MBAF911D Accounting in Logistic and Supply Chain PDF

Accounting in Logistics and Supply Chain Sector
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Course Design
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Advisory Council
Chairman
Dr Parag Diwan
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Members
Dr Shrihari Dr Anirban Sengupta Dr Ashish Bhardwaj
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Dean Dean CIO
Dr Satya Sheet Prof I M Mishra Mr M K Goel

VP – Academic Affairs Dean – IIT Roorkee Management Consultant
SLM Development Team

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Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
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Dr K K Pandey
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Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
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Author
N Balwani
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All rights reserved. No parts of this work may be reproduced in any form, by mimeograph or any other means,
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without permission in writing from Hydrocarbon Education Research & Society.

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Course Code: MBAF-911D
Course Name: Accounting in Logistics and Supply Chain Sector

(c)
Version: January 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
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Contents
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Block-I
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Unit 1 Fundamentals of Accounting................................ ................................ ........................ 3
Unit 2 Generally Accepted Accounting Principles (GAAP)................................ ................... 17
Unit 3 Accounting Principles and Standards ................................ ................................ ........ 29
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Unit 4 Accounting Equation ................................ ................................ ................................ .. 41
Unit 5 Case Studies................................ ................................ ................................ ................ 49
Block-II
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Unit 6 Accounts ................................ ................................ ................................ ...................... 55
Unit 7 Journal ................................ ................................ ................................ ........................ 67
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Unit 8 Ledger ................................ ................................ ................................ ......................... 79

Unit 9 Subsidiary Books ................................ ................................ ................................ ........ 93
Unit 10 Case Studies................................ ................................ ................................ .............. 113
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Block-III
Unit 11 Trial Balance................................ ................................ ................................ ............. 119

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Unit 12 Preparation of Trading, Profit & Loss Account and Balance Sheet ........................ 127
Unit 13 Depreciation Accounting................................ ................................ ........................... 141
Unit 14 Cash Flow Statements................................ ................................ .............................. 153
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Block-IV
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Unit 16 Financial Aspects of Supply Chain Management ................................ .................... 169

Unit 17 Inventory Management’s Techniques and Control................................ .................. 181
Unit 18 Cost Accounting ................................ ................................ ................................ ........ 193
Unit 19 EVA and Budgets................................ ................................ ................................ ...... 207
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Block-V
Unit 21 Corporate Financial Reporting................................ ................................ ................. 223
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Unit 22 International Financial Reporting Standards ................................ ......................... 233
Unit 23 International Accounting Standards-I ................................ ................................ ..... 241
Unit 24 International Accounting Standards-II................................ ................................ .... 251
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Unit 25 Case Study ................................ ................................ ................................ ................ 263
Glossary................................ ................................ ................................ ................................ .......... 265
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UNIT 1: Fundamentals of Accounting
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Notes
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BLOCK-I
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Detailed Contents
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Notes
UNIT 1: FUNDAMENTALS OF ACCOUNTING
___________________ UNIT 3: ACCOUNTING PRINCIPLES AND
STANDARDS
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 Introduction
___________________  Introduction
 Characteristics of Accounting
___________________  Accounting Process
 Stages of Accounting
___________________  Uses, Advantages or Role of Accounting
 Objectives of Accounting
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___________________  Limitations of Accounting
 Accounting Information
___________________
 Functions of Accounting UNIT 4: ACCOUNTING EQUATION
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___________________  Introduction
 Branches of Accounting
___________________  Meaning of Accounting Equation
UNIT 2: GENERALLY ACCEPTED ACCOUNTING
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___________________
PRINCIPLES (GAAP)  Calculation/Computation of Accounting Equation
 Introduction
___________________  Effect of Transactions on Accounting Equation
 Classification of Accounting Principles

UNIT 5: CASE STUDIES
 Basic Assumptions
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 Basic Accounting Principles
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Notes
___________________
Fundamentals of Accounting
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___________________
___________________
Objectives
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After completion of this unit, the students will be aware of the following
topics: ___________________
 Characteristics of Accounting ___________________
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 Stages of Accounting ___________________
 Objectives of Accounting
___________________
 Accounting Information
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___________________
 Characteristics of Accounting Information
 Functions of Accounting ___________________
 Branches of Accounting
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Introduction
Accounting is used as an information system by its users. The
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users are of two types i.e., Internal and External. Accounting is

generally termed as the language of business. It records all the
transactions which can be expressed either in money or money’s
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worth and have taken place during a particular period. It is also

termed as a science as the Transactions are recorded (which are of
economic nature) in a systematic manner and also an art of
analysing and interpreting the same i.e., the business transactions.
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Accounting is defined by different authors and institutions. Some

of the most important definitions are as given below:
“Accounting system is a means of collecting, summarizing,

analyzing and reporting in monitory terms, information about the
.
business.”
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—Robert N. Anthony
“Accounting is the process of identifying, measuring and

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communicating economic information to permit informed

judgements and decisions by users of information.”
—The American Accounting Association (AAA), 1966

(c)
“Accounting is the art of recording, classifying and summarizing in

a significant manner and in terms of money, transactions and
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events which are, in part, at least, of a financial character, and
Notes interpreting the results there of.”
Activity
___________________
Write an article on the —American Institute of Certified Public Accountants, 1941
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characteristics of accounting.
___________________
___________________ Characteristics of Accounting

___________________ The following are the characteristics of accounting:
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___________________
Recording of transactions of financial nature: Transactions
___________________ or events which are of economic/financial nature are only recorded
in accounting. Events/transactions which cannot be measured in
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___________________
terms of money, are not at all recorded in accounting. For example,
___________________
efficiency or honesty of the employees cannot be recorded because
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___________________ it cannot be measured in terms of money though it affects the total
___________________ profits of business. Similar is the case of a quarrel between the
factory workers and the factory production Manager which affects
the production, but it is not recorded in the books as it can neither
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be measured in terms of money nor has any exchange or economic
value.
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Recording in definite (certain) units: Only such events are

recorded which are measured in terms of money, no other unit is
used to record such transactions, for example, if the publisher sells
10 books (copies) of Accounting to a bookseller and 20 copies of
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Business Studies to another bookseller, then the publisher is

required to record these transactions only in terms of money. That
in the first case 10 No. of copies is to be multiplied by the price per
copy and if any discount (trade) is to be given, is deducted. The
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recording is done for the net amount in the books of the business
and not in terms of 10 or 20 or so on the number of books only.
It is an art of classifying the data: Accounting is also an art of
classifying the data systematically. After all the transactions are
.
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recorded properly, all such data are also classified under

appropriate heads, so that as and when data is analysed or
interpreted, correct results can be drawn if data of similar nature
is available at a particular place. This also saves the time and
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avoids unnecessary wastage of money.

It is a science: Accounting is a science because every business
transaction is recorded in a systematic manner. This is done first
in the Journal which is the primary book of Accounting/Business.
(c)
This may further be sub-divided into various types of subsidiary

books such as cashbook for recording cash transactions only
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whereas sales day book for recording credit sales of goods.
Purchases book for recording credit purchases of goods and returns Notes
Activity
books for recording purchase returns and sales returns and other
W ___________________
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subsidiary books such as Bills Receivable book, Bills Payable book,
___________________
etc.
___________________
Accounting can be used for analyzing and interpreting
business transactions: As we know that the purpose of ___________________
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accounting is not only recording of transactions but also of ___________________
analyzing and interpreting data for taking certain important ___________________
future decisions. This is also known as future forecasting. Thus, we
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___________________
see that definition of accounting is changing rapidly because of
increase in its functions. i.e., from recording of transactions to ___________________
interpreting of economic events.
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___________________
___________________
Stages of Accounting
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After knowing the characteristics of Accounting, one can list the
different stages of Accounting which are as follows:
 Financial Transactions,
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 Recording of Transactions,
 Classifying in different groups of transactions based as per the
nature of transactions,
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 Summarizing of transactions, and

 Analyzing and interpreting the same.
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Table 1.1: Distinction between Book-keeping and Accounting
S. Basis of Book-keeping Accounting

No. Difference Accounting
1 Objective The objective of book- Whereas the objective of
keeping is to record accounting is not only the
.
the transactions of recording of transactions but

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economic nature. also analyzing and interpreting

the data.
2 Nature (Art It is an art. It is a science.
or science)
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3 Scope The scope of book- The scope of accounting is very

keeping is very wide.
limited.
4 Functions Most of the functions Functions of accounting involve
of book-keeping are expert human beings in the art
now-a-days of analysis and interpretation.
(c)
performed by
machines.
Contd...
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5 Accounting Book-keeping is just Accounting involves the entire
Notes Process one part of process of accounting that is
Activity accounting process. why it is said that accounting
___________________
Make a report on the begins where book-keeping
ends.
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objectives of accounting.
___________________
6 Rules to be Rules of accounting Along with rules, assumptions
___________________ followed are followed for and conventions are also there
recording. to follow.
___________________ 7 Net Results Net results of the Whereas accounting is used to
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Profit or loss business cannot be find out net results of the
___________________ known from book- business.
keeping.
___________________
8 Time Transactions are Transactions are generally
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___________________ immediately recorded after a gap of time or
recorded. at the end of a financial year.
___________________
Check Your Progress
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___________________
___________________ State whether True or False:

1. Accounting is the language of business.
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2. Transactions or events which are of economic/financial
nature are only recorded in accounting.
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Objectives of Accounting
The basic objective of Accounting is to provide necessary
information to the persons interested in the business. As we know
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that persons interested in the business are of two types: (a)

Internal users and (b) External users.
(a) Internal users: These are the persons who manage the
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business, i.e., management at all the levels–top, middle and

lower level.
(b) External users: External users are all persons other than
internal users such as Investors, creditors, Government. The
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necessary information is supplied to the external users

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through the following financial statements:

 Profit & Loss Account/Statement and
 Balance Sheet.
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Whereas the internal users can obtain necessary information other

than the above statements from the records of the business. Thus,
the primary objectives of accounting are as given below:
(c)
1. Maintenance of records of business.

2. Calculation of profit or loss of the business.
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3. Presentation of the financial position of the business.
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4. To provide and make available the necessary and financial
___________________
information to the users.
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___________________
The above objectives can be explained in detail:
___________________
1. Maintenance of records of business: The Primary objective
___________________
of accounting is to maintain proper records of business, i.e.,
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every transaction which is of financial nature must be ___________________
recorded fully otherwise it is very difficult to remember all the ___________________
transactions because human memory is very short. Moreover,
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___________________
correct and fair results of the business transactions cannot be
ascertained (calculated). So it is very much essential to keep ___________________
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proper and complete records of all business transactions so ___________________
that records can be used as and when required/desired by the ___________________
persons interested in the business.
2. Calculation of Profit or Loss: As we know that one of the
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most important objectives of business is to earn profit, and the
main objective of accounting is to maintain proper records of
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all financial transactions in to order to calculate profit or loss

of the business. This can be done with the help of a financial
statement known as the Profit & Loss statement. This
statement is prepared for a particular period which can tell us
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about the profit or loss of the business. If there is a profit, the

management can take important decisions relating to selling
price, output, etc. If two years results are known, then a
comparison can also be made. Similarly, if there is a loss, then
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management can decide to discontinue the production of such

items. Thus, we see that it is a very important objective of
accounting, i.e., to provide information relating to profit or loss
of business. This statement is very useful to all the persons
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interested, i.e., from management to creditors, investors,

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government and society at large including employees of the

business. Thus, profit or loss statement is a measurement of
performance of the business.
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3. Presentation of financial position of the business: The

financial position of the business is presented through another
financial statement known as the Balance Sheet or Position
Statement. This is a statement of assets and liabilities of the
(c)
business. It tells about the owned capital as well as borrowed

capital (liabilities) along with different assets such as fixed
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assets and current and other assets. If total liabilities are
Notes deducted from the total assets, then balance depicts the
Activity
___________________
Present a draft on accounting owners’ capital (owned funds). As we know that the objective of
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information. accounting is not only recording of financial events, make
___________________
available information relating to profit or loss of the business
___________________
but also provide full information regarding financial position of
___________________ the business. This is done through a financial statement. The
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___________________ balance sheet is a mirror showing the financial solvency or
insolvency of the business. If assets are more than its
___________________
liabilities, it is a solvent otherwise in case of reverse, it is an
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___________________ insolvent business.
___________________
4. To provide and make available the necessary and
financial information to the users: The major objective of
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___________________
___________________ accounting is to provide and make available the necessary and

financial information to the users or the persons interested so
that, necessary and financial decisions and actions can be
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initiated by the management/persons interested such as
owners, shareholders, debenture holders, creditors, investors,
government and others such as research scholars, etc.
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Thus, we see that the accounting can play a very important

role in depicting the financial results (profit/loss) of the
business as well as the financial position (solvency or
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insolvency) of the business.
Accounting Information
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As per Accounting Principles Board (APB), Accounting is defined

as follows:
“Accounting is a service activity. Its function is to provide

qualitative information, primarily financial in nature about
.
economic activities that is intended to be useful in making economic

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decisions.”
Thus, it is clear from the above definition, that accounting

information is an important function of accounting. Accounting
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information must also be of quality so that important financial

decisions can be taken by the users of accounting. Accounting
information is supplied through financial statements. Financial
statements are Profit & Loss account being income statement and
(c)
balance sheet being position statement.

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The information which is provided by these statements is as
follows: Notes
1. Information about profit or loss of the business. ___________________
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2. Information about financial position of the business. ___________________
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Information about Profit or Loss of the Business
___________________
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The Profit & Loss account which is also known as income
___________________
statement provides accounting information about profit earned or
loss suffered (incurred) during an accounting period. This ___________________
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statement provides gross profit through trading account and net ___________________
profit through Profit & Loss account.
___________________
Gross profit = Sales – Cost of Sales
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___________________
This information is very useful as it helps in deciding the following ___________________
questions:
1. Whether cost of sales is reasonable or not?
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2. Whether it can be reduced or not?
3. Whether selling price can be increased or not?
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The Accounting information, thus available through trading

account helps us to resolve the above questions.
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Net profit is the profit earned after allowing all the expenses
relating to factory administration, financial, selling and
distribution. Thus, income statement makes available information
about net profit earned or net loss suffered. This also helps in
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answering the following questions.

1. Whether expenses are reasonable or not?
2. Whether expenses can be reduced or not?
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Net profit is used as a basis for taxation purposes.

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Information about Financial Position of Business

The balance sheet also known as position statement tells about
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financial health of the business. This statement tells about the

assets owned by the business including cash and bank balances.
These assets are total of liabilities owned by the business which
may be taken from the proprietor of the business or borrowed from
outsiders. The position statement helps in determining the
(c)
following questions:
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1. Whether funds invested are safe and sound, means provides
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reasonable return of income along with safety of funds?
___________________
2. Whether return of income is adequate or not?
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___________________
3. It helps the investors, the creditors to arrive at a correct
___________________
decision regarding investment, lending of funds, etc.
___________________
4. It helps in restoring confidence among the employees about
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___________________
their provident fund being properly deposited with the cost as
___________________ per requirements.
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___________________
Characteristics of Accounting Information
___________________
Accounting information consists of the following characteristics:
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___________________
1. Reliability: Whatever accounting information is supplied
___________________
must be reliable, means it must be free from all sorts of biases.
Otherwise the basic purpose of using accounting information is
defeated. Accounting information is reliable if following rules
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are observed:
(a) Principle of prudence is followed: It means the principle of
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prudence, i.e., conservatism is followed and all losses are

taken into account while all prospective gains are left out.
In other words, accounting information tells about the
facts and does not give any wrong information about the
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business.
(b) Neutral Accounting information is free from all sorts of
biases because if information supplied is biased, it would
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give misleading results.

(c) Complete: Whatever accounting information is supplied,
must be complete in all respects. Otherwise incomplete
information may give us misleading results.
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2. Relevance: The accounting information should also disclose

other information which may be useful to the users of
information. This is in addition to the information which is
required by statutes under different Acts/Laws.
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3. Understandability: The accounting information provided,

must be in a form which is understandable to the users of
information. However, the information which can be useful
must also be given. Whatever is the requirement of disclosure
(c)
of information, must be followed strictly.

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4. Comparability: The users should be able to compare the
accounting information as inter firm or intra firm comparison. Notes
It is therefore necessary to use standardized accounting ___________________
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policies consistently.
___________________
Various Users of Accounting Information ___________________
Following are the users of accounting information: ___________________
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1. The owners: Whosoever’s money is provided to the business, ___________________
such persons are known as owners of the business. Such ___________________
persons may be either the proprietor, the partners or the
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___________________
shareholders. They are very much interested in knowing about
the profit or loss of the business and also the financial health ___________________
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and wealth of the business. ___________________
2. Investors: Everyone who is either willing to invest in a ___________________

business as a partner or as a shareholder is always interested
to know about the safety of funds as well as adequate return
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on investments.
3. Creditors are interested to be satisfied about the credit
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worthiness of the business before supplying goods or services.

Accounting information available through financial statements
thus proves useful and helpful.
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4. Government is interested in having certain other financial

information on the basis of which economic and taxation
policies are decided.
5. Employees: Accounting information is useful to the employees
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by telling them about their contribution which is regularly

deposited with the Government by their employers.
6. Society: Accounting information is useful to the society. It
depicts general financial state of affairs in the society, i.e.,
.
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standard of living, per capita income, national income, etc.
Check Your Progress

Fill in the blanks:
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1. The ........................ also known as position statement

tells about financial health of the business.
2. ................... is the profit earned after allowing all the
(c)
expenses relating to factory administration, financial,

selling and distribution.
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Functions of Accounting
Notes
Activity
___________________
Prepare an assignment on the
The main function of accounting is to record the business
transactions scientifically and systematically. Apart from this,
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functions and branches of
___________________
accounting. there are other functions of accounting which are as follows:
___________________
1. It depicts the true and fair picture of the financial position of
___________________
the company.
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___________________
2. It helps in ascertaining profit or loss of the business which is
___________________ the only primary aim of the business.
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___________________
3. It helps in future decision-making by different persons
___________________ interested in such accounting information.
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___________________ 4. It depicts the earning capacity of the business.
___________________ 5. It satisfies all Government rules and regulations connected
with Accounting information such as all the companies are
required to prepare their statements as per requirements of
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the Indian companies Act, 1956, amended up to date.
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Branches of Accounting
As we know that the objectives of accounting are recording of
business transactions and also make necessary information
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available to the persons interested. The accounting is broadly

classified into three main branches, in order to achieve the above
objectives. The branches are:
(a) Financial Accounting
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(b) Cost Accounting

(c) Management Accounting
(a) Financial Accounting: It is mainly concerned with the
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ascertainment of profit or loss made during a particular period

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and also presents the financial position of the business.

(b) Cost Accounting: As the name suggests, this type of
accounting is mainly related with the ascertainment of the cost
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of a product, so that the management can exercise its control

in order to minimize the costs and maximize the profits.
(c) Management Accounting: This type of accounting is a tool in
the hands of management for various functions; (i) to control
(c)
costs (ii) to take important future decisions (forecasting).

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Thus, we see that there are different branches of accounting, each
Notes
branch is assigned a different job.
___________________
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Check Your Progress ___________________
Fill in the blanks:
___________________
1. ................... is mainly concerned with the ascertainment ___________________
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of profit or loss made during a particular period and
___________________
also presents the financial position of the business.
___________________
2. ................... accounting is a tool in the hands of
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management for various functions; (i) to control costs ___________________
(ii) to take important future decisions (forecasting). ___________________
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___________________
Summary ___________________
Accounting is generally termed as the language of business. It

records all the transactions which can be expressed either in
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money or money’s worth and have taken place during a particular
period. It is also termed as a science as the Transactions are
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recorded (which are of economic nature) in a systematic manner

and also an art of analysing and interpreting the same i.e., the
business transactions.
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Lesson End Activity

Collect more information on accounting and present it in the form
of a chart.
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Keywords
Accounting: It is the process of identifying, measuring and
communicating economic information to permit informed
.
judgements and decisions by users of information.

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Cost Accounting: As the name suggests, this type of accounting is

mainly related with the ascertainment of the cost of a product.
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External Users: All persons other than internal users such as

Investors, creditors, Government.
Financial Accounting: It is mainly concerned with the
ascertainment of profit or loss made during a particular period and
(c)
also presents the financial position of the business.

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Internal Users: These are the persons who manage the business,
Notes
i.e., management at all the levels–top, middle and lower level.
___________________
Management Accounting: This type of accounting is a tool in the
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___________________
hands of management for various functions; (i) to control costs (ii)
___________________ to take important future decisions (forecasting).
___________________
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___________________ Questions for Discussion
___________________ 1. Describe the characteristics of accounting.
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___________________ 2. Explain the stages of accounting.
___________________ 3. Discuss the objectives of accounting.
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___________________
4. What do you understand by accounting information?
___________________
5. Explain the characteristics of accounting information.
6. Describe the functions of accounting.
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Further Readings
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Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
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Bhattacharya S. K. and Dearden J. Accounting for Management–

Text and Cases, New Delhi, Vikas, 1996.
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
No
II, Sultan Chand and Sons.

Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
5th ed. New Delhi, Sultan Chand, 1992.
Jawahar Lal, Cost Accounting, Vikas Publishing House, New
.
Delhi.
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Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,

New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New

Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
(c)
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.

Chand, New Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html Notes
www.accsoft.ch/download/accountingconcepts.pdf ___________________
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www.investopedia.com/university/accounting/ ___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf ___________________
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Notes
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___________________
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___________________
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___________________
___________________
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___________________
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___________________
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(c)
UNIT 2: Generally Accepted Accounting Principles (GAAP)
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Notes
Activity
___________________
Write an article on the
Generally Accepted Accounting
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classification of accounting
___________________
principles.
Principles (GAAP) ___________________
___________________
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Objectives ___________________
___________________
topics:
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___________________
 Classification of Accounting Principles
 Basic Assumptions ___________________
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 Basic Accounting Principles ___________________
___________________
Introduction
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Accounting is a medium of recording the transactions made in the
business that is why; accounting is termed as the language of the
business. All the persons interested in the business, such as the
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owners/shareholders, the creditors, the government and the others,

get the necessary business information through accounting
because it is properly recorded, analyzed and summarized to the
extent that it can be understood by all. This is possible when all
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the financial statements are prepared in accordance with generally

accepted accounting principles. If such uniform principles are not
adhered /followed, there would be a lot of difficulties and confusion
which makes comparison impossible, unreliable or dependence is
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also reduced because, its acceptability is unsuitable for different

business houses, etc. The accountants, therefore, have suggested
the common concepts and conventions of accounting in order to
overcome the above mentioned difficulties and problems
.
enumerated earlier. Such accounting concepts and conventions are

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known as basic accounting concepts and conventions as they have

been commonly accepted by the professional accounting world for
preparing financial statements and reports for external use based
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on experience and practice.
Classification of Accounting Principles

All the accounting concepts and conventions are broadly classified
(c)
into three broad categories, such as:

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1. Basic assumptions are like pillars on which the structure of
Notes
accounting is based
___________________
2. Basic Principles and
n/S
___________________
3. Modifying Principles.
___________________
In this unit, we will study the basic assumptions and the basic
___________________
principles. We will study the modifying principles in the next unit.
tio
___________________
___________________
Basic Assumptions
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___________________
Assumptions provide a base for accounting process without which
___________________ no enterprise can prepare its financial statements. The following
are the basic assumptions:
rod
___________________
___________________ (a) Accounting entity/Business entity

(b) Monetary unit/Money measurement concept
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(c) Going concern
(d) Periodicity.
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Accounting Entity
It is also termed as Economic entity assumption which means that
economic unit/event can be known with a specific unit. For this
t fo
purpose business is considered as a distinct and separate entity

than its owners. Recording of every transaction is done whether it
is related to the owner/s or not. The business controls each and
every activity this is possible because of its separate entity hence,
No
it is also accountable. For example, when a business is started by

the owners, then cash/goods come in the business which results in
an increase in the capital of business and on the other hand, it
reduces private capital of the owners. Nowadays the concept of
.
business entity is becoming more and more popular because of

ES
further division of accounting in different departments, so that the

responsibility of each department can be ascertained easily. This is
done in responsibility accounting. According to this accounting
UP
entity, a distinction should be made between (1) Private/personal

and (2) those of another business entity. If it is not done, results
would not be accurate.
It would be rather confusing, uncertain, ambiguous, though it is

(c)
one of the most useful assumptions. Business and the owner/s

whether sole proprietor or partner/s are one in the eyes of law, but
ale
they are considered as separate entities from practical accounting
point of view. But in case of companies, the law recognizes legal Notes
and separate entity from its owners, i.e., the shareholders. ___________________
n/S
Monetary Unit/Money Measurement Concept ___________________
Only such transactions are recorded in accounting that are of ___________________

monetary value or that can be measured in terms of money. The ___________________
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transactions/events which cannot be measured in terms of money
___________________
are not at all recorded in accounting. For example, if there is
dispute between a manager and a worker which affects/does not ___________________
uc
affect the business, it cannot be recorded unless and until it is ___________________
measured in terms of money. Likewise the health of the proprietor,
___________________
sale policy of the business, entrance of other competitors in the
rod
___________________
business are such events which cannot be recorded in accounting
howsoever important it may be, because these cannot be measured ___________________
in terms of money. This is a peculiar feature of the Money
measurement concept but this can also be termed as limitation of
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this concept which has attracted the attention of all the
accountants in the world. All the transactions which are recorded if
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measured in money, at a present level, any increase/decrease after

recording is left out. To make accounting records relevant, simple,
understandable and of the same class or groups, they are brought
to a common unit of measurement i.e., Money. It makes possible
t fo
the preparation of financial statements. Had there been no

monetary unit assumption, it would have been difficult to record
business transactions; hence monetary unit concept is introduced.
Though it is assumed that the monetary unit is a stable unit in
No
value but in practice, this assumption is not correct as the money

value changes over a period of time.
Limitations of Money Measurement

.
ES
There are certain limitations of this concept because of which the

scope of accounting is limited the limitations are as follows:
(i) Records only such events/transactions which can be expressed
UP
in terms of money but as we know that there are certain

events which affect the business but cannot be measured such
as wealth of the proprietor etc. such events are responsible for
the success of the business but unable to record in the books of
accounts, the direct result is that whatever information is
(c)
gathered not correct and fair view of the either operational or

position of the business is not there.
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(ii) There is no consideration for purchasing power of money
Notes
which is fluctuating. Again the result is that it is not a true
___________________
and fair view of the business.
n/S
___________________
Going Concern Concept
___________________
It is assumed that every business would continue for a long period
___________________
or have an indefinite life unless it is likely to be sold or wound up
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___________________ in the near future. This is also known as the concept of continuity.
___________________ Keeping this in view, recording of transactions in accounting and
division of expenses is done. In other words, it is seen whether
uc
___________________
benefit from expenses is immediate or long-term. If it is
___________________
immediate, then it is to be treated as revenue or if it is long-term,
rod
___________________ it is to be treated as capital, depending upon the nature of
___________________ expenses. This concept of going concern is considered better as
compared to short-term or temporary business. In other words, a
businessman charges depreciation on the historical (probable) costs
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as well as expected life and not on the market value. This is also a
sound and fundamental basic principle of financial statement. This
concept helps the investors in providing necessary capital to the
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business because of the assurance regarding the continuation of

the business for a long time. If this type of commitment is absent,
then it would be very difficult to procure funds for the business.
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Accounting Period Concept

This is also known as time period assumption, and the economic
life is divided into different periods for preparing financial
No
statements. As per going concern concept the financial statements

must be prepared only when either it is sold or liquidated. But
practically it is very difficult to wait for such a long period, hence it
is agreed that economic life of a business must be reported over a
reasonable time period which is normally taken as one year, either
.
ES
calendar year, financial year and or other year such as Deepawali,

Dussehra or Samvat year, etc. Though, sometimes, it may be less
than 12 months also i.e. monthly, quarterly or half yearly, etc.; but
such periods are termed as interim periods and reports for such
UP
periods are called interim reports. Such reports are generally less
reliable than annual reports. So it is very much desired to have
relevant information, so that quick decisions can be taken. Thus,
we see that the idea of accounting period is quite helpful and
(c)
useful to all classes of users – management, creditors, investors

and others.
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Make a report on the basic
n/S
1. ................... means that economic unit/event can be accounting principles.
___________________
known with a specific unit.
___________________
2. ................... is also known as time period assumption,
___________________
and the economic life is divided into different periods
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for preparing financial statements. ___________________
___________________
Basic Accounting Principles
uc
___________________
The Accountants have agreed on some principles which tell how ___________________
the transactions should be recorded and reported in the books of
rod
___________________
the business. Important basic accounting principles are as given
___________________
below:
1. Cost principle
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2. Revenue/Realization principle
3. Matching principle
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4. Full disclosure principle

5. Dual aspect principle and
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6. Objectivity principle.
The above principles can be explained in detail one by one.
1. The Cost Principle: Every transaction should be recorded at
its actual (historical) cost or cost of its acquisition and not its
No
market price. For example, if a Machine is purchased for 1 lac

and its market price is 2.50 lacs, then recording of this
transaction is done at 1 lac being its actual cost/or cost of its
acquisition. Sometimes market price may be less than even
.
ES
then recording would be at its actual cost because of the cost

principle, which is the basis of charging depreciation in future.
If there is any residual value of asset and the asset is sold,
then such amount is deductible from such value. If the asset is
UP
having no residual value, such assets are not shown in the

Balance sheet though the existence of assets is very important
to the business. Thus, we see that the Balance sheets which
are based on cost concept/principle give us very wrong/
(c)
incorrect results for those investors who are interested to know

the real values of the assets. This principle of cost is applicable
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in case of fixed assets as well as the current assets. In the
Notes words of Hendriksen, “Expenses are using or consuming goods
___________________ and services in the process of obtaining revenues.” Thus, it is
n/S
the amount that is spent with a view to produce or procures
___________________
goods or services to obtain revenue from the sale of such goods
___________________
or services. In spite of so many criticisms of this, the cost
___________________ principle is definite and reliable. So, it has an edge over other
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___________________ principles. It also provides an objective and comparable data in
the financial statements.
___________________
2. Revenue Principle (Realization Principle): Only such
uc
___________________
transactions are recorded in accounting which have actually
___________________
taken place not the ones which would take place in future.
rod
___________________ This is based on revenue realization principle. For example, if
___________________ goods are sold or purchased by a trader, transaction is
recorded but if there is a contract or an agreement has taken
place, it would not be recorded unless and until the contract is
ep
executed/complete/obligations/duties are performed as per
contract. However, there are certain exceptions to the sales
basis for revenue realization. In case of construction projects,
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revenue is generally realized before the contract is complete.

