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Chapter -1 Introduction to the concept of business

Concept of business Any activity to make profit. Whenever a person or two or more
persons are coming together and involves themselves into any activity with an object to
make some profit. To get profit means earning are more than what they have invested into
the business. In practice we can see number of people are buying some goods on
wholesale basis and sell it at retail with an object of making profit.
Different types of businesses Trading business In trading, the businessman buys goods
in bulk and sells the same goods to his customers in retail. Here the businessman is not
making any changes/process on the goods. For example Vinayak Medicals, Mahalaxmi
Jwellers, Nirmiti Furnitures are the examples of traders where the owner of the business
is buying the ready made goods and selling it again to his customers. Majority
transactions under trading business are relating to purchase and sale of goods,
transportation, storage of goods.
Manufacturing activities includes buying of raw material , processing it to convert into
finished goods with the use of machines and workers and then to sell into the market. For
Example Reliance Industries Ltd, Tata Motors Ltd etc. Here in comparing with trading
business, number of transactions are on higher side, more workers are required, more
assets are required for the business such as factory building, machines, tools, equipments
etc . Major focus is on raw material and conversion of raw material into finished goods.
Service provider In such type of business, customers are getting different types of
services such as Bank of India, Kingfisher Airlines, Infosys Technologies Ltd, Ludhiyana
Roadways , TNT Courier Services etc. In such type of businesses goods are not produced
however the owner is providing different services to the customers. In service industry
huge factory building, machines are not required but manpower is the basic asset of the
business.
Forms of Business Organizations
All the above different business can be managed under various forms of business
organizations. Mainly there are three types of business organizations
1. Sole Proprietorship Sole proprietor is the only owner of the business. He invests his
personal funds as the initial capital of the business. He takes all the decisions of his
business and he is responsible for all the profits and losses of the business. For example
Mr.Ganesh is having a Pan shop, Mr.Salim is having a garage, Mr.Agarwal is having a
business of exporting readymade garments.
Advantages of Sole Proprietorship- Owner of the business is in full control of the
business. He takes all the decisions of the business. Decisions can be very fast. He enjoys
all the profits

Disadvantages There is limitation to introduce capital for the business. One person can
not be expert in various business areas such as finance, marketing, production etc. If there
are losses to the business the owner has to suffer the losses. He has to make the losses
good by bringing money from his personal property. Sole Proprietor has no separate legal
entity.
Partnership - When two or more persons are coming together to do a business it is a
partnership firm. All the partners are bringing capital into the business and accordingly
profit and losses can be shared among the partners. Since there are two or more partners,
everybody is having expertise to deal with various business areas such as finance,
marketing, production etc.
Comparing to Sole proprietor, decisions relating to the business are taken by all the
partners with consultation so more time is involved in decision making process. If there
are losses all the partners have to suffer the losses and like sole proprietor, Partnership
firms are also do not have a separate legal status. If there are losses to the business all
the partners have to suffer the losses and have to make the losses good by bringing
money from their personal property. However recently a new concept of Limited
Liability Partnership is introduced where liability of the partners is limied.
Company Company form of organization is totally different form of organization. Here
minimum two and maximum 50 members in case of private company and for public
company, minimum seven members and maximum with no limit can come together to do
any legal business. They have to register and complete the legal formalities with the
Government to take permission and then they can start the business. Every member has to
share in capital of the business that is why the capital is called share capital. The owners
of the company are called Equity shareholders. Every shareholder is having voting right
according to his share holding ( generally one share one vote ). Profits of the business can
be distributed among the shareholders which is called dividend. Shareholders will appoint
different persons from different fields to manage the business who are called Directors
of the Company. To run the business, specific powers are with the directors and specific
powers are with the owners of the company i.e. equity shareholders.
Comparing to Sole proprietor and Partnership firm, under company form of organization
more capital can be brought in to the business. Any outsider can be appointed who is
expert in a specific area as employee of the company. All the properties of the business
are in the name of the company and not the owners of the company. Shareholders are
contributing towards share capital as per the agreed amount per share. Once this amount
is paid they are not liable to pay further amount. Even if the company is having huge
losses, shareholders are not liable to make good the loss of the company.( Limited
Liability ).Another important advantage under company form of organization is equity
shareholders can at any time sell their shares to any interested party and can get their
money back .

Exercise
Explain the concept of business

What are the different types of business?

What are the features of different types of businesses ?

Which are the different forms of business organization ?

Explain the advantages and disadvantages of different types of business


organization

What is the limit of minimum and maximum number of members for Private
Company and a Public company?
What is the meaning of Dividend ?
Who are directors of a company ?

Chapter - 2
Basic objects of any business All the business houses as mentioned above are doing
their business with the object of making profit and that is why it is up most necessary for
them to know whether we are running the business at profit or loss and what is the
position about the assets i.e properties of the business and liabilities of the business i.e
various amounts which business has to pay to outsiders.
To understand and to achieve the above objects of the business, it is necessary to record
each every transaction relating to the business which is called accounting. It is necessary
to record all the transactions whether they are big or small, such as purchases and sales
made for the business and also a transaction where even ten rupees are involved.
Who is interested in finding out the performance of the business?
All the parties directly or indirectly related to the business are interested to know the
financial performance of the business. Owners ( shareholders) , employees of the
business are interested as insiders where as Suppliers, Bankers, Government, Customers,
Investors, analysts etc are also interested to know the financial performance of the
business.
Financial AccountingTo record each and every transaction of the business where funds are involved is called
Financial Accounting i.e recording of transactions relating to finance. Financial
Accounting considers all the transactions which can be expressed in terms of money. In
case of a manufacturing company, transactions includes buying of raw material, buying
of land, constructing building, factory sheds, purchase and installation of machines,
processing the raw material with the use of machines and workers, advertisement, selling
the finished goods , recovery from the customers, payment to suppliers of raw material
etc. Recording of all such transactions where funds are involved is called Financial
Accounting. To achieve the object of the business, owner must know the profit or loss
from the business and whether this profit is sufficient or not. For this purpose Profit &
Loss Account is to be prepared where all the revenues from the business are to be
considered and all the expenses for the same are to deducted so as to calculate profit or
loss. Similarly to know the position of assets and liabilities, Balance sheet is to be
prepared. In short for any business the transactions recorded will come under either of the
following headings
1. Assets of the business
2. Liabilities of the business. 3.Income /Revenues of the
business
4. Expenses of the business
Assets of the Business Assets or properties of the business means with the use of those
assets business can generate benefits in future. Assets means what business owns. Assets
are mainly divided in Non current assets such as land ,building, plant, machinery,
furniture, vehicles, and Current assets such as trade receivables, inventory etc. Assets or
properties can be converted in to cash at any point of time. It is also called Capital
Expenditure. The most important point is Capital expenditure will not appear in Profit

& Loss account and will be presented directly under Balance sheet. The logic is very
simple we buy a machine of Rs.1,00,000 for the business in the first year and where the
life of the machine is 10 years it means business is going to receive the benefit from the
machine ( by using it for manufacture ) for next 10 years and not only for the year in
which it is purchased.

