the end-users can
make a meaningful judgement about the financial
condition and profitability of the business operations.

 Communicating:- The accounting information after

being
meaningfully analysed and interpreted has to be
communicated in a proper form and manner to the
proper person.
Importance & Objectives
Importance of Accounting Information.
 Proprietors.
 Managers.
 Creditors.
 Prospective Investors.
 Government.
 Employees.
 Citizen.
Objectives of Accounting.
 To keep systematic records.
 To protect business properties.
 To ascertain the operational profit or loss.
 To ascertain the financial position of business.
 To facilitate rational decision making.
ACCOUNTING PRINCIPLES
They are a body of doctrines commonly associated
with the theory and procedures of accounting, serving
as an explanation of current practices and as a guide
for selection of conventions or procedures where
alternatives exist.

It is defined as those rules of action or conduct which

are adopted by the accountants universally while
recording accounting transaction. It is also termed as
Accounting Standards.

Accounting principles are classified into two

categories. Namely Accounting concepts and
Accounting conventions.
ACCOUNTING CONCEPTS
The term concepts include those basic assumptions upon
which accounting is based.

 Separate Entity Concept

 Money Measurement Concept
 Cost Concept
 Going Concern Concept
 Dual Aspect Concept
 Realisation Concept
 Accrual Concept
ACCOUNTING CONVENTIONS
Customs and traditions which guide the
accountants while preparing the accounting
statements.

 Consistency

 Full Disclosure

 Conservatism

 Materiality
ACCOUNTING POLICIES
Accounting policies refer to specific
accounting principles and the methods of
applying those principles adopted in the
preparation and presentation of financial
statements. The choice of appropriate
accounting principles in the specific
circumstances of each enterprise calls for
considerable judgment by the management
of the enterprise

example:-Methods of depreciation
Accounting Cycle
A complete sequence beginning with the
recording of the transactions and ending
with the preparation of the final accounts.
Jounalising
Posting
Balancing
Trial Balance
Income Statement
Balance Sheet
Accounting Process & Equation
 An overview of the steps of cycle,
beginning with a transaction and
ending with the closing of the books
and reversing entries.
 Equation
Assets= Capital+Liabilities or
Shareholders equity= Assets –
Liabilities
 GAAP
Generally Accepted Accounting Principles :
Standard framework of guidelines for
financial accounting. It includes the
standards, conventions , and rules
accountants follow in recording and
summarising transactions, and in the
preparation of financial statements.

The following are the Seven principles.

 7 P’s
 Principle of regularity: Regularity can be defined as
conformity to enforced rules and laws. This principle is
also known as the Principle of Consistency.
 Principle of sincerity: According to this principle,
the accounting unit should reflect in good faith the
reality of the company's financial status.
 Principle of the permanence of methods: This
principle aims at allowing the coherence and
comparison of the financial information published by
the company.
 Principle of non-compensation: One should show
the full details of the financial information and not
seek to compensate a debt with an asset, a revenue
with an expense, etc.
7 P’s
 Principle of prudence: This principle aims at
showing the reality "as is" : one should not try to
make things look prettier than they are. Typically, a
revenue should be recorded only when it is certain
and a provision should be entered for an expense
which is probable.
 Principle of continuity: When stating financial
information, one should assume that the business will
not be interrupted. This principle mitigates the
principle of prudence: assets do not have to be
accounted at their disposable value, but it is accepted
that they are at their historical value.
 7 P’s
 Principle of periodicity: Each
accounting entry should be allocated
to a given period, and split
accordingly if it covers several
periods. If a client pre-pays a
subscription (or lease, etc.), the
given revenue should be split to the
entire time-span and not counted for
entirely on the date of the transaction
 IFRS
International Financial Reporting Standards are standards
and interpretation adopted by the International
Accounting Standards Board (IASB). In April 2001,
the IASB adopted all IAS and continued their
development, calling the new standards IFRS.
Assumptions
Accrual basis: The effect of transactions and other
events are recognised when they occur, not as cash is
received or paid.
Going concern: The financial statements are prepared
on the basis that an entity will continue in operation
for the foreseeable future.
Mechanics of Accounting
Transaction of a business refers to an event the
recognition of which gives rise to an entry in account
records.

Account is a summary of the relevant transactions at

one place relating to a particular head. It records not
only the amount of transaction but also their effect
and direction.

Accounts can be broadly classified into Personal

Accounts and Impersonal Accounts.