Similarly in other cases, such as in case of sale by Instalment
method revenue is realized later though sale has taken place
earlier. Revenue is realized when cash is received. Sometimes
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there may be defaults in payment of some instalments. Apart

from these exceptions, revenue is generally realized at the
time of sale when actually the title of ownership passes from
No
the seller to the buyer. This assumption is especially

important because it recognizes the assets, liabilities, incomes
and expenses as and when the transactions relating to these
take place. We can find out from the books of account how
much is due to creditors (liabilities) and how much the firm
.
ES
owns (assets). Apart from this, one can also know about the
profit earned or loss suffered.
3. Matching Principle: As we all know that the business is a
UP
going concern, so it is even more necessary to know its

operational results for a particular/fixed period. This period
may be of six months or one year. Profit or loss during this
period indicates the financial operational results of the
business, so it is necessary to put all financial records of the
(c)
expenses, revenues or incomes relating to a particular period,

so that matching between revenues and expenses can be
ale
facilitated. This matching is termed as matching principle of
accounting. The equation can be written as: Notes
Profit = Revenues – Expenses ___________________
n/S
This principle of Matching is very much important for ___________________
ascertainment of correct amount of profit (income) which is a ___________________

measurement of performance. All expenses which can generate
___________________
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revenues in the current accounting period are taken as
___________________
expenses. The matching of expenses with revenue is based on
accrual system of accounting. In accrual system, revenue is ___________________
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recognized when sale is complete or services are rendered ___________________
rather than when cash is received. Similar rule is applicable in
___________________
the case of expenses, i.e., expenses are recognized, when assets
rod
and services are put to generate revenues and not when cash ___________________
is paid. ___________________
The matching principle makes the following points clear:

ep
(a) When an item of expense is spent against revenue it will
be entered in the following period, result would be to show
it in the Balance sheet and in the following period, to be
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treated as an expense.
(b) When an item of revenue is recorded in the Profit & Loss
account, all the expenses incurred whether paid for cash
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on not should be recorded as the expenses.

(c) If any amount of revenue is received but either goods are
to be supplied in future or services are rendered in future,
the amount is not recognized as revenue in the current
No
year, the result is to be shown as liability in the balance

sheet but if any loss is there for which no revenue is
earned it is to be charged from the current Profit & Loss
account, for example in fire insurance premium. If goods
.
ES
are lost, whatever is recovered from insurance company is

deducted from the cost of goods lost and the balance of loss
is charged from Profit & Loss account.
UP
4. Full Disclosure Principle: The objective of accounting is to

provide true and accurate information. This may be because of
law or social customs. All facts of assets must be disclosed
along with their valuations. Principle of disclosure means to
supply all information relating to economic activity of the
(c)
business completely to the owners, creditors and Investors

which can protect their interests. Disclosure does not mean
ale
only that information which is required up to the stage when
Notes the Balance Sheet is prepared but after the preparation of
___________________ Balance Sheet also. For example, bad debts, destruction of any
n/S
machinery/building because of natural calamity, loan taken
___________________
within a week or so, after the Balance Sheet is prepared,
___________________
method of providing depreciation and Valuation of stock. All
___________________ such events affect the investor’s decisions. So such events must
tio
___________________ be given compulsorily. The purpose of this principle is to
convey all material and relevant facts relating to the
___________________
operational result and the financial positions to the parties
uc
___________________ using the financial statements.
___________________
Financial Statement must be duly supported by footnotes. A
rod
___________________ good accounting principle requires that all significant and
___________________ important information must be disclosed, apart from legal
requirements.
5. Dual Aspect Principle: Every transaction of a business is
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recorded at two places. That is why it is termed as Double
entry system of accounting. Every debit has a credit. For
example, when a business is started by a proprietor for cash,
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then whatever comes in the business is debited and whosever

gives loan as giver is credited. Thus the following entry in the
Journal is passed:
t fo
Cash a/c Dr.

Or
Goods a/c Dr.
No
To Proprietor's a/c
Or
To Capital a/c
Cash or Goods brought in as capital by the proprietor or partners.
.
As we know that only such events are recorded in financial

ES
accounting which are related to economic activities or can be

expressed in money. These events may be either purchase or
sale of goods on cash or on credit, receipts or payments, etc.
UP
Every transaction is recorded at two places that are why

double entry system is in vogue. In America, this system is
used in the form of equation. In the above example the owners
can bring cash or goods or both as capital. The Following
(c)
would be the equations:
Capital = Cash/Stock/Cash + Stock

ale
If any loan is taken then Notes
Capital + Loan = Cash + Stock ___________________
n/S
OR ___________________
Total Liabilities = Total Assets ___________________
OR ___________________
tio
Internal + External Liabilities = Fixed Assets + Current ___________________
Assets ___________________
uc
In other words, we can say that ___________________
Equity or owner’s equity = All Assets – Loans or ___________________

liabilities of outsiders
rod
___________________
Thus, we see that the Principle of Dual aspect would provide
___________________
us all the rules required for recording all the transactions of a
business.
ep
6. Principle of Objectivity: All transactions which are recorded
must be duly supported, by documents as far as possible. Then
only the auditor would be able to verify the accounts: if it is
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not, transactions must have substantial evidence which is free

from personal bias and is based on rational approach. As we
know that the cash is definite and verifiable while value is not.
t fo
The principles of Objectivity require that accounting data

should be verifiable and free from bias.
Check Your Progress

No
Fill in the blanks:

1. ................... principle of Matching is very much
important for ascertainment of correct amount of profit
(income) which is a measurement of performance.
.
ES
2. ................... is based on revenue realization principle.

3. Principle of ................... means to supply all information
relating to economic activity of the business completely
UP
to the owners, creditors and Investors which can protect

their interests.
Summary
(c)
All the persons interested in the business, such as the

owners/shareholders, the creditors, the government and the others,
ale
get the necessary business information through accounting
Notes because it is properly recorded, analysed and summarized to the
___________________ extent that it can be understood by all. This is possible when all
n/S
the financial statements are prepared in accordance with generally
___________________
accepted accounting principles. If such uniform principles are not
___________________
adhered /followed, there would be a lot of difficulties and confusion
___________________ which makes comparison impossible, unreliable or dependence is
tio
___________________ also reduced because, its acceptability is unsuitable for different
business houses, etc.
___________________
uc
___________________
Lesson End Activity
___________________
Gather information about the GAAP. Present the information
rod
___________________
collected in the form of a collage.
___________________
Keywords
ep
Accounting Entity: It is also termed as Economic entity
assumption which means that economic unit/event can be known
with a specific unit.
rR
Accounting Period Concept: This is also known as time period

assumption, and the economic life is divided into different periods
for preparing financial statements.
t fo
Going Concern Concept: It is assumed that every business would

continue for a long period or have an indefinite life unless it is
likely to be sold or wound up in the near future. This is also known
No
as the concept of continuity.

Monetary Unit Concept: Only such transactions are recorded in
accounting that are of monetary value or that can be measured in
terms of money.
.
The Cost Principle: Every transaction should be recorded at its

ES
actual (historical) cost or cost of its acquisition and not its market
price.
UP
Questions for Discussion

1. Describe the classification of accounting principles.
2. Explain the basic assumptions of GAAP.
(c)
3. Discuss the basic accounting principles.

ale
Further Readings
Notes
Books ___________________
n/S
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., ___________________
___________________
___________________
tio
___________________
II, Sultan Chand and Sons. ___________________
uc
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, ___________________
5th ed. New Delhi, Sultan Chand, 1992. ___________________
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Jawahar Lal, Cost Accounting, Vikas Publishing House, New ___________________
Delhi.
___________________
New Delhi.
ep
Delhi.
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t fo
Chand, New Delhi.
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
No
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
.
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
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t fo
. No
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UP
(c)
UNIT 3: Accounting Principles and Standards
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Notes
Activity
___________________
Accounting Principles and
n/S
modifying accounting
___________________
principles.
Standards ___________________
___________________
tio
Objectives ___________________
___________________
topics:
uc
___________________
 Modifying Accounting Principles
 Accounting Standards in India ___________________
rod
 Accounting Process ___________________
 Uses, Advantages or Role of Accounting ___________________
 Limitations of Accounting
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Introduction
Basic accounting assumptions and principles provide different
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rules for preparing certain financial statements which can provide

useful information to different interested persons.
In the previous unit, we studied the basic assumptions and the
t fo
basic accounting principles of accounting. In this unit, we will

study the modifying accounting principles.
Modifying Accounting Principles

No
The information is useful if it is relevant and reliable. Information

is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
.
statements, it is necessary, to modify certain assumptions and

ES
principles. Cost benefits relationship, materiality, consistency,

conservatism. Timeliness and industry practice, etc., have to be
taken into account for making the information more useful. The
UP
following are the important modifying principles;

1. Consistency: One thing must be kept in view, while recording
in the books of account i.e., whatever principle or method is
adopted in a year, must be adopted for the subsequent years
(c)
then only comparison of results is possible. For example, if

stock is valued using LIFO (Last In First Out) or FIFO (First
ale
In First Out) or any other method, the same method must be
Notes followed in subsequent years likewise is in case of depreciation
___________________ and if there is any change in the method of charging
n/S
depreciation it must be reported. Because of this, convention of
___________________
consistency occupies an important place in the field of
___________________
accounting. Consistent use of accounting principle and
___________________ conventions is necessary in achieving comparability. Though
tio
___________________ the principle of consistency requires that a particular method
used, generally should not be changed unless otherwise
___________________
required and the user is informed accordingly. The Generally
uc
___________________ Accepted Accounting Principles (GAAP) allow more than one
___________________ method of explaining similar operational results but in such
situations, financial statements are not comparable. This is
rod
___________________
why the principle of consistency requires that the basis should
___________________
remain consistent with the previous accounting year. One can
conclude from the above that the principle of consistency does
not allow a firm to change its method under any situation. It
ep
allows the firm to change its method if it is more useful or can
supply better information or results. This change must be
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reported/disclosed in the financial statements by way of a foot

note with a view to inform the users about the lack of
consistency.
2. Conservatism [Prudence]: All financial statements are
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prepared and presented as per law or conservatism and not for

a specific purpose. That is why it is termed as convention of
conservatism. This is a good and the safest policy. Accordingly
No
all possible losses are taken into account and all (probable)
(unrealized) profits/gains are left out. Likewise stock can be
valued either at cost or market price whichever is lower.
Similarly, provision for doubtful debts or provision for
depreciation can also be arranged as per the conservatism. It
.
ES
can be a useful tool in such situations but if it is not used

properly, it may lead to unpleasant and unforeseen results.
For example, if a machine is purchased and the cost of
machine is charged as an expense, then profit as well as assets
UP
would be underestimated.
Nowadays conservatism has been replaced by prudence which
means the principle of conservatism is applied by the
accountants only in case of doubts or uncertainties with
(c)
prudence. The theme of the principle of conservatism is under-

ale
statement of profit or assets rather than over-statement of
profit or assets. Notes
3. Principle of Materiality: The American Accounting ___________________
n/S
Association defines the term materiality as, “an item should be
___________________
regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed ___________________
investor”. In other words, materiality means only that ___________________
tio
information should be used which influences the decision of
___________________
the investors, creditors, shareholders, etc. Though there may
___________________
be so much financial information, but only relevant must be
uc
taken into account. This is very subjective. Likewise the ___________________
problem may be in case of allocation of costs/other expenses. ___________________
Moreover information material for one concern may not be
rod
___________________
material for others so, an alert is required and care has to be
exercised while selecting or rejecting information. As per ___________________
principle of disclosure, all relevant and necessary information

(facts) must be disclosed whereas the Principle of Materiality
ep
is an exception or modifying principle. It is because of this,
that the events or items not relevant or having an insignificant
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effect, need not be given. The concept of Materiality is relative.

It is different for different enterprises. For example, the cost of
a component is very significant to a small company whereas it
is insignificant for a big company. Similarly nature of
t fo
transaction also affects the decision of the user of information.

Thus, it is clear from the above that the principle of
materiality is very much useful in the day-to-day working of
an organization.
No
4. Cost Benefit Principle: This principle says that the cost of

applying an accounting principle should not exceed its benefit.
It does not mean that to save cost, no information or very little
information should be given to the users. Certain minimum
.
ES
levels of relevance and reliability must be reached for

information to be useful.
For example, it is required under the Companies Act, 1956
UP
that information regarding managerial remuneration

satisfying the overall ceiling of 11% of Net Profits should be
given. This increases the cost of providing information.
5. Timeliness: Information given must be relevant and reliable.
(c)
In order to be relevant the information must also be timely. If

information is not available or is provided after a long gap, it is
ale
of no use. It is therefore desired that information must be
Notes available for decision-making before it becomes redundant. Old
Activity
___________________
Present a report on the
and late information hampers the ability of users on
n/S
accounting standards of India. application of different accounting principles.
___________________
___________________ 6. Substance over form: Means accounting treatment and its

presentation in financial statement should be as per substance
___________________
of the Transaction and not by its legal form alone. For
tio
___________________ example, in case of a lease the lessor is funding the
___________________ transactions, hence he recognized the assets so financed as his
assets whereas the lessee recognized lease payments as hire
uc
___________________
charges paid. In the First case, it is the legal form whereas in
___________________
the second case, it is the substance of the transaction.
rod
___________________
7. Variations in Accounting Practices: It means different
___________________ accounting practices, which are equally acceptable. As such
there is no single accounting practice which is applicable in all
cases. For example valuation of inventories, method of
ep
charging depreciation, treatment of contingent liabilities etc.
In the above such cases, the Management is required to use
considerable judgment to select an appropriate/just practice.
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8. Industry Practice: Sometimes different industries use

different accounting principles and approaches to produce
realistic financial reporting. For example, it is a practice to
t fo
show investment at cost or market price whichever is lower.

Similarly, agricultural produce is shown at market price
because of certain practical difficulties. Thus, it is very much
clear from the above that Industry practice also plays a very
No
important role while applying certain accounting principles.
Check Your Progress

Fill in the blanks:
.
ES
1. ................... is defined as an item should be regarded as

material if there is reason to believe that knowledge of
it would influence the decision of informed investor
UP
2. ................... principle says that the cost of applying an

accounting principle should not exceed its benefit.
Accounting Standards in India

(c)
India’s accounting standards are explained in the following sub-

sections:
ale
Meaning of Accounting Standards
Notes
It is a set of certain generally accepted rules, principles, concepts
and conventions issued by the Institute of Chartered Accountants ___________________
n/S
of India in consultation with other International Accounting ___________________
Bodies. The purpose of making uniform rules and principles is to
___________________
make the preparation and presentation of financial statement
easy, relevant, reliable, understandable and finally comparable. In ___________________
tio
other words, Accounting standards are the basis of accounting ___________________
policies and practices to facilitate the recording of transactions and
___________________
events in such a way which can change them into financial
uc
___________________
statements, to be used by the persons interested in getting the
correct and reliable information with a view to take future ___________________
decisions.
rod
___________________
Need for Accounting Standards ___________________
Different business enterprises were having different modes of

ep
recording the transactions and events and lack of uniform set of
rules created a lot of problems, such as comparison was not truly
possible but difficult also this was because of the nature of
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business, diversified and complex economic situations. This also

made accounting information incomparable and less meaningful.
Therefore a need was felt to have certain minimum standards
which can are universally applicable, so that the financial
t fo
statements thus made, can be more reliable, comparable, relevant

and understandable. Keeping this in view, International
Accounting Standard Committee (IASC) was set up in 1973. The
No
objectives of this Committee were:

(i) To formulate and publish in the public interest, accounting
standards to be observed in the presentation of financial
statements and also its world-wide acceptance, and
.
(ii) To work for improvement and harmonization of regulation of

ES
accounting standards and procedure relating to the

presentation of financial transactions.
UP
Nature
The Institute of Chartered Accountants of India had set up
Accounting Standards Board on 22nd April, 1977 to formulate
accounting standards on a number of accounting issues, taking
(c)
into account the accounting standards developed by the

International Accounting Standard Committee, prevailing laws in
ale
India, business customs usages and conventions, etc. The
Notes Accounting Standards made were not mandatory in the beginning
___________________ but after the amendment in the Sec 211(3C) of Companies Act,
n/S
1956 Accounting Standards out of 28 have been made mandatory.
___________________
The Auditor is required to give in his report to the shareholders
___________________
that accounts are prepared (drawn) in accordance with the
___________________ provisions relating to Accounting Standards in India.
tio
___________________
___________________ Accounting Process
uc
___________________ The basic accounting process is shown in the Figure 3.1.
___________________ The first thing that the accounting system takes on is the financial
transactions. A transaction is defined as an external event or
rod
___________________
internal event which gives rise to a change affecting the operations
___________________
or finances of an organisation. Now there should be evidence that a
transaction has taken place. This evidence comes from the
documents that are used to support a transaction, like invoices,
ep
receipts, cheques, bank statements, etc. For recording a
transaction, it must be analysed to determine its effects on the two
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(or more) accounts and the reason why it affects those accounts. As
the original document cannot be used to write these details, a
standard document known as a voucher is used to accompany the
original document.
t fo
. No
ES
UP
(c)
Figure 3.1: Basic Accounting Process

ale
Voucher is therefore the basic document of an accounting
transaction. Every voucher mentions the two (or more) accounts Notes
that are being affected, the amount with which each account is ___________________
n/S
affected and the reason for the transaction (known as narration).
___________________
Each voucher is numbered and dated, so as to make referencing
___________________
easier.
___________________
Once the vouchers are made for the day, they are entered into an
tio
intermediate book known as Journal. Vouchers are normally ___________________
recorded in the order in which they occur. Journal entries contain ___________________
all relevant information pertaining to a transaction.
uc
___________________
This data from the journal has to be rearranged to assist in ___________________
analysis. For this the data is transferred to Accounts in the
rod
___________________
General Ledger (the process is known as posting). In accounting
the term account is used to denote any item for which the ___________________
transactions affect the amount of that item. A general ledger is a

group of accounts, both permanent and temporary. In a manual
ep
system a loosely bound book with the title general ledger could be
used where at least one side of a page is maintained for every
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account. More pages are added as required if the number of

transactions in that particular account is high. In computers, the
records are kept in the databases and there is no limitation either
on the number of accounts or on the number of entries (accept the
t fo
limitation of storage space on the computer). Hence is it much

easier for the bigger companies to keep a computerised track of
their accounts than keeping a manual system.
No
There are five basic types of accounts: assets, liabilities, owner’s

equity, revenue and expenses.
Accounts can be represented as T-accounts, a sample of which is
shown in figure below:
.
ES
UP
(c)
Figure 3.2: T-account Example

ale
A T-account is balanced only periodically (note that the rupee sign
Notes
Activity is not shown in the T-account, as it is the normal book keeping
___________________
Construct a summarized procedure). In the T-account in Figure 3.2 above, the left-hand side
n/S
report on the uses,
___________________ is called the debit side and the right-hand side is called the credit
advantages, or role of
accounting. side. Therefore, to debit means to make an entry on the left-hand
___________________
side of the account and to credit means to make an entry in the
___________________ right-hand side of an account.
tio
___________________
Check Your Progress
___________________
Fill in the blanks:
uc
___________________
1. ................... is a set of certain generally accepted rules,
___________________
principles, concepts and conventions issued by the
rod
___________________ Institute of Chartered Accountants of India in
___________________ consultation with other International Accounting
Bodies.
2. ................... is defined as an external event or internal
ep
event which gives rise to a change affecting the
operations or finances of an organisation.
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Uses, Advantages or Role of Accounting

The important uses/advantages of accounting are as given below:
t fo
1. Useful in depicting financial results: Accounting is very

useful in depicting the financial results, i.e., profit or loss of
the business. If information relating to profit or loss of a
business is available, necessary decisions/future planning can
No
take place either correcting the situation or improving the

performance.
2. Useful in showing financial positions of the business:
.
The main function/objective of accounting is to show the

ES
financial position of the business, so that necessary steps can

be taken for arranging additional funds, if any required. This
also helps in depicting solvency of the business.
UP
3. Replacement of memory: It is very difficult to remember all

the events for a business man. That is why such events if are
of financial/monetary nature are recorded, which is one of the
foremost objectives of accounting. This recording is a
(c)
replacement of memory. One is not required to remember, but

is required to contact the accountant for necessary information
regarding any of the transactions.
ale
4. Helpful in calculating tax liabilities: Accounting is also
Notes
helpful in calculating correct liabilities relating to income-tax
and other taxes such as sales-tax, etc. ___________________
n/S
5. Accounting records: It can be used as evidence in the court ___________________
of law. If there is any dispute regarding any business ___________________

transactions, then the statement which was recorded at the
___________________
tio
time of transaction can be used as evidence in the court of law.
___________________
This is considered as a good proof/evidence by the court.
___________________
6. Helpful to an insolvent person: If proper records are
uc
maintained by the businessman, then it can be helpful to an ___________________
insolvent person in explaining certain things (events) which ___________________

have already taken place in the past.
rod
___________________
7. Helpful in the sale of a business: If sometimes business is ___________________
closed down, it can get reasonable price if proper records are
maintained otherwise, it is very difficult to realize the assets’
ep
correct values and also difficult to pay off the liabilities.
8. Helpful in detecting errors and frauds: If any error or
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fraud is committed by any employee of the business, the same

can be detected early by maintaining proper books of accounts.
9. Helpful in the valuation of goodwill: If proper record is
maintained it is very helpful in the valuation of goodwill of the
t fo
firm.
10. Helpful in comparative study: If proper record is
maintained then accounting helps in comparing past
No
performances through its results, i.e., past can be compared

with the present and accordingly future decisions can be taken
regarding forecasting, planning, etc.
.
Limitations of Accounting
ES
There are some limitations of accounting. These limitations are

described below:
UP
1. Financial Accounting is not absolutely exact: The

transactions are recorded in accounting on actual basis, i.e., as
and when it takes place such as sales and purchases and
receipt or payment of cash, but sometimes estimates are also
taken in account in order to ascertain correct amount of profit
(c)
or loss such as depreciation of asset, bad debts, etc. Where

estimates are taken, such may also be different in different
ale
cases because of different nature of persons. The result will be
Notes different amount of profit/loss. Since there is no uniformity in
___________________ the above estimates, the profit may vary in different cases and
n/S
cannot be treated as exact.
___________________
___________________ 2. Accounting results cannot give us correct value of the

business: As and when Balance sheet of a business is studied,
___________________
it cannot give us correct value of the assets/liabilities of the
tio
___________________ business because, there are certain assets which are not meant
___________________ for resale but for use in the business where depreciation is
provided as a regular practice.
uc
___________________
___________________
3. Accounting is unable to disclose the full information
about the business: As we know only such transactions are
rod
___________________
recorded which are of financial nature. The transactions which
___________________ are not of financial/economic nature are not at all recorded
such as honesty of the manager, Good health of workers,
quality of goods and efficiency of labour, etc. unless all such
ep
items are taken into account, it cannot disclose the full
information of the business.
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4. Window-dressing: When exact accounting principles/

concepts or conventions are not strictly applied, it cannot give
the correct picture of the business.
t fo
5. Sometimes wrong conclusions are drawn: Sometimes

wrong statements are prepared because of different methods.
In case of stock valuation cost or market price whichever is
lower is taken, the figure of amount thus would be different in
No
different cases.
6. Accounting figures are not at all affected by inflation: If
proper adjustments are not made, figures of profit or loss
ascertained would not be accurate because inflation is not
.
taken into account.

ES
Sometimes figures which are worthless are also shown such as

preliminary expenses, discount on issue of shares/debentures,
UP
etc. are shown.

Thus, we see that there are certain limitations of accounting also,
but if proper control is exercised, these limitations can be checked
properly.
(c)
ale
Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. ............... can be used as evidence in the court of law.
___________________
2. The transactions are recorded in accounting on
___________________
................... basis, i.e., as and when it takes place such
___________________
as sales and purchases and receipt or payment of cash.
tio
___________________
Summary ___________________
uc
Basic accounting assumptions and principles provide different ___________________
rules for preparing certain financial, statements which can provide ___________________
useful information to different interested persons.
rod
___________________
The information is useful if it is relevant and reliable. Information ___________________
is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
ep
statements, it is necessary, to modify certain assumptions and
principles. Cost benefits relationship, materiality, consistency,
conservatism. Timeliness and industry practice, etc., have to be
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taken into account for making the information more useful.
Lesson End Activity

t fo
Make an informative presentation on the accounting principles and

standards.
No
Keywords
Accounting Standards: It is a set of certain generally accepted
rules, principles, concepts and conventions issued by the Institute
of Chartered Accountants of India in consultation with other
.
International Accounting Bodies.