Liabilities - Liabilities are what business owes to others. What business has to pay.
Liabilities are also divided into Non current liabilities and Current Liabilities. For
example Non current liabilities covers capital received from the owners, Long term bank
loans or any other loans, whereas Current liabilities covers amounts payable to suppliers
of raw material, employees etc .
Income/Revenues of the business
All receipts we have shown in Profit & Loss Account are from day to day operations of
the business i.e. sales. All revenues which are earned for that particular period are treated
as revenue receipts/income. This receipt or income is mainly divided in two parts
1.Opearional Income 2.Non-Opearational Income
Operational Income covers income from main operations of the business for example
income generated form sale of vehicles is the Income from operations for Tata Motors.
Sometimes there is other operational income which is related to the main business for
example sale of by products, services related to main business.
Non-operational income comes under Other income such as dividend received, interest
received on investments, rent received.
Expenses of the business
Expenses also covers operational expenses and other expenses. Expenses relating to main
activity of the business are coming under operational expenses for example for Tata
Motors- raw material, power, repairs to machinery, repairs to building, depreciation ,
office expenses, selling expenses etc. We observe here that we have put revenue
receipts/incomes ( income from business) on one hand and all expenses on the other hand
so as to calculate profit or loss. Another important point is expenses what we have
recorded all are recurring in nature. These are the expenses where no any asset is created.
In fact benefit from this expenses is already received by the business i.e. different parties
involved have already provided the services to the business against which business has to
pay such as material is received from supplier, workers have worked or the business,
space is occupied by the business so rent is paid Electricity and telephone services are
received by the business etc. These expenses are called Revenue Expenses. These
expenses are routine expenses and will be repeated again and again during the year.
Following are some revenue expenses for a hotel business
1. Food and beverages 2.salary to staff 3. licensing and fees 4. Electricity and water 5.
Fuel, coal and gas 6.Washing and cleaning 7. Linen and uniform expenses 8.Painting and

Decoration 9. Repairs and maintenance 10. Laundry expenses 11. Various taxes 12.
Crockery expenses 13. Advertisement 14. Audit fees 15. Computer maintenance
16.Books and newspaper etc. So depending upon the business and product, revenue
expenses will be different .
In short any transaction relating to the business will come under the following four
categories
1. Assets of the business
2. Liabilities of the business. 3.Income/Revenues of the
business
4. Expenses of the business
Revenues and Expenses are covered under Profit & Loss Account and Liabilities and
Assets are covered under Balance Sheet.
Example- Mr.A who is trading in furniture, has given the following information
Sales for the year Rs.1,00,000 , Material purchased Rs.60,000, Rent paid Rs. 5,000,
Salary paid to employees Rs.10,000, Electricity Bills paid Rs.2,000, Advertisement
Rs.10,000, Telephone Bill paid Rs.1,000.
In the above example profit made by the business is Rs.12,000 where the revenues are
Rs.1,00,000 and expenses are Rs.88,000. Here sales for the year are shown and expenses
for the year are considered. When we are recording all the sales on daily basis then we
get the total sales figure. Similarly expenses are recorded as and when they are incurred
so as to calculate total expenses for the full year . Profit & Loss Account always show
revenues and expenses for a particular period that is why heading for the Profit & Loss
Account is for the year ended on
Here it is important to note that Profit & Loss Account shows all revenues from the
business whether actually received or not . For example out of total sales of Rs.1,00,000,
customers have paid Rs.65,000 and for remaining amount of Rs.35,000, they have
promised to pay the amount in future. Similarly all the revenue expenses will be shown in
Profit & Loss Account whether they have actually paid or not. This system of accounting
is called Accrual system of accounting .
If we put figures in the above example, Profit & Loss Account will look like as
Statement of Profit & Loss Account
Sales
Less : Expenses
Material consumed
Salary
Rent
Electricity
Advertisement
Telephone Expenses
Profit ( Balancing figure )
Total

1,00,000
60,000
10,000
5,000
2,000
10,000
1,000
12,000
1,00,000

Profit & Loss Account shows the transactions for the year say from 1 st April to 31st
March. All the sales made during this period will be clubbed and can be shown as total
sales under Profit & Loss Account, similarly total of all expenses for the year will appear
under profit & Loss Account.
Balance Sheet shows the position of assets and liabilities on the last day of the year. i.e
what business owes to the others and what business owns on the last day of the year.
Income Tax authorities requires the records for tax purposes from the period 1st April to
31st March every year. That is why maximum businesses keeps their records for the
period 1st April to 31st March every year so that there is no need to keep separate records
for tax and accounts.

Example From the following balances of various accounts on the last day of the year
i.e. 31st March, 2012 . Prepare a Balance sheet .
Land & building Rs.11,00,000, Machinery Rs.8,00,000, Furniture Rs.2,00,000, Sales
for the year Rs.45,00,000 , Vehicles Rs.4,00000 , Computer software Rs.1,00,000,
Amount receivable from customers ( Trade receivables) Rs.1,50,000, Cash & Bank
balance Rs. 3,50,000, Equity Share Capital 20,00,000, Reserve & surplus ( profit )
4,00,000, Long term loan from Bank Rs.6,00,000, amount payable to suppliers of raw
material ( Trade payables ) Rs.1,00,000
Balance sheet as on 31st March, 2012
Liabilities
Amount
Share Capital
20,00,000
Reserves & Surplus
4,00,000
Non Current Liabilities
Long term Bank Loan
6,00,000
Current Liabilities
Trade payables
1,00,000
Total
31,00,000
.Assets
Amount
Non Current Assets
Fixed Assets Tangible
Land & Building
12,00,000
Machinery
8,00,000
Furniture
2,00,000
Vehicles
4,00,000
Fixed Assets- Intangible
Computer software
1,00,000
Current Assets
Trade Receivables
1,50,000
Cash & Bank balance
3,50,000
Total
31,00,000
While preparing Balance sheet, we have not considered sales for the year because it is
revenue from the business and will be part of Profit & Loss Account.

Exercise -1
A company engaged in hotel business and has given the following transactions which
have taken place during the year
Sales for the year Rs.5,00,000, Food & beverages expenses Rs.2,50,000, Electricity
& water expenses Rs10,000, Washing & cleaning expenses Rs.25,000, Linen &
uniform expenses Rs.20,000, Laundry expenses Rs.12,000, Audit fees Rs.3,000,
Purchase of Machine Rs.2,25,000, crockery expenses Rs.5,000. Calculate profit /loss
for the year
Exercise 2 Information for a manufacturing company is given, state whether the
following items are coming under Asset, liability, revenue/income or expenditure
1. Salary paid 2. Cash in hand 3. sales 4. loan from bank 5. share capital 6. amount
receivable form customers 7. amount payable to suppliers 8. amount paid in advance to
suppliers 9. Land & Building 10. printing & stationery
1.

2.

3.

4.

5.

9.

10

Exercise -3 The assets of a business are Rs.87,000 , share capital is Rs.53,000 what is
the amount of liability?
Exercise 4 Share capital of a company is twice of its liabilities. The total assets of the
company are Rs.81,000. what is the amount of liability ?

Exercise - 5
What is the meaning of Financial Accounting ?
Why it is necessary to record all business transactions ?
What is the meaning of Profit & Loss Account ?
What is the meaning of Balance sheet ?
Explain the meaning of Assets and Liabilities

Explain the meaning of Capital Expenditure with example


Explain the meaning of Revenue expenditure with example

Explain the meaning of Revenue receipt and Capital receipt

Chapter - 3
We have seen that Financial Accounting is necessary to find out profit or loss for the
business. Under Financial Accounting Profit & Loss Account and Balance sheet is
prepared. They are collectively called Financial Statements.
Features of Financial Accounting

Financial Accounting is historical accounting . It records the transactions which


have already taken place.