Impersonal Accounts are further classified into Real

Accounts and Nominal Accounts.
 Classification
Personal Accounts:- These are the accounts of persons with whom the
business deals. Ex: Sold goods to kumar, paid cash to ravi.

DEBIT THE RECEIVER

CREDIT THE GIVER
Real Accounts :- These are the accounts of tangible objects ie. Assets
owned by an enterprise and carrying probable future benefits.
Ex: cash received from ravi.
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
Nominal Accounts :- These accounts are opened to explain the nature
of transactions. Nominal accounts include accounts of all expenses,
losses, incomes and gains.
Ex: Paid wages, commission received.
DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL GAINS AND INCOMES
Meaning and Rules of Debit &
Credit
Debit means to enter an amount of a
transaction on the left side of an account,
Credit means to enter an amount of a
transaction the right side on an account.
Dr. and Cr. are the abbreviated form of
debit and credit.
Both debit and credit may represent either
increase or decrease depending upon the
nature of an account.
 Journal
Journal:- The book in which the business transactions are recorded in a
chronological order, after analysing them and classifying the benefits
according to the principles of debit and credit is called journal.
The transactions in the journal are recorded on the basis of the rules of
debit and credit.

Debit is that aspect of transaction that causes:

An increase in an Asset, a decrease in Liability
An increase in Expense or Loss, a decrease in Income or Gain
An increase in Drawings, a decrease in Capital

Credit is that aspect of transaction that causes:

A decrease in Asset, an increase in Liability
A decrease in Expense or Loss, an increase in Income or Gain
A decrease in Drawing, an increase in Capital
Advantages of journal entries
 A businessman can find out the information when
required, quickly and easily.
 When any difference arises with regard to past
transactions, the trader can satisfy by explaining the
dates and the circumstances of the differences.
 It helps in the preparation of final accounts at the end
of the year.
Business transactions have been classified into three
categories:
Transactions relating to persons, properties and
assets and to incomes and expenses.
 PROFORMA OF JOURNAL
Date particulars L.F Debit Rs. Credit Rs.

 Date:- The date on which the transaction was entered is recorded

here.
 Particulars:- The two aspect of the transaction are is recorded in
the column i.e., the details regarding accounts which have to
be debited and credited.
 L.F:- It means ledger folio .the transactions entered in the
journal are later
on posted to the ledger procedure regarding posting the
transactions in the ledger

 Debit:- In this column, the amount to be debited is entered.

 Credit:- In this column, the amount to be credited is shown.
Problems
1) From the following transactions journalise.
a) Rent paid.
b) Salaries paid.
c) Interest received.
d) Dividends received.
e) Furniture purchased for cash.
f) Machinery sold.
g) Outstanding for salaries.
h) Paid to Suresh.
i) Received from Mohan (the proprietor).
j) Lighting.
2) Pass journal entries from the following

1.Jul.1,2007,Ajit started business with cash Rs 40,000.

2.Jul.3,he paid into the Bank Rs 2,000.

3.Jul.5,he purchased goods for cash Rs 15,000.

4.Jul.8,he sold goods for cash Rs 6,000.

5.Jul.10,he purchased furniture and paid by cheque Rs 5,000.

6.Jul.12,sold goods to Arvind Rs 4,000.

7.Jul.14,he purchased goods from Amrit Rs10,000.

.
8.Jul.15,he return goods to Amrit Rs 5,000.

9.Jul.16,he received from Arvind Rs3,960 in full settlement

10.Jul18,he withdraw goods for personal use Rs1,000.

11.Jul.20,he withdraw cash from business for personal use Rs 2,000.

12.Jul.24,he paid telephone charges Rs 1,000.

13.Jul.26,cash paid to Amrit in full settlement Rs4,900.

14.Jul.31, Paid for stationery Rs 200, rent Rs 500 and salaries to staff
Rs 2,000.

15.Jul..31, goods distributed by way of free samples Rs 1,000.

3) Journalise the transactions given below in the books of Prasad.

April 1 Prasad commenced business with a cash of Rs.30,000.

April 3 Cash sales Rs.4,000.

April 4 Bought Machinery Rs.15,000.

April 7 Sold goods to Raju Rs. 10,000.

April 9 Purchased goods from Ramana Rs.8,000.

April 10 Sold goods to Gupta Rs.5,000.

April 12 Paid for stationery Rs.1,000.

April 14 Carriage expenses Rs.500.

April 15 Bought furniture for proprietor's residence and paid cash
Rs.7,000.
April 17 Sold goods to Krishna for cash Rs.3,000.