ES
Cost Benefit Principle: This principle says that the cost of

applying an accounting principle should not exceed its benefit.
UP
Materiality: It is an item should be regarded as material if there

is reason to believe that knowledge of it would influence the
decision of informed investor
Transaction: It is defined as an external event or internal event
(c)
which gives rise to a change affecting the operations or finances of

an organisation.
ale
Voucher: It is therefore the basic document of an accounting
Notes
transaction.
___________________
n/S
___________________
___________________
1. What are modifying accounting principles?
___________________
2. Explain the Accounting Standards in India.
tio
___________________
3. Describe the concept of accounting process.
___________________
4. Discuss the uses, advantages or role of accounting.
uc
___________________
5. Highlight the limitations of accounting.
___________________
rod
___________________
Further Readings
___________________
Books
ep
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t fo

Delhi.
No

.
Chand, New Delhi.

ES
Web Readings
UP
(c)
UNIT 4: Accounting Equation
ale
Notes
Activity
___________________
Make a report on the meaning
Accounting Equation
n/S
and relevance of accounting
___________________
equation.
___________________
Objectives
___________________
tio
topics: ___________________
 Meaning of Accounting Equation ___________________
uc
 Calculation/Computation of Accounting Equation ___________________
 Effect of Transactions on Accounting Equation
___________________
rod
___________________
Introduction
___________________
The basic accounting equation is the foundation for the double-
entry bookkeeping system. For each transaction, the total debits
ep
equal the total credits.
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Meaning of Accounting Equation

Every transaction which passes through books of accounts is
recorded at two places because of duality concept, i.e., every debit
t fo
has a credit. For example, as and when business is started by the

owner of the business, Cash or Goods are brought by the proprietor
as capital. So this very transaction has two aspects: one Cash or
Goods brought in are debited and whosoever has paid is to be
No
credited. Thus, we can say that

Capital = Total Assets (either in the form of Cash or
Goods or both)
Similarly, if a bank’ loan is raised/taken it has again two aspects

.
ES
i.e., cash brought in is debited and bank is credited. In this case,

Cash is an asset and Bank is a liability. If it is put in accounting
equation then it is
UP
Capital + Liabilities = Total Assets (Cash + Goods)
In the first case capital brought in by the owner is also termed as

owner’s equity in the accounting parlance (language) whereas in
the second case loan capital brought in is known as loan capital or
(c)
capital provided by the outsiders. If this relationship is put in the

ale
equation form, it is known as accounting equation or the Balance
Notes
Activity sheet equation. Thus we can say that
___________________
C = A
n/S
calculation and computation of
___________________
accounting equation.
Or C + L = A
___________________
___________________ Where C stands for owner’s equity, L stands for liabilities and A
tio
stands for Total Assets. The above equation can also be expressed
___________________
in the following ways namely:
___________________
C = A–L
uc
___________________
___________________ L = A–C
rod
___________________ A – C – L = Zero
___________________
Thus, it is clear from the above equations that owner’s equity
stands for capital paid + accumulated profits which are earned
during the period. The above point can be illustrated from the
ep
following Balance Sheet of Ram Krishna Ltd.
Balance Sheet of M/s Ram Krishna Ltd.
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As on 31-3-2006
Owner’s Equity and Liabilities Assets

Capital Fixed Assets
Profits and Loss A/c Current Assets
t fo
(Profits accumulated)
Loans
Current liabilities
No
Check Your Progress

Fill in the blanks:
1. Every transaction which passes through books of
accounts is recorded at two places because of .................
.
concept
ES
2. Capital + ................... = Total Assets (Cash + Goods)
Calculation/Computation of Accounting Equation

UP
As we know that the total Assets must be equal to owner’s equity +

outsider’s capital. If there is any change in the amount of assets or
liabilities or owner’s equity, the capital is formed to change
(c)
accordingly. It may be either an increase in assets or decrease in

ale
liabilities then it means an increase in capital in the first case
whereas decrease in the amount of capital in the second case. Notes
___________________
Thus, we see that every transaction before it is recorded is
n/S
analysed to ascertain which account is debited and which account ___________________
is to be credited. The test of equality is kept in mind before ___________________
recording each and every transaction, which have taken place in
___________________
the books of M/s Producers (India) Ltd. during January, 2006.
tio
___________________
1. Jan. 1, 2006 Business started with a capital of 10,000. This
transaction makes two things very clear: ___________________
uc
___________________
(i) Cash brought in by the proprietor is equal to 10,000 and
___________________
(ii) Capital contributed by the proprietor (owner) is equal to
rod
10,000. If it is put in an accounting equation form or ___________________
Balance Sheet equation form, it is like this ___________________
Assets = Capital
ep
10,000 = 10,000 (Cash in hand)
2. Jan. 2, 2006 the business purchased furniture for 1000. The

effect of this transaction would be reduction in the amount of
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cash but a new asset in the form of furniture would be there,

thus without affecting the overall position of assets. If it is put
in Balance sheet equation form, it will appear as follows:
t fo
Assets
Cash in Capital
Furniture =
Hand +
Old Balance 10,000 + 0 = 10,000

No
Effect of transaction – 1000 + 1000 = —

New Balance 9,000 + 1,000 = 10,000
3. Jan. 3, 2006 the business took a loan for 20,000 from SBI
.
New Delhi. The effect of this transaction would be increase in

ES
the amount of cash as well as increase in liabilities also. If it is

put in equation form, it will appear as follows:
Assets
UP
Cash in
+ Furniture = Capital + Liabilities
hand
Old Balance 9,000 + 1,000 = 10,000 + 0

Effect of 20,000 + 0 = 0 + 20,000
transaction
(c)
New 29,000 + 1,000 = 10,000 + 20,000

Balance
ale
4. Jan. 5, 2006 the business purchased goods for 12,000 for
Notes cash. The effect of this transaction would be reduction in Cash
Activity
___________________
Balance but a new current asset in the form of goods or
n/S
effect of transaction on merchandise would be there, thus without affecting the
___________________
accounting equation. overall position of assets. This would be clear from the
___________________ following equation:
___________________ Assets = Capital + Liabilities
tio
Cash Goods
___________________ in + Furniture + =
hand (Merchandise)
___________________
Old Balance 29,000 + 1,000 + 0 = 10,000 + 20,000
uc
___________________ Effect of
12,000 + 0 + 12,000 = 10,000 + 20,000
transaction
___________________
New
17,000 + 1000 + 12,000 = 10,000 + 20,000
Balance
rod
___________________
___________________ Check Your Progress

Fill in the blanks:
ep
1. Assets must be equal to ................... + outsider’s capital.
2. If there is any change in the amount of assets or
liabilities or owner’s equity, the ................... is formed to
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change accordingly.
Effect of Transactions on Accounting Equation

t fo
It is clear from the above transactions how the accounting equation

is affected by different transactions. Net result remains unaffected
i.e., capital + liabilities = total assets. Only difference is in their
No
form i.e., there may be different assets in place of some assets if

assets are purchased for cash or on credit or if assets are sold then
assets may be changed accordingly.
Example: From the following transactions, make sure that
.
accounting equation is satisfied.

ES
2006
April 1 Ashish commenced business with a capital of 25,000.
April 2 He purchased furniture for 15,000 for cash.
UP
April 4 He purchased goods for 25,000 on credit.

April 7 He paid cartage 250.
April 12 Sold Goods for 7,500 costing 6,800 for cash.
April 15 Withdrew 2,500 for personal use.
April 18 Paid 20,000 to his supplier.
April 21 Rent due but not paid amounting to 600.
(c)
April 27 Introduced further capital of 10,000.

April 30 Took a loan from PNB of 50,000.
ale
Solution:
Notes
Accounting Equation: Assets = Capital + Liabilities
Date Transactions Assets = Capital + Liabilities ___________________
n/S
April 1 Ashish commences business 25,000 = 25,000 + 0 ___________________
April 2 Purchased furniture –15,000
___________________
for cash + 15,000 = 0 + 0
New equation 25,000 = 25,000 + 0 ___________________
tio
April 4 Purchased Goods ___________________
on credit 25,000 = 0 + 25,000
___________________
New equation 50,000 = 25,000 25,000
uc
April 7 Paid cartage –250 = – 250 + 0 ___________________
New equation 49,750 = 24,750 + 25,000 ___________________

April 12 Sold Goods for
rod
___________________
` 7,500 costing + 7,500 = +700 + 0
` 6,800 for cash – 6,800 = ___________________
New equation 50,450 = 25,450 + 25,000
April 15 Withdrew for personal use –2,500 = –2,500 + 0
ep
New equation 47,950 = 22,950 + 25,000
April 18 Paid to his supplier –20,000 = 0 + (–20,000)
New equation 27,950 =
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22,950 + 5,000
April 21 Rent due but not paid — = –600 + 600
New equation 27,950 = 22,350 + 5,600
April 27 Introduced further Capital 10,000 = + 10,000 + 0
t fo
New equation 37,950 = 32,350 + 5,600

April 30 Took a loan from PNB 50,000 = 0 + 50,000
New equation 87,950 = 32,350 + 55,600
Thus, we can say that the accounting equation is fully satisfied in

No
all the transactions.

Example: Nishank had the following transactions. Show the effect
of the transactions on his assets, liabilities and capital using
accounting equation.
.
ES
1. Commenced business with cash 1,00,000

2. Purchased goods for cash 20,000
3. Purchased goods on credit 40,000
UP
4. Sold goods for cash 30,000

5. Sold goods on credit 25,000
6. Furniture purchased for cash 10,000
7. Building purchased for cash 50,000
(c)
8. Rent paid 2,500

9. Purchased T.V. for personal use 12,000
10. Interest outstanding 1,000
ale
Solution:
Notes
Accounting Equation: Assets = Capital + Liabilities
___________________ No. Transactions Capital + Liabilities = Total Assets
n/S
___________________ 1. Business commenced with
cash 1,00,000 + 0 = 1,00,000
___________________ 1,00,000 + 20,000
– 20,000
___________________
2. Goods purchased for cash 1,00,000 + 0 = 1,00,000
tio
___________________ 3. Goods purchased on credit 1,00,000 + 40,000 = 1,40,000
1,00,000 + 40,000 = 1,40,000
___________________
4. Goods sold for cash + 30,000
uc
___________________ – 30,000
1,00,000 + 40,000 = 1,40,000
___________________
5. Goods sold on credit 1,00,000 + 40,000 = – 25,000
rod
___________________ +25,000
1,00,000 + 40,000 = 1,40,000
___________________
6. Furniture purchased for + 10,000
cash –10,000
1,00,000 + 40,000 = 1,40,000
ep
7. Building purchased for + 50,000
cash – 50,000
1,00,000 + 40,000 = 1,40,000
rR
8. Rent paid – 2,500 – 2,500

97.500 + 40,000 = 1,37,500
9. T.V. Purchased for personal 12,000 – 12,000
use
t fo
85,500 + 40,000 = 1,25,500

10. Interest outstanding –1,000 + 1,000
New Equation 84,500 + 41,000 = 1,25,500
No
Summary
The basic accounting equation is the foundation for the double-
entry bookkeeping system.
Every transaction which passes through books of accounts is
.
ES
recorded at two places because of duality concept, i.e., every debit

has a credit. For example, as and when business is started by the
owner of the business, Cash or Goods are brought by the proprietor
as capital. So this very transaction has two aspects: one Cash or
UP
Goods brought in are debited and whosoever has paid is to be

credited.
In the first case capital brought in by the owner is also termed as
owner’s equity in the accounting parlance (language) whereas in
(c)
the second case loan capital brought in is known as loan capital or

capital provided by the outsiders.
ale
Lesson End Activity
Notes
With the help of internet, find out more practical problems on
___________________
accounting equation and try to solve them.
n/S
___________________
Keywords ___________________
___________________
Double-entry Book Keeping: It is a set of rules for recording
tio
financial information in a financial accounting system in which ___________________
every transaction or event changes at least two different nominal ___________________
ledger accounts.
uc
___________________
Outsider’s Capital: The value of investments minus operating
___________________
expenses that are held by company stockholders.
rod
___________________
Owner’s Equity: Total assets minus total liabilities of an
___________________
individual or company. For a company, it is also called net worth or
shareholders' equity or net assets.
ep
Total Assets: These are everything that a business or an
individual owns. Based inherently on the purchase value of an
item, total assets are listed on a balance sheet.
rR

1. Explain the meaning of accounting equation.
t fo
2. Discuss about the calculation/computation of accounting

equation.
3. Describe the effect of transactions on accounting equation.
No
Further Readings
Books
.
ES

UP

(c)

ale
Notes
Delhi.
___________________
n/S
___________________
New Delhi.
___________________
___________________ Delhi.
tio
___________________ R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
___________________ Chand & Sons, New Delhi.
uc
___________________
Chand, New Delhi.
___________________
Web Readings
rod
___________________
___________________ www.accountingcoach.com/online-accounting-course/60Xpg01.html
ep
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t fo
. No
ES
UP
(c)
UNIT 5: Case Studies
ale
Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
tio
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study 1: Rental Company Applies Accounting Concepts
uc
to Transaction Processing in MAS200 with help from ___________________
Connective Values ___________________
rod
Sage Software and its channel partners provide “second-to-none” ___________________
technical (program) support for MAS90 and MAS200 (a robust
client/server edition of MAS90). But to operate their systems ___________________
effectively, users must also be able to apply underlying accounting
concepts to MAS90/200 transaction processing.
ep
After we implemented MAS200 for a rental company, they asked
us to provide ongoing technical and accounting support for their
system. There were 10-12 users of this system, ranging from the
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company’s CEO to line (entry) personnel. During implementation,

management - whose formal education included accounting and
finance - had attended Sage training in core applications (general
ledger, accounts receivable, accounts payable, payroll and bank
reconciliation). Line personnel tended to possess spotty
t fo
accounting education and limited experience with business

management systems. Turnover among these users was fairly
high. As part of our implementation, we wrote procedures for
many tasks, which helped bridge the gap when turnover occurred.
But issues kept arising among continuing personnel and new
No
hires that signalled the need for a better understanding of

accounting concepts in order to use MAS200 effectively.
As both CPAs and certified Sage partners, we were able to help
our client in a cost-effective, real time manner, combining “as-
needed” site visits with “real-time” Citrix-based support. We
.
resolved specific MAS200 issues and provided training on the

ES
accounting concepts involved, including inter-company

transactions; general/subsidiary ledger reconciliation; bank
reconciliation; inventory counts; sales/purchase order, credit card,
credit memo and payroll processing; payroll tax table updates;
sales tax treatment of customers and inventory items; balance
UP
sheet/income statement treatment of large recurring journal

entries (like insurance premium payments); sales tax code
maintenance; and inventory assembly and unit of measure issues.
We also helped our client write procedures that formalized the
resolution of many of these problems.
(c)
Contd…
ale
A better understanding of accounting concepts improved our
Notes client’s ability to use MAS200. Thanks to our remote support
___________________
capabilities, we were able to resolve both simple and complex
issues quickly while strengthening our clients accounting skills.
n/S
___________________ Often, we were able to handle incidents at the time they occurred
with one phone call. We did this without increasing the cost of our
___________________ services.
___________________ Question:
tio
___________________ Analyse the case and summarise it in your own words.
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
ale
Case Study 2: General Accounting Files
Notes
The Situation
A Fortune 500 diversified manufacturing corporation processes ___________________
n/S
thousands of journal entries and monthly reconciliations each ___________________
month.
___________________
The staff entering the journal entries is in seven different states,
and their outside auditors consistently raise red flags about ___________________
tio
missing and incomplete documentation.
___________________
The Challenges
___________________
Our client came to us with two key objectives: ensure that each
uc
documentation packet included several different components ___________________
(calculation worksheet, approval signature, and supporting
documentation) and that documentation for every journal entry ___________________
was accounted for.
rod
___________________
The Solution ___________________
Pickup: After each monthly close, National Scanning picks up
the journal entry documentation from each of the client locations.
An extract from their GL system is sent to us electronically that
ep
lists every journal entry made. Processing each record is scanned
upon receipt and tagged by GL Account, Journal entry number,
date, and amount. The scanned records are output to an
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encrypted DVD, which is loaded by the client onto their server for
access by all authorized employees.
Auditing: This is where the National Scanning accounting
records scanning services truly shine. Utilizing a combination of
t fo
advanced character recognition technology and a team of

document auditors, we confirm that the required documentation
(worksheet, approval signature, and supporting documentation) is
included in each entry.
Defects are noted and a report is presented to management. The
No
listing of scanned documents is compared to the extract from the

client GL system, and missing documents are identified and
presented to management as well. The auditing process gives the
client the opportunity to find missing documentation or prepare a
replacement. The new documents are then sent to National
Scanning, where they are scanned along with the original
.
documents.
ES
This entire process takes just a few days. Typically, the final DVD
is sent to the client within a week of monthly close.
The Outcome
UP
By auditing documents on the front end and saving them to a

secure server, our client can trust the integrity of their files. The
Director of Corporate Accounting remarked “I feel so much better
knowing that when an auditor asks for information that it will be
there! Plus, accessing the files is so much easier – it saves me and
(c)
my staff countless hours each week researching transactions.”
Contd…
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All and all, it is a very successful engagement (the client has been
Notes with us for three years now!).
___________________
Question:
n/S
___________________ Study the case and recommend what could have done to better
solve the problem.
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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(c)
UNIT 6: Accounts
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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BLOCK-II
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(c)
Detailed Contents
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Notes
UNIT 6: ACCOUNTS
___________________ UNIT 8: LEDGER
n/S
 Introduction  Introduction
___________________
 Traditional Classification  Meaning of Ledger
___________________
 Classification of Accounts based on Accounting  Importance of Ledger
___________________
Equation
 Sub-division of Ledger
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 ___________________
Balancing of an Account
___________________ UNIT 9: SUBSIDIARY BOOKS

UNIT 7: JOURNAL  Introduction
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___________________
 Introduction
 Need for sub-division of Journal

___________________
Double Entry System of Accounting
 Types of Subsidiary Books
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 ___________________
Books of Business
 Cash Book with Bank and Discount Columns or
___________________ Three Columns Cash Book
UNIT 10: CASE STUDY

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(c)
UNIT 6: Accounts
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Notes
Activity
Activity
D ___________________
Write an article on the concept
Accounts
n/S
of accounts.
___________________
___________________
Objectives
___________________
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topics: ___________________
 Meaning of an Account ___________________
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 Traditional Classification ___________________
 Classification of Accounts based on Accounting Equation
___________________
 Balancing of an Account
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___________________
___________________
Introduction
A record of financial transactions for an asset or individual, such
ep
as at a bank, brokerage, credit card company, or retail store is
called an account. More generally, an arrangement between a
buyer and a seller in which payments are to be made in the future.
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Meaning of an Account
An account is a summary of all relevant transactions relating to
t fo
one person at one place for a particular period. This is also known
as the condensed form of a statement. It records not only the
amount of transactions but also their effect and direction.
Generally, an account is in “T” form. Following is the form of an
No
account.
Form of Account
Dr. Cr.
.
Date Particulars J.F. Amount Date Particulars J.F. Amount

ES
UP
An Account contains 8 columns and is divided into two parts. The

left side of an account is termed as the debit side whereas right
side of an account is the credit side. Debit and credit are generally
represented by Dr. and Cr. The first four columns are of debit side
and other four columns are of credit side. As it is clear from the
(c)
above form of account that the entire space is divided in two equal
parts and column 1 is meant for date, column 2 for particulars,
ale
column 3 for journal folio and column 4 for amount, etc. The same
Notes procedure is carried out in case of other 4 columns. The account,
Activity
___________________
Prepare a report on the
which involves receiving the goods/cash etc., is generally put on the
n/S
traditional classification of debit side whereas the account which involves giving/supplying
___________________
accounts.
cash/goods etc. is put on the credit side.
___________________
___________________ Types of Accounts
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___________________ There are two types of classification: (1) Traditional classification
and (2) Classification of Accounts based on Accounting equation.
___________________
Also known as Modern classification. These are explained in the
uc
___________________ following sections.
___________________
Traditional Classification
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___________________
___________________ As per traditional classification, account is classified into three

categories, namely:
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(a) Personal Accounts
(b) Real Accounts
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(c) Nominal Accounts
Personal Accounts
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The transactions which involve Cash Receipts or Cash Payments

or transfer of assets from one person or institution to other persons
or institutions, are recorded in this category. This payment may be
against purchase of goods or services rendered or loans taken,
likewise receipts may be on account of sale of merchandise,
No
services enjoyed or loans given. Following principle is to be

applied, i.e., ‘Debit the Receiver and Credit the Giver’. For
example–If A has given a loan of 100 to B then B is the receiver,
hence to be debited and A is the giver, then he is to be credited.
.
Personal Accounts include three types of persons.

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1. Natural persons: Such as Mr. Rao or Mr. Reddy, Mrs.

Bhaskaran, Rama, krishna, Hari, Rekha, Hema Malini,
Madhu, Karina, Karishma, Madhuri, Jeenat, Jaya Prada,
UP
Bipasha, Priyanka, Lara Dutta etc., who either buy or sell the
goods, or lend or borrow the money or render services.
2. Legal entities: Such as companies, corporations or an
association of persons such as co-operative societies, etc.
(c)
3. Accounts which deemed to be impersonal accounts, are

also personal Accounts: Such as outstanding expenses a/c,
UNIT 6: Accounts
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prepaid expenses a/c similarly accrued Incomes a/c or
unaccrued Incomes a/c because it represents a particular Notes
person or group of persons. If something is added with these ___________________
n/S
accounts, they become personal accounts and if nothing is
___________________
added, then they are Nominal accounts. So it is important to
see whether something is added, also known as prefix, then it ___________________
is a personal otherwise if no prefix is there then it is a nominal ___________________
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account.
___________________
Real Account ___________________
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All transactions involving tangible assets or goods are the subject ___________________
matter of this category. Such assets are cash, bank, furniture, ___________________
goods, etc. Following is the golden principle of passing the journal
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___________________
entry relating to the above transactions:
___________________
‘Debit whatever comes in, credit whatever goes out’
For example: If Ram purchases furniture from Ashish for
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1000 for cash then Ram is getting furniture so in the books of
Ram, Furniture account is to be debited and cash account is to be
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credited because it is going out. Coming text would be the journal

entry. In the books of Ram.
Dr. Cr.
S. No Particulars L.F.
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Furniture A/C
Dr.
To Cash A/C
Furniture purchase for cash
No
Real Accounts are meant for assets and properties which are of two
types:
1. Assets, which are used in the business such as land and
buildings, plant and machinery, furniture and fixture, etc.
.
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2. Assets/Goods, which are meant for resale.

Assets can also be classified as:
(a) Tangible Assets
UP
(b) Intangible Assets and

(c) Fictitious Assets
(a) Tangible Assets: These are such assets, which can be seen
and felt such as land and Buildings, Plant and
(c)
Machineries, Stocks, Furniture, etc.

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(b) Intangible Assets: These are such assets which can not be
Notes
seen but only felt such as goodwill and trade marks or
___________________
patents.
n/S
___________________
(c) Fictitious Assets: These are those assets which have no
___________________ value such as cost of establishment, preliminary expense,
___________________ etc.
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___________________
Nominal Accounts
___________________
All gains/profits/incomes and losses and expenses are recorded.
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___________________ Following is the principle of passing the journal entry relating to
___________________ the above items in the books of the business:
‘Debit losses or expenses, credit gains/profits/incomes’.
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___________________
___________________ For example: Rent, interest, discount, commission, depreciation

etc. are recorded. If Ram pays 200 as rent to Hari. As Ram is
making a payment of rent and rent is an expense of the business,
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so it is to be debited and as the payment is made in cash so cash is
going out, hence it is to be credited. Following journal entry would
be passed in the books of Ram:
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Dr. Cr.
S. No. Particulars L.F.
Rent A/c 200
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To cash A/C 200

Rent of 200 paid
Similarly if Mr. Pal borrowed 10,000 from Smith and Smith

received 500 as interest, then in this case interest is a gain
No
(profit) income, hence it is to be credited and cash received to be

debited.
This may be depicted in the following form of journal entry:

.
In the books of Smith and Smith:

ES
Dr. Cr.
S. No Particulars L.F.
Cash A/c
To Interest a/c
UP
Interest of 500 received

(c)
UNIT 6: Accounts
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Table 6.1: Distinction between Personal and Impersonal Accounts
Notes
Basis of Personal Account Impersonal Accounts
Difference ___________________
n/S
1. Subject The subject matter is The subject matter is
matter person’s whether-natural, Assets and Goods as well as ___________________
Institutions or deemed to be income and expense such as
___________________
person. Such as–Name of an land and buildings rent,
Individual, Name of a firm interest, commission cash
___________________
or a Company in hand/at Bank or stock.
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2. Rules for Debit the receiver 1. Debit what comes in ___________________
debit and Credit the giver. 2. Credit what goes out
credit ___________________
3. Debit Expenses/Losses
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4. Credit Income/Gains ___________________
3. Balances of Balances of personal Balances of Assets are
Accounts accounts are shown in the shown in balance sheet ___________________
Balance sheet. where balances of expenses
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___________________
are in P&L a/c or trading
a/c as the case may be. ___________________
Example: Classify the following accounts into Personal, Real, and
Nominal accounts.
ep
1. Cash A/c 2. Salary A/c 3. Goods A/c 4. PN Bank
A/c
5. Dividend 6. Furniture A/c 7. Purchases 8. Sales A/c
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Received A/c A/c

9. Capital A/c 10. Drawings A/c 11. Ram’s A/c 12. House
Rent A/c
13. Postage A/c 14. Mathura 15. Discount
Refineries A/c A/c
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Solution:
Name of Item Type of Account
1. Cash A/c Real A/c
2. Salary A/c Nominal A/c
No
3. Goods A/c Real A/c

4. PN Bank A/c Personal A/c
5. Dividend Received A/c Nominal A/c
6. Furniture A/c Real A/c
7. Purchase A/c Real A/c
.
8. Sales A/c Real A/c

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9. Capital A/c Personal A/c

10. Drawings A/c Personal A/c
11. Ram’s A/c Personal A/c
12. House Rent A/c (Drawings A/c) Personal A/c
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13. Postage A/c Nominal A/c

14. Mathura Refineries A/c Personal A/c
15. Discount A/c Nominal A/c
Example: Classify the following under three types of accounts

(c)
(Personal, Real or Nominal Account):

(i) Drawings
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(ii) Cash
Notes
Activity
___________________
(iii) Outstanding Salary
Present an assignment on the
n/S
classification of accounts (iv) Depreciation
___________________
based on accounting
equation. (v) Prepaid Insurance Premium
___________________
___________________ (vi) Loan
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___________________ Solution:
___________________ Name of Item Type of Accounts
(i) Drawings (i) Personal A/c
uc
___________________
(ii) Cash (ii) Real A/c
___________________ (iii) Outstanding Salary (iii) Personal A/c
(iv) Depreciation (iv) Nominal A/c
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___________________ (v) Prepaid Insurance Premium (v) Personal A/c
___________________ (vi) Loan (vi) Personal A/c
Check Your Progress

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Fill in the blanks:
1. The transactions which involve Cash Receipts or Cash
Payments or transfer of assets from one person or
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institution to other persons or institutions, are recorded

as ....................
2. All transactions involving tangible assets or goods are
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the subject matter of ....................