Financial Accounting considers only monetary transactions. Financial Accounting


records only those transactions which can be expressed in terms of money.

Financial Accounting is a legal requirement. Keeping of records for business


transactions, getting them audited are the requirements, particularly for company
form of business organization.

Financial Accounting is for outsiders. Outsiders such as Govt, Banks, Suppliers,


Investors, shareholders are interested in Financial accounting and financial results
and that is why uniformity is ensured so that comparison is possible between
financial performance of two different entities.

Financial statements are available at a particular point of time after the expiry of
the accounting period for example Balance sheet as on 31 st March, 2009 can be
available after this date.

Financial Accounting gives the result of the business as a whole. It does not give
the details about the individual departments, job wise information etc. Even
though now a days segment reporting etc are introduced, it is applicable only to
limited companies.

Generally Accepted Accounting principles ( GAAP )


While recording various business transactions under Financial Accounting there are
certain assumptions which are followed by all accountant and are referred as accounting
principles, concepts, conventions and rules. The principles which are basic of theory and
practice of accounting are as below.
Business Entity Concept It means there is clear cut separation between business and
the owners of the business. While recording transactions accountant has to keep this in
mind. For example, in case of proprietary firm accounting process is carried out for the
business and not for the individual person who owns it. There should be clear cut
separation between business and owner.

Dual Aspect Concept It means every business transaction has two aspects that means
when a person brings capital say of Rs.10,000/- in the business then we have to show
Rs.10,000/- as liability of the business ( as this amount I payable to the owner in future )
and Rs.10,000/- cash as an asset of the business.
Going Concern Concept It assumes that business is going to be in existence for a long
time in future. Because of this assumption we have to valuate all assets and liabilities at a
cost price less depreciation and not at market price.
Accounting Period Concept as we have discussed in the first para that accounts are
prepared to know the profit or loss of the business. However we have to take a cut off
period to prepare those accounts to ascertain profit or loss and hence a period of 12
months i.e one is a period decided for this purpose. Hence Profit & Loss Account and
Balance Sheet is prepared after every 12 months to find out the business position.
Cost Concept It proposes that assets should be shown at cost in the books less
depreciation.
Money measurement concept The transactions which are expressed in term of money
only will find place in accounting for example a company is having a very good team of
very skilled workers will not find any place in accounting.
Matching Concept This concept proposes that to find out profit or loss of a particular
period we have to consider all the revenues and expenses and cots for that period whether
they have actually paid or not. For example if accounting period is 1 st April to 31st March
then salary for the month of March is to be considered in the same year even though it is
paid in the April of next year.
Now if we see the above mentioned assumptions while preparing accounts, first we have
to assume that business is separate from its owner, we have to fix a period for which we
have to record the transaction etc.
With the above assumptions we have to consider certain traditions or customs which are
called conventions while preparing accounts
Materiality Consider only those transactions which are having material/ significant
impact on the profitability of the business.
Consistency The accounting policies which are now following, follow it for the next
periods also then only you can compare the financial statements for different periods.

Chapter - 4
Contents of Company Balance sheet
Equity Share Capital. As per the provisions of the Companies Act, 1956 equity
shareholders are owners of the company and they are having specific rights such as
voting rights whenever any decision is taken with the approval of the shareholders.( on
the basis of one share one vote ). They are also having other rights such as right to attend
general meetings of the company, right to receive dividend, right to inspect the statutory
registers of the company etc. However equity shareholders are unsecured i.e they dont
have any right on assets of the company to receive their amount given to the company.
Similarly at the time of liquidation ( closing down the business ) of the company equity
shareholders are having last priority to get their funds from the liquidator of the company.
even though they are owners of the company they can not decide the rate of dividend it is
the Board of Directors who decides whether to declare and pay any dividend or not. At
the outset we can conclude that equity shareholders are owners of the company with
limited rights with lot of risk towards their investment made in the company. As far as
business is concern the amount which is received from equity shareholders for the
business is liability because business has to pay this amount to the equity shareholders
hence Equity Capital is the first item shown as liability of the business. In the Balance
sheet equity capital is shown under following headings
Authorized Capital This is the maximum amount of capital company can raise from the
investors. For example 1,00,000 equity shares of Rs.10 each.
Issued capital This is the amount out of Authorized capital which company has offered
to the investors by way of offering no. of shares. For example 80,000 equity shares of
Rs.10 each
Subscribed Capital This is the amount of capital, investors have agreed to pay to the
company For example - 70,000 equity shares of Rs.10 each
Called Up Capital This the amount of capital out of subscribed capital which company
has called up ( demanded ) from the investors i.e shareholders. For example 70,000
equity shares of Rs.10 each amount called up Rs.5 per share
Paid Up Capital This is the amount shareholders have paid to the company. For
example out of 70,000 equity shares company has received Rs.5 on 69,500 shares and
on 500 shares only Rs.3 per share. i.e calls are in arrears of Rs. 2 per share on 500
shares. So paid up capital is Rs.3,47,500 + Rs.1,500. ( i.e Paid up capital Calls in
arrears Rs.3,50,000 Rs.1,000)
If there is any amount because if forfeiture of shares it has to be added to the Paid up
capital. In the Balance sheet paid up capital has to be shown in the outer column.

A Company can issue its shares at a premium i.e a share having face value of Rs.10/- will
be issued at price say Rs.12/-. In this situation, amount towards face value will be shown
under Share Capital account and Rs.2 per share under share premium account.
A Company can issue its shares at discount i.e a share having a face value of Rs10/- will
be issued at Rs 9/- per share. In this situation, amount towards face value of Rs.10 will be
shown under Share Capital Account and rs.1 per share under Misc. Expenses not written
off under Asset side.
Preference Shareholders Preference shareholders are less risky than equity
shareholders. They get dividend from the company at a predetermined rate. Company has
to pay dividend to the preference shareholders and then to equity shareholders. At the
time of liquidation of the company, to get the funds from the company, preference
shareholders get priority over equity shareholders .
Preference shareholders are not owners of the company. They dont have any voting
rights means they are not the part of decision making process. They are having voting
rights only under specific circumstances where their interest is affected. Like equity
shareholders they are also unsecured. They get the dividend only when there is profit to
the company. Company can issue preference shares to mobilize the funds and can repay
them after a specific predetermined period. As far as business is concern the amount
which is received from preference shareholders for the business is liability because
business has to pay this amount to the preference shareholders hence Preference Capital
is the item shown as liability of the business after Equity Capital.
Sometimes a company issues convertible preference shares where after a specific period,
preference shares gets converted into equity shares.
A Company can issue its shares at a premium i.e a share having face value of Rs.10/- will
be issued at price say Rs.12/-. In this situation, amount towards face value will be shown
under Share Capital account and Rs.2 per share under share premium account.
A Company can issue its Preference shares at discount i.e a Preference share having a
face value of Rs10/- will be issued at Rs 9/- per share. In this situation, amount towards
face value of Rs.10 will be shown under Share Capital Account and Rs.1 per share under
Misc. Expenses not written off under Asset side.
Sometimes a company will redeem the preference shares at a premium i.e a Preference
share of a face value of Rs.10 will be repaid at the rate of Rs.11/-. In this situation,
amount towards additional amount paid i.e Rs.1 will be shown under Misc. Expenses not
written off under Asset side.