April 22 Received Discount Rs. 800.

April 24 Paid for wages Rs.1,200.

April 26 Sales Rs.15,000.

April 27 Deposited cash with Bank Rs.10,000.

April 28 Received cash from Mahesh Rs.1,500.

April 29 Received Interest on loan from Viswanath Rs.600.

4) Journalise the following transactions and post them
into Ledger
1. Ram started business with a capital of Rs 10,000.
2. He purchased furniture for cash Rs 4,000.
3. He purchased goods from Mohan on credit Rs2,000.
4. He paid cash to Mohan Rs 1,000.
5. He received cash from Suresh Rs 1,000.
Ledger & Posting
Ledger :- A book containing different accounts
of an entity and facilitates recording of all
types of transactions related to Personal,
Real and Nominal accounts separately in
related accounts.

Posting :- Transferring the debit and credit

items from the journal to the respective
accounts in the ledger
 PROFORMA OFAccount
LEDGER
Dr Cr
Date particulars Amount Date Particulars Amount
Rs Rs

Notes:1) It is customary to use words “To” and “By” while making posting in the
Ledger.
2) The word “To” is used with the accounts which appear on Debit side
of a Ledger Account.
3) Similarly, the word “By” is used with accounts appear on the Credit side
of a Ledger Account.
 Trail balance
Trial balance :- It is a statement containing the
various ledger balances on a particular date, arranged
in the form of debit and credit columns
placed side by side and prepared the object of
checking the arithmetical accuracy of the ledger
postings.

Objects of preparing trail balance:-

 Checking of the arithmetical accuracy of the
accounting entries.
 Basis for financial statements.
 Summarised ledger
Trial balance Errors
 Error of original entry
 Error of omission
 Error of reversal
 Error of commission
 Error of principle
 Compensating errors
 Transposition error
 Trading Account
This is the first step in preparation of final accounts. It is prepared at the
end of each accounting period to asses the Gross Profit or Gross Loss.

Advantages:-

 We can ascertain Gross Profit/Gross Loss.

 We can observe the changes in direct expenses.

 We can calculate the cost of production.

 We can establish the relation between the costs and revenues.

 We can analyse the trend in sales.

 We can decide the earning capacity of the firm

 PROFORMA OF TRADING ACCOUNT
Trading Account of
Dr for the year ended Cr
Particulars Amount Particulars Amoun
Rs t
Rs
To Opening stock By Sales
To Purchases Less Returns
Less Returns By Closing Stock
By Gross Loss c\d

To Direct
Expenses

TO Gross Profit
PROBLEMS
From the following ledger balances as on 31-12-2006,
prepare Trading Account.

Rs
Stock as on 1-1-2006 2,000

Purchases 38,000
Sales
56,000 Returns
Inward 2,000
Returns Outward 3,000
Closing Stock 12,000
You are requested to prepare Trading Account from the following
information.
Rs

Stock(1-1-2006) 1,000

Purchases 25,000
Sales 35,000

Returns Inward 1,500

Returns Outward 1,000
Direct Wages 2,000
Carriage Inward 3,000
Carriage Outward 1,800
Factory Rent 1,000
Office Rent 800
Customs Duty 200
Electricity (motive power) 500
Office Lighting and repairs 700
Closing Stock 5,000
 PROFORMA OF P&L ACCOUNT
Profit and Loss Account of …
for the year of ending…
Dr Cr
Particulars Particulars
Amount Amount
Rs Rs

To Gross Loss b/d By Gross Profit b/d

To Salaries By Discount
To Rent Received
To Commission By Interest on
To Advertisement Drawings
To Bad Debts By Profit on Sale of
To Discount Assets
TO Net Profit By Net Loss
Transferred Transferred to
to Capital a/c Capital a/c
From the following particulars prepare Profit and Loss Account.
Rs

Gross Profit 2,56,250

Rent 6,500
Commission Paid 3,250
Salaries 9,750
Taxes 9,750
Trade Expenses 1,625
Bank Charges 1,950
Printing & Stationery 8,125
Packing Charges 1,625
Carriage Outward 6,500