3. All gains/profits/incomes and losses and expenses are
recorded as ....................
No
Classification of Accounts based on Accounting

Equation
.
This classification is based on the nature of accounts. It is also

ES
known as modern classification. Broadly speaking, the following

will be the types of accounts.
(a) Assets
UP
(b) Liabilities
(c) Capital
Let us discuss the above types of accounts one by one.
(c)
(a) Assets: These accounts are related to all types of assets

whether tangible or intangible. Example– Land and Building,
UNIT 6: Accounts
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Plants and Machinery, Furniture and fixture, all current
assets–such as cash, Bank, Stock, Debtors, Bills receivable, Notes
Goodwill, Patents a/c, etc. ___________________
n/S
(b) Liabilities refer to such accounts, which create obligations for ___________________
the business for the outsiders. Such as creditors, bills payable,
___________________
long-term loans in the form of debentures and outstanding
liabilities, etc. ___________________
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___________________
(c) Capital refers to such accounts which are for the proprietor of
the business, example is Cash/Goods brought in as capital and ___________________
uc
drawings, etc. ___________________
As the capital is affected by expenses and profits, there will be two ___________________
more types of accounts as part of capital:
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___________________
(i) Expenses and ___________________
(ii) Incomes or Gains
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(i) Expenses refer to such accounts which show the amount which
is incurred/spent or lost in the process of earning Revenues, for
example: Purchases a/c, wages a/c, discount allowed, interest
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paid/payable, rent paid/payable, goods lost in fire, etc.

(ii) Incomes refer to such accounts which are brought in by way of
sale of Goods or rendering of services by the business, for
t fo
example: Sales Discount received, Royalty, Interest received,

Dividend received, etc.
Rules of Debit and Credit

No
(I) In case of Traditional Type of Accounts
(i) Personal Account: The rule of debit and credit is as

follows:
.
Debit the Receiver

ES
Credit the Giver

(ii) Real Account: The rule of debit and credit is as follows:
Debit what comes in
UP
Credit what goes out.

(iii) Nominal Account: The rule of debit and credit is as
follows:
(c)
Debit all expenses and losses

Credit all Gains profits or Incomes
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(II) In case of Modern classification of Account also known as
Notes classification based on accounting equation.
___________________
Capital = Assets
n/S
___________________
___________________
___________________
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Owned Borrowed = Total Assets
___________________
___________________ Thus Total Assets – Borrowed = Capital

We also know that if there is a change on one side. The other side
uc
___________________
is bound to be affected. This change occurs because of the concept
___________________
of dual aspect.
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___________________
Technically, when some transaction is entered/recorded on the left-
___________________ hand side of an account it is termed as debit whereas when some
transaction is recorded/entered on the right-hand side of an
account, it is termed as credit. Both debit and credit result, either
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an increase or decrease depending upon the nature of an account.
Following are the rules for debit and credit
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(i) Assets Increase in assets Debit

Decrease is assets Credit
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(ii) Capital Increase in capital Credit

Decrease in capital Debit
(iii) Liabilities Decrease in liability Debit

No
Increase in liability Credit
(iv) Revenue Decrease in Revenue Debit

Income Increase in Revenue Credit
(v) Expenses Increase in Expenses Debit

.
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Decrease in Expenses Credit

Thus, it is clear from the above rules of debit and credit that,
(1) An increase in assets is recorded on the left-hand side of
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Account and decrease in assets on the right-hand side.

(2) In case of Capital and liabilities: increase is recorded on the
right-hand side of an account whereas decrease is recorded on
the left-hand side of an account.
(c)
UNIT 6: Accounts
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All the above explained rules of Debit and Credit can be explained
Notes
in a Tabular Form.
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
Example: From the following Decrease in the Accounts, write ___________________
down the side of account to be recorded along with the nature of
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___________________
the account.
___________________
1. Cash withdrew by the owner
2. Furniture a/c
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3. Rent a/c
4. Interest a/c
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5. Bills Receivable
6. Wages a/c
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7. Plant a/c
8. Rent outstanding a/c
9. Commission prepaid/paid in advance
No
10. Tushar (a customer)

11. Sneha (a Supplier)
12. Loan a/c
.
Solution:
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(c)
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Balancing of an Account
Notes
Activity
Every account is closed at the end of a month or year with a view
___________________
Develop a draft on the
to ascertain the balance in an account. The procedure of balancing
n/S
process of balancing an
___________________
account. of an account is very simple. From the total of the greater side the
___________________ total of smaller side is deducted, the remaining is the balance of an
___________________ account. For example, if the total of debit side is 10,000 and the
total of credit side is 7,500 and the balancing is done then it is
tio
___________________
2,500 i.e., ( 10,000 – 7,500). After balancing the account, the
___________________ most important problem to be faced by a beginner is to know the
type of balance whether it is a debit balance or a credit balance.
uc
___________________
The answer is very clear that is the balance represents the greater
___________________
side. In the given example as the debit side is greater than credit
rod
___________________
side, hence it is the debit balance. Otherwise if the credit side is
___________________ greater than debit side, then it is a credit balance. The balancing of
an account is carried down to the next month/year as the case may
be and there balancing is carried forward/brought down for the
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next month/year balancing for the first time when it is ascertained,
it is termed as closing balance and when balancing is brought
down, it is termed as opening balance.
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Notes:
1. Whatever is the opening balance, it is always written on the

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reverse side of the closing balance. If closing balance is

written on the credit side of an account, then opening balance
is to be given on the debit side of that account. Similar is in
case of debit side having a closing balance, is to be given on
No
the credit side as opening balance. Whenever an account is

balanced, the total of both the sides become equal.
2. Balancing of account is done only in case of personal and real
accounts but not in case of Nominal accounts because their
.
balances are directly transferred to Profit & Loss account.

ES
Check Your Progress

Fill in the blanks:
UP
1. ................... accounts are related to all types of assets

whether tangible or intangible.
2. ................... refer to such accounts, which create
obligations for the business for the outsiders.
(c)
3. ................... refers to such accounts which are for the

proprietor of the business.
UNIT 6: Accounts
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Summary
Notes
A record of financial transactions for an asset or individual, such
___________________
as at a bank, brokerage, credit card company, or retail store is
n/S
called an account. More generally, an arrangement between a ___________________
buyer and a seller in which payments are to be made in the future. ___________________
This is also known as the condensed form of a statement. It records ___________________
tio
not only the amount of transactions but also their effect and
___________________
direction. Generally, an account is in “T” form.
___________________
uc
___________________
Lesson End Activity
___________________
Create an effective presentation on accounts and the forms and
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types of accounts. ___________________
___________________
Keywords
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Account: It is a summary of all relevant transactions relating to
one person at one place for a particular period.
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Fictitious Assets: These are those assets which have no value

Intangible Assets: These are such assets which can not be seen
but only felt
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Nominal Accounts: All gains/profits/incomes and losses and

expenses are recorded.
Personal Accounts: The transactions which involve Cash
Receipts or Cash Payments or transfer of assets from one person or
No
institution to other persons or institutions, are recorded in this

category.
Real Account: All transactions involving tangible assets or goods
are the subject matter of this category.
.
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Tangible Assets: These are such assets, which can be seen and
felt
UP

1. Discuss the meaning of an account.
2. Explain the types of accounts.
(c)
3. How are accounts classified based on accounting equation.

4. Describe the Process of balancing of an account.
ale
Further Readings
Notes
___________________ Books
n/S
___________________ Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
___________________ Homewood, Illinois, Richard D. Irwin, 1995.
___________________ Bhattacharya S. K. and Dearden J. Accounting for Management–

tio
___________________
___________________
uc
___________________
___________________ 5th ed. New Delhi, Sultan Chand, 1992.
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___________________ Jawahar Lal, Cost Accounting, Vikas Publishing House, New
___________________ Delhi.
New Delhi.
ep
Delhi.
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Chand, New Delhi.
Web Readings
No
.
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UP
(c)
UNIT 7: Journal
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Notes
Activity
Make___________________
a report on the double
Journal
n/S
entry system of accounting.
___________________
___________________
Objectives
___________________
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topics: ___________________
 Double Entry System of Accounting ___________________
uc
 Meaning of Source Documents ___________________
 Books of Business
___________________
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___________________
Introduction
___________________
Even when a business has a single owner we make a distinction
between the owner's assets and the assets of the business. For
ep
example if the owner gives a van to the business this will count as
capital introduced, if the owner takes a salary this will be
accounted for as drawings.
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All accounting transactions are first recorded in a journal. The

most common of these is the General Journal, sometimes also
known as the Book of Original Entry, because it is the first place a
t fo
transaction is entered into the books. Journal Entries are made

from source documents, which can be anything from receipts to
invoices to bank statements.
No
Double Entry System of Accounting

Double entry system is a system in which every transaction affects
at least two accounts. Under this system every debit has a credit.
.
Every transaction, which is in money or measured in terms of

ES
money worth, is recorded. These transactions, as it is clear from its

very name are recorded in two accounts. These accounts are of
individuals or Institutions who either receive some benefit or
UP
sacrifice something. If they receive then debit the benefit if it is a

sacrifice then credit the same. For example, Ram receives 100
from Shyam. Under this contract, Ram is the receiver. Hence Ram
a/c is to be debited and as Shyam pays, then his a/c is to be
(c)
credited.
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Advantages of Double Entry System of Accounting
Notes
As we know that double entry system of accounting is a systematic
___________________ and scientific system of accounting, so it offers a number of
n/S
___________________ advantages. The following are the most important advantages of
the system.
___________________
___________________ 1. Complete record of transactions: Under this system,

recording of all transactions is done whether related to
tio
___________________
personal or impersonal accounts.
___________________
2. Ascertainment of profit or loss: Under this system of
uc
___________________ accounting complete Profit & Loss account can be prepared by
___________________ which profit or loss of a particular period can be ascertained.
rod
___________________ 3. Mathematical check on accuracy: Every debit has a credit,
___________________ so it is an accurate system as far as mathematical accuracy is
concerned which may be proved by preparing trial balance.
4. Check for fraud: Scope of fraud is limited as it minimizes the
ep
chances of fraud because of scientific system.
5. Ascertainment and knowledge of financial position of
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the business: Under this system it is possible to know the

financial position of the business at any time. For this purpose
Balance Sheet can be prepared any time.
t fo
6. Possibility of full control over business: Under this system

full information is available which enables the management to
exercise full control over the business.
7. Easy accessibility of information: Under this system all
No
information is easily available and also accessible which is

very helpful and useful for the management.
8. Possibility of comparative study: Under this system it is
possible to prepare comparative statement and also compare
.
ES
the previous year’s results with the current year’s result and
take corrective steps as and when necessary to improve the
operational results.
UP
9. Reliable information: Under this system Information

received is reliable.
Disadvantages of Double Entry System of Accounting

Double Entry System of Accounting has the following
(c)
disadvantages:
UNIT 7: Journal
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1. It is suitable only for big business houses.
Notes
Activity
2. It is expensive.
___________________
Prepare a report on source
n/S
3. Complete knowledge of accounting is essential. documents in accounting.
___________________
4. If any transaction is left, it is difficult to trace. ___________________
Though the above mentioned are the defects of double entry ___________________
tio
system of accounting, but the fact is that the defects are not of the
___________________
system but of the users. If proper care is taken, the system would
prove perfect, scientific and the best system of recording all ___________________
uc
transactions of the business. ___________________
___________________
Check Your Progress
rod
___________________
Fill in the blanks:
___________________
1. ................... is a system in which every transaction
affects at least two accounts.
ep
2. Under the double entry system, it is possible to prepare
................... statement and also compare the previous
year’s results with the current year’s result.
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Meaning of Source Documents

Whenever recording of transactions is done in the books of the
t fo
business, it is on the basis of some documentary proof which is

called source documents. There are different types of source
documents, such as– Goods purchased/Goods sold. The
documentary proof is cash memo receipt or Debit Note or Credit
No
Note, etc., depending upon buying or selling for cash or credit.
Thus, source document is the first record prepared for a business

transaction from where entries are made in the books of the
business. These documents are kept by the businessman till the
.
accounts are audited and tax is assessed. It is used as a legal

ES
document in case if there is any disagreement.
Types of Source Documents

UP
There are many types of source documents, which are used for
recording business transactions in the books of the business. The
following are widely used source documents:
1. Cash memo
(c)
2. Debit or credit note

3. Cheques
ale
Notes
4. Invoice
Activity
___________________ 5. Pay in slip
n/S
books of business.
___________________ Meaning of Voucher
___________________ As we know that the recording of Transactions is done with the
___________________ help of source documents as explained above. On the basis of
tio
___________________
source documents, a detailed statement is prepared which is
termed as a voucher. We can know from the voucher, the no. of
___________________
accounts debited and credited.
uc
___________________
___________________ Books of Business
rod
___________________
The books which are used in the business are generally classified
___________________ into two categories namely:
1. Main books of the business i.e. Journal and Ledger Accounts.

ep
2. Subsidiary books. (These are explained in Unit 9)
The Main Books of the Business (Journal)

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The transactions, which take place in the business daily, are

recorded in a book, known as journal. It is the basic book of
original entry. Recording of transactions in the journal is done
t fo
according to the nature of transactions i.e., if personal account

then Debit the receiver and Credit the giver and if it is real
account then Debit what comes in, Credit what goes out and if it is
nominal accounts then Debit losses/expenses and Credit
No
incomes/gains. The recording of a transaction in the journal is

called journalizing.
Form of Journal: Following is the form of Journal required to

record the transactions:
.
ES
UP
There are five columns in a journal and every transaction is

recorded at two places. The first account is debited and second
account is credited. While recording in journal first account is
written as Debit very close to the line of particulars whereas
(c)
second account is written after leaving some space from the margin
in the particular column to make it distinct from the debit account.
UNIT 7: Journal
ale
Note: Nowadays Dr/Cr or to is not written but the old practice is
Notes
adopted keeping in view the convenience.
___________________
n/S
Narration: After recording of a transaction is over then a brief
___________________
summary of the transactions is given which is known as narration.
___________________
The Memorandum Book or the Waste Book: The traders
___________________
generally note down the transactions in a book known as the
tio
Memorandum book or the waste book or the rough book. This is ___________________
the book where the transactions are recorded briefly as and when
___________________
transactions take place. The purpose of maintaining this book is to
uc
avoid slip-out of any transaction from memory. This book is ___________________
actually used before journalizing the transactions in the main book ___________________
of the business.
rod
___________________
That is why it is considered as an aid for the preparation of the ___________________
Journal.
Form of the Waste Book
ep
Date Particulars
2006
rR
July 1 Goods sold for cash 5,000

July 4 Goods purchased from Rao 10,000
July 5 Rao was paid 3,000
July 8 Goods purchased for cash 7,000
July 12 Rent paid 500
t fo
July 15 Goods purchased from Reddy 1,500

July 21 Goods returned to Rao 2,000
July 25 Salaries paid 1,200
July 31 Interest paid 800
No
Journalizing: The transactions, which are briefly recorded in the

waste book or the rough book, are properly journalized in a book
known as the journal. All the transactions are recorded in a
systematic order and that too in a chronological order.
.
ES
Procedure of Journalizing: The procedure is very simple which

is as follows:
1. Ascertain which account is to be debited or credited? Once this

UP
is clear, one can proceed with the actual journalisation i.e.,

passing of the Journal entry.
2. After passing the Journal entry, write down the brief

summary of the transaction which is known as narration.
(c)
3. After narration one simple line is drawn to indicate that the

transaction is fully journalized and is over.
ale
Example: Classify the following transactions into different types
Notes of accounts. Also journalize them clearly indicating the reasons for
___________________ debiting or crediting a particular account.
n/S
___________________ Date Particulars
2006
___________________
April 1 Mr. Ram Reddy Started business with 5000
___________________ April 2 Purchased furniture for cash 1,500
tio
April 5 Goods purchased from Raja Rao 4,000
___________________
April 7 Goods Sold to Gundu Rao 2,500
___________________ April 12 Goods Returned to Raja Rao 500
April 15 Paid Rent 750
uc
___________________ April 20 Cash sales 3500
April 27 Cash purchases 2000
___________________
Solution: Statement showing classification of transactions into
rod
___________________
___________________
different Accounts along with reasons for debiting or crediting a
particular account.
Date Transactio Nature of Type of Reasons for
ep
n A/c’s Accounts debit/credit
2006
April 1 Business (i) Cash Real Cash is to be debited as
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started (ii) Capital Personal the cash comes in

April 2 Furniture (i) Furniture Real Debit what comes in.
purchased (ii) Cash Real Credit what goes out.
April 5 Goods (i) Goods Real Debit what comes in.
t fo
purchased (ii) R. Rao Personal Credit the giver.

from R. Rao
April 7 Goods sold to (i) G. Rao Personal Debit the receiver
Gundu Rao (ii) Goods Real Credit what goes out
April 12 Goods (i) R. Rao Personal Debit the receiver
No
Returned to (ii) Goods Real Credit what goes out

R. Rao Returned
April 15 Rent paid (i) Rent Nominal Debit the expenses
(ii) Cash Real Credit what goes out
April 20 Cash sales (i) Cash Real Debit what comes in
.
(ii) Sales Real Credit what goes out

ES
April 27 Cash (i) Purchases Real Debit what comes in

purchases (ii) Cash Real Credit what goes out.
Example: Journalize the following transactions with narration.

UP
2006 Particulars
March 1 ‘X brought capital into the Business 20,000
March 3 Purchased Furniture for cash 4,000
March 5 Purchases of Goods 15,000
(c)
March 10 Purchases of goods from ‘M’ 10,000

Contd...
UNIT 7: Journal
ale
March 15 Sold goods to ‘N’ 8,000
March 20 Cash Sales 10,000 Notes
March 22 Cash paid to ‘M’ 10,000
___________________
n/S
March 31 Salaries paid 2,000
___________________
Solution: ___________________
Journal Entries
___________________
tio
Date Particulars L.F. ` `
___________________
2006
June 1 Cash a/c Dr. 2,500 ___________________
To Ramu 2,500
uc
___________________
Cash received from Ramu
June 4 Purchases a/c Dr. 1,000 ___________________
To cash a/c 1,000
rod
___________________
Goods purchased for cash
June 5 Hari Dr. 4,000 ___________________
To Goods a/c (Sales A/c) 4,000
Goods sold to Hari
ep
June 8 Furniture a/c Dr. 500
To Raju 500
Furniture bought from Raju
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June 10 Office Stationery a/c Dr.

To cash a/c 150
Paid for office stationery 150
Compound Entries: Sometimes when a transaction involves more

t fo
than two accounts, then either we can pass separate entries, as

shown in illustration or a combined (Compound) entry because it
involves more than two accounts. For example, if a debtor is
allowed cash discount and he makes the payment. Then the
No
accounts involved are three, i.e., (1) Cash A/c (2) Discount A/c and
(3) The Debtors A/c
The following compound entry is to be passed:

.
Cash A/c Dr.

ES
Discount A/c Dr.

To Debtors A/c
Debtor paid & was allowed discount.
UP
Example: Journalize the following transactions with narration:
2006
Aug 1 Commenced business with cash 40,000/- and Goods

20,000/-,
(c)
ale
Aug 3 Purchased goods 'From 'X' and Co. for 10,000/- Paid
Notes Cash 5,000/-,
___________________
Aug 5 Goods returned to 'X' Co. 200/-,
n/S
___________________
Aug 10 Sold goods to 'Y' & Co. 30,000/- and cash received from
___________________
him 20,000/-,
___________________
Aug 15 'Y' & Co. returned goods 500/-,
tio
___________________
Solution:
___________________
Journal Entries
uc
___________________
Cr. Dr.
___________________
Date Particulars L.F.
rod
___________________ 2006
Aug 1 Cash a/c Dr. 40,000
___________________
Goods a/c Dr. 20,000
To Capital a/c 60,000
business commenced with cash and goods
ep
Purchases a/c Dr.
Aug 3 To X & Co. 10,000
Goods purchased from x 10,000
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X & Co. Dr.

Aug 3 5,000
To cash a/c
5,000
Paid cash
If combined entry is passed
t fo
Purchases a/c Dr. 10,000

Aug 3 To cash a/c 5,000
To X & Co. 5,000
Goods purchased from X and paid cash
200
No
X & Co. Dr.

Aug 5 To Purchases Returns a/c 200
Goods returned to X
20,000
Cash a/c Dr.
Aug 10 10,000
Y& Co. Dr.
30,000
.
To sales a/c
ES
Goods sold to Y and cash received from him

If separate entries are made then
Y& Co. Dr. 30,000
To Sales a/c 30,000
UP
Aug 10 Goods sold to Y

Cash a/c Dr. 20,000
To Y & co. 20,000
Aug 10 Cash received from him
Sales Return a/c Dr. 500
(c)
To Y & Co. 500

Aug 15 Goods returned by Y & Co.
UNIT 7: Journal
ale
Advantages of Journal
Notes
The following are the main advantages of using the journal:
___________________
n/S
(i) It provides a permanent record of all transactions.
___________________
(ii) It provides a record in a chronological (date-wise) order which
___________________
saves time if some entries are checked later on.
___________________
tio
(iii) It reduces the possibility of error because both the columns
___________________
are totalled and must be equal. If there is any difference, it
can be searched out but if direct entries are passed in the ___________________
ledger account, the chances are there to commit error which is
uc
___________________
very difficult to locate later on.
___________________
(iv) If the journal is sub-divided into other subsidiary books then
rod
___________________
it reduces the burden of the administration (office).
___________________
Limitations of Journal
Though the journal is very useful but still it is not free from
ep
criticisms, which are known as its limitations. If every transaction
is recorded (as discussed earlier) in the journal then it makes the
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journal unwieldy because of the following:

1. The journal will be too big (long) to manage easily.
2. It fails to provide certain other important information to the
business such as cash balance, etc.
t fo
Nowadays the journal is sub-divided in different other books

because of its above mentioned limitations and it is used only for
such transactions which are very few or are not many.
No
Opening entry: The previous year’s balances are carried forward

to the new books of the current year. This is done by means of a
journal entry which is called as opening journal entry. In this entry
all the assets are debited and all liabilities along with owner’s
.
capital are credited. If the owner’s capital is not given, then the
ES
difference between total assets and liabilities is termed as the

owner’s capital.
Thus, the opening entry would be:

UP
Dr. Cr.
All Assets a/c Dr.
To all liabilities a/c
To Capital a/c
(c)
Assets and liabilities

Transferred
ale
Example: Pass the necessary opening entry on 1st January, 2006
Notes in the books of Gopinath.
___________________
Cash in hand 3,000
n/S
___________________
Cash at Bank 16,000
___________________ Stock in trade 30,000
___________________ Furniture & Fittings 5,000
tio
___________________ Sundry Debtors 21,000
___________________ Sundry Creditors 18,000
Loan from Ganesh & Co. 9,000
uc
___________________
___________________ Solution:
rod
___________________ Opening Journal Entries
___________________ Dr. Cr.
1.1.2006 Cash in hand a/c Dr. 3,000
ep
Cash at Bank a/c Dr. 16,000
Stock in trade a/c Dr. 30,000
Furniture’s Fittings a/c Dr. 5,000
Sundry debtors a/c Dr. 21,000
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To Sundry creditors a/c 18,000

To Ganesh & Co. a/c 9000
To Capital a/c 48,000
Opening entry in respect of assets and
t fo
liabilities. (Difference between Assets and

liabilities is equal to capital)
Check Your Progress

Fill in the blanks:
No
1. Journal provides a record in a ................... order

2. The previous year’s balances are carried forward to the
new books of the current year and is done by means of a
.
journal entry which is called as ...................

ES
Summary
UP
The most common of these is the General Journal, sometimes

also known as the Book of Original Entry, because it is the first
place a transaction is entered into the books. Journal Entries are
made from source documents, which can be anything from receipts
to invoices to bank statements. The books in which these
(c)
transactions are recorded first time are called the books of original
entries or records.
UNIT 7: Journal
ale
When a transaction takes place in the business it is first roughly
Notes
written in the memorandum book chronologically for the memory
only. 'Journal' word is derived from French word 'Jour' which ___________________
n/S
means a day book. Journal is a primary book of original entries for ___________________
accounting data. If all the transactions of the business are recorded
___________________
in Journal it will be too bulky to manage. Therefore, now-a-days
original records are maintained in the subsidiary books. These ___________________
tio
subsidiary books are also called sub-division of Journal. ___________________
___________________
Lesson End Activity
uc
___________________
Make a journal of your last week’s expenses and classify them into ___________________
the various subsidiary books.
rod
___________________
___________________
Keywords
Journal: Journal is a primary book of original entries for
ep
accounting data.
Memorandum Book: When a transaction takes place in the
rR
business it is first roughly written in the memorandum book

chronologically for the memory only.
Subsidiary Books of Original Records: These subsidiary books
t fo
are also called sub-division of Journal.

No
1. What do you understand by books of original record?

2. Explain the concept of Journal.
3. List the rules of debiting & crediting in journal.
.
4. Explain the various subsidiary books of original records.