Reserves & Surplus A company out of its profits keeps aside certain amount for future
which are called Reserves. Reserves are divided in two Revenue reserves and
Capital Reserves.
Revenue Reserve are those reserves which are created out of the profits generated from
the main business activity ( operating activities ) of the company whereas Capital
Reserves are those reserves which are created out of profits generated from other ( nonoperational ) activities. For example in case of a manufacturing company, any reserve
created from the profit generated from the manufacturing activity is revenue reserve and
if company has sold any asset during the year at profit then it is a capital reserve.
When a company keeps aside any amount from profits without any specific reason it is
called General Reserve.
When a company issues its shares at a price more than its face value, the excess amount
collected is called share premium. For example recently Reliance Power issued its equity
shares of a face value of Rs.10 per share issued the shares at Rs.430 per share to retail
investors, the excess amount i.e Rs.420 per share is share premium. All the amount
coming under Reserves are considered as part of owners funds that is why they are
included in shareholders equity.
When a company transfers any amount from profits to reserves it is only through book
entry, no funds are involved. Profit is to be reduced by the amount and reserve has to be
increased by that amount.
Money received against share warrants
Share warrant is a instrument against which the warrant holders gets specific number of
shares in future at a specific pre determined rate. If company has received any amount
against such issue of warrant it should be shown here.
Non-Current Liabilities
To understand Non current liability, first we have to understand what id Current liability.
A liability shall be classified as current when it satisfies the following criteria
1.
2.
3.
4.

It is expected to be settled in normal operating cycle of the company


It is held primarily for the purpose of being traded
It is due to be settled within 12 months from the reporting date
Company does not have an unconditional right to defer the settlement of the
liability for at least 12 months after the reporting date

All liabilities except above will come under Non current liabilities
Long Term Borrowings It covers Debentures/Bonds, Term loan from Banks/other
parties, Deferred payment liabilities, Deposits, Loan and advances from related parties,
Long term maturities of finance lease obligations. Such borrowings are further classified
as secured and unsecured.

Under this , major item is debentures. Debentures means loan taken by the company from
the investors for its business. Company has to pay interest on the debentures at a pre
determined rate whether there is profit or not. In case of secured debentures, at the time
of accepting money, company gives its fixed assets such as land, buildings as security to
the debenture holders. In case company is not able to pay interest and principle loan
amount, debenture holders have every right to sell off the assets to recover their dues.
Comparing to Equity shareholders and Preference shareholders , debenture are less risky
because they are secured that is why rate of interest on debentures is lower comparing to
equity and preference dividend. They do not have any voting rights. After a specific
period company can pay back the amount taken from the debenture holders. Like
Preference shares, a company can issue convertible debentures means after specific
period debentures gets converted into equity shares. Company should disclose the
particulars of redemption or conversion. Current maturities will be disclosed under Other
Current liabilities.
Like debentures, under this category , Term loans taken from the banks and financial
institutions are covered. Like debentures, company has to pay interest on the loan taken
irrespective of the profitability. Company has to accept certain terms and conditions put
by the bankers. Sometimes bankers appoints their representative on the Board of the
company. Terms of repayment of loan should be mentioned. Current maturities will be
disclosed under Other Current liabilities.
All the above alternative sources available to the company to mobilize the funds for the
business are long term sources. Company uses this money for the business for a long term
period say 5 to 10 years even more than that. When these parties gives money to the
business, they expects return i.e either dividend or interest from the company which is
called cost of capital. i.e amount paid by the company to these parties for the usage of
funds. The basic difference is that interest payment made to debenture holders or banker
is treated as expenditure of the business which reduces profits and whereas dividend
payment to equity shareholders and preference shareholders is appropriation of profit
which is paid after payment of tax which will not save tax of the company.
Current Liabilities Like long term liabilities as discussed above there are certain
current liabilities which are created due to the day to day activities of the company.
Company has to pay off such type of liabilities in one year. We have already covered the
definition of Current liabilities. It includes Short term borrowings , Trade payables, Other
current liabilities and short term provisions.
Short term borrowings covers loans repayable on demand from banks and others, loans
and advances from related parties, deposits, other loans and advances. Borrowings can be
further classified as secured and unsecured, nature of security provided, whether loan
have been guaranteed by any director or others
Trade Payables covers bills payables, sundry creditors as against purchase of raw material
in day to day operations.

Other Current Liabilities covers current maturities of long term debts, current maturities
of finance lease obligations, interest accrued but not due on borrowings, interest accrued
and due on borrowings, income received in advance, unpaid dividends, application
money received for allotment of securities and due for refund and interest accrued
thereon., unpaid matured deposits and interest thereon., unpaid matured debentures and
interest thereon. Other payables such as service tax, VAT , excise duty etc.
Short term provisions covers Provision for taxation, provision for PF, gratuity etc.
Balance Sheet Asset side
The fist item under Balance sheet asset side is Non Current Assets which will cover first
Fixed Assets. Fixed assets are those assets with the use of which company carry on its
business. Fixed assets are mainly divided in two tangible fixed assets and intangible
fixed assets. Tangible assets are land, building, plant, machinery, vehicles, furniture
having physical existence where as intangible fixed assets consist of patents, trade marks,
copy rights, goodwill etc which are by way of rights. When tangible fixed assets are in
developing stage for example company is constructing factory building , the amount
spent on construction till date is called capital Work in progress. When company will
actually use the asset in the business, it will be added in fixed assets and then
depreciation can be charged on those assets. Similarly when company is developing its
intangible fixed assets , they will come under intangible assets under development.
Since tangible fixed assets are giving benefits to the company for a longer period and not
just one year in which they are purchased. The purchase value of the asset is spread over
the life time of that asset. Every years portion is called depreciation which is treated as
expenditure for that year. For example when a machine is purchased for Rs.1,00,000 life
of which is 10 years, the amount of Rs.1,00,000 is spread over a period of ten years since
company is going to use the asset for ten years. Thus every years portion will be Rs
Rs.10,000 which is called depreciation and will be treated as expenditure for that year.
Thus at the end of first year balance sheet will show machine value as Rs.1,00,000
Rs.10,000 = Rs.90,000 and income statement for the year will show expenditure of
Rs.10,000/Like tangible fixed assets, money spent to acquire/ generate intangible assets is also
required to spread over a number of years. This is called amortization. When a Trade
Mark is registered, owner gets a right to use it for 10 years after which he has to apply for
renewal of the same. In case of patents, the period is 5 years for food, drug and medicines
and 14 years for others. For copy rights, it is valid during the life time of the author and
60 years after his death.
Non Current Investments Second heading under asset side is Non Current
Investments. Company can invest the surplus funds in various securities like property,
equity shares, debentures, mutual funds. Investment in Partnerships. Investment in
subsidiary, associate companies, joint ventures should be indicated separately.
Investments are shown in the Balance Sheet at purchase price and market price in the
brackets.