Discount Received 3,250

Discount Allowed 2,112

Bad Debts 2,438
Depreciation on Plant 4,875
From the following Ledger balances of X Ltd, prepare Trading & Profit and Loss
Account for the year ended 31st Dec,2006.
Rs
Opening Stock 1,87,500
Purchases 2,71,875
Sales Returns 15,000
Furniture 52,500
Machinery 2,43,750
Carriage Outward 5,625
Wages 37,500
Sales 6,90,000
Purchase Returns 9,375
Carriage Inward 7,500
General Expenses 7,500
Salaries 7,500
Commission Received 1,875
Discount Allowed 2,750
Bad Debts 1,000
Commission to Agent 1,875
Bank Charges 563
Interest Received 1,125
Rent Received 16,875
Investments 3,75,000
Insurance 3,750
Closing Stock 3,75,000
 Assets- Resources acquired

Circulating/Floating Fixed:- these are not meant to be sold but are

Assets constantly meant to be utilized in the firm’s Business.
change in value through
transactions that are
entered into. These are
meant to be converted in
to cash at the earliest Tangible
opportunity.
Which can be seen Fictitious
and felt
Assets of which no
value

Intangible
Which cannot be seen
Liabilities are claims of the creditors against the enterprise
arising out of past activities that are to be satisfied by the
disbursement or utilisation of corporate resources.

Liabilities

Fixed Contigent
Current
Other than current Which may arise in
Repayment
obligation Payable future depending on
within one year from happening of an
the date of Balance uncertain event.
sheet.
PROFORMA OF BALANCE SHEET
Permanency Order Balance sheet of
–
as on-
Liabilities Amount Assets Amount
Rs Rs

Capital Fixed Assets : ***

Add: Net Profit, Good will, Patents,
Additional copy right, trade
capital, marks, Land
&Buildings, Plant
Interest & Machinery,
on Furniture &
capital. Fittings etc.
Less: Investments ***
Drawings, Int Current Assets:
on drawings, ***
Net Loss. Debtors, closing
stock, cash in
Long term *** hand& at Bank
 Liabilities Amount Assets Amount
Rs Rs

Current Prepaid Expenses ***

Liabilities: Accrued Incomes ***
Creditors, Bills *** Bills Receivable
payable, Bank
Overdraft,
Outstanding
Expenses,
Income
received in ***
advance.
Liquidity Order
PROFORMA OF BALANCE SHEET

Liabilities Amount Rs Assets Amount Rs

Current Liabilities: Current Assets : ***

Outstanding Expenses Prepaid Expenses
Income Received in Accrued Income
Advance Cash in Hands
Bills Payable Cash at Bank
Bank Overdraft Bills Payable
Creditors Debtors ***
Loans: Investments
Long Term Loans *** Loose Tools
Short Term Loans *** Fixed Assets:
Capital: Furniture & Fittings
Capital *** Vehicles
ADD: Additional capital Leasehold Property
Interest on capital Plant & Machinery
Net Profit Land & Buildings
Less: Drawings Patents
Interest on drawings Trade Marks
Net Loss Copy rights
 10)From the following Trial Balance as on 31 Dec 2006, Prepare a Trading and
a Profit and Loss Account, Balance Sheet.
Trail Balance on 31 Dec 2006

Debit Amount Credit Amount

Rs Rs
Cash 1,740 Profit on sales of Assets 2,130
Purchases 2,69,320 Recovery of Bad Debts 1,440
Traveling Expenses 10,510 Bank Overdraft 24,420
Carriage 86,580 Creditors 52,290
Discount Allowed 1,800 Commission 3,450
Audit fees 2,746 Bills Payable 17,780
Debtors 68,440 Capital 40,656
Furniture 2,180 Purchase Returns 1,320
Trade Expenses 3,250 Sales 4,72,290
General Expenses 9,950 Interest Received 1,310
Legal Expenses 2,540
Penalties 4,300
Salaries 25,200
Opening Stock 5,200
Carriage Outward 43,810
Postage 2,790
Telephone 1,930
Goodwill 21,270
Commission 3,370
Wages 13,230
Drawings 20,340
Loose Tools 14,870
Interest on Overdraft 1,720
6,17,086 6,17,086

Closing Stock as on 31-12-2006 Rs 10,580.