ES
Further Readings
UP
Books
(c)

ale
Notes II, Sultan Chand and Sons.
___________________
n/S
___________________
Delhi.
tio
___________________
New Delhi.
___________________
uc
___________________
Delhi.
___________________
rod
___________________ Chand & Sons, New Delhi.
___________________ M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
ep
Web Readings
rR
t fo
. No
ES
UP
(c)
UNIT 8: Ledger
ale
Notes
Activity
W ___________________
Ledger
n/S
meaning and importance of
___________________
ledger.
___________________
Objectives
___________________
tio
topics: ___________________
 Meaning of Ledger ___________________
uc
 Importance of Ledger ___________________
 Sub-division of Ledger
___________________
rod
___________________
Introduction
___________________
Whenever any transaction takes place it is recorded first in the

primary books of the business i.e., The Journal, if it can be
ep
measured in terms of money or Money’s worth. These journal
entries are then posted in different ledger accounts as per the
nature of the transaction concerned. The ledger account is the
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main book of the business. It is a bound book which contains

number of accounts. Thus, the accounts are in a classified
summary of the transactions relating to a particular account. The
t fo
method or the process through which recording is done from

journal to ledger account is called the posting. Thus, it is very easy
for a person to know the current and exact position of an account
on a particular date.
No
Meaning of Ledger
Ledger is also called as a book of final entry because all
transactions are finally recorded in the ledger accounts. Journal of
.
a business is very useful but it does not reply the different queries
ES
as how much amount is due from debtors, how much is to be paid

to creditors and what is the balance of a particular account etc. For
the reply of all these queries the ledger is prepared from the
UP
Journal entries. Ledger is the set of accounts in which all types of

account (personal, real or nominal) are kept. There can be two
forms of ledger:
(a) Bound Ledger
(c)
(b) Loose Leaf Ledger

ale
Importance of Ledger
Notes
Activity
As we know that the ledger is a bound book. It offers many
W ___________________
advantages which are as follows:
n/S
sub-division of ledger.
___________________
___________________
1. Final position of an account: It is possible through an
account to know the final position regarding the balance which
___________________
is either outstanding or owing as the case may be.
tio
___________________
2. It makes the accounting exercise done as full and final as it is
___________________ difficult to know at once the same from the Journal.
uc
___________________ 3. It saves a lot of time: As all the entries are available at one
___________________
place, it saves a lot of time which can be used for other useful
purposes.
rod
___________________
4. Indispensable: Nowadays, it has become indispensable i.e.,
___________________
there is no escape from it. It has to be maintained at all times,
whatever may be the cost.
ep
Check Your Progress
Fill in the blanks:
rR
1. ................... is also called as a book of final entry

because all transactions are finally recorded in the
ledger accounts.
t fo
2. There can be two forms of ledger: these are ...................

ledger and ................... ledger.
Sub-division of Ledger
No
It is not possible to have one ledger for all the accounts in big
business houses. It is possible only for a small businessman. Thus,
the ledger is sub-divided as per the convenience of the trade. The
following are the sub-divisions of a ledger:
.
ES
1. General Ledger: It is meant for all the accounts other than

debtors and creditors. In other words it is meant for real and
nominal accounts. It is also known as Impersonal Ledger or
UP
Main Ledger.
2. Debtors Ledger: It is meant for all the debtors to whom
goods are sold on credit. It is also known as sold ledger or
sales ledger.
(c)
UNIT 8: Ledger
ale
3. Creditors Ledger: It is meant for all the creditors from whom
Notes
goods are bought on credit. It is also known as bought ledger
or purchase ledger. ___________________
n/S
4. Private Ledger: It is meant for personal account of the ___________________
proprietor. i.e. the capital account, drawing account, current ___________________
account and final a/c (Trading and Profit & Loss a/c) and a
___________________
balance sheet.
tio
___________________
Balancing of Account
___________________
Accounts are periodically balanced generally at the end of the
uc
___________________
accounting period. The purpose of this balancing is to know the
___________________
financial position of the business. Balancing of an account means
rod
that both the sides of an account are totalled and the difference ___________________
between them is termed as balance, which is written as balance c/d ___________________
at the side which is shorter and this amount is brought down in
the next accounting period thinking that it is a continuous process
ep
till the account is finally closed.
Table 8.1: Distinction between the Journal and the Ledger

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Basis of The Journal The Ledger

difference
1. Primary or When the business is It is the primary or
Principal Book small, it is the main book Principal book.
but when the business is
t fo
large, it becomes a
subsidiary book
2. Original/ Final It is the book of original It is the book of final entry.
entry entry
3. Used daily It is used daily to record It is used periodically,
No
the transactions on which may be weekly,

chronological order. fortnightly or monthly.
4. Process/ Method of recording in the Whereas process of
Method of Journal is known as recording in ledger
recording Journalization accounts is known as
posting.
.
ES
5. Complete At a time Complete Ledger provides/makes it

Information information about a/c’s possible & provides full &
transactions is not complete information.
possible.
UP
Ruling of Ledger Account

An account, first of all is divided into two parts. The left-hand side
of as account is known as debit side whereas the right-hand side of
as account is termed as credit. Debit and credit are generally
(c)
represented by Dr. and Cr. Thus, every account contains 8

columns. The first four columns are of debit side and other four
ale
columns are of credit side. Account is in form of T. Following is the
Notes form of Account.
___________________ Form of Account
n/S
___________________ Dr. Name (Title) Page No……. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
___________________
( ) ( )
___________________
tio
___________________
___________________
uc
___________________
As it is clear from the above form of account that the entire space
___________________
is divided into two equal parts and Date, Particulars, Journal Folio
rod
___________________
and Amount etc., are written in column 1, 2, 3 & 4 respectively.
___________________ The same procedure is adopted in case of other columns.
Rules/Points to be kept in mind while posting into ledger account:
The following points are to be remembered while posting:
ep
1. When one is going to post the journal entries first read out the
names of accounts involved.
rR
2. Now you can open respective accounts.
3. Now if you want to post-see the side of the account concerned,

t fo
it may be either debit side or credit side.
After determining the side post the other account to that side
to which the account concerned represents.
No
4. Never write/post the name of that account in which you are

going to post.
After keeping the above rules in mind, we can prepare the

following ledger accounts:
.
ES
Example: Prepare the account of X & Co. from the following.
2006
Feb 1 Balance due from X & Co. 1,000

UP
Feb 3 Cash sales to X & Co. 700
Feb 4 Bought furniture from X & Co. 250
Feb 6 Murthy returned goods to us 200

Feb 9 X & Co. Purchased goods from us 1,200
(c)
Feb 10 Return of goods from X & Co. 150

Feb 20 X & Co. settled his account by cheque and received discount 20
UNIT 8: Ledger
ale
Solution:
Notes
X & Co. Account
___________________
n/S
Dr. Cr.
Date Particulars J.F. Date Particulars J.F. ___________________
2006 2006
___________________
Feb 1 To balance b/d 1,000 Feb 4 By furniture a/c 250
Feb 9 To sales a/c 1,200 Feb 10 By sales returns a/c 150 ___________________
tio
Feb 20 By Bank a/c 1780
By Discount a/c 20 ___________________
2,200 2,200
___________________
uc
Example: The following were the transactions of Delite Furniture, ___________________
Delhi during July 2006 ___________________
Date Particulars
rod
___________________
2006
July 1 Started business with ___________________
Cash 3,500
Bank 9,200
ep
July 3 Bought furniture from M/s New Light 2,000
July 5 Bought furniture for the office 1,000
July 6 Sold furniture to Roop 2,000
July 8 Bought furniture
rR
1,800
July 10 Returned furniture to M/s New Light 50
July 12 Roop returned furniture 200
July 14 Paid taxi fare 10
July 15 Sold furniture to Sanjay for Rs. 500
t fo
Less trade discount @ 10%

July 17 Received Commission
July 18 Paid to New light by cheque 15
July 19 Paid to Bank 1,000
July 22 Received a cheque for Rs. 500 from Roop and deposited the 200
No
July 23 same in Bank. 500

July 24 Paid Rent to Naresh
July 25 Roop’s cheque dishonoured. 150
July 26 Furniture taken for personal use 400
July 27 Received interest 10
.
July 29 Received dividend 25

ES
July 30 Postage stamp paid 5

July 31 Paid house rent by cheque 100
July 31 Withdrawn from bank for office use 2,000
July 31 Salary paid 300
UP
Taxes paid 250
You are required to journalize the above transactions in the books

of M/s Delite Furniture and post them in their respective ledger
accounts.
(c)
ale
Solution:
Notes
Journal Entries
___________________
n/S
___________________ 2006
___________________ July 1 Cash a/c Dr. 3,500
Bank a/c Dr. 9,200
___________________ To capital a/c 12,700
tio
Business started
___________________
July 3 Purchases a/c Dr. 2,000
___________________ To M/s New light a/c 2,000
Furniture bought
uc
___________________
July 5 Furniture a/c Dr. 1,000
___________________ To Cash a/c 1,000
Furniture purchased for office use
rod
___________________
July 6 Roop Dr. 2,000
___________________ To goods a/c 2,000
Furniture sold to Roop
July 8 Purchases a/c Dr. 1,800
To Cash a/c 1,800
ep
Furniture bought
July 10 M/s New Light A/c Dr. 50
To goods (Return) A/c 50
rR
(purchases return) Furniture

returned.
July 12 Goods (Return) A/c (Sales Return) Dr. 200
To Roop 200
t fo
Roop Returned Furniture.

July 14 Trade Expenses A/c Dr. 10
To cash A/c 10
Taxi Fare Paid
July 15 Sanjay Dr. 450
No
To Good A/c (Sales a/c) 450

Furniture sold for Rs. 500 less
trade discount @ 10%
July 17 Cash A/c Dr. 15
To commission A/c 15
.
Commission Received
ES
July 18 M/s New Light A/c Dr. 1,000

To Bank A/c 1,000
New light was paid by cheque
July 19 Bank a/c Dr. 200
UP
To cash A/c 200

Bank paid
July 22 Bank a/c Dr. 500
To Roop 500
A cheque was received from Roop
(c)
which was deposited in the bank.

Contd...
UNIT 8: Ledger
ale
July 23 Rent a/c Dr. 150
To cash a/c 150 Notes
Rent paid to Naresh
July 24 Roop Dr. 500 ___________________
n/S
To Bank A/c 500
___________________
Roop’s cheque dishonoured.
July 25 Drawings A/c Dr. 400 ___________________
To Goods A/c 400
___________________
Furniture taken away for personal
tio
use. ___________________
July 26 Cash A/c Dr. 10
___________________
To interest A/c 10
uc
Interest received. ___________________
July 27 Cash A/c Dr. 25 25
To Dividend A/c ___________________
Dividend Received.
rod
___________________
July 29 Postage Stamp A/c Dr. 5
(Trade Expenses) 5 ___________________
To cash A/c
Postage Paid
ep
July 30 Drawings A/c Dr. 100
To Bank a/c 100
House rent paid by cheques
rR
July 31 Cash a/c Dr. 2000

To Bank a/c 2000
Withdraw for office use
July 31 Salary a/c Dr. 300
Taxes a/c Dr. 250
t fo
To cash a/c 550

Salary & taxes paid
Total 25665 25665
Notes: Following points are to be kept in view while journalizing

No
the transactions in the journal:
1. Nature of business: In the above illustration, it is clear that

the dealer is dealing in furniture, hence furniture purchased
.
& sold is considered as sale and purchase of goods.

ES
2. When the goods are sold or bought, sometimes one or the

other is returned or comes back. Treatment is on the lines of
goods returned.
UP
3. House rent paid is treated as drawings.

(c)
ale
Following are ledger accounts:
Notes
Cash Account
___________________
Dr. Cr.
n/S
___________________ Date Particulars L.F. Amount Date Particulars L.F. Amount
( ) ( )
___________________
2006 2006
___________________ July 1 To capital A/c 3,500 July 5 By office furniture A/c 1,000
July 17 To commission 15 July 8 By goods A/c 1,800
tio
___________________ July 26 A/c 10 July 14 By Trade Expenses A/c 10
July 27 To interest A/c 25 July 19 Bank A/c 200
___________________ July 31 To dividend A/c 2,000 July 23 By Rent A/c 150
To bank A/c July 29 By Postage stamp A/c 5
uc
___________________
July 31 By salary A/c 300
___________________ July 31 By trade expenses A/c 250
July 31 By balance c/d 1,835
rod
___________________ 5,550 5,550
Aug. 1
___________________ To balance b/d 1,835
Bank Account
ep
Dr. Cr.
( ) ( )
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2006 2006
July 1 To Capital A/c 9,200 July 18 By new light 1,000
July 19 To Cash A/c 200 July 24 By Roop 500
July 22 To Roop 500 July 30 By Drawings 100
July 31 By Cash A/c 2,000
t fo
July 31 By Balance c/d 6,300
Aug 1. To balance b/d 9,900 9,900

6,300
No
Capital Account
Dr. Cr.
( ) ( )
2006 12,700 2006
.
July 31 To Balance c/d July 1 By Cash A/c 3,500

ES
July 1 By Bank A/c 9,200

12,700 12,700
Aug 1 By balance b/d

12,700
UP
(c)
UNIT 8: Ledger
ale
Goods Account
Dr. Cr. Notes
Amount Amount
Date Particulars L.F. Date Particulars L.F. ___________________
( ) ( )
n/S
2006 2006 ___________________
July 3 To M/s New light 2,000 July 6 By Roop 2,000
July 8 To Cash A/c 1,800 July 15 By Sanjay 450 ___________________
July 25 By Drawings 400
July 31 A/c 950 ___________________
tio
3,800 By Balance c/d 3,800
Aug 1. To balance b/d ___________________
950
___________________
uc
M/s New Light Account
___________________
Dr. Cr.
Amount Amount ___________________
Date Particulars L.F. Date Particulars L.F.
( ) ( )
rod
___________________
2006 2006
July 10 To Goods (Ret) 50 July 3 By Goods A/c 2,000 ___________________
July 18 A/c 1,000
July 31 To bank A/c 950
To Balance c/d 2,000 2,000
ep
Aug 1 By Balance 950
b/d
Office Furniture Account

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Dr. Cr.
Amount Amount
( ) ( )
2006 2006
t fo
July 5 To Cash A/c 1,000 July 31 By Balance c/d 1,000

Aug 1 To Balance b/d 1,000
Roop
No
Dr. Cr.
Amount Amount
( ) ( )
2006 2006
July 6 To Goods A/c 2,000 July 12 By Goods (Ret.) A/c 200
July 24 To Bank A/c 500 July 22 By Bank A/c 500
.
July 31 By Balance c/d 1,800

ES
2,500 2,500
Aug 1. To Balance b/c 1,800
Goods (Return) A/c

UP
Dr. Cr.
Amount Amount
( ) ( )
2006 2006
July 12 To Roop 200 July 10 By new Light A/c 50
July 31 By Balanced c/d 150
(c)
200 200
Aug 1. To Balance 150
b/d
ale
Trade Expenses Account
Notes Dr. Cr.
___________________ Amount Amount

( ) ( )
n/S
___________________ 2006 2006 265
July 14 To cash a/c 10 July 31 By balance c/d
___________________
July 29 To cash A/c 5
___________________ July 31 To cash a/c 250
tio
___________________ 265 265
Aug a To Balance
___________________ a/c 265
uc
___________________ Sanjay
___________________ Dr. Cr.
Amount Amount
rod
___________________ Date Particulars L.F. Date Particulars L.F.
( ) ( )
___________________ 2006 2006
July 15 To Goods A/c 450 July 31 By balance c/d 450
Aug 1. To Balance b/d 450
ep
Commission A/c
Dr. Cr.
Amount Amount
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( ) ( )
2006 2006
July 31 To Balance c/d 15 July 17 By cash A/c 15
Aug 1. By Balance b/d 15
t fo
Rent Account
Dr. Cr.
Amount Amount
( ) ( )
No
2006 2006
July 23 To cash A/c 150 July 31 By Balance c/d 150
Aug 1 To Balance b/d 150
Drawings Account
.
ES
Dr. Cr.
Amount Amount
( ) ( )
2006 2006
UP
July 25 To Goods A/c 400 July 31 By Balance c/d 500

July 30 To Bank A/c 100
500 500
Aug 1 To Balance b/d
500
Note: Drawing A/c can be closed by way of transferring to Capital

(c)
A/c
UNIT 8: Ledger
ale
Interest Account
Dr. Cr. Notes
Amount Amount
Date Particulars L.F Date Particulars L.F. ___________________
( ) ( )
n/S
2006 2006 ___________________
July 31 To balance c/d 10 July 26 By balance A/c 10
Aug. 1 By Balance b/d ___________________
10
___________________
tio
Dividend Account
Dr. Cr.
___________________
Amount Amount ___________________

( ) ( )
uc
___________________
2006 2006
July 31 To balance c/d 25 July 27 By cash a/c 25 ___________________
rod
Aug.1 By Balance b/d ___________________
25
___________________
Salary Account
Dr. Cr.
ep
Amount Amount
( ) ( )
2006 2006
July 31 To cash a/c 300 July 31 By balance c/d 300
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Aug 1 To balance a/c 300 300
Check Your Progress

t fo
Fill in the blanks:

1. ................... is meant for all the accounts other than
debtors and creditors.
No
2. ................... is meant for all the debtors to whom goods

are sold on credit.
Summary
.
In modern accounting software or ERP, the general ledger works

ES
as a central repository for accounting data transferred from all

sub-ledgers or modules like accounts payable, accounts receivable,
cash management, fixed assets, purchasing and projects.
UP
Ledger is the set of accounts in which all types of account

(personal, real or nominal) are kept.
The process of transferring the entries from Journal to Ledger
(c)
accounts is called posting. In other words account-wise selection of

debit or credit items and recording them into the relevant side of
the relevant account is called posting.
ale
Lesson End Activity
Notes
Draw a sample of an account ledger.
___________________
n/S
___________________
Keywords
___________________
Creditors Ledger: It is meant for all the creditors from whom
___________________
goods are bought on credit.
tio
___________________
Debtors Ledger: It is meant for all the debtors to whom goods are
___________________
sold on credit.
uc
___________________
General Ledger: It is meant for all the accounts other than
___________________ debtors and creditors.
rod
___________________ Ledger: It is also called as a book of final entry because all
___________________ transactions are finally recorded in the ledger accounts.
Private Ledger: It is meant for personal account of the proprietor.
ep
1. Explain the meaning of ledger.
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2. Discuss the importance of ledger.

3. Make a list of the sub-division of ledger.
t fo
Further Readings
Books
No

.
ES

UP

Delhi.
(c)
New Delhi.
UNIT 8: Ledger
ale
Notes
Delhi.
___________________
n/S
Chand & Sons, New Delhi. ___________________
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. ___________________

Chand, New Delhi. ___________________
tio
___________________
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html ___________________
uc
www.accsoft.ch/download/accountingconcepts.pdf ___________________
rod
___________________
ep
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t fo
. No
ES
UP
(c)
ale
Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
UNIT 9: Subsidiary Books
ale
Notes
Activity
___________________
Make a report on the need for
Subsidiary Books
n/S
sub-division of journal.
___________________
___________________
Objectives
___________________
tio
topics: ___________________
 Need for sub-division of Journal ___________________
uc
 Types of Subsidiary Books ___________________
 Cash Book
___________________
rod
___________________
Introduction
___________________
Subsidiary Books is a normal routine to record individually each
and every transaction which takes place in the business. As we
ep
know it is first recorded in a book known as memorandum book
from where it is recorded in a book known as the journal being the
primary book of the business.
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If all the transactions of the business are recorded in Journal it

will be too bulky to manage. Therefore, now-a-days original records
are maintained in the subsidiary books. These subsidiary books are
t fo
also called sub-division of Journal.
Need for sub-division of Journal

No
It is possible to record each and every transaction in the primary

book of the business when the size of the business is very small but
it becomes difficult and impossible to record transactions in the
journal when the size of the business is large. This is because of
.
certain problems which are termed as limitations of the journal.

ES
Though the journal is very useful but still it is not free from
criticisms which are known as its limitations. If every transaction
is recorded in the journal then it makes the journal unwieldy
UP
because of the following:
1. The journal will be too bulky and voluminous to manage

easily.
(c)
2. It fails to provide certain other important information to the

business such as cash balance, etc.
ale
3. It is difficult to handle the entire work of journalization by one
Notes person as the work will be very heavy and large.
Activity
___________________
Prepare a draft on cash book, 4. It fails to provide details regarding sales tax and other
n/S
its characteristics, nature, its
___________________
kinds and the balancing of taxation.
cash book.
___________________ 5. It is also difficult to comply with the formalities connected with
___________________ each journal entry.
tio
___________________ In order to overcome the above limitations of the journal, the need
for its sub-division arises. Therefore, it is advisable to sub-divide
___________________
the journal. This sub-division of the journal is termed as the use of
uc
___________________
subsidiary books.
___________________
Types of Subsidiary Books
rod
___________________
___________________
Following are the subsidiary books:
1. Cash book
ep
2. Purchases journal
3. Sales journal
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4. Purchases returns journal

5. Sales returns journal
6. Bills receivable journal
t fo
7. Bills payable journal

8. The journal proper
No
Importance and Advantages of Subsidiary Books

These can be understood in the following manner:
1. Division of Labour: Use of subsidiary books reduces the work
load of the journal, i.e., the division of labour is reflected
.
ES
clearly.
2. Maintenance of records systematically and accurately: It
also helps in maintaining records accurately and
UP
systematically.
3. It saves time in locating any transaction.
4. Minimization of fraud: It reduces (minimizes) the chances of
fraud.
(c)
ale
5. Availability of information: It helps in providing more and
more details about all the transactions which otherwise would Notes
not be possible with one journal. ___________________
n/S
6. Serves as a ready reference: It serves as a ready reference. If ___________________
some information about credit sales or credit purchases is
___________________
required, it is easily available.
___________________
tio
7. Helpful in increasing efficiency: It increases the efficiency
___________________
of the workers as they work with speed and accuracy.
___________________
8. Helpful in fixing responsibility: It helps in fixing
uc
responsibility of each worker. ___________________
9. It helps internal check-work can be finished at the earliest. ___________________
rod
___________________
Now we would discuss all the books one by one. The first and most
___________________
important subsidiary book of the business is the cash book.
Cash Book
ep
Most of the transactions relate generally to receipts and payment
of cash. It may be either purchase of goods for cash or sale of goods
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for cash or it may be either payment of expenses or receipts of

income. All such transactions are recorded separately in a book,
known as the Cash Book. This book is helpful in telling the
accurate balance of cash in hand or at Bank as and when one
t fo
desires to know. All cash transactions are directly entered into the
Cash Book and on the basis of Cash Book, ledger accounts are
prepared.
No
Characteristics of Cash Book
Following are the important characteristics of a cash book:

1. Only cash transactions are recorded in the cash book.
.
ES
2. Cash receipts are recorded on the debit side of the cash book.
3. Cash payments are recorded on the credit side of the cash
book.
UP
4. All cash transactions are recorded in a chronological order.
Nature of Cash Book

Whether Cash Book is a subsidiary book or a principal book of the
(c)
business: The Cash Book is both. It is a principal book of the

business because it is a part of ledger whereas it is a subsidiary
ale
book of the business because all cash transactions are directly
Notes recorded in it and on the basis of such record, ledger accounts are
___________________ prepared.
n/S
___________________
Kinds of Cash Book
___________________ The main Cash Books are of three types:
___________________ 1. Simple Cash Book with one column.
tio
___________________ 2. Cash Book with discount column also known as two columns
___________________ Cash Book.
3. Cash Book with Bank and discount column also known as
uc
___________________
three columns Cash Book.
___________________
Apart from the above division of Cash Book, nowadays, one more
rod
___________________
Cash Book is also used by big business houses which are termed as
___________________
Petty Cash Book. Now we shall discuss all the Cash Books one by
one.
ep
Simple Cash Book: Also known as one column-Cash Book. This is
just like cash account where all the transactions relating to
receipts and payment are recorded. The following is the form of
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simple cash book.
Simple Cash Book

Cr.
t fo
Dr.
Particulars Amount Particulars Amount
L.F. Date L.F.
Date (Receipts) ( ) (Payments) ( )
No
Balancing of Cash Book

.
ES
The Cash Book is closed like other accounts and it is closed by

taking a balance if either receipts are more than payments and
generally it is there then it is a debit balance to be shown on the
UP
credit side of the account as balance c/d and next month or year it
is shown on the debit side of the Cash Book as balance b/d.
Note: One thing which is every important to remember while

recording a transaction in the Cash Book is that no distinction is
(c)
adopted about capital or revenue nature of transactions i.e., all the

transactions are recorded in the Cash Book.
ale
Example: Enter the following transactions in the Cash Book of
Notes
Mr. Ashish Kumar for the month of June 2006 and find out its
closing balance. ___________________
n/S
___________________
June 1 Cash in hand 5,000 ___________________

June 2 Furniture purchased for Cash 1,000
___________________
tio
June 4 Good purchased for cash 3,000
___________________
June 5 Cash sales 2,800
June 7 Cartage paid 50 ___________________
uc
June 18 Cash purchases 2,500 ___________________
June 23 Cash sales 3,000
___________________
June 24 Rent paid 500
rod
June 28 Paid to Rakesh 500 ___________________
June 30 Received from Mukesh 2,500 ___________________

June 30 Salaries paid 850
ep
Solution:
Cash Book
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Date Receipts L.F. Date Payments L.F.

2006 2006
June 1 To Balance b/d 5,000 June 2 By Furniture A/c 1,000
June 5 To Sales A/c 2,800 June 4 By Goods
Purchases A/c 3,000
t fo
June 23 To Sale A/c 3,000 June 7 By Cartage A/c 50

June 30 To Mukesh 2,500 June 18 By Purchases A/c 2,500
June 24 By Rent A/c 500
June 28 By Rakesh A/c 500
June 30 By Salaries A/c 850
No
June 30 By Balance c/d 4,900

13,300 13,300
July 1 To Balance b/d 4,900
Notes:
.
ES
(i) It is clear from the above Cash Book that all the receipts and
payments are properly recorded.
(ii) It is just like an account.

UP
Cash Book with Discount Columns (also known as Two

Columns Cash Book)
As the name suggests this Cash Book contains two additional

columns for amounts i.e. (i) for cash receipts or payments (ii)
(c)
Discount allowed or received.

ale
Notes The discount is an incentive given or received for prompt payment.
To record discount, one additional column on both the sides of the
___________________
Cash Book is added i.e. (4 + 4 + 2). The Cash Book is termed as
n/S
___________________ Cash Book with discount column because of recording of discount.
___________________ Discount is of two types:
___________________ I. Trade Discount
tio
___________________
II. Cash Discount
___________________
I. Trade Discount: It is given for increasing the volume of sales
uc
___________________ and it is adjusted in the invoice, hence no entry is passed in
___________________ the books of the business, as it is always deducted from the
catalogue price. It is usually allowed by a whole seller to a
rod
___________________
retailer. For example, if the printed price of a book is 200
___________________ and 10% is offered as a Trade discount, then it is 20/- and
the net price would be 180/- i.e., ( 200 – 20) accordingly
entries are to be made by the seller as well as the buyer for
ep
180 in their books.
II. Cash Discount: It is given for prompt payment; hence it is
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recorded in the Cash Book. When discount is given for prompt

payment, it is a loss, hence it is to be shown on the debit side
of the Cash Book whereas discount received is to expedite
payment to the outsiders, hence it is shown on the credit side
t fo
of the Cash Book.