Net Deferred Tax Assets - Details are to be provide for Deferred tax assets and deferred
tax liabilities so as to arrive at net figure.
Long Term Loans and Advances
It covers Capital advances, security deposits, loans and advances to related parties which
also should be classified as secured, unsecured, considered good or doubtful etc. Loans
and advances due by directors should be shown separately. Other Loans and advances
should cover prepaid expenses, advance tax paid, VAT receivable, Service tax receivable,
CENVAT receivable which are not expected to be realized within next twelve months etc
Other Non-Current Assets
It normally covers long term trade receivables. They should be further classified as
secured or unsecured, considered as good or doubtful.
Current Assets Like fixed assets, business requires certain assets for its day to day
operations. These assets are called current assets. For example in case of a manufacturing
company the process is purchase of raw material, conversion of raw material in to
finished goods with the use of machines and workers and then selling the finished goods
in the market either on cash or credit basis. So the assets which can be generated are raw
material, work in progress, finished goods, debtors, cash in hand, cash at bank etc.
Current assets are those assets which can be convertible in to cash or cash equivalent
assets in a period of one year without reduction in its value.
Current assets includes Current Investments, Inventories , Trade Receivables, Cash &
cash equivalents, Short term loans and advances and Other Current assets.
Current investment covers all investments made which can be realized within 12 months.
Equity shares, debentures, mutual fund units , preference shares, government securities ,
investment in partnerships etc.
Inventories covers raw material, work in progress, , finished good, stock in trade, stores
& spares, loose tools etc.
Trade receivables ( current ) should appear here. With all details such as considered good,
doubtful etc.
Cash & Cash equivalent covers balance with bank, cash on hand, cheques on hand ,
balances with banks kept as margin money against any loan etc
Short term loans to related parties, considered as good, doubtful , loans and advances due
by directors.
Other Current Assets should cover unbilled revenues, unamortized share issue expenses,
discount and premium related to borrowings etc
Format of Balance Sheet

Liabilities
I Equity and Liabilities
1. Share holders Fund
a) Share Capital
Equity Capital
Preference Capital
b) Reserves & Surplus
General Reserve amount kept for future plans
Capital Reserve
Securities Premium Account
Revaluation Reserve
Debenture Redemption Reserve
Share options outstanding amount
Profit & Loss Account
c) Money received against share
warrants
2. Share application money pending
Allotment
3. Non- Current Liabilities
Long term borrowings Bank Loans, Debentures etc
Deferred Tax Liability
Other long term liabilities- Trade payables
Long term provisions4. Current Liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short term provisions
Total.
II Assets
Non Current Assets
1..a.i) Fixed Assets
Tangible Assets
Land & Building
Plant & Equipment
Furniture & Fixtures
Vehicles
Office Equipments
1.a.ii) Intangible Assets
Goodwill
Brand/Trade mark
Computer Software
Patents/Copy rights
Licenses and franchise
a.iii) Capital Work in Progress

Current
Year

Amount

Previous
Year

a.iv) Intangible Assets under development


b) Non Current Investments
c) Deferred Tax Assets
d) Long term loans and advances
e) Other non-current Assets
2. Current Assets
a) Current Investments
b) Inventories
c) Trade Receivables
d) Cash & cash equivalents
e) Short term loans and advances
f) Other Current assets
Total
Long Term Provisions - Provision against warranty, Provision against Employee benefits
etc
Other Current liabilities includes current maturities of long term debts, income received
in advance, interest accrued and due on borrowings, Interest accrued but not due on
borrowings, unpaid dividends, unpaid matured deposits and interest, unpaid matured
debentures and interest
Short term Provisions includes provision for employee benefits, provision for tax etc
Non Current investment includes Investment in property, in equity, Preference shares,
Government securities, Mutual Funds, Investment in Partnership etc.
Long term loans and advances covers Capital advances, security deposits, loans and
advances to related parties , Other Loans and advances should cover prepaid expenses,
advance tax paid
Other Non-Current Assets
It normally covers long term trade receivables
Inventory includes Raw material, Work in progress, Finished goods, Stock in trade,
Stores & spares, Loose Tools etc
Cash and Cash includes Cash in Hand, Cash at Bank, Cheques on Hand etc

Chapter 5 Format of Statement of Profit & Loss


Particulars

Current
Year(Rs.)

Previous year
( Rs.)

Revenue from operations


Other Income
Total Revenue
Less: Expenses
Cost of raw material consumed
Purchase of stock in trade
Changes in inventory of finished goods and work
in progress
Employee benefit expenses
Finance cost
Depreciation and amortization
Other expenses
Total Expenses
Profit before exceptional items and extra
ordinary items and tax
Less: Exceptional items
Profit before Extra ordinary items and tax
Less: Extra ordinary items
Profit before tax
Less: Tax Current
- Deferred tax
Profit / Loss for the period from continuing
operations
Add: Profit /Loss from discontinuing operations
Tax expense of discontinuing operations
Profit/Loss for the period
Earnings per share
Profit & Loss Account basically covers Income and expenses of the business for that
particular period.
Revenue from operations covers all revenues from main business activity of the business.
For example sale of cars for Tata Motors, Sale of Software for Infosys , Sale of steel for
Tata Steel etc.
Revenue from other operating activities includes revenue from activities related to the
main activity of the business for example sale of scrap, sale of by products, sale of
services relating to main product etc.
Other Income It covers income generated from other activities and not the main
manufacturing activities. For example rent received, interest received, dividend received ,
sale of assets, foreign exchange gain or loss etc

Expenses
Expenses mainly covers material consumed, purchase of stock in trade, employee
benefits, other operational expenses such as rent, power, insurance , repairs to building,
repairs to machinery , finance cost, depreciation and amortization, other expenses
Exceptional items
These are the items coming under ordinary activities of the company however the nature
and amount involved in the transaction is such that it is necessary to record separately.
For example
1 Writing down the inventory to net realizable value
2. Disposal of fixed asset ( Profit on sale of assets / division)
3. Disposal of long term investments( diminution in value of investment/ sale of joint
venture shareholding )
4. legal changes having retrospective effect
5. Legal cases settled
6. Reversal of any provision
7. Foreign exchange losses
8. Sale of Logo ( Fedders Lloyd Corporation Ltd )
9 Asset constructed at others premises ( written off) ( Shri Cement )
Extraordinary items
Extra ordinary items are such which are not related to ordinary business. For example
losses from earthquake , terrorist attack etc

Examples to prepare Profit & Loss Account


Case 1
From the following information prepare Profit & Loss Account for a manufacturing
company
Particulars
Opening stock of raw material
Purchase of raw material
Power & fuel
Wages
Repairs to machinery
Repairs to factory building
Salary to staff
Printing & stationary
Interest paid

Amount
( Rs.)
15,000
1,15,000
21,000
34,000
7,000
4,000
14,000
3,000
11,000

Particulars
Telephone expenses
Advertisement
Delivery expenses
Depreciation on fixed
assets
Sales
Closing stock of raw
material
Interest received
Audit fees
Profit on sale of building

Amount( Rs
.)
2,500
6,500
4,700
12,000
3,20,000
20,000
8,000
3,000
45,000

Case 2
From the following information prepare Profit & Loss Account for a Trading company
Particulars
Opening stock of goods
Purchase of goods
Transportation
Rent paid
Insurance
Salary to staff
Printing & stationary
Interest paid

Amount
( Rs.)
45,000
4,15,000
31,000
47,000
7,000
24,000
2,000
15,000

Particulars
Telephone expenses
Advertisement
Depreciation on fixed
assets
Sales
Closing stock of goods