Adjustment Entries
1. Closing Stock.
2. Expenses Outstanding.
3. Prepaid Expenses.
4. Accrued Incomes.
5. Incomes Received in Advance.
6. Depreciation on Assets.
7. Bad Debts.
8. Reserve for Doubtful debts.
9. Reserve for discount on debtors.
10. Reserve for discount for creditors.
11. Interest on Capital.
12. Interest on Drawings.
13. Stock lost in Accident.
1. Closing Stock
Closing Stock A/c ..........Dr
To Trading A/c
a) Given in the adjustment
b) Appearing in the Trial balance
2. Expenses Outstanding
Rent A/c ……………….Dr
To Out Rent A/c
a) Given in the adjustment
b) Appearing in the Trial balance
3. Prepaid Expenses
Prepaid Expens A/c. Dr
To Expense A/c
a) Given in the adjustment
b) Appearing in the Trial balance
4) Accrued Income- Income which has been earned during the
accounting year but which has not yet become due and
therefore has not been received
Accrued Income A/c…….Dr
To Income A/c
a) Given in the adjustment
b) Appearing in the Trial balance
5) Income Received in Advance.
Income A/c ………………..Dr
To Income Received in Advance
Adjustment
1.Should be deducted from the relevant A/c in the Profit and Loss
A/c
2. Shown in the Liabilities side of the Balance sheet.
 6)Depreciation
Depreciation A/c ……………….Dr
To Fixed Asset A/c
a) Given in the adjustment
b) Appearing in the Trial balance
7)Bad Debts
Bad Debts A/c……………………Dr
To Debtors A/c
a) Given in the adjustment
Bad Debts should be debited to P&L A/c and
Should be deducted from Debtors in the assets side of the Balance
Sheet.
b) Appearing in the Trial balance
To be shown in the Debit side of the P&L A/c
C) Bad debts were given in the Trial Balance and
Adjustment.
8. Provision for Bad and Doubtful debts
Profit and Loss A/c ………Dr
To Prov for Bad debts A/c
a) Given in the adjustment
b) Appearing in the Trial balance
9. Provision for Discount on Debtors
Profit & Loss A/c…………..Dr
To Dis on Debtors A/c
10. Provision for Discount on Creditors
Prov for Dis on Creditors..Dr
To Profit & Loss A/c
11.Interest on Capital
Int on Capital A/c…………Dr
To capital A/c
12. Interest on Drawings
Drawings A/c ……………..Dr
To Int on Drawings
13. Stock Lost in Accident
Adjustment entries:

1.For the Loss sustained by fire accident

Loss on fire accident A/c ….Dr
To Trading A/c

2.Claim received from Insurance Company

Cash A/c ………Dr
To Loss A/c
3.Loss On fire Transferred to P&L A/c
P&L A/c …………….Dr
To Loss A/c
11. From the following Trail Balance As on 31-3-2007, Prepare
the Trading Profit & Loss A/c and Balance Sheet.
Trail Balance

Debit Balance Amount Credit Amoun

Rs Balance t
Rs
Salaries 6,000 Capital 25,000
Purchases 26,000 Sales 47,000
Trade 1,000 Discount 200
Expenses 7,800 Creditors 21,000
Wages 400 Bills Payable 6,800
Carriage 500
Office 600
Expenses 1,200
Commission
Bad Debts
 (1) (2) (3)
(4)
Debtors 30,000
Furniture 3,000
Machinery 10,000
Insurance 400
Bills Receivables 2,000
Opening Stock 7,000
Cash in Hands 500
Cash in Bank 3,600
1,00000 1,00,000
.
Adjustments:
1.Closing Stock Rs. 11,000.
2.Outstanding Wages Rs.2,000.
3.Prepaid InsuranceRs.50.
4.Provide Bad Debts Reserve at 5%
5.Depreciation on machinery and furniture by 5%.
12. Prepare Final Accounts of Mr X
Trial Balance as on 31-12-2006

Particulars Debit Rs Credit Rs

Capital 50,000
Drawings 7,500
Purchases and Sales 72,100 95,000
Returns 1,300 2,700
Debtors, Creditors 18,200 35,750
Stock (1-1-2006) 19,800
Bad debts 3,000
Bills Receivable 12,000
Bills Payable 23,000
Cash in Hand 800
Office expenses 6,210
Sales Van 15,000
Expenses of Sales van 1,400
Discount 2,910
Rent 10,700
Telephone Charges 1,050
Postal Charges 3,700
Furniture 5,000
Commission 8,400
Carriage inward 3,200
Salaries & Wages 20,000

2,09,360 2,09,360
Adjustments :
1.Closing Stock Rs61,700.
2.Depreciate Furniture by 10%, Sales van by 20%.
3.Rent Outstanding Rs 900.
4.Bad Debts Rs 200.
5.Provide 5% for Bad and Doubtful Debts.
6.!/4 Of salaries and wages belongs to factory.
13. Prepare final accounts.