Note: No balance of discount columns is taken; simply the
total of both the sides is given.
No
Double Columns Cash Book
Dr. Cr.
Discount Cash Discount Cash

Date Receipts L.F. Date Payment L.F.
.
ES
Recording of Transactions in the Double Columns Cash Book

UP
As and when some incentive is offered for prompt payment,

discount offered is a loss; hence it is shown on the debit side of the
Cash Book. For example, Roop owes 1000 to M/s Goyal Traders of
Muzaffar Nagar. The firm offers a discount of 1% if payment is
made within one month. Roop makes the payment within
(c)
stipulated time. So he is offered 10 as discount and he makes the

payment of 990 to the firm. The following entry is required to be
ale
passed in the Journal if no Cash Book is used in the books of M/s
Goyal Traders. Notes
Dr. Cr. ___________________
n/S
___________________
Cash A/c Dr. 990
Discount A/c Dr. 10 ___________________
To Roop 1000
___________________
Cash received and discount allowed.
tio
___________________
If Cash Book is used, then both the accounts namely cash and
discount are to be recorded on the debit side of the Cash Book. ___________________
uc
Similarly, if discount is received for making prompt payment then ___________________
such items are to be recorded on the credit side of the Cash Book,
___________________
i.e., amount received or paid in the Amount/Cash column and
rod
discount allowed/received in the discount column. ___________________
___________________
Example: Enter the following transactions into a two columns
Cash Book:
ep
2006
July 1 Balance of cash in hand 2,100
July 2 Cash sales 550
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July 5 Received 1460 from Mr. Mukesh and allowed him a

discount of 40
July 10 Paid to Rakesh 970 in full settlement of his account 1,000
July 11 Furniture purchased for cash 1,500
t fo
July 12 Cash sales 2,500

July 15 Cash purchases 900
July 21 Goods purchased from Sanjay 2000
No
July 24 Goods sold to Ram Niwas 2,500

July 25 Paid to Sanjay in full settlement of his A/c 1,950
July 27 Received from Ram Niwas in full Settlement of his a/c 2,480
July 29 Salaries paid 2,000
July 30 Wages paid 50
.
ES
Solution:
UP
Dr. Cr.
Cash Cash
Particulars Discount Amount Particulars Discount Amount
Date L.F. Date L.F.
(receipts) (Payments)
2006 2006
(c)
July 1 To Balance 2,100 July By Rakesh 30 970

b/d 10
Contd...
ale
July 2 To Sales a/c 550 July By Furniture 1,500
10 a/c
Notes
July 5 To Mukesh 40 1,460 July By purchases 900
___________________ 15 a/c
n/S
July To Sales a/c 2,500 July By Sanjay 50 1,950
___________________ 12 25
___________________ July To Ram 20 2,480 July By salaries a/c 2,000

27 Niwas 29
___________________ July By wages a/c 50
tio
30
___________________
July By Rent a/c 500
31
___________________
July Balance c/d 1,220
uc
31
___________________
60 9,090 80 9,090
___________________
Aug. 1 To balance b/d 1,220
rod
___________________
Note: As it is clear from the above cash book that cash balance is
___________________ taken whereas in discount column-no balance is taken, it is simply
totalled which shows that if debit side is taken 60 is allowed as
discount which is a loss and on the other hand, if credit side is
ep
taken then 80 which is received as discount hence it is a
profit/gain.
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Example: From the following particulars, write out Cash Book of

Mr. V. Ratna and bring down the closing balance of cash in
hand:
t fo
2006
July 1 Cash in hand 840
July 3 Recorded from Wilson and Co. 180
July 7 Paid to Thomas and Bros. 65
No
July 10 Electricity Paid 150

July 12 Cash purchases 270
July 15 Cash sales 550
.
July 20 Goods purchased on credit from Devdanam 1,000

ES
July 22 Goods sold on credit to Ramanathan 2,500

July 24 Received in full settlement of his A/c Ramanathan 2,450
July 25 Paid to Devadanam in full settlement of his A/c 980
UP
July 27 Cartage paid 12

Solution:
(c)
ale
Discoun Amoun Discoun Amou Notes
Particular L.F t t Particular L.F t nt
Date Date
s . s .
( ) ( ) ( ) ( ) ___________________
n/S
2006 2006
___________________
July To Balance 840 July 7 By Thomas 65
1 b/d 160 July 10 & Bros. 150 ___________________
July To Willson 550 July 12 By 270
3 & Co. Electricity ___________________
50 2,450 July 25 20 980
tio
July To sales A/c A/c
July 27 12
15 To By ___________________
July 30 Purchases 153
July Ramanatha
24 n July 31 A/c 2370
___________________
50 4,000 By 20 4000
uc
Devdanam ___________________
A/c
By Cartage ___________________
A/c
rod
By Rent A/c ___________________
By Balance
c/d ___________________
Aug. To Balance 2,370
1 b/d
ep
Note: Whenever two column cash book is used, it is not necessary
to have two columns meant for cash and discount only. The
columns may be used as –2 for cash and 2 for bank. This system of
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cash book is adopted when the receipts and the payments are by
cheques and, the transactions with bank are in large numbers. The
bank account maintained by the business is of personal nature
t fo
(account). This two column (popularly) known as double column

cash book provides an opportunity to keep both the accounts
simultaneously i.e., the cash and bank. This is more convenient
and one is able to find out quickly both the balances at a glance.
No
Important Points while Making Two Column Cash Book

These important points are discussed below:
1. Business started: As and when a business is commenced

.
ES
with cash, then this amount is shown in the cash column of

the Cash Book as to capital account and if cash directly paid
to Bank, then in the Bank column. If balances are carried
down, then balances brought down and amount is written as
UP
given in cash as well as Bank column.
2. Cash paid to Bank: This item affects both the accounts

namely (i) Cash A/c and (ii) Bank A/c, hence it is written on
both the sides of Cash Book i.e., debit side as well as credit
(c)
side; in debit side to cash A/c in the Bank column whereas in

the credit side By Bank A/c in the cash column.
ale
3. Cash withdrawn from Bank: This transaction also affects
Notes both the accounts of the Cash Book i.e., (i) Cash A/c and (ii)
Activity
___________________ Bank A/c. This also requires posting at both the sides of the
Present a draft of the cash
Cash Book. Though it is different from the earlier one i.e., on
n/S
book with bank and discount
___________________
columns. the reverse side.
___________________
Contra: As the transaction is posted on both the sides of Cash
___________________ Book, such entry is called Contra. This is indicated by the
tio
___________________
capital word ‘C’.
___________________ 4. Payment by cheque: When cheque is issued in lieu of cash,

then the account which ought to be credited is cash but as the
uc
___________________
cheque is issued so Bank A/c is credited in place of cash. Thus
___________________ when it is directly put in the Cash Book, amount is entered in
Bank column on the credit side of the Cash Book.
rod
___________________
___________________ 5. Receipts of cheques: When cheques are received from the

customers or outsiders, then Cash A/c can be put in the cash
column on the debit side of the Cash Book and follow them to
the principle as explained in term No.2 or better would be if
ep
directly amount is shown in the Bank column on the debit side
of the Cash Book.
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Check Your Progress

Fill in the blanks:
1. ................... is given for prompt payment, hence it is
t fo
recorded in the Cash Book.

2. If Cash Book is used, then both the accounts namely
cash and discounts are to be recorded on the
No
................... side of the Cash Book.
Cash Book with Bank and Discount Columns or Three

Columns Cash Book
.
ES
This type of Cash Book is used by big business houses because (i)
there is large number of transactions and (ii) receipts and
payments are through cheques. Under this Cash Book three
UP
columns meant for (A) Discount (B) Cash and (C) Bank, are shown
on both the sides of the Cash Book. Other columns remain as
usual. This Cash Book contains three columns; hence it is termed
as Three Column Cash Book.
(c)
ale
Following is the form of Three Columns Cash Book.
Notes
Three Columns Cash Book
Ca Ba Disco Ba ___________________
n/S
Da Partic L. sh nk Da Particul L. unt nk
Discount Cash
te ulars F. te ars F. ___________________
( ) ( ) ( ) ( ) ( ) ( )
___________________
___________________
tio
___________________
Example: From the following particulars, write up the Cash Book ___________________
of M/s K.K. of Chennai with Cash and Bank columns and bring
uc
___________________
down the final balance:
___________________
2006
rod
___________________
Oct. 1 Cash in hand 100
___________________
Oct. 1 Cash at Bank 3,500
Oct. 5 Paid salary by cheque 250
ep
Oct. 7 Paid to K.K. & Co. by cheque 260
Oct. 9 Received a cheque from B & Co. 2,500
Oct. 12 Bought goods for cash paid by cheque 750
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Oct. 15 Received cash from M/s S. Chand 1,500

Oct. 17 Deposited cash into bank 1,450
Oct. 18 Sundry creditors were paid by cheque 1,250
t fo
Oct. 19 Received from debtors by cheque Which could not be sent 1,780
to bank
Oct. 20 B & Co. cheque dishonoured 2,500
Oct. 22 B & Co. paid cash 2,500
No
Oct. 24 R & Co. issued a cheque for 470 in full Satisfaction of 500
his account for
Oct. 27 Shyam Lal was paid 395 in full Settlement of his A/c 400
amounting to
.
Oct. 31 Deposited into the Bank 2,200

ES
Solution:
Three Columns Cash Book
UP
Discou Cas Ban L.F Discou Cas Ban

Particula L. nt h k Particula . nt h k
Date Date
rs F rs
( ) ( ) ( ) ( ) ( ) ( )
2006 2006
Oct.1 To Balance 100 3,500 Oct.5 By salaries – 250
b/d – 2,500 Oct.7 A/c
(c)
Oct.9 – 260
Oct.1 To B & Co. 1,50 Oct.1 By K & Co. – 750
5 To S. (C) 0 1450 2 By (C) 1450 –
Oct.1 Chand – Oct.1 Purchase
ale
7 To Cash 1,78 – 7 A/c – 1250
Oct.1 A/c 0 – Oct.1 By Bank – 2,500
Notes
9 To 30 2,50 470 8 A/c 5 395
Oct.2 Debitors 0 2,200 Oct.2 By S.
___________________ (C) (C) 2,20
2 A/c 0 Creditors 0 5,110
n/S
___________________ Oct.2 To B & Co. Oct.2 By B & Co. 4,88
4 To R & Co. 7 By Shyam 5
___________________ Oct.3 To Cash Oct.3 Lal
1 A/c 1 By Bank
___________________ A/c
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By Balance
___________________ c/d
30 5,88 10,12 5 5,88 10,12
___________________
0 0 0 0
uc
___________________
Petty Cash Book
___________________
This type of Cash Book is used in such concerns where small
rod
___________________
payments are made daily and that too in large numbers. In such
___________________ situation, a fixed amount of cash in the beginning of the month is
given to a person who is known as petty cashier. After a fixed
period say a week or month, he is again reimbursed or paid back
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the amount whatever he has spent at the end of week or period.
Such a system is known as imprest system which is becoming very
popular because of certain advantages.
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Advantages of Petty Cash Book: Following are the main

advantages of the Petty Cash Book:
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1. Time is saved (saving of time): As and when petty cashier is

appointed, it saves precious time of the head cashier.
2. Maintenance of efficiency: The efficiency of the business is
there because of such system.
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3. Minimizes the chances of fraud: It minimizes the chances

of fraud as the head cashier is in a position to exercise better
control and can inspect or check his accounts any time.
.
4. It is convenient to prepare ledger accounts: It is very easy

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to prepare ledger accounts as the totals are recorded.

5. Saving labour & space: It also helps in saving the labour of
the head cashier along with a little space required for the
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totals of various items.

Thus, this type of system (the Imprest System) is very useful. It
contains only one column to record receipt of cash to be taken from
the head cashier and other column to record payments of various
(c)
counts. All such payments are to be totalled to know the total

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amount spent, so that necessary accounts are debited. The
following is the form of Petty Cash Book. Notes
Analytical Petty Cash Book ___________________
n/S
Total Amount Printing
___________________
Receipts Date Particulars Voucher No. Cartage Postage
& Stationery
___________________
___________________
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___________________
Example: Enter the following transactions in Analytical petty ___________________
Cash Book:
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___________________
2006
___________________
Jan.1 Received cheque from Head Cashier 100.00
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Jan.2 Paid for Postage and Telegram 15.00 ___________________
Jan.3 Stationery purchased 5.00 ___________________

Jan.14 Paid for cartage 8.00
Jan.18 Paid for travelling 7.00
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Jan.27 Tea for guests 6.00
Jan.29 Office cleaning charges 12.00
Jan.30 Paid for carriage 4.00
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Jan. 31 Telegram charges 8.00
Analytical Petty Cash Book

Tea &
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Voucher Total Postage Cartage

Receipts Date Particulars Stationary office
No. Amount telegram Travelling
expenses
2006
100.00 Jan.1 To cash a/c –
Jan.2 By Postage & 15.00 15.00 – – –
No
Jan.3 telegram 5.00 – 5.00 – –

Jan.1 By Stationery 8.00 – – 8.00 –
4 By Cartage 7.00 – – 7.00 –
Jan.1 By Travelling 6.00 – – – 6.00
8 By Tea for –
Jan.2 guest
12.00 – – – 12.00
7 By office
4.00 – – 4.00 –
.
Jan.2 cleaning
8.00 8.00 – – –
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9 charges
Jan.3 By Carriage
0 By Telegram 65.00 23.00 500 19.00 18.00
Jan.3 35.00
1
100.00 Jan.3 100.00
UP
1
35.00 By Balance
65.00 c/d
100.00 Total
Feb.1 To Balance
Feb.1 b/d
(c)
To Cash
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Purchases Day Book
Notes
All credit purchases are recorded in this book which is either used
___________________
for resale or Raw materials used for production. The purchases
n/S
___________________ which are made for cash are not at all recorded in this book.
___________________ Similarly the assets which are bought for running the business are
also not recorded such as machinery, furniture, etc. All these
___________________
assets and cash purchases are separately recorded in the journal
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___________________ Cash Book. Following is the form of Purchases Day Book.
___________________ Purchases Day Book
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___________________ Date Particulars Invoice No. L.F. Amount ( )
I II III IV V
___________________
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___________________
___________________ I. Column is meant for date.
II. Column is meant for writing details regarding name of

supplier, name of articles purchased & number i.e., quantities.
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III. Invoice No.
IV. Ledger Folio

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V. Amount of the purchase
Thus, all the credit purchases are totalled which give us the
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amount of total credit purchases made during the period.
Sales Day Book

The goods which are sold on credit are recorded in this book but if
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sales are made for cash or assets are sold either for cash or on
credit, these are not at all recorded in this book, but are recorded
either in the cash book or in the journal. The form of this book is
similar to that of purchases book.
.
Thus all the credit sales are totalled which give us the amount of
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total credit sales made during the period.
Invoice: An Invoice is given to the buyer when sales are made on

credit. It is generally a bound invoice book which is serially
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numbered in duplicate. Original copy is given to the buyer and

duplicate copy is retained. There after entries in the sales book are
made with the help of duplicate.
(c)
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Purchase Returns Book
Notes
This book is also known as Returns Outward Book. This book
records all the returns to the suppliers which are made during the ___________________
n/S
period. The return is of goods or raw materials purchased from the ___________________
Suppliers and Return is on account of difference in quantity or
___________________
quality. This book is used when the returns are in sufficient
number. If returns are not much, then it may be recorded in the ___________________
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Journal. The form of Purchase Returns Book is similar to that of ___________________
Purchase Day Book.
___________________
Form of Purchase Returns Book
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___________________
Debit Amount
Date Particulars L.F. ___________________
Note No. ( )
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I II III IV V ___________________
___________________
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Debit Note: Whenever goods are returned to the supplier, a letter
which is known as the debit note is also sent along with returned
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goods. The purpose of this note is to inform the supplier about this
deduction or debit given to his account. This note contains the
following particulars such as:
1. Name and address of the supplier
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2. Description of the goods returned

3. Rate and total value
4. Invoice no, along with date
No
5. Signature
Following is the specimen of a debit note -
Debit Note
.
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No. ..........................
Place .......................
Date ........................
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From
Name and address ....................................................

(of the sender) ....................................................
(c)
To name and address ....................................................

(of the supplier) ....................................................
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We are debiting your account with value of under mentioned goods
Notes returned to you for reasons stated below:
___________________
Sales Returns Book
n/S
___________________
This is also known as Returns Inward Book. As and when goods
___________________
are returned by the customers, a credit note is issued and the entry
___________________ is made in this book. This book again contains the same columns
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___________________ which a Purchases Returns Book contains. There is only one
difference i.e. in place of debit note No. the column is used to note
___________________
the credit note No. The form of sales Returns Book is as under:
uc
___________________
Sales Returns Book
___________________
Credit Amount
Date Particular L.F.
Note No. ( )
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___________________
I II III IV V
___________________
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Credit Note: As and when goods are returned by the customers, a
credit note is being sent to him.
This note informs the customer that his account has been credited
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for the goods returned and he is required to pay less from the
original amount outstanding in his account. It also contains the
following particulars.
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(i) Name and address of the customer

(ii) Description of goods returned
(iii) Value
No
(iv) Signature
Following is the specimen of a credit note
Credit Note
.
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No. .....................
Place .................
Date ..................
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From
Name and Address
Bills Receivable Book

(c)
When bills are received from debtors and number of such bills
received is larger (big) then such bills are recorded in a separate
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book, known as bills Receivable Book. All such bills are totalled for
a particular period and are posted in the accounts of the debtors Notes
from whom such bills are received. Following is the form of Bills ___________________
n/S
Receivable Book.
___________________
Bills Receivable Book
___________________
Date of Receipt
Cash Discount
Where payable
Amount of bill
Terms of Bill
From Whom
Endorser(s)
___________________
Received
Due date
Acceptor
Remarks
Tenor or
allowed
Drawer
Date of
tio
L.F.
Bill
( )
___________________
___________________
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___________________
___________________
Bills Payable Book
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___________________
Where either purchase is made for credit or loans are taken, then ___________________
Bills are issued which are termed as Bills Payable. The book in
which these bills are recorded is termed as Bills Payable Book. All
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such Bills are totalled after a lapse of a certain period and are
posted in the accounts of the creditors to whom such bills are
issued. Following is the form of Bills Payable Book:
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Bills Payable Book

Remarks
To Whom
Endorser
Due Date
Acceptor
Payable
Amount
payable
Drawer
Where
Term
Date
L.F.
( )
(s)
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Check Your Progress

No
Fill in the blanks:

1. ................... is also known as Returns Inward Book.
2. Whenever goods are returned to the supplier, a letter
.
which is known as the ................... is also sent along

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with returned goods.
Summary
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Subsidiary Books is a normal routine to record individually each

and every transaction which takes place in the business. As we
know it is first recorded in a book known as memorandum book
(c)
from where it is recorded in a book known as the journal being the

primary book of the business.
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Lesson End Activity
Notes
With the help of internet, gather information on subsidiary books
___________________
accounting.
n/S
___________________
___________________
Keywords
___________________
Cash Book: All cash transactions are directly entered into the
tio
___________________ Cash Book and on the basis of Cash Book, ledger accounts are
___________________ prepared.
uc
___________________ Cash Discount: It is given for prompt payment; hence it is
___________________ recorded in the Cash Book.
Petty Cash Book: This type of Cash Book is used in such concerns
rod
___________________
where small payments are made daily and that too in large
___________________
numbers.
Subsidiary Books: It is a normal routine to record individually
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each and every transaction which takes place in the business.
Trade Discount: It is given for increasing the volume of sales and
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it is adjusted in the invoice, hence no entry is passed in the books

of the business, as it is always deducted from the catalogue price.

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1. Explain the need for sub-division of journal.

2. Describe the types of subsidiary books.
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3. Discuss the concept of Cash Book.

4. Write short notes on:
(a) Petty Cash Book
.
(b) Purchases Book

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(c) Sales Return Book
Further Readings
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Books
(c)

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Notes
___________________
n/S
Delhi. ___________________
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Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, ___________________
New Delhi.
___________________
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___________________
Delhi.
___________________
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Chand, New Delhi.

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Web Readings
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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___________________
Case Study 1: Profit vs. Cash Flow
uc
___________________
If you keep your business's books on the accrual method of
accounting, you'll have to make some adjustments to determine ___________________
your actual cash flow. These adjustments are necessary because
rod
___________________
certain accrual accounting transactions are taken into account to
determine your accrual net profit, even though these expenses do ___________________
not currently require a cash outlay.
The following example looks at the adjustments necessary to
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convert the accrual profits of Bug Busters Exterminating Service
to its cash flow for its year ending December 31, 2011.
To convert its accrual profit to its cash flow profit, Bug Busters
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will need balance sheets from the beginning and end of the period
it wishes to examine. In this case, Bug Busters will examine the
period starting on January 1, 2011, and ending on December 31,
2011. Below is the comparative balance sheet provided by Bug
Busters' accountant for December 31, 2011, and December 31,
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2009:
Bug Busters Exterminating Service
Comparative Balance Sheets
12/31/08 12/31/2009
No
Cash $17,845 $4,375

Accounts Receivable 12,185 27,371
Inventory 6,034 9,133
Property and Equipment 83,239 83,239
Less: Accumulated Depreciation (44,826) (48,989)
.
Total Assets $74,477 $75,129

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Accounts Payable $6,977 $7,630

Notes Payable (Bank Loans) 27,500 12,000
Total Liabilities $34,477 $19,630
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Stockholder's Equity $40,000 $55,499

Total Liabilities and Equity $74,477 $75,129
The conversion process also requires an income statement for the end of
the period under examination. The income statement of Bug
Busters Exterminating Service for the year ending December 31,
2011 is presented below. The income statement was prepared
(c)
using the accrual method of accounting.
Contd…
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Bug Busters Exterminating Service Income Statement
Notes December 31, 2011
Sales $267,189
___________________
Less: Cost of Goods Sold 132,122
n/S
___________________ Gross Profit $135,067
Less: Operating Expenses (115,405)
___________________
Less: Depreciation (4,163)
___________________ Net Profit $15,499
tio
___________________ Bug Busters will have to adjust its accrual net profit to determine
its cash flow for the year. As a general rule, Bug Busters can
___________________ convert its accrual net profit using the following formula:
uc
___________________ Net Profit
___________________ + Depreciation
- Increases (or + Decreases) in Accounts Receivable
rod
___________________
- Increases (or + Decreases) in Inventories
___________________ + Increases (or - Decreases) in Accounts Payable
- Decreases (or + Increases) in Notes Payable (Bank Loans)
= Net Cash Flow
ep
Using the formula above, Bug Busters can adjust its accrual net
profit to determine its cash flow for the year:
Adjustment Description Amount
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Net Profit--December 31, 2011 $15,499

Add: Depreciation 4,163
Subtract: Increase in Accounts Receivable between 12/31/10 and 12/31/11 (15,186)
Subtract: Increase in Inventory between 12/31/10 and 12/31/11 (3,099)
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Add: Increase in Accounts Payable between 12/31/10 and 12/31/11 653

Subtract: Decrease in Notes Payable between 12/31/10 and 12/31/11 (15,500)
Net cash flow for the year ended December 31, 2011 ($13,470)
Bug Busters' accrual net profit and the net cash flow for the year
No
ended December 31, 2011, report two entirely different results.

The income statement prepared using the accrual method of
accounting reports a profit of $15,499 for the year. However, in
terms of a cash flow, Bug Busters had a negative cash flow of
$13,470 for the same year. In other words, Bug Busters spent
.
$13,470 more than it collected during the year.

ES
Question:
Analyse the case and make a comparative balance sheet for the
two years.
UP
Source: http://www.wbsonline.com/resources/case-study-profit-vs-cash-flow/
(c)
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Case Study 2: The Importance of Accounting Standards – A
PricewaterhouseCoopers Case Study Notes
Accounting Standards ___________________
n/S
Several of the SSAPs and FRSs are detailed in the context of a ___________________
fictional oil company (Global Oil). Further FRSs are expected as
business becomes more complex. How these different standards ___________________
are applied varies with the type of business conducted by a
___________________
company. As for any company the shareholders’ interests must be
tio
protected. The following examples of SSAPs and FRSs ___________________
demonstrate the consideration that must be given in drawing up
financial accounts in order that interested individuals, such as ___________________
financial analysts, can clearly judge a company’s performance and
uc
___________________
position.
SSAP 12 Accounting for Depreciation ___________________
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Companies invest in assets (such as machinery) in order to ___________________
produce goods or services to sell. These are known as fixed assets.
In the case of the gas or oil industry, an oil rig is a fixed asset – ___________________
the company must own an oil rig to supply oil or gas. All
companies have some form of fixed assets although the
ep
dependence on these assets varies with the type of business.
Another example could be machinery for manufacturing a car, or
a building in which employees work.
In this example, Global Oil has built an oil rig for £50m. In its
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balance sheet, cash will be reduced by £50m and fixed assets will
increase by £50m. In 20 years’ time (the ‘economic life’); the
company knows that the oil rig will need to be replaced. By the
20th year, the value of the oil rig in the company’s balance sheet
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will be zero. Thus, the value of the oil rig will reduce each year by
a set amount (£2.5m in this example). This is known as
depreciation and the annual depreciation figure is shown in the
profit and loss account.
SSAP 12 states that the economic life of a fixed asset should be
No
reviewed regularly and should be stated in the notes to the

accounts, together with how the rate of depreciation was
determined.
FRS 11 Impairment of Fixed Assets and Goodwill
FRS 11 is a new standard and deals with any loss in value to a
.
fixed asset, for example through damage or downturn in the

ES
economy. This is known as impairment.

For example, if a pipeline from Global Oil’s oil rig is damaged, the
supply of oil or gas is reduced or stopped until repairs are made.
Thus the ability of the oil rig to produce oil or gas is less than
UP
expected and the fixed asset’s value is reduced. Global Oil must
therefore make a general reduction in the value of the asset and
charge the loss to the profit and loss account.
FRS 11 states that all companies must reassess the value of their
fixed assets on a regular basis to establish whether the figure in
(c)
the balance sheet is a ‘fair value’.

Contd…
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FRS 1 Cash flow Statements
Notes
There are three main statements in a company’s annual report
___________________ and accounts - the profit and loss account, the balance sheet and
n/S
the cash flow statement. For example, while Global Oil may be
___________________ highly profitable, without any cash it will be unable to pay its
___________________ employees or suppliers. Clearly, when Global Oil sells oil to its
customers, it needs to ensure it receives prompt payment. Cash is
___________________ the lifeblood of a business and it is therefore important for a
company to issue a cash flow statement. FRS 1 sets out the
tio
___________________ format and contents of a company’s cash flow statement.
___________________ Question:
Analyse the case and summarise it briefly.
uc
___________________
Source: http://businesscasestudies.co.uk/pricewaterhousecoopers.html
___________________
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___________________
___________________
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(c)
UNIT 11: Trial Balance
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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BLOCK-III
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(c)
Detailed Contents
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Notes
UNIT 11: TRIAL BALANCE
___________________ UNIT 13: DEPRECIATION ACCOUNTING
n/S
 Introduction  Introduction
___________________
 Meaning of Trial Balance  Meaning of Depreciation
___________________
 Types of Errors  Need of Depreciation
___________________
 Methods for Providing Depreciation
tio
UNIT 12: PREPARATION OF TRADING, PROFIT &
___________________
LOSS ACCOUNT AND BALANCE SHEET
___________________ UNIT 14: CASH FLOW STATEMENTS
 Introduction
 Introduction
uc
 ___________________
Classification of Final Accounts
 Meaning of Cash Flow Statement
 ___________________
Manufacturing Account
 Objectives of Cash Flow Statement
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 ___________________
Balance Sheet
 Classification of Cash Flow
___________________
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Notes
Activity
___________________
Trial Balance
n/S
meaning of a trial balance.
___________________
___________________
Objectives
___________________
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topics: ___________________
 Meaning of Trial Balance ___________________
uc
 Methods of Preparing Trial Balance ___________________
 Types of Errors
___________________
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___________________
Introduction
___________________
Every transaction which takes place in the business is recorded
either in the journal or in the subsidiary books. It is posted in the
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concerned accounts. After posting is over, final accounts are
prepared in order to know the operational results of the business
during a particular or fixed period and also to depict financial
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position of the business on a particular date. Final accounts can be

prepared only if information relating to balances of all accounts are
available. This function of supplying necessary and accurate
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balances is performed by Trail Balance so it is very much

necessary to know the meaning of Trial Balance.
Meaning of Trial Balance

No
Trial Balance is a statement which shows balances of all accounts

on a particular date. In other words, trial balance is a schedule or
list of balances whether debit or credit, extracted from the
.
accounts in the ledger including cash and bank balances from the
ES
Cash Book.
Preparation of a Trial Balance

UP
It is very easy to prepare a Trial Balance. It contains three

columns which are as follows:
1. Particulars
2. Amount (Dr.)
(c)
3. Amount (Cr.)
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The above columns if put in a statement form, can be depicted as
Notes given below:
___________________ Trial Balance as on____________________
n/S
___________________ Amount (Dr.) Amount (Cr.)
Particulars
___________________
___________________
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___________________
___________________
uc
___________________
___________________ Methods of Preparing Trial Balance
rod
___________________ Generally speaking there is one method of preparing Trial Balance
___________________ i.e., by balance method. But as per Accountants, the following are
the methods of preparing Trial balance:
1. By Balance Method
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2. By Total Method
3. By Combined method i.e., Balance and total method

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1. Balance Method: Under this method as the name of method

suggests, the balance of each account is taken. This method is
very simple, easy to calculate, saves both time and labour.
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That is why it is in vogue.
2. Total Method: Under this method, instead of taking balance

of each account, the total of both the sides of each account is
No
taken.
3. Combined Method: Under this method, as it is clear from the

name of the method, both the above explained methods i.e.,
balance as well as total method is used. This method is not in
.
use because of wastage of time and labour.

ES
Objects and Functions of Trial Balance

The main objectives of preparing a trial balance are to check the
UP
arithmetical accuracy of all transactions. In every trial balance,

the total of debit balances must agree with the total of credit
balances. It is a proof of arithmetical accuracy of postings but it is
not a conclusive evidence of correctness of the books of accounts.
The other objects and functions of a trial balance are as under:
(c)
1. It serves as a summary of all accounts.

