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Basics of Accounts
Basics of Accounts
-By -Ravi
Somani
What is Accounting?
Identifying a business transaction Preparation of Business Documents. Recording of the transaction in the book of first entry (Journal)
Sales or Purchase Module Relevance with the banking operations
Posting in the ledger (Automatic in Software) Preparation of Trial Balance (System Generated) Preparation of Profit and Loss Account and Balance Sheet
Dual Entity Money Measurement Concept Accounting Period Concept Going Concern Concept Conservatism Concept (Provisioning for NPA in Banks) Accrual Concept ( Accrual of interest income and expenses in Banks) Consistency Concept Matching Concept
Process of Accounting
Types of
Categories of Accounts
Debit: Credit:
Debit: Credit:
Accounting Standards
are accounting standards? Who issues the accounting standards? Why do we need Accounting Standards? How many accounting standards are there? Are the accounting standards mandatory?
What
Syntel Technologies Issued 1000 shares of Rs.10 each at a premium of Rs.110 each. The amount was deposited in our bank account (SBI) Raised a loan from Bank of India Rs.25,000. Purchased materials costing Rs.20000 cash down. Purchased materials costing Rs.10000 on credit. Manufacturing expenses incurred Rs.25000 Administration and selling expenses incurred Rs.15,000. Sold goods for cash Rs.120000. Sold goods on credit Rs.20000 Collection from customers Rs.10000. Payment to suppliers Rs.5000. Outstanding wages of workers Rs.5000. Interest payable to the bank Rs.2500.
Finalization of accounts
Refers
to the preparation of Profit and Loss Account and the Balance sheet as per the legislative famework. Adjusting entries are to be passed. The revised trial balance is generated. Financial statements are prepared. Relevance of Accrual Concept, Matching Concept, Accounting Period Concept, Conservatism Concept at the time of finalization.
Cash from operating activities Cash from financing activities Cash from investing activities Change in cash and cash equivalents
Ratio Analysis
Accounting ratios is an expression showing the relationship between two figures of financial statement. Accounting ratios may be expressed in terms of fractions like 1/2 ,1/3 or rates like two times, three times or percentage like 10%, 20%, etc. Many times absolute figures do not help to understand the position of the concern & the final account & financial statements prepared there from may not reveal enough information which will help in decision making. Therefore ratio analysis is employed as a tool to analyse financial position & make logical inferences out of the same. There are three types of ratio:1) Balance Sheet ratios. 2) Revenue Statement ratios. 3) Combined ratios.
Important Ratios
Balance Sheet Ratios
i) Current ratio ii) Quick ratio iii) Proprietary ratio iv) Debt Equity ratio
Combined Ratios
i) Return on Investment ii) Return on Proprietors Fund iii) Return of Equity Capital iv) Earning per share v) Price earning ratio vi) Dividend Payout ratio vii) Debt Service ratio viii) Debtors turnover ratio ix) Creditors Turnover ratio
Current Ratio
Current
i It Indicates short term solvency or short term financial strength of company. i It shows whether the company is capable of paying off its short term commitments easily out of its current assets i Too high & too low ratios not desirable. A high current ratio indicates presence of idle funds whereas low ratio indicates inadequacy of funds.
Quick Ratio
Quick
i It Indicates immediate solvency / financial strength of company. i It shows whether the organization is in a position to pay its liabilities within a very short period of time out of assets which can realize money quickly.
Proprietory Ratio
Proprietary
i It shows the trading efficiency of management. i It should be sufficient enough to cover operating and non- operating expenses to assure final profits.
i It shows amount blocked in stock & how fast it can be converted into sales & finally cash. i It indicates efficiency of company in inventory management. i Sometimes too high ratio also indicates a possibility of stock out.
ROI = NP before tax & Interest/ Capital Employed i It Indicates management efficiency in utilizing shareholders & borrowed funds. & is a clear index of earning capacity. i Higher ratio indicates higher returns & hence can attract additional funds from lenders. i Higher earning power indicate more punctual repayment of interest & principal amount.
i It indicates profitability on proprietors funds and efficiency of company in utilizing shareholders fund.
i Higher profitability attracts higher funds from shareholders & can also increase market price of shares in anticipation of higher dividends & bonus shares.
i It indicates earning for equity holders and managements efficiency in utilizing equity capital. i Dividend percentage is also determined on the basis of above ratio after taking decisions of retention of some portion of profit for expansion of diversification schemes.
i It indicates absolute earning per share which affect a market prices of shares. i High EPS encourages prospective investors.
Price Earning ratio = MPS / EPS i It indicates market price as compared to earning per share. i Lower ratio generally attracts investors for purchase of share.
Dividend payout ratio = (DPSX100) / EPS i It indicates extent of dividend declared out of earnings. i Lower ratio indicates greater portion kept for self financing. i Short terminvestors are always interested in higher ratio & vice versa for long terms investors.
DSCR = (NP bef int tax and dep) / Interest + Instalment due in next year i It indicates ability to meet current interest & instalment due. i it is an index of long term solvency. i Higher ratio indicates more safety for lenders.
Drs turnover ratio = Sales / Average receivables i It indicates efficiency of company in management of account receivables. i Higher the index, better is the ratio & result.
It helps to know creditors velocity i.e. average period offered by suppliers for making payment. i Lower the turnover, better is the result as it indicates more period offered by suppliers to make payment.
financing
Minimum
Thank You