Amount( Rs
.)
4,500
7,500
12,000
7,20,000
21,000

Case 3
From the following information prepare Profit & Loss Account for a Bank
Particulars
Interest earned
Interest on investments
Interest on balance with RBI
Other Income
Interest paid
Printing & stationary
Salary to staff
Rent paid

Amount
( Rs.)
1500
300
55
500
1100
32
145
22

( Rs. In lacs )
Particulars
Amount( Rs
.)
Telephone expenses
9
Advertisement
11
Depreciation on fixed
65
assets
Provision for Tax
145

Case 4
From the following information prepare Profit & Loss Account for a manufacturing
company in a format given under schedule III
Particulars
Opening stock of raw material
Purchase of raw material
Power & fuel
Wages
Repairs to machinery
Repairs to factory building
Salary to staff
Printing & stationary
Interest paid
Loss due to foreign exchange
fluctuation
Opening WIP
Opening Finished goods
Provision for Tax

Amount
( Rs.)
15,000
1,15,000
21,000
34,000
7,000
4,000
14,000
3,000
11,000
16,000
9,000
16,000
40,000

Particulars
Telephone expenses
Advertisement
Traveling expenses
Depreciation on fixed
assets
Sales
Closing stock of raw
material
Interest received
Audit fees
Profit on sale of building
Gain due to change in
depreciation method
Closing WIP
Closing Finished goods

Amount( Rs
.)
2,500
6,500
4,700
12,000
3,20,000
20,000
8,000
3,000
45,000
7,000
5,000
12,000

Statement of Profit & Loss


Particulars
Revenue from operations
Other Operational income
Total Operational Income
Less: Expenses
Cost of raw material consumed
Purchase of stock in trade
Changes in inventory of finished goods and work
in progress
Employee benefit expenses
Finance cost
Depreciation and amortization
Other expenses
Total Expenses
Profit before other income, exceptional items and
extra ordinary items and tax
Add: Other Income
Profit before exceptional items and extra ordinary
items and tax
Add: Exceptional items
Profit before Extra ordinary items and tax
Less: Extra ordinary items
Profit before tax
Less: Tax Current
- Deferred tax
Profit / Loss for the period from continuing
operations
Add: Profit /Loss from discontinuing operations
Profit/Loss for the period

Exercise-1

Current Year(Rs.)
3,20,000
00
3,20,000
1,10,000
0
8,000
48,000
11,000
12,000
51,700
2,40,700
79,300
8,000
87,300
36,000
1,23,300
0
1,23,300
40,000
83,300
0
83,300

On 1st April, 2008, Mr.Ramesh stared a real estate agency under the name Ramesh Real
Estate Agency Private Limited by depositing Rs.1,00,000 in the companies bank account.
The activities resulted in the following revenue and expenses
Commission Income Rs.1,35,000, Salary expenses Rs.25,000, Electricity charges
Rs.3,000, Rent Expenses Rs.36,000, Advertisement Rs.20,000. The assets and
liabilities of the business on 31st March, 2009 are Cash Rs.95,000, Debtors Rs.40,500,
office Equipments Rs.30,000. Creditors- Rs.2,500, Loans payable Rs.12,000.
Exercise - 2
Mr.Anand after completing his MBA, started his own furniture business under the name
Anand Plywoods Private Limited by depositing Rs.2,00,000 in companys bank account
towards Equity Capital.. Company purchased a plot of Rs.75,000 and constructed a shed
of Rs.25,000. During the year company approached a bank and takes a loan of Rs.50,000
@ 10% interest, Sale for the year were made for Rs.2,50,000 and following expenses
were incurred and paid
Purchase of stock Rs. 1,50,000, Wages & Salaries Rs.20,000, Electricity Rs.2,500,
Advertisement Rs.15,000 and delivery expenses Rs.4,500, Interest to the Bank Rs.5,000.
1. Explain the capital expenditure and revenue expenditure involved in the first year of
business
2. Explain the capital receipts and revenue receipts which are involved in the first year
3. Prepare Profit & Loss Account and Balance sheet of the sole proprietor. Ignore
depreciation and tax.
4. Discuss various generally accepted accounting principles followed while preparing the
Profit & Loss Account and Balance sheet.

Exercise 3 Mr. Sanjay is having business of ready made garments under the name
Sanjay Garments Private Limited. He was going through the records of the company and
found the following transactions for the first year which ended on 31st March, 20016
1.
2.
3.
4.
5.
6.
7.
8.
9.

Introduced Rs.5,00,000 as capital of the business


Purchase of premises for the shop of Rs.2,60,000
Material purchased on cash basis Rs.1,00,000
Salary paid to staff Rs.24,000
Cash Sales Rs.1,80,000
Material purchased on credit Rs.20,000
Credit sales Rs.24,000
Interest free Loan taken from the Friend Rs.50,000
Telephone, Electricity bill paid for the shop Rs.12,000

On 31st March, his accountant informed him that salary for the month of march of
Rs.12,000 to staff is not yet paid and material costing Rs.8,000 is still lying in the shop
on 31st March, 2016.
Prepare the Income statement and Balance sheet of the business and also discuss the
Generally Accepted Accounting Principles followed by the business.

Exercise - 4
Mr.Narayan and Mr.Nandan , after working for more than ten years in a software
company started their own software company under the name Infosys Technologies
Private Limited. Both contributed Rs.1,00,000 each towards equity share capital.
Company started its activities on 1 st July, 2015 and both started looking after the business
as Directors of the company.
Company taken on rental basis an office and paid rent of Rs.14,000. Couple of computers
were purchased and were paid of Rs.80,000. Salary paid to staff during the year was
Rs.42,000. During the year company deposited Rs.50,000 with Vijaya Bank as fixed
deposit with interest rate @ 8%.
During the year company completed three orders and bills were raised for Rs.1,50,000
and were duly received.
At the end of the year on 31st March, 2016, the accountant informed them
1. Rent paid Rs.14,000 includes Rs.5,000 for the next year.
2. Interest accrued on fixed deposits but not received ( for 9 months ) and the
amount is Rs.3,000
3. Salary of Rs.10,000 for the month of March is not yet paid
4. On 31st March, one customer has paid Rs.10,000 as advance against his work
order.
5. Depreciation of Rs.20,000 is to be charged on computers.
Prepare Profit & Loss Account and Balance sheet of the company.

Exercise - 5
Prakash Industries Limited started its manufacturing unit in April, 2014. The initial
capital consist of Equity share capital of Rs.7,00,000 and Preference share capital of Rs.
3,00,000. Company had to spend Rs.40,000 for formation expenses. During the year
company approached Axix Bank for a Term loan of Rs.5,00,000 . Loan was sanctioned at
11% interest . the installment towards principal amount will due from second year.
Company also accepted interest free loan from a director of Rs.3,00,000.
During the year Company purchased a premises for its factory and office costing
Rs.8,00,000 and purchased and installed machinery of Rs.5,00,000. Furniture of
Rs.1,00,000 was also purchased. During the year. Management has decided to charge
depreciation on all fixed assets at 10% on straight line method. Company had to keep
interest free deposit with Excise authorities of Rs.50,000 and Rs.25,000 deposit with
Electricity Board.
During first year company achieved a turnover of Rs.30,00,000 out of which sales of
Rs.4,00,000 amount is not recovered from the customers. Following are expenses
incurred during the year
Material consumed Rs.16,00,000 ( amount of Rs.50,000 not yet paid to the supplier),
Employee cost Rs.5,00,000, power & fuel Rs.1,20,000, Repairs & maintenance
Rs.80,000, other office expenses Rs.1,55,000, Selling expenses Rs.75,000, Audit fees
Rs.5,000 and other misc expenses Rs.35,000. all expenses are paid in full except creditors
for goods. Provide for tax @ 30%.
Prepare Profit & Loss Account and Balance sheet of the company in horizontal as well as
in vertical format.