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2. It helps in locating error if any. Notes
3. It acts as a base for the preparation of final accounts. ___________________
n/S
Example: Prepare a trial balance from the following transactions: ___________________
2006 ___________________
July 1 Ram commenced business with cash 10,000
___________________
tio
July 3 Paid to bank 8,000
___________________
July 3 Bought goods for cash 500
July 5 Bought office furniture 400 ___________________
uc
July 10 Drew from bank for office 1,000 ___________________
July 13 Goods sold to Shyam 600
___________________
July 15 Bought goods from Krishan 410
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July 18 Trade expenses paid 100 ___________________
July 19 Received cash from Shyam 590 ___________________

allowed him discount 10
July 25 Wages paid 50
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July 29 Krishan paid off in full settlement of his 400
account
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July 31 Interest due on Capital 500
Solution:
Trial Balance
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As on July, 31, 2005

Amount (Dr.) Amount (Cr.)
Particulars
Capital a/c ---- 10,500
No
Cash a/c 2,040 ---

Bank a/c 7,000 ---
Purchases a/c 910 ---
Sales a/c ---- 600
.
Office Furniture a/c 400 ----

ES
Trade Expenses a/c 100 ----

Wages a/c 50 ----
Rent a/c 100 ----
UP
Interest on Capital a/c 500 ----

Discount a/c 10 10
11,110 11,110
It is clear from the above trial balance that it is tallied and one can
(c)
conclude that the balances of all accounts are accurate

arithmetically but it is not a conclusive proof of correctness of
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accounts because of certain errors which are not disclosed by the
Notes trial balance.
Activity
Make___________________
a report on the types of
Check Your Progress
n/S
errors that can be made in trial
___________________
balance.
Fill in the blanks:
___________________
1. Under ................... method, as the name of method
___________________
suggests the balance of each account is taken.
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___________________
2. Under ................... method, instead of taking balance of
___________________
each account, the total of both the sides of each account
uc
___________________ is taken.
___________________
Types of Errors
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___________________
___________________ There are two types of errors. They are explained below.
Errors which cannot be located by Trial Balance

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The following errors cannot be detected by the trial balance means
in spite of agreeing the totals of debit side and credit side, these
errors occur in the accounts. These are also known as clerical
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errors.
(i) Error of Omission: These errors occur when any business
transaction is completely or partially omitted from the
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recording in the books of original records. As goods, sold of

Rs.10,000 to Mr. Ram, is entered nowhere in the original books
then its effect will also not come on the ledger and trial
balance. Thus, such type of errors cannot be located by trial
No
balance.
(ii) Error of Commission: Such type of errors is found when one
account is debited or credited in the place of another account.
As cash received from Shyam Rs.1,000 has been credited in the
.
ES
name of Ram. Such type of errors do not affect the agreement

of the totals of the debit and credit side of the trial balance but
they affect the result of the business.
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(iii) Error of Principle: These errors occur when there is wrong

classification between the capital and revenue nature incomes
or expenditures. As the purchases of furniture of Rs.20,000 are
entered in the book of purchases while it should be in furniture
account. Such errors cannot be located by trial balance.
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(iv) Compensating Error: When two errors of the same account
Notes
occur and the effect of one error is compensated by the effect of
other error it is called compensating error. For example, if ___________________
n/S
purchase of Rs.10,000 from Ajay is credited only by Rs.1,000 ___________________
while the purchases from Vijay for Rs.1,000 is credited by
___________________
Rs.10,000. Thus, such type of errors do not affect on the
agreement of the Trial Balance. ___________________
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___________________
Errors which can be located by Trial Balance
___________________
The errors which affect the agreement of the totals of the Trial
uc
___________________
balance can be located easily. These are also known as principle
errors. These errors may be relating to: ___________________
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(i) Totals of the subsidiary books or ledger accounts. ___________________
___________________
(ii) Balancing of an account of the ledger.
(iii) Wrong posting of any amount in any account.
ep
(iv) Posting of any account may be in the wrong side of the
account.
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(v) Balance of any account may be omitted in writing in the Trial

Balance.
(vi) Wrong total of the Trial Balance.
t fo
Check Your Progress

True or False:
1. If all the transactions are correctly made, then only the
No
total of trial balance will tally.

2. When a transaction is omitted partially or completely to
be recorded in the subsidiary books, it is known as Error
.
of commission.
ES
3. Compensating error is a type of principle error.

4. Errors can also be rectified.
UP
Summary
A Trial Balance is a statement which contain the debit and credit
balances of all the ledger accounts, prepared on a particular date to
(c)
verify whether the entries in the books of accounts are

arithmetically correct or not. If the trial balance agree i.e. the total
ale
of debit column is equal to the total of credit column of the trial
Notes balance, it can be assumed that books of accounts are
___________________ arithmetically correct. If the trial balance does not agree, it means
n/S
mistakes have been done in recording the transaction.
___________________
___________________
Lesson End Activity
___________________
tio
On a chart, prepare the Performa of a trial balance. Also state the
___________________
components that are included in a trial balance.
___________________
uc
___________________
Keywords
___________________
Balance Method: Under this method as the name of method
rod
___________________ suggests, the balance of each account is taken.
___________________
Combined Method: Under this method, as it is clear from the
name of the method, both the above explained methods i.e.,
balance as well as total method is used.
ep
Total Method: Under this method, instead of taking balance of
each account, the total of both the sides of each account is taken.
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Trial Balance: It is the list of accounts taken from the ledger.

t fo
1. What is meant by trial balance?

2. What are the types of trial balance? Explain.
3. How Trial Balance is prepared. Explain.
No
4. Why there is disagreement of Trial Balance?

5. What are the types of errors in trial balance?
6. Prepare a Trial Balance from the following items:
.
ES
(a) Amount due to Kishore 1500

(b) Furniture 1500
(c) Sales 15000
UP
(d) Purchases 22500

(e) Returns Outward 1500
(f) Office Expenses 3000
(g) Overdraft 2250
(h) Capital 9000
(c)
(i) Due from Ram 3000

(j) Outstanding 750
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Further Readings
Notes
Books ___________________
n/S
___________________
___________________
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___________________
uc
rod
Delhi.
___________________
New Delhi.
ep
Delhi.
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t fo
Chand, New Delhi.
Web Readings
No
.
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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. No
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UP
(c)
UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
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Notes
Activity
___________________
Prepare a report on the final
Preparation of Trading, Profit &
n/S
accounts classification.
___________________
Loss Account and Balance Sheet ___________________
___________________
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Objectives ___________________
___________________
topics:
uc
___________________
 Classification of Final Accounts
 Manufacturing Account ___________________
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 Balance Sheet ___________________
___________________
Introduction
ep
The Profit & Loss account and the balance sheet are, together
popularly known as the final accounts. The Profit & Loss account
is prepared to show the financial results of a business and the
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balance sheet is prepared to show the financial position. To

calculate the accurate amount of profit or loss, it is a must that
there should be recognition of the revenues and expenditures. If
t fo
there is a wrong recognition of expenses or revenues, results of the

business will also be wrong. Thus the distinction between the
capital and revenue items is very important.
No
Classification of Final Accounts

The final accounts can be classified in the following categories:
Trading and Profit & Loss Account

.
ES
In the Trading and Profit & Loss Account all those accounts are
disclosed which affect the profit or loss of the business. In other
words, all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left-hand
UP
side, all the expenses incurred during a period and in the right-
hand side all the incomes earned during a period are disclosed.
This account contains two parts:
1. Trading Account
(c)
2. Profit & Loss Account

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Trading Account
Notes
Trading account is the comparison of sales and purchase. This
___________________
account is prepared to determine the amount of gross profit or
n/S
___________________ gross loss on sales. The proforma of Trading Account is given
___________________ below:
___________________ Proforma of Trading Account
tio
In the Books of …………….
___________________
Trading Account
___________________ (for the year ending …………….)
Dr. Cr.
uc
___________________
Particulars Amount Particulars Amount
___________________ ( ) ( )
To Opening Stock ------- By Sales --------
rod
___________________
To Purchases --------- Less: Returns -------- -------
___________________ Less: Returns --------- ------- By Closing stock -------
To Wages & Salaries ------ By Gross Loss (if any)
To Carriage Inwards ------- Transferred to P/L A/c -------
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To Cartage ------
To Freight -------
To Light Power & Heating in
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factory
To Factory Insurance ------
To Works Manager’s Salary -------
To Foreman’s Salary ------

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To Factory Rent & Taxes -------

To Motive Power ------
To Factory Repairs -------

To Factory Expenses ------
No
To Octroi duty -------

To Custom Duty ------
To Manufacturing Exps. -------
To Consumable Stores ------
To Gross Profit -------
.
Transferred to P/L A/c. ------

ES
------ -------
Profit & Loss Account

UP
Profit & Loss Account is the second part of Trading and Profit &
Loss Account. Trading Account shows the gross profit which is the
difference of sales and cost of sale. Thus the gross profit cannot
treated as net profit while the businessman wants to know how
(c)
much net profit he has earned from the operating activities during
a period. For this purpose Profit & Loss Account is prepared
ale
keeping in mind all the operating and non-operating incomes and
losses of the business. In the debit (left-hand side) side all the Notes
expenses and losses are disclosed and in the credit side (right-hand ___________________
n/S
side) all the incomes are disclosed. The excess of credit side over
___________________
debit side is called net profit while the excess of debit side over
credit side shows net loss. Net profit increases the net worth of the ___________________
business; therefore, it is added to the capital of owner. Net loss ___________________
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decreases the net worth of business so it is subtracted from capital.
___________________
The proforma of Profit & Loss Account is given below:
___________________
Proforma of Profit & Loss Account
uc
___________________
Particulars Particulars
To Gross Loss (if any) transferred By Gross Profit (transferred ___________________
from Trading Account — from Trading Account) —
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___________________
To Staff Salaries — By Discount Received —
To Office Rent — By Commission Received — ___________________
To Rates & Taxes — By Dividend —
To Office Lighting and Heating — By Interest Received —
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To Printing & Stationary — By Rent from Tenant —
To Bank Charges — By Interest from Bank —
To Insurance — By Interest on Drawings —
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To Telephone Charges — By Profit on Sale of Investment —

To Legal Expenses — By Provision for Discount on —
Creditors
To Repairs — By Bad Debts recovered —
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To Postage & Stamps — By Profit on Sale of Assets —

To Trade Expenses — By Other Incomes —
To Establishment Exps. — By Net Loss (if any) transferred to —

Capital A/c
No
To Audit Fees —
To Charity & Donations —

To Management Exps. —
To Depreciation on —
Land & Buildings —
.
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Plant and Machinery —

Furniture —
To Stable Expenses —
To Directors Fee —
UP
To Bank Charges —
To Interest on Loan —
To Interest on Capital —
To Discount on B/R —
To Sales Tax —
(c)
Contd...
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To Advertisement —
Notes To Bad Debts —
Activity
___________________ To Agents’ Commission —
To Travelling Expenses —
n/S
manufacturing account.
___________________
To Free Samples distributed —
___________________ To Warehouse Expenses —
To Packing Expenses —
___________________
To Brokerage —
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___________________ To Distribution Expenses —
To Delivery Van Expenses —
___________________
To Provision for Bad and Doubtful —
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___________________ Debts
To Entertainment Expenses —
___________________
To Carriage Cutward —
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___________________ To Loss on Sale of Assets —
___________________ To Licence Fees —

To Repairs of Assets & Motor Car
To Loss by Fire
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To Conveyance Expenses
To Net Profit (Transferred to
Capital A/c.)
— —
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Check Your Progress

Fill in the blanks:
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1. ................... account is prepared to determine the

amount of gross profit or gross loss on sales.
2. ................... depicts the gross profit which is the
No
difference of sales and cost of sale.

3. ................... is prepared keeping in mind all the
operating and non-operating incomes and losses of the
business.
.
ES
If in the business some goods are being manufactured along with
UP
the trading activities, a manufacturing account is also prepared. In

the case of trading activities (selling and purchasing of goods) only,
the Trading and Profit & Loss Account is prepared to compute the
net profit which is discussed in the preceding pages. In case there
is a manufacturing unit in the business with the trading, such a
(c)
businessman’s income statement will include:

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1. Manufacturing Account Notes
2. Trading Account ___________________
n/S
3. Profit & Loss Account ___________________
The Proforma of Manufacturing Account is given here under: ___________________
Proforma of Manufacturing Account ___________________
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Manufacturing Account ___________________
(for the year ending ………)
___________________
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To Opening Stock By Closing Stock ___________________
Raw Materials ------ Raw Materials ------
Work-in-progress ------ — Work-in-progress ------ — ___________________
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By Sale of Scrape — ___________________
By Cost of Production —
(Transferred to Trading A/c) ___________________
To Purchase of materials ------
Less returns ----- —
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To Manufacturing Wages —
To Carriage Inwards —
To Factory Expenses —
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To Stores Consumed —
To Factory Rent —
To Electricity —
To Depreciation on Plant —
To Repairs of Plant —
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To Works Manager’s Salary —

To Coal and Fuel —
To Other Factory exps. —
— —
No
Example: (Manufacturing, Trading and Profit & Loss A/c)

From the following particulars of Mr. Amit Agrawal, prepare a
Manufacturing Account, Trading and Profit & Loss Account for the
year ended 31st March, 2008.
.
ES
Purchase of Raw Material 39,58,500

Return Inwards 21,000
Stock on 31 March, 2008:
st
UP
Raw Materials 3,63,000

Work-in-Progress 3,00,000
Finished Goods 4,11,000
Productive Wages 6,00,000
(c)
Factory Expenses 5,52,000

General Office Expenses 90,000
ale
Salaries 1,80,000
Notes
Distribution Expenses 30,000
___________________ Selling Expenses 2,10,000
n/S
___________________ Purchase Expenses 1,80,000
Export Duty 90,000
___________________
Import Duty 60,000
___________________ Interest on Bank Loan 1,80,000
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___________________ Stock on 1 April, 2007:
st
Raw Material 1,20,000

___________________
Work-in-Progress 90,000
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___________________
Finished Goods 1,23,000
___________________ Sales 58,50,000
Return Outwards 25,500
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___________________
Carriage Inwards 31,500
___________________
Discount allowed 3,000
Sale of Scrap 6,000
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Depreciation on Plant 1,50,000
Depreciation on Furniture 12,000
Solution:
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(for the year ending 31st March, 2008)
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To Opening Stock
Materials 1,20,000 By Sale of Scrap 6,000
Work-in-Progress 90,000 By Closing Stock:
To Purchase less Materials 3,63,000
No
Returns
(39,58,500- 25,500) 39,33,000 Work-in-Progress 3,00,000
To Productive Wages 6,00,000 By Cost of
Production
.
To Factory Exps 5,52,000 (Transferred to 50,76,000

ES
Trading A/c)
To Purchase Exps. 1,80,000
To Import Duty 60,000
To Carriage Inwards 30,000
UP
To Depreciation on 1,50,000
Plant
To Repairs to Machines 30,000
57,45,000 57,45,000
(c)
ale
(for the year ending 31st March, 2008)
Notes
Activity
___________________
Present a draft of an
n/S
To Opening Stock of By Sales less assignment on balance sheet
Finished Goods Returns and___________________
marshaling of its assets
To Cost of Production 1,23,000 (58,50,000 – 21,000) 58,29,000 and liabilities.
___________________
(Transfer from 50,76,000 By Closing Stock 4,11,000
Manufacturing A/c) ___________________
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To Gross Profit c/d 10,41,000
___________________
62,40,000 62,40,000
___________________
To General Office Exps. 90,000 By Gross Profit b/d 10,41,000
uc
To Salaries 1,80,000 ___________________
To Depreciation on 12,000 ___________________

Furniture
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To Discount Allowed 9,000 ___________________
To Carriage Outwards 25,500 ___________________

To Interest on Bank Loan 1,80,000
To Export Duty 90,000
ep
To Selling Expenses 2,10,000
To Distribution Expenses 30,000
To Net Profit (Transferred to 2,14,500
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Capital A/c.)
10,41,000 10,41,000
Check Your Progress

t fo
Fill in the blanks:

1. If in the business some goods are being manufactured
along with the trading activities, a ................... account
No
is also prepared.
2. The balance of a manufacturing account is transferred
to ................... Account.
.
Balance Sheet
ES
After the determination of the net profit of the business through

the Trading and Profit & Loss Account, the businessman wants to
UP
know the financial position of the business. For this purpose he

prepares a statement which is called the Balance Sheet. The
Balance Sheet depicts the financial position of the business on a
fixed date. A Balance Sheet is prepared with those balances of
Trial Balance which are left out (personal and real accounts) after
(c)
taking out the nominal accounts’ balances to prepare the Trading

and Profit & Loss Account. A Balance Sheet has two sides – assets
ale
side and liabilities side. The assets and liabilities are shown in a
Notes particular order.
___________________
Marshalling of Assets and Liabilities
n/S
___________________
___________________
Order of presenting the assets and liabilities in the balance sheet
is called marshalling of assets and liabilities. A balance sheet may
___________________ be prepared by marshalling the assets and liabilities in the
tio
___________________ following orders:
___________________ Balance Sheet prepared in Liquidity Order: Here liquidity
means conversion of assets into cash. When a Balance Sheet is
uc
___________________
prepared on the basis of liquidity order, more easily convertible
___________________
assets into cash are shown first and those assets which cannot be
easily converted into cash are shown later and so on. In the case of
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___________________
___________________ liabilities, first those liabilities are shown which are payable
earlier and then those liabilities are shown which are payable
later. The proforma of such a Balance Sheet is given below:
ep
Proforma of Balance Sheet in Order of Liquidity
(as on ………………….. )
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Liabilities Assets
Current Liabilities Current Assets ------
Sundry Creditors ------ Cash in Hand
Bank Overdraft ------ Cash at Bank ------

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Short-term Loan ----- Short-term Investment ------

Outstanding Expenses ----- Prepaid Expenses ------
Unaccrued Income ----- Bills Receivable ------
Bills Payable ----- Accrued Incomes ------
No
Long-term Liabilities Debtors ------

Capital ------- Closing Stock ------
(+) Net Profit ------- Fixed Assets
------- Land & Building -----
.
(–) Drawings ------- ----- Plant & Machinery -----

ES
Long-term Loans ----- Furniture -----

Contingent Investments (Long-term) -----
Liabilities
-------- Goodwill ------
UP
-------- Patents & Trademarks ------

Livestock ------
------- -------
Balance Sheet prepared in Permanency Order: Balance Sheet

(c)
prepared under this order is the reverse of the Balance Sheet

prepared in liquidity order. In this case first those assets are
ale
shown which are more permanent means fixed assets and then less
permanent assets (Current Assets) are shown. Similarly, first long- Notes
term liabilities (more permanent) are shown then less permanent ___________________
n/S
(short-term on current) liabilities are shown. The proforma of such
___________________
type of Balance Sheet is given below:
___________________
Proforma of Balance Sheet in Permanency Order
(as on ……………. ) ___________________
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Liabilities Assets ___________________
Long-term Liabilities Fixed Assets
___________________
Capital ------ Land & Building -----
uc
___________________
(+) Net Profit ------ Plant & Machinery -----
------ Furniture ----- ___________________
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(–) Drawings ------ ------ Long-term Investment ----- ___________________
Long-term Loans ------ Goodwill -----
___________________
Current Liabilities Patents & Trademarks -----
Sundry Creditors ------ Livestock etc. -----
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Bank Overdraft ------ Current Assets
Bill Payable ------ Cash in Hand -----
Short-term Loan ------ Cash in Bank -----
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Outstanding Expenses ------ Short-term Investments -----

Un-accrued Incomes ------ Bill Receivable -----
Prepaid Expenses -----
t fo
Accrued Incomes -----

Debtors -----
Closing Stock -----
------ -----
No
Example: (Manufacturing, Trading and Profit & Loss Account and

Balance Sheet)
From the following Trial Balance of Mr. Aditya, prepare a Trading
Manufacturing and Profit & Loss Account and Balance Sheet as on
.
31st December, 2007.

ES
Trial Balance
(as on 31st December, 2007)
UP
Particulars
Stock on 1.1.2007:
Raw Materials: 8,000 ---
Work-in-Progress 20,000 ---
Finished Goods 40,000 ---
(c)
Manufacturing Wages 40,000 ---

Contd...
ale
Purchases of Raw Materials 1,20,000 ---
Notes Factory Rent 20,000 ---
___________________ Carriage of Raw Materials 12,000 ---
n/S
Salary of the Works Manager 8,000 ---
___________________
Office Rent 8,000 ---
___________________
Printing and Stationary 4,000 ---
___________________ Bad Debts 4,000 ---
tio
___________________ Sales --- 2,40,000
Land and Buildings 1,20,000 ---
___________________
Plant and Machinery 80,000 ---
uc
___________________ Depreciation on Plant 8,000 ---
___________________ Sundry Debtors 20,000 ---
Sundry Creditors --- 1,20,000
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___________________
Cash in Hand 20,000 ---
___________________
Capital --- 1,72,000
5,32,000 5,32,000
ep
Closing stock on 31st December, 2007 were as follows:
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Raw Materials 20,000
Finished Goods 40,000

t fo
Solution:
In the Books of Mr. Aditya

(for the year ended 31st December, 2007)
No
To Opening Stock: By Closing Stock:
Raw Materials 8,000 Raw Material 20,000
Work-in-Progress 20,000 28,000 Work-in-Progress 16,000
To Purchase of Materials 1,20,000 By Cost of Production 36,000
.
ES
To Carriage on Raw 12,000 (Transfer to Trading A/c.) 2,00,000

Materials 8,000
To Depreciation on Plant 40,000
To Manufacturing Wages 20,000
To Factory Rent 8,000
UP
To Salary of Works Manager

2,36,000 2,36,000
(c)
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(for the year ending 31st December, 2007)
Notes
Particulars Amount Amount (Rs.) ___________________
n/S
(Rs.)
To Opening Stock: By Sales ___________________
2,40,000
Finished Goods 40,000 By Closing Stock
40,000 ___________________
To Cost of Production 2,00,000 Finished Goods
(Transfer from Manufacturing A/c) ___________________
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To Gross Profit
(carried to P. & L. A/c) 40,000 ___________________
2,80,000 2,80,000
___________________
To Office Rent 8,000 By Gross Profit (brought
40,000
uc
To Printing & Stationary 4,000 from Trading A/c)
___________________
To Bad Debts 4,000
To Net Profit (carried to Capital ___________________
A/c) 24,000
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40,000
___________________
40,000
___________________
Balance Sheet
(as on 31st December, 2007)
ep
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital 1,72,000 Land and Buildings 1,20,000
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(+) Net Profit 24,000 1,96,000 Plant and Machinery 80,000

Sundry Creditors 1,20,000 Sundry Debtors 20,000
Stock on 31st Dec., 2007:
Raw Materials 20,000
Finished Goods 40,000
t fo
Cash in Hand 20,000

3,16,000 3,16,000
Check Your Progress

No
Fill in the blanks:

1. ................... means conversion of assets into cash.
2. The outstanding expenses at the time of preparation of
final account are shown in the ................... side of the
.
ES
balance sheet.
3. Interest on Capital is added to the capital of owner in
the ................... side of the Balance Sheet ...................
UP
Summary
Final accounts include the Trading and Profit & Loss Account and
Balance Sheet. Trading and Profit & Loss Account is prepared to
(c)
calculate the net profit earned by business during a period and

ale
Balance Sheet of a business is prepared to disclose the financial
Notes picture of the business.
___________________
In this unit, we have learnt about the basic elements of balance
n/S
___________________ sheet that includes assets and liabilities and the purpose of
___________________ preparing balance is to ascertain the financial position of the
business concern as on a particular date.
___________________
tio
We have also learned about the concept of assets and liabilities and
___________________
their classification. Assets can be classified as current assets and
___________________ fixed assets while liabilities are classified as current liabilities and
uc
___________________ long term liabilities.
___________________
Lesson End Activity
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___________________
___________________ Analyse the profit & loss account of HDFC bank for FY 2009-10
and make a balance sheet from it.
ep
Keywords
Financial Statements: These include the Trading and Profit &
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Loss Account, and Balance Sheet of the business.

Gross Loss: It is the excess of cost of sales over sales.
Gross Profit: It is calculated by comparing the sales and cost of
t fo
sales. It is the excess of sales over cost of sales.

Net Loss: Excess of expenditures over revenues is called net loss.
Net Profit: It is the excess of revenues over expenses. It is
No
depicted by P&L A/c.

.
1. What do you mean by Trading Account? Give the proforma of

ES
Trading Account and explain why it is prepared.

2. What is the importance of Balance Sheet? Give a form of
Balance Sheet in Liquidity order with imaginary examples.
UP
3. What do you mean by balance sheet? What is the purpose of

balance sheet?
4. Discuss the concept of liability and its classification in terms of
long term liability and current liability.
(c)
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5. Write short notes on the following:
Notes
(a) Net Profit
___________________
n/S
(b) Manufacturing Accounts
___________________
___________________
Further Readings
___________________
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Books ___________________

uc
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management– ___________________
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___________________
___________________
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Chand, New Delhi.
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Web Readings
http://accounting4management.com/examples_of_trading_and_prof
t fo
it_and_loss_account_and_balance_sheet.htm
http://www.futureaccountant.com/funds-flow-cash-flow/study-
notes/balance-sheet-information-derived-marshalling-assets-
liabilities-vertical-horizontal-forms/f17l/
No
http://www.kkhsou.in/main/EVidya2/commerce/financial_
statement.html
.
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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. No
ES
UP
(c)
UNIT 13: Depreciation Accounting
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Notes
Activity
___________________
Write an article on the concept
Depreciation Accounting
n/S
and causes of depreciation.
___________________
___________________
Objectives
___________________
tio
topics: ___________________
 Meaning of Depreciation ___________________
uc
 Need of Depreciation ___________________
 Methods for Providing Depreciation
___________________
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___________________
Introduction
___________________
Depreciation means decrease in the value of assets. According to
W. Pickles, depreciation is permanent continuing diminution in the
ep
quality, quantity or the value of an asset whereas J.R. Batliboi
says; the term depreciation represents loss or diminution in the
value of an asset consequent upon wear and tear, obsolescence,
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affluxion of time or permanent fall in market value. Whereas the

Institute of Chartered Accountants of India defines depreciation as
follows: “Depreciation is a measure of the wearing out,
t fo
consumption, or other loss of value of depreciable asset arising

from use, affluxion of time or obsolescence through technology and
market changes”.
No
Meaning of Depreciation
Depreciation is allocated so as to charge a fair proportion of the
depreciable amount in each accounting period during the expected
.
useful life of the asset. Depreciation includes amortization of assets

ES
whose useful life is predetermined. According to International

Accounting standards committee, “Depreciation is the allocation of
the depreciable amount of an asset over its estimated useful life.
UP
Depreciation for the accounting period is charged to income either

directly or indirectly.”
Thus, it is clear from the above definitions that depreciation is a
loss arising on account of circumstances, some of which are known
(c)
whereas others are not.

ale
Causes of Depreciation
Notes
Activity As we know that every asset is having a working life and if it is
___________________
Prepare a brief report on the over, then life of the asset is wasted. As the asset is in use of the
n/S
need for providing
___________________
depreciation.
business, the value of asset decreases and it must be charged from
the year’s relevant Profit & Loss account. The decrease in the
___________________
value of assets is because of the following causes:
___________________
1. Normal wear and tear: It is a very important cause of
tio
___________________
depreciation in case of tangible assets because of their use.
___________________
2. Obsolescence because of new inventions, old assets may be
uc
___________________ scrapped such machines become obsolete. Still they are capable
___________________ of being run physically.
rod
___________________ 3. On account of accidents such as loss by fire, earthquake or any
___________________ other natural calamity.
4. Fall in market prices: Market conditions may change the
market prices of the current assets but not the book value.
ep
5. Effect of time etc.: Some assets have definite time life like
lease hold property. On the expiry of its term, such asset ceases
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to exist.
Need of Depreciation
t fo
Depreciation must be provided because of the following reasons:

1. Profits are divisible only after providing for depreciation as per
section 2005 of the Indian companies Act. The profits can be
No
distributed without providing for depreciation with the prior

permission of the central Government. Thus depreciation as we
know is the decrease in the value of assets, to be transferred to
Profit & Loss account in order to calculate the correct amount
of profit as well as the exact value of the assets.
.
ES
2. Suitable provision for depreciation is must in order to put the

assets at the correct costs. If we show the assets and cost
without providing for depreciation which is due to normal wear
UP
and tear, so the Balance Sheet having different assets without

providing for depreciation, would be incorrect and it cannot
depict the true and fair view of the financial position of the
business. Therefore, it is, therefore, necessary to provide for
depreciation.
(c)
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3. Depreciation funds can be created for replacement of fixed
Notes
assets. After the expiry of life of the asset, replacement of such Activity
asset is possible if it is properly provided for in the form of ___________________
n/S
different methods for providing
depreciation fund created from Profit & Loss account. ___________________
depreciation of assets to be
recorded in the books of
Thus, we see that depreciation plays an important role in ___________________
records.
ascertaining the correct amount of profit as well as depicting a true
___________________
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and fair financial position of the business.
___________________
Calculation of Depreciation ___________________
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Depreciation can be calculated if the following items of information ___________________
are available. ___________________
1. Cost of the asset: including all expenses incurred for freight
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___________________
carriage including erection charges.
___________________
2. Scrap or residual value of the asset: It is estimated and
deducted from the original cost of the asset. Effective working
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life of the asset is not the physical life of asset.
Check Your Progress

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Fill in the blanks:

1. ................... is a measure of the wearing out,
consumption or other loss of value of depreciable asset
t fo
arising from use, affluxion of time or obsolescence

through technology and market changes
2. Depreciation includes ................... of assets whose
No
useful life is predetermined.
Methods for Providing Depreciation

There are various methods of allocating depreciation over the
.
useful life of the assets. The method of providing the depreciation

ES
is selected on the basis of various factors as types of assets, nature

of business, circumstances prevailing in business, etc. These
methods are given below:
UP
Fixed Instalment Method

Under this method, depreciation is a certain percentage of cost
which is calculated on the basis of the original cost-scrap value if
(c)
any divided by the number of years i.e., life of the asset. This can
be expressed like:
ale
Original Cost  ScrapValue
Notes Depreciation 
Life of the Asset
___________________
n/S
___________________ Cost  ScrapValue
Amount of Depreciation 
Number of useful life i.e., No. of Years
___________________
___________________
This method is also known as fixed/original cost/straight line
method of depreciation.
tio
___________________
___________________ Characteristics of the Method
uc
___________________ Fixed instalment method has the following characteristics:
___________________ (i) The amount of depreciation remains uniform/fixed under this
method.
rod
___________________
___________________ (ii) The value of the asset becomes zero at the end of its life.
Merits of the System

ep
Following are the important merits of this method:
(i) This method is very simple and easy to calculate.
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(ii) The value of the asset becomes zero.