Debit Balances Amount Rs Credit Balances Amount Rs

Purchases 25,200 Sales 61,604

Furniture 1,600 Capital 35,000
Wages 3,500 Creditors 3,903
Machinery 20,000 Purchase Returns 222
Opening Stock 17,525
Sales Returns 1,200
Debtors 10,400
Carriage Inward 200
Salaries 10,600
Carriage outward 503
Rent& Taxes 2,001
Cash at bank 8,000
Adjustments: 1,00,729 1,00,729
1. Closing Stock Rs. 16,800.
2. Outstanding Salaries Rs 400: Prepaid rent Rs. 201.
3. Provide 5% to Bad and Doubtful debts on debtors.
4. Depreciation on machinery is 10%.
5. Interest on capital is 5%.
14.Prepare a Trading and Profit &Loss a/c and Balance Sheet.
Trail Balance as on 31-12-2008

Debit Amount Rs Credit Amount Rs

Drawings 750 Capital 15,000
Stock 6,920 Purchase Returns 320
Bills Receivables 1,000 Bills Payables 1,180
Sales Returns 300 Sales 8,300
Purchases 4,500 Discount 30
Wages 70 Creditors 1,300
Salaries 200 Bank overdraft 900
Fixed Deposits 3,000
Insurance 120
Buildings 3,000
Furniture 700
Debtors 6,000
Cash in Hand 470

27,030 27,030
Adjustments:
1 Calculate 12% interest on Capital.
2 Insurance Premium Rs 120 was paid for the half year ended
with 31-3-2009.
3 Depreciate buildings and furniture by 10%.
4 Outstanding wages Rs 40.
5 Create provision for bad debts at 10%.also create a provision
for discount on debtors as well as creditors at 5%.
6 Closing stock as on 31-12-2008,Rs 8,000.
15.Prepare the final accounts of Mr X.
Trial Balance as on 31-3-2009

Debit Rs Credit Rs
Cash in Hand 800 Sales 69,400
Good Will 40,000 10% Loan(1-1-2009) 51,000
Purchases 68,000 Reserve for Bad Debts 500
Cash at Bank 1,200 Creditors 8,000
Direct Wages 2,000 Capital 90,000
Opening stock 35,000 Bills Payable 2,000
Interest on Loan 2,500
Insurance 900
Carriage on Sale 900
Carriage on Purchases 400
Commission 500
Fittings 5,000
Bad Debts 200
Buildings 25,000
Plant & Machinery 10,000
Postage 500
Debtors .25,000
Salaries 3,000

220900 220900
Adjustments:
1 Stock as on 31-3-2009 Rs 75,000.
2 Provide 5% for doubtful debts.
3 Provide depreciation 10% on fittings and on Plant & Machinery,
5% on Buildings.
4 Mr X has taken Rs 500 worth of stock for his Domestic use.
5 Stock worth Rs 10,000 was destroyed in a fire accident for
which Insurance company agreed to reimburse Rs 2,000.
 SCHEDULE Vl (sec 211)
Form of Balance Sheet
Balance Sheet of………
As at ……………………

Liabilities Assets
SHARE CAPITAL FIXED ASSETS
Authorised INVESTMENTS
Subscribed
In Govt. Securities
Called up
Less Calls unpaid In Shares, Debentures or Bonds
Add Forfeited Shares Immovable Properties
RESERVES AND SURPLUS In the capital of Partnership
Capital Reserves firms
Capital Redemption reserve CURRENT ASSETS,LOANS AND
Share premium ADVANCES
Other Reserves A. Current Assets
Surplus
Stores and spare parts
Proposed additions to reserves
Stock-in-trade
 Liabilities Assets