Exercise -6
Bafna Oils Private Limited started its business on 1st April, 2014 with Equity capital of
Rs.10,00,000 . Preliminary expenses for the year were Rs.10,000. Company purchased a
plot of Rs.2,00,000 and constructed a factory by spending Rs.3,00,000. Machines of
Rs.2,00,000 were purchased and installed. During the year, company approached IDBI
Bank for a secured loan of Rs.5,00,000 which was duly sanctioned by the bank. For the
first two years company paid interest @10 % on the loan and installment towards
principal amount will start from the third year .
During the year company purchased raw material of Rs.3,60,000 ( amount not yet paid to
the suppliers Rs.30,000) and other expenses were Wages and salaries Rs.1,00,000,
Factory expenses of Rs.30,000, Office Expenses Rs.22,000 and selling expenses of
Rs.28,000. During the year company achieved sales of Rs.7,50,000 where payments were
received from the customers except one customer from whom Rs.70,000 not yet received.
Stock lying in stores at the end of the year was of Rs.20,000
In the second year company achieved a sales of Rs.8,50,000 out of which amount not yet
received from customers Rs.1,00,000. Material purchased Rs.4,00,000 amount not yet
paid Rs.50,000 , wages and salaries Rs.1,00,000, Office expenses Rs.25,000 and selling
expenses of Rs.35,000. Material lying in stores at the end of the year was of Rs.25,000
Management decided to charge depreciation on fixed assets @10% on straight line
method. Provide for tax @ 30%.
Prepare Profit & Loss Account and Balance sheet of the company for two years in
Vertical Format

Exercise -7
Mr.Sukhwinder Singh, Managing Director of Sher-e-Punjab Hotels Private Limited was
going through the books of accounts of his company. Ho found that the turnover of the
company is Rs.20,00,000 for the year ended 31st March, 2011 with following expenses
Food and beverages Rs.11,00,000 , Salary to staff Rs.1,00,000 , Fuel, coal and gas
Rs.90,000, Electricity & water Rs.80,000, Printing and stationary Rs.7,500, Licenses and
fees Rs.5,000, Insurance Rs1,200, Repairs and maintenance Rs.30,000, painting and
decoration Rs.2,500, washing and cleaning Rs.16,500, crockery expenses Rs.21000, linen
and uniform expenses Rs.10,000, Laundry charges Rs.11,000, Computer maintenance
Rs.2,500, audit fees Rs.3,000, Directors remuneration Rs.1,00,000, advertisement
Rs.2,500, books and newspapers Rs.1,000 and interest on loan of Rs.40,000.
He further found that opening balance of food and beverages was Rs.35,000 and closing
balance was Rs.65,000 and income from other sources was Rs.40,000.
He found the following ledger balances of assets and liabilities
Debtors Rs.46,000, Loans and advances Rs.2,20,000 and cash & bank balance of
Rs.15,000, Investments Rs.1,34,000, Fixed assets of Rs.5,60,000 on which depreciation
for this year is to be charged @10%. whereas creditors at Rs.90,000, Provision for tax at
Rs.1,89,000, Share Capital Rs.1,00,000, Reserves & surplus at Rs.6,00,000 and
unsecured loans of Rs.5,00,000. Mr. Sukhwinder Singh wants to know the profit of the
business. Prepare Profit & Loss Account and Balance sheet of the Company for the year
31st March, 2011.

Exercise - 8
Mr.Prashant and Mr.Sujeet , after working for more than eight years in a auto parts
manufacturing company started their own manufacturing company in auto parts under the
name Sujeet Auto Engineering Private Limited. Both contributed Rs.10,00,000 each
towards equity share capital. Preliminary expenses for formation of the company were
Rs.40,000. Company started its activities on 1st April, 2014 and both started looking after
the business as Directors of the company.
Company purchased a plot at M.I.D.C., Pune measuring 3,000 sq.metres at a cost of
Rs.6,50,000 and constructed factory building by spending Rs.4,50,000. Company
approached immediately to Bank of India, Industrial Finance Branch for a Term Loan of
Rs.5,00,000 which was immediately sanctioned. The rate of interest for the loan is 10%
and for the first year it is payable for six months. Installment towards principal amount
will start after third year. During the year company purchases and installed three
machines costing Rs.2,00,000 each in the factory where depreciation is to be charged
@10% on straight line method for the full year.
During the year company purchased raw material of Rs.4,50,000 out of which Rs.30,000
are not yet paid till 31st March, 2008, payment made to workers was Rs.1,25,000, other
factory expenses of Rs.32,000, Office expenses including salary payment to office staff
was Rs.21,000 and advertisement Rs.5,000. At the beginning , company had to keep
interest free deposit with Maharashtra State Electricity Board of Rs.25,000.
During this year company achieved a turnover of Rs.9,20,000 out of which Rs.20,000
were not received till the end of the year. At the end of the year material lying in stores
was of Rs.21,000.
For the second year 15-16, company management decided to focus more on marketing
the product and purchased a small sales office in Mumbai for Rs.3,75,000. In the second
year turnover achieved was Rs.11,00,000 with Rs.45,000 receivable at the end of the
year. During the second year , company incurred the following expenses
Material purchased Rs. 4,75,000, amount payable to creditors at the end of the year
Rs.40,000, payment of wages Rs.1,37,000, factory expenses Rs.35,000, Office expenses
Rs.22,000 and Rs.25,000 on advertisement. During the year surplus funds of Rs.1,50,000
were invested in the share market where company received dividend of Rs.7,000. In the
second year management proposed Rs.50,000 (5% of the share capital ) as dividend and
transferred Rs.75,000 to General Reserve. Material lying in go dawn at the end of the
year was Rs.28,000
Prepare Profit & Loss Account and Balance Sheet in the Vertical Format for both the
years. Provide for tax @ 30% and charge depreciation @10% on all fixed assets except
land on straight line method.