(iii) This method is suitable to such type of assets where physical
deterioration takes place automatically such assets are land
t fo
and buildings, lease hold properties, etc.

(iv) Suitable for all types of business whether small or big.
Demerits of the Method

No
In spite of so many merits, this method is not free from its

demerits. The following are its important demerits:
(i) Though the amount of depreciation remains constant, but the
amount of repairs and renewal if any increases with the
.
ES
passage of time.
(ii) Loss of interest as the amount is not invested outside the firm.
(iii)If any other asset is purchased, then depreciation is separately
UP
calculated.
(iv) No provision for replacement as the amount of deprecation is
retained in the business.
(v) This method is not scientifically recognized; hence income tax
(c)
rules do not allow business houses to use this method of

depreciation.
ale
Accounting Entries
Notes
Following entries are required to pass in the books of the owner of
assets. ___________________
n/S
___________________
(i) For Depreciation of assets when depreciation account is not
maintained ___________________
S. No. Particulars L.F. ___________________
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1 Depreciation a/c Dr. ___________________
To particular asset a/c
Depreciation on asset provided. ___________________
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2. Profit and Loss a/c Dr. ___________________
To Depreciation a/c
Balance transferred ___________________
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___________________
All the above two entries are passed every year except the year
when scrap is sold. If scrap or residual is sold the following entry is ___________________
to be passed.
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Dr. Cr.
Cash a/c Dr.
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To Asset a/c
Sale of scrap recorded
Example: From the following transactions of a Thapar Oil Co.,

prepare machinery account for the year ending 31st December,
t fo
2006.
2006
January 1 Purchased a second hand machine for 40,000
No
January 1 Spent 10,000 on repairs for making it serviceable.

June 30 Purchased additional machinery for 20,000
Sep 30 Repairs and renewals of machinery 2,000
Dec 31 Depreciate the machinery at 10% p.a. on original cost method.
.
Solution:
ES
Machinery Account
Date Particulars Date Particulars
2005 2005
UP
Jan.1 To Balance a/c 40,000 Dec. 31 By Depreciation 6,000

Jan.1 To Bank (for repairs) 10,000 Dec 31 By Balance c/d 64000
June 30 To Bank a/c 20,000
70,000 70,000
(c)
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Working Notes:
Notes
___________________ (i) Depreciation on machine I for one year on 50,000 @ 10% p.a. = 5,000
n/S
(ii) Depreciation on machinery II for six months on 20,000 @ 10%
___________________
p.a. = 1,000
___________________ Total Depreciation = 6,000
(iii) Spent 2,000 in Sept 2006 as revenue expense to be debited to profit and
___________________ loss a/c.
tio
___________________
Sale of Asset: If the asset is disposed-off in the middle of the year,
___________________ the sale proceeds are to be credited in the asset account. If there is
any balance in the asset account, it may be either loss or profit to
uc
___________________
be transferred to Profit & Loss account. For example if the above
___________________
machine written down value of which was 16,700 as on 31.12.05
rod
___________________ is disposed of on 1st July 2006 for 13,500 then the machinery a/c
___________________ would be as follows:
Machinery Account
ep
Date Particulars Date Particulars
1.1.06 To Balance b/d 16700 1.7.06 By cash 13,500
(sale proceeds)
1.7.06 By Depreciation 825
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A/c (For six months)

By P & L a/c
(Loss on a/c of sale) 2,375
16,700 16,700
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Diminishing Value (Balance) Method

Under this method depreciation is calculated as a certain
percentage of the value i.e., written down value or diminishing
No
value but the rate of depreciation remains constant (fixed). The

amount of depreciation decreases every year with the passage of
time but the value of the asset never becomes zero. This method is
also known as written down value method. Rate of depreciation
.
can be determined on the basis of cash, scrap value and useful life
ES
of the asset which is as follows:
 s 
R  1  n 100 
UP
 c 
Where, R stands for rate of depreciation in %
S stands for scrap/salvage value
(c)
C stands for cost of asset

D stands for the useful life of the asset.
ale
Merits
Notes
1. It is very easy to calculate as compared to other methods.
___________________
2. The amount of depreciation and repairs put same amount of
n/S
___________________
burden on Profit & Loss a/c.
___________________
3. No difficulty in calculating the amount of depreciation where
expansion or increase in the value of assets takes place. ___________________
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4. This method is scientific/systematic and is recognized under ___________________
income tax rules. ___________________
uc
5. It is suitable for assets having long life such as land and ___________________
building, plant and machinery, etc. ___________________
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Demerits ___________________
___________________
1. No attention is given towards interest on capital invested.
2. Difficult to calculate because of reducing balance and fixed

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rate of depreciation.
3. Difficult to bring the value of asset as zero.
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4. No funds for replacement.
Accounting entries
t fo
Similar entries are passed as given in the first method of charging

depreciation i.e., fixed instalment method.
Change of Depreciation Method

No
The business concerns such as firms or companies, sometimes, are

interested to change the method of charging depreciation i.e., from
fixed instalment method to written down value or diminishing
balance method or vice versa.
.
The change may be effective from the year in which the decision is
ES
taken. Though there is no problem except that the depreciation is

charged on the original cost or written down values, the cost or the
value is to be found out by applying the rate of depreciation of the
UP
method asked to adopt, but if this change is effective from the back
date or retrospective year, then it poses some difficulties. If
patiently worked out, the problem can be sorted out. The following
illustration would help the reader to understand the mechanisms
(c)
explained.
ale
Depletion Method
Notes
This is also known as production method. It is suitable for mining,
___________________ oil wells etc. At that time when mines are taken on a contract and
n/S
___________________ that too on rent which is divided by the total production. This can
be calculated with the following formula:
___________________
___________________ Annual Output

Depreciation  Depreciable Cost 
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___________________
Lifetime Output ( Expected )
___________________ It is difficult to maintain the accounts of annual production. When

it becomes uneconomic, then it is a very difficult task.
uc
___________________
___________________ Amortization
In the course of doing business, you will likely acquire what are
rod
___________________
___________________ known as intangible assets. These assets can contribute to the

revenue growth of your business and, as such, can be expensed
against these future revenues. An example of an intangible asset is
ep
buying a patent for an invention.
The term amortization is used in respect of intangible assets like
patents, copyrights, leasehold and goodwill which are recorded at
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cost. Some intangible assets have limited useful life and are,
therefore, written off. The process of their writing off is called
amortization.
t fo
Calculating Amortization
The formula for calculating the amortization on an intangible asset
is similar to that one used for calculating straight-line
No
depreciation. You divide the initial cost of the intangible asset by

the estimated useful life of the intangible asset. For example, if it
costs 10,000 to acquire a patent and it has an estimated useful life
of 10 years, the amortized amount per year equals 1,000. The
.
amount of amortization accumulated since the asset was acquired

ES
appears on the balance sheet as a deduction under the amortized

asset.
UP
Formula
Initial cost ÷ useful life = amortization per year

10,000 ÷ 10 = 1,000 per year
(c)
ale
Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. Straight Line Method is also known as ...................
___________________
2. Diminishing Balance Method is also known as
___________________
...................
___________________
tio
3. In ................... method, depreciation is calculated on
___________________
diminishing value but the rate of depreciation remains
constant. ___________________
uc
___________________
Summary ___________________
rod
According to W. Pickles, depreciation is permanent continuing ___________________
diminution in the quality, quantity or the value of an asset ___________________
whereas J.R. Batliboi says; the term depreciation represents loss
or diminution in the value of an asset consequent upon wear and
ep
tear, obsolescence, affluxion of time or permanent fall in market
value. Whereas the Institute of Chartered Accountants of India
defines depreciation as follows: “Depreciation is a measure of the
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wearing out, consumption, or other loss of value of depreciable

asset arising from use, affluxion of time or obsolescence through
technology and market changes.
t fo
Lesson End Activity

Make a chart on the various methods for providing depreciation
No
and the formulas and the calculation for each method.
Keywords
Amortization: The term amortization is used in respect of
.
intangible assets like patents, copyrights, leasehold and goodwill

ES
which are recorded at cost. The process of their writing off is called
amortization.
Depreciation: It is a measure of the wearing out, consumption, or
UP
other loss of value of depreciable asset arising from use, affluxion

of time or obsolescence through technology and market changes
Diminishing Value (Balance) Method: Under this method
(c)
depreciation is calculated as a certain percentage of the value but

the rate of depreciation remains constant.
ale
Fixed Instalment Method: Under this method, depreciation is a
Notes
certain percentage of cost which is calculated on the basis of the
___________________
original cost-scrap value if any divided by the number of years
n/S
___________________

___________________ 1. What do you understand by the term depreciation? What is the
tio
___________________ need for providing for depreciation?
___________________ 2. Discuss the reasons for depreciation.
uc
___________________ 3. Explain the methods for providing depreciation.
___________________ 4. Write brief notes on the following:
rod
___________________
(a) Fixed Instalment Method
___________________
(b) Diminishing Value (Balance) Method
(c) Amortization
ep
Further Readings
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Books
t fo

No

.
Delhi.
ES

New Delhi.
UP

Delhi.
(c)

Chand, New Delhi.
ale
Web Readings Notes
www.accountingcoach.com/online-accounting-course/60Xpg01.html ___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
ale
Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
UNIT 14: Cash Flow Statements
ale
Notes
Activity
___________________
Write a report on the meaning
Cash Flow Statements
n/S
and the objectives of the cash
flow___________________
statement in accounting.
___________________
Objectives
___________________
tio
topics: ___________________
 Meaning of Cash Flow Statement ___________________
uc
 Utility of Cash Flow Statement ___________________
 Classification of Cash Flow
___________________
rod
___________________
Introduction
___________________
Cash is considered one of the vital sources of the firm to meet day
to day financial commitments. The cash is considered to be as most
ep
important source of life blood of the business. The day to day
financial commitments are met out only out of the available
resources. The cash resources are availed through two different
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types of receipts viz. sales, dividends, interests known as regular

receipts and sale of assets, investments known as irregular
receipts of the business enterprise. To have smooth flow of
t fo
business enterprise, it should have ample cash resources for its

operations. The availability of cash resources is mainly depending
on the cash inflows of the enterprises. The smoothness in
operations of the enterprise is obtained through an appropriate
No
matching of cash inflows and cash outflows.
Meaning of Cash Flow Statement

.
Cash flow statement is a statement which indicates the changes of

ES
cash during an accounting period. The basis of cash flow statement

is cash and cash equivalents. CFS also shows the sources of inflow
of cash and applications or uses of outflow of cash during a
UP
specified period (that may be a month or a year). To prepare CFS

the information are used from the analysis of the balance sheet
and the profit and loss account and the opening and closing
balances of the cash during a period are also used in it.
(c)
The cash flow statement is being prepared on the basis of extracted

information of historical records of the enterprise. Cash flow
statements can be prepared for a year, for six months, for quarterly
ale
and even for monthly. The cash includes not only means that cash
Notes in hand but also cash at bank.
Activity
___________________
Prepare an assignment on the The following are the main motives of preparing the cash flow
n/S
classification of cash flow.
___________________ statement:
___________________ 1. To identify the causes for the cash balance changes in between
___________________ two different time periods, with the help of corresponding two
tio
different balance sheets.
___________________
2. To enlist the factors of influence on the reduction of cash
___________________
balance as well as to indicate the reasons though the profit is
uc
___________________
earned during the year and vice versa
___________________
Check Your Progress
rod
___________________
Choose the correct option:
___________________
1. How are cash flows denominated in terms of both
current assets and current liabilities?
ep
(a) Increase in current assets and decrease in current
liability
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(b) Decrease in current assets and increase in current

liability
(c) Increase in current assets and increase in current
t fo
liability
(d) Both (a) and (b)
2. Cash position in the opening and closing comprises of:
No
(a) Cash in hand

(b) Cash at bank
(c) Both cash in hand and cash at bank
.
(d) None of the above

ES
Objectives of Cash Flow Statement

UP
The objective of the cash flow statement is to provide the

information about the cash flows of a business to the various users
of the financial statements during an accounting period. Thus, it is
very important tool for the financial analysis used for the
followings purposes:
(c)
ale
1. Knowledge of Cash Position: CFS is prepared on the basis of
Notes
cash which indicates the changes in cash position of a concern
during a specified period. It also discloses the causes of such a ___________________
n/S
change of cash. ___________________
2. Knowledge of Cash Inflow and Cash Requirements: This ___________________

statement is used to throw the light on the various sources of
___________________
tio
cash from where the cash is generated during an accounting
___________________
period. The cash requirement in the coming time can also be
forecasted by the preparation of project CFS. ___________________
uc
3. Knowledge of Short-term Solvency: CFS helps in the ___________________
analysis of short-term solvency of a company. Cash is more ___________________

relevant to meet the immediate obligations of a company.
rod
___________________
4. Help in Framing the Financial Policies: CFS may also be ___________________
used to get the help in framing the financial policies of a
business regarding the sources and uses of cash during a
ep
period.
5. Helpful in Dividend Policy: CFS helps the management of a
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company regarding taking the decision of cash payment of

dividend such as, how much cash would be available for the
payment of dividend.
6. Helpful in Cash Budget: It provides the base to prepare the
t fo
cash budget regarding the receipts and payment of cash during

a particular period.
7. Useful for External Investors: CFS is very useful for the
No
external investors of a company. They use it to know the ability

of the company to repay the outsiders' obligations in short
period. On the basis of that they take the decision whether they
should give loan to the company or not.
.
8. Study of Sources and Uses of Cash from Various

ES
Activities: Under the CFS all the activities of the business are
classified into three – operating, investing and financial
activities. The sources and uses of cash from all these activities
UP
are mentioned in the CFS. Thus we can study the trend of cash
inflow and outflow from CFS.
Classification of Cash Flow

(c)
As per AS-3 (revised) the cash flow statement is prepared in a

manner reporting the cash flows into following categories:
ale
1. Cash Flow from Operating Activities: Cash flows from
Notes
operating activities are earned from the principal revenue –
___________________
producing activities of an enterprise. Through these activities
n/S
___________________ the net profit or loss of the business is also determined.
___________________ Examples of such a flow from operating activities are given in
AS-3 (revised) as follows:
___________________
tio
(a) Cash receipts from the sale of goods and rendering of
___________________
services;
___________________
(b) Cash receipts from royalties, fees, commissions and other
uc
___________________
revenue;
___________________
(c) Cash payments to suppliers for goods and services;
rod
___________________
(d) Cash payments to and on behalf of employees;
___________________
(e) Cash receipts and cash payments of an insurance enterprise
for premiums and claims, annuities and other policy
ep
benefits;
(f) Cash payments or refunds of income taxes unless they can
be specifically identified with financing and investing
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activities; and
(g) Cash receipts and payments relating to future contracts,
forward contracts, option contracts and swap contracts
t fo
when the contracts are held for dealing or trading purposes.

. No
ES
UP
(c)
Figure 14.1: Diagrammatic Presentation of

Cash Flow from Operating Activities
ale
Some transactions, such as the sale of an item of plant, may give
rise to a gain or loss which is included in the determination of net Notes
profit or loss. However, the cash flows relating to such transactions ___________________
n/S
are cash flows from investing activities.
___________________
2. Cash Flow from Investing Activities: Investing activities of ___________________
an enterprise include the purchase of fixed assets (as plant
___________________
and machinery, land and buildings, furniture and fixtures)
tio
with an intention to generate the future incomes. On account ___________________
of being an important activity, a separate disclosure of the ___________________

cash flows from these activities is made. Examples of cash
uc
___________________
flows arising from investing activities are in AS-3 (revised) as
___________________
follows:
rod
___________________
(a) Cash payments of acquired fixed assets (including
intangibles). These payments include those relating to ___________________
capitalized research and development costs and

self-constructed fixed assets;
ep
(b) Cash receipts from disposal of fixed assets (including
intangibles);
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(c) Cash payments to acquired shares, warrants or debt

instruments of other enterprises and interests in joint
ventures (other than payments for those instruments
t fo
considered to be cash equivalents and those held for dealing

or trading purposes);
(d) Cash receipts from disposal of shares, warrants or debt
instruments of other enterprises and interests in joint
No
ventures (other than receipts from those instruments

considered to be cash equivalents and those held for dealing
or trading purposes);
(e) Cash advances and loans made to third parties (other than
.
ES
advances and loans made by a financial enterprise);

(f) Cash receipts from the repayment of advances and loans
made to third parties (other than advances and loans of a
UP
financial enterprise);
(g) Cash payments for future contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
(c)
payments are classified as financing activities; and

ale
(h) Cash receipts from future contracts, forward contracts,
Notes
option contracts and swap contracts except when the
___________________
contracts are held for dealing or trading purposes, or the
n/S
___________________ receipts are classified as financing activities.
___________________ When a contract is accounted for as a hedge of an identifiable
___________________ position, the cash flows of the contract are classified in the same
tio
manner as the cash flows of the position being hedged.
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
Figure 14.2: Diagrammatic Presentation of

Cash Flow from Investing Activities
3. Cash Flow from Financing Activities: Under financial

No
activities those activities are included which are relating to the

size and composition of capital (equity and preferences) and
borrowing or loans. As per AS-3 (revised), the separate
disclosure of cash flows arising from financing activities is
.
important because it is useful in predicting claims on future

ES
cash flows by providers of funds (both capital and borrowings)

to the enterprise. Examples of cash flows arising from
financing activities are:
UP
(a) Cash proceeds from issuing shares or other similar

instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds
and other short or long-term borrowings; and
(c)
(c) Cash repayments of amounts borrowed.

ale
Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
Figure 14.3: Diagrammatic Presentation of ___________________
Cash Flow from Financing Activities
___________________
rod
Choose the correct option: ___________________
1. Sale of plant and machinery falls under the category of:

ep
(a) Non-current assets sale – cash inflow
(b) Current asset sale – cash outflow
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(c) Non-current assets sale – cash outflow

(d) None of the above
2. Cash flow analysis is superior to the fund flow analysis
due to:
t fo
(a) Shorter span of cash recourses are considered

(b) Real cash flows are taken into consideration
(c) Both the opening and closing balances are considered
No
(d) All the above
Summary
.
Cash flow statement indicates sources of cash inflows and

ES
transactions of cash outflows prepared for a period. It is an

important tool of financial analysis and is mandatory for all the
listed companies. The cash flow statement indicates inflow and
UP
outflow in terms of three components: (1) Operating, (2) Financing,

and (3) Investment activities. Cash inflows include sale of assets or
investments, and raising of financial resources. Cash outflows
include purchase lo assets or investments and redemption of
financial resources.
(c)
ale
Lesson End Activity
Notes
With the help of internet, find out the schedule and format of the
___________________
various components of cash flow as stated in cash flow statement.
n/S
___________________
___________________
Keywords
___________________
Adjusted Profit & Loss A/c: Statement devised to determine the
tio
___________________
cash from operations.
___________________
Cash from Operations: Cash resources accrued in the business
uc
___________________ operations.
___________________
Decrease in Working Capital: Decrease in Net working capital
rod
___________________ i.e. Excess of current liabilities over the current assets – Resources
___________________ side of the fund flow.
Flow: Flow means changes occurred in between two different time
periods.
ep
Fund from Operations: Income generated from only operations.
Fund Loss in Operations: Loss incurred in the operations.
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Fund: Fund means working capital.
Increase in Working Capital: Increase in Net working capital

i.e. Excess of current assets over the current liabilities-
t fo
Applications side of the fund flow.

Non-current Assets: Long-term assets.
Non-current Liabilities: Long-term financial resources.
No
Statement of Changes in Working Capital: Enlisting the

changes taken place in between the current assets and current
liabilities of two different time horizons.
.
ES

1. Data Ltd., supplies you the following balance on 31st Mar 2005
and 2006:
UP
Liabilities 2005 2006 Assets 2005 2006

Share Bank
1,40,000 1,48,000 18,000 15,600
capital balance
Accounts
Bonds 24,000 12,000 29,800 35,400
Receivable
(c)
Contd...
ale
Accounts
20,720 23,680 Inventories 98,400 85,400
payable
Notes
Provision
1,400 1,600 Land 40,000 60,000 ___________________
for debts
n/S
Reserves ___________________
and 20,080 21,120 Good will 20,000 10,000
Surpluses ___________________
2,06,400 2,06,200 2,06,400 2,06,200
___________________
tio
Additional Information: ___________________
(a) Dividends amounting to 7,000 were paid during the ___________________
uc
year 1996. ___________________
(b) Land was purchased for 20,000. ___________________
rod
(c) 10,000 were written off on good will during the year. ___________________
___________________
(d) Bonds of 12,000 were paid during the course of the year.
You are required to prepare a cash flow statement.

ep
2. Since everything has some utility, analyse the cash flow
statement analysis and explain its various utilities.
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3. Discuss the procedure of determining cash provided by

operating activities. Give suitable example to illustrate your
answer.
t fo
Further Readings
Books
No

.
ES

UP

Delhi.
(c)
New Delhi.
ale
Notes
Delhi.
___________________
n/S
___________________
___________________ M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
___________________ Chand, New Delhi.
tio
___________________
Web Readings
___________________
www.accountingbase.com/CashFlow.html
uc
___________________
www.kkhsou.in/main/EVidya2/management/cash_flow.html
___________________
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___________________
___________________
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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___________________
Case Study 1: Kathryn Kennedy’s Trial Balance
uc
___________________
Kathryn Kennedy’s pet grooming business has been operating for
one month. Kennedy prepared her financial records according to ___________________
accepted accounting procedures. At month’s end she had the
rod
___________________
following accounts and balances:
Cash $2,202. ___________________
Accounts Receivable $1,002.

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Pet Grooming Equipment $2,300.
Office Equipment $2,800.
Accounts Payable $2,300.
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Kathryn Kennedy, Capital $2,804.

Kathryn Kennedy, Withdrawals $ 500.
Revenues $1,800.
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Expenses $ 900.
Kennedy prepared her trial balance for the month and ended up
with debit and credit balances of $8,304. She was pleased that her
trial balance did, in fact, balance—proving that she had kept
accurate records for the month. When she explained her pride to
No
her accountant, he indicated that even though the trial balance

was equal, she may have made errors.
Question:
1. Write the answer to the case study describing the errors that
she made.
.
ES
Source: highered.mcgraw-hill.com/sites/dl/free/.../sample_chapter5.pdf
UP
(c)
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Case Study 2: Asian Pacific Community Counseling, Inc.
Notes
Several years ago I received a call from the Executive Director of
___________________ this non-profit organization who's bookkeeper had just quit.
n/S
Payroll was approaching and they needed help that day to
___________________
calculate and prepare their payroll checks. We were able to do
___________________ that in a matter of a couple of hours. But they needed much more
help than that. They were receiving funding from several sources
___________________ and needed to maintain the integrity of their bookkeeping and
tio
cost allocation plan (such as it was). After getting into the details
___________________
of how their books were organized we determined that changes
___________________ needed to be made to more reasonably allocate costs to cost
centers and to better manage unexpended balances so that a
uc
___________________ closer monitoring of spending was possible. We ended up
becoming their full-charge bookkeeper handling daily
___________________ transactions, monitoring grant spending and providing on -going
financial reports for their executive director and Board of
rod
___________________
Directors. We were able to essentially replace the full-time person
___________________ they had employed for many years with a flat, monthly fee that
not only saved the company over $12,000 in annual accounting
costs, but ended the situation at year-end of being required to
send grant funds back to the funder because of under-spending.
ep
Better information with less hassle and headaches for a lower
cost. That's one of the advantages of using a professional, online
bookkeeping company that has the experience to do the job
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efficiently and effectively.

Question:
Analyse and summarise the case.
Source: www.dailybalance.com/clients/testimonials/
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Case Study 3: X & Co.
Notes
From the following balances extracted from the books of X & Co.,
prepare a trading and profit and loss account and balance sheet ___________________
n/S
on 31st December, 1991.
___________________
$ $
Stock on 1st January 11,000 Returns outwards 500 ___________________
Bills receivables 4,500 Trade expenses 200 ___________________
tio
Purchases 39,000 Office fixtures 1,000
___________________
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750 ___________________
Sundry debtors 30,000 Tent and taxes 1,100
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___________________
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000 ___________________
Interest on capital 700 Bills payable 3,000
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___________________
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900 ___________________
The stock on 21st December, 1991 was valued at $25,000.

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Source: http://accounting4management.com/examples_of_trading_and_profit_and_loss_
account_and_balance_sheet.htm
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 16: Financial Aspects of Supply Chain Management
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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BLOCK-IV
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Detailed Contents
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Notes
UNIT 16: FINANCIAL ASPECTS OF SUPPLY
___________________ UNIT 18: COST ACCOUNTING
CHAIN MANAGEMENT
n/S
 Introduction
 ___________________
Introduction
 Scope of Cost Accounting in Chain Management
 ___________________
Supply Chain Accounting
 Functions of Cost Accounting
 ___________________
Accounting and Logistics Cost: An Impediment to
 Essentials of Cost Accounting System
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Supply Chain Effectiveness
___________________
 Costing Systems
 Consignment Accounting
___________________
 Role of Cost in Cost Accounting
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UNIT 17: INVENTORY
___________________ MANAGEMENT’S
 Elements of Cost
TECHNIQUES AND CONTROL
___________________
 Introduction
UNIT 19: EVA AND BUDGETS
rod
___________________
 Inventory