SECURED LOANS Sundry Debtors

Debentures Debts outstanding for a
Loans and Advances from Banks period
Loans and Advances from
Subsidiaries
exceeding six months
Other Loans and Advances Other debts-
UNSECURED LOANS Less provision
Prepaid expenses
Cash Balance
Fixed Deposits Bank Balance-
Loans and Advances from
With scheduled banks and
subsidiaries
Short Term Loans and Advances With others
From Banks B. Loans and Advances
From others. Advances and Loans to:
Other Loans and Advances Subsidiaries
From Banks
Partnership firms
From others
Bills of exchange
 Liabilities
CURRENT LIABILITIES AND
PROVISIONS
A Current Liabilities
Sundry creditors
Unclaimed dividends
Interest accrued but not due
B Provisions
Provision for Taxation
Proposed Dividends
For pf, Insurance, pension and
similar staff benefit schemes
Assets
MISCELLANEOUS EXPENDITURE
(to the extent not written off or
adjusted).
Preliminary expenses
Expenses including commission
or brokerage or underwriting or
subscription of shares or
debentures.
Discount allowed on the issue of
shares or debentures.
Interest paid out of capital
during construction.
Development expenditure not
adjusted
l Vertical form of Balance Sheet
Sources of funds
1. Shareholders Funds
a) Capital
b) Reserves and surplus
2. Loan funds
a) Secured loans
b) Unsecured loans
Total
ll Applications of Funds
1 Fixed assets
a) Gross Block
b) Less: Depreciation
c) Net Block
d) Work in Progress
2. Investments
3. Current Assets, Loans and Advances
a) Inventories
b) Sundry Debtors
c) Cash and Bank balances
d) Other Current Assets
e) Loans and Advances
Less: Current liabilities and Provisions
a) Liabilities
b) Provisions
Net Current Assets
4. a) Miscellaneous Expenditure to the extent not written off or
adjusted.
b) Profit and Loss Account.
Total
Provision and Reserve
 A provision is an amount set apart for meeting
possible losses and it is a charge against profit. It
should be debited to P&L account irrespective of
the fact whether there is a profit or not.

 Reserve is an appropriation of profit. If there is no

profit, then no reserve can be made. The purpose is
to strengthen the financial position of the business.
Analysis of Financial Statements
 Meaning of Financial Analysis
refers to the process of determining financial
strengths and weaknesses of the firm by
establishing strategic relationship between the
items of the balance sheet, Profit & Loss account
and other operative data.
 is a process of evaluating the relationship
between component parts of a financial statement
to obtain a better understanding of a firm’s position
and performance.
Financial Statements
 FS are the sources of information on the basis of which
conclusions are drawn about the profitability and
financial position of a concern.
 Prepared for the purpose of presenting a periodical
review of report on progress by the management and
deal with the status of investment in the business and
the results achieved during the period under review.
They reflect a combination of recorded facts,
accounting principles and personal judgments.
Comparative and common size
analysis
Statements summarize and present related data for a number of
years, incorporating therein changes in individual items of
financial statements. They help in making inter-period and
inter –firm comparisons, and also highlight the trends in
performance efficiency, and financial position.
Common-size balance sheet
Balance sheet items are expressed as the ratio of each asset to
total assets and the ratio of each liability is expressed as a ratio
of total liabilities is called common size balance sheet.
RATIO ANALYSIS
A ratio is a simple arithmetical expression of
the relationship of one number to another.
A ratio is an expression of the quantitative
relationship between two numbers.
Ratio’s are classified as-
 Short term solvency ratio’s.
 Long term solvency ratio’s.
 Turnover ratio’s.
 Profitability ratio’s.
Short term solvency ratio’s are the ratios which measure the short term
solvency or financial position of a firm. It indicates the ability to pay
its current obligation in time.
Current ratio or Working capital ratio = Current assets/ Current
liabilities
Note :
1) Current assets include
1.Cash in hand & at Bank.
2.Short term investments.
3.Bills receivable.
4.Sundry debtors.
5.Stocks/ inventories.
6. Prepaid expenses.
7.Work in process.
2) Current liabilities include
1. Outstanding expenses/ accrued expenses.
2. Bills payable.
3.Sundry creditors.
4.Short term advances.
5.Income tax , Dividends payable.
6.Bank overdraft.
3) Ratio of 2:1 is considered satisfactory
Quick ratio or Liquid ratio or Acid test ratio

Quick ratio =Quick assets /Quick liabilities.

Note:1 Quick assets =current assets – prepaid expenses.
2 Quick liabilities =current liabilities –bank over draft.
3 Ratio of 1:1 is considered as satisfactory.
Long term solvency ratio’s or Leverage ratios or capital structure ratios
convey firms ability to meet the interest costs and repayment schedules
of its long term obligations. It helps in assessing the risk arising from use
of Debt capital.
Debt equity ratio= long term debt / share holders fund.
Note:1 Long term debt includes mortgage loans , debentures, loans from
finance corporation.
2 Shareholders funds include Equity share capital +Preference share
capital + Reserves and surplus + profit and loss account+ share
premium –preliminary expenses – Discount on issue of debentures.
3 It is a ratio to measure the relative claims of outsiders.
Fixed assets ratio
Fixed assets / Long term funds
Notes: 1 This ratio indicates the extent to which the total of fixed
assets are financed by long term funds of the firm.
2 Long term funds include long term loans and share holder
funds.
Turnover ratios or Efficiency ratios or activity ratios
1 Stock turnover ratio
Cost of goods sold / average stock
Note: Cost of goods sold is sales- gross profit.
2 Debtors turnover ratio
Net credit annual sales /average trade
debtors
Note: Trade Debtors include sundry debtors and bills receivable. No
provision for bad and doubtful debts be deducted.
3 Creditors turnover ratio
Net annual purchases / average trade
creditors
Note: Trade creditors include creditors and bills payable
 Profitability ratios

related to sales.(%)