Exercise 9
Neha and Priya have started a beauty parlor under a private company named Neha Beauty
Parlor Private Limited by introducing equity capital of Rs.1,20,000. Both started looking
after the business as directors of the company. Along with parlor service, company has
decided to keep cosmetic products for sale. Company has taken a shop cum office on
rental basis. Company has also spend Rs.40,000 on furniture and other equipments for the
business.
During the year company has incurred and paid for following
Purchase of cosmetic material
Rs.25,000, Rent Rs.60,000, Electricity and water
Rs.5,000, Creams and powder Rs.4,000, Magazines and news papers Rs.5,000, salary
Rs.20,000, telephone expenses Rs.2,000 and advertisement Rs.8,000.
During the year, company has generated income of Rs.95,000 through parlor services and
Rs.35,000 through selling of cosmetic products.
Neha is claiming that since sufficient funds are available in the bank at the end of the
year, Board should recommend dividend of Rs.12,000 ( 10% on Capital ) . Advice the
company by preparing Statement of Profit & Loss and Balance sheet for the first year.
Ignore depreciation and taxation.
Exercise 10 Manisha Food Products Limited started its manufacturing unit in April,
2015. Company has issued 80,000 Equity shares of Rs.10 each and 10% , 2,000
Preference share of Rs.100 each.capital of Rs. 3,00,000. Company has paid Rs.45,000 for
formation expenses. In the month of June company approached Axix Bank for a Term
loan of Rs.5,00,000 . Loan was sanctioned at 13% interest . In the first year company has
paid interest for 6 months and has paid the installment towards principal amount of
Rs.50,000.
During the year Company purchased a plot of Rs.2,00,000 and has constructed building
for its factory and office costing Rs.8,00,000. Company has purchased machinery of
Rs.6,00,000. out of which company has paid only Rs.2,00,000 and remaining amount is
payable in next two years. Furniture of Rs.1,00,000 was also purchased.
Management has decided to charge depreciation on all fixed assets at 10% on straight line
method. Company had to keep interest free deposit with Excise authorities of Rs.1,50,000
and Rs.55,000 deposit with Electricity Board.
During first year company achieved a turnover of Rs.34,00,000 out of which sales of
Rs.4,00,000 amount is not yet received from the customers. Following are expenses
incurred during the year
Material consumed Rs.17,00,000 ( amount of Rs.1,50,000 not yet paid to the supplier),
Employee cost Rs.5,50,000, power & fuel Rs.1,20,000, Repairs & maintenance
Rs.80,000, office expenses Rs.1,55,000, Selling expenses Rs.75,000, Audit fees Rs.5,000
and advertisement Rs.35,000. all expenses are paid in full except salary of Rs.50,000 to

employees. Provide for tax @ 30%. Raw material lying in stores at the end of the year is
Rs.1,75,000.
Prepare Profit & Loss Account and Balance sheet of the company in horizontal as well as
in vertical format for the year 15-16.
Exercise No.11 Following Balance sheet of Sarita Chemicals Limited, a manufacturing
company is available as on 31st March, 2015
Liabilities
Equity Capital
(3,50,000 Equity shares
of Rs.10 each )
Reserves & Surplus
General Reserve
Profit & Loss Account
Non-Current Liab
12% Bank Loan
Current Liabilities
Trade Payables
Short term provisions
Provision for tax

Amount
35,00,000

Total

62,10,000

8,00,000
5,00,000
10,00,000
2,50,000

Assets
Amount
Fixed Assets- Tangible
45,00,000
Less : Depreciation
15,00,000
Net Block
30,00,000
Fixed Assets Intangibles
Software
4,50,000
Non-Current Investments 12,50,000
Current Assets
Stock
3,50,000
Trade Receivables
4,50,000
Cash at Bank
7,10,000

1,60,000
Total

62,10,000

During the year 15-16 , Company has achieved sales of Rs.80,00,000 ( out of which sales
of Rs.4,00,000 in the month of march amount not yet received from customer.) Purchase
of Material Rs.45,00,000 ( amount not yet paid Rs.6,00,000), Other operating expenses
fully paid are Rs.15,00,000.
During the year company has issued fresh 40,000 equity shares of Rs.10 each at a
premium of Rs.15 and repaid the bank loan in full along with interest of Rs.1,00,000.
Charged depreciation @10% on the tangible fixed assets and provision for tax @30% of
the profits. Raw material lying in stores at the end of the year is Rs.2,50,000 . At the end
of the year Company has transferred Rs.1,00,000 to General Reserve out of current years
profit.
Prepare Profit & Loss Account and Balance Sheet as on 31 st Mach, 2016 assuming that
previous years Trade payables are paid in this year and previous years Trade receivables
are received in this year. Previous years tax is paid in this year.

Exercise No.12 Following is the Balance sheet of Akshay Hotels Limited, as on 31 st


March, 2015 , ( All figures in lacs).
Capital & Liabilities
Amount ( Rs.)
Equity
Capital
( 20.00
2,00,000 equity shares
of Rs.10 each )
Reserves & Surplus
Profit & Loss Account
( 4.00 )
Non-Current
Liabilities
12% Bank Loan
25.00
Current Liabilities
Trade Payables
1.00
Total
42.00

Assets
Fixed
Tangible

Assets-

Less : Depreciation
Net Block
Current Assets
Stock
Cash at Bank
Total

Amount ( Rs.)
45.00
15.00
30.00
4.00
8.00
42.00

Management of the company was worried about the losses and taken number of steps to
improve the sales. Apart from aggressive advertisement, company has introduced number
of food items and has separated vegetarian and non vegetarian section. Management was
also worried about the high loans and during the current year company has paid the loan
to the extent of Rs.10 lacs out of operational cash inflow apart from interest payment of
Rs. 3 lacs.
During the year 15-16 , Company has achieved sales of Rs.90 Lacs . Purchase of Material
Rs.30 lacs ( amount not yet paid Rs.3 lacs), Other operating expenses fully paid are
Rs.16.00 lacs.
Charged depreciation of Rs.5 lacs on tangible fixed assets on gross value . Raw material
lying in stores at the end of the year is Rs.5 Lacs .
At the end of the year company has transferred Rs.4 lacs to General Reserve out of
current years profit and has proposed a dividend of 15% i.e Rs.1.50 per equity share.
provision for tax is made at @30% of the profits.
Prepare Profit & Loss Account for the year ended on 31 st March, 2016 and Balance Sheet
as on 31st Mach, 2016 assuming that previous years Trade payables are paid in this year .

Exercise No.13 Following is the Balance sheet of Sujata ( India ) Limited, as on 31 st


March, 2015 , a company engaged in FMCG products. ( All figures in lacs)
Capital & Liabilities
Amount
Assets
Equity Capital
30.00
Fixed
Assets- 60.00
Tangible
Reserves & Surplus
Less : Depreciation
20.00
General Reserve
42.00
Net Block
40.00
Profit & Loss Account
11.00
Fixed
Assets

Intangibles
Non-Current Liab
Software
4.00
12% Debentures
10.00
Non-Current
21.00
Investments
Current Liabilities
Long term Loans &
Adv.
Trade Payables
2.00
Loans to employees
5.00
Loan to Group Co.
10.00
Short term provisions
Current Assets
Provision for tax
1.00
Stock
4.50
Trade Receivables
3.50
Cash at Bank
8.00
Total
96.00
Total
96.00
During the year 15-16, Company has achieved sales of Rs.110 Lacs out of which Rs.10
lacs not yet received from customer. Purchase of Material Rs.50 lacs ( amount not yet
paid Rs.3 lacs), Other operating expenses fully paid are Rs.26.00 lacs.
Company has paid interest on debentures of Rs.1.20 and charged depreciation @10% on
the tangible fixed assets on gross value and amortized Rs.1 lac from software.
During the year advance tax of Rs. 5 lac is paid
At the end of the year raw material lying in stores is Rs.5 Lacs . company has transferred
Rs.8 lacs to General Reserve out of current years profit and has proposed a dividend of
Rs.3 lac . provision for tax @30% of the profits.
Prepare Profit & Loss Account and Balance Sheet as on 31 st Mach, 2016 assuming that
previous years Trade payables are paid in this year and previous years Trade receivables
are received in this year. Previous years tax is paid in this year.