1. Gross profit ratio

Gross profit/Sales
2. Net profit ratio
Net profit/Sales
3. Expenses ratio

Respective particular expense/Sales

Ratios related to Investment
1. Earnings per share
Profit after preference dividend/Number of Equity
shares
2 Price earning ratio
Market price per Equity share/EPS
 Problems

Calculate short term solvency ratios from the following.

Rs

Stock 60,000
Sundry debtors 70,000
Cash balances 20,000
Bills receivables 30,000
Pre-paid expenses 10,000
Land and Buildings 1,00,000
Goodwill 50,000
Sundry creditors 20,000
Bills payable 15,000
Tax payable 18,000
Outstanding expn 7,000
Bank overdraft 25,000
Debentures 75,000
 2.

Liabilities Rs Assets Rs
2,000 Equity shares of Rs 100 2,00,000 Fixed assets
each 1,00,000 4,00,000
1,00,000
1,000 9% pref Shares of Rs Current
50,000
100 each assets 2,00,000
50,000
1,000 10% Debentures of Rs
100 each 1,00,000
Reserves :General Reserve
Reserves for
contingencies

Current liabilities
6,00,000
6,00,000

Calculate Debt –Equity Ratio

 3. The comparative balance sheets of a Ltd. Company are given
for the years ending December31,2005 and 2006.
2005 2006 2005 2006
Equity Share 3,00,000 Goodwill
4,00,000 2,00,000 2,00,000
Capital 1,50,000 2,80,000
Land& Building 3,00,000 4,00,000
Reserve Fund 2,00,000 3,00,000
Plant& 2,50,000 3,50,000
8% Debentures 4,00,000 2,58,000
machinery 50,000 50,000
Mortgage Loan 50,000 70,000
Patents 1,50,000 2,00,000
Sundry creditors 25,000 35,000
Stock 1,00,000 80,000
Bills payable 40,000 60,000
Sundry debtors 80,000 90,000
Bank overdraft 10,000 15,000
Bills receivable 18,000 20,000
Outstanding Marketable
expenses 15,000 20,000 securities 40,000 45,000
Cash 2,000 3,000
Tax liabilities Prepaid
11,90,00 14,38,00 expenses 11,90,00 14,38,00
0 0 0 0

5,00,000 6,00,000
Sales
Purchases 3,00,000 4,05,000
Calculate the following for two years.
1 Current Ratio
2 Acid test Ratio
3 Inventory Turnover Ratio
4 Debtors Turnover Ratio
5 Creditors Turnover Ratio
Notes: a) Trade debtors include debtors and bills receivables.
b) Trade creditors include creditors and bills payable.
Following information is given to you.
Find out 1.Current assets 2. Current liabilities.
i. Current ratio 2.5
ii. Working capital Rs.90000

Following information is given to you.

Find out 1.Current assets 2. Liquid Assets.3.Inventory
Current ratio 2.5; Acid test ratio 1.5; Current liabilities
Rs.50000
Given
Current ratio 2.8; Acid test ratio 1.5; Working capital Rs162000.
Find out CA; CL; LA

The ratios relating to Osmos Ltd are given as follows

GP ratio 15percent
Stock velocity 6months
Debtors velocity 3months
Creditors velocity 3months
Gross profit for the year Dec31st,2008 amounts to Rs.60000.
Closing stock is equal to opening stock.
Find out– Sales, Closing stock, Sundry Debtors, Sundry Creditors.
 Your company had the following earnings last year:
Profit before tax Rs 24.46 lakhs.
Tax rate 60%
Proposed dividend 20%
Capital of the company is
9% Preference shares Rs 10 lakhs
Equity Shares 30,000 Shares of Rs 100 each Rs 30 lakhs
Reserve in the beginning of the year Rs 22 lakhs.
From the above compute 1 EPS
2 P-E Ratio.
The current market price of equity share is Rs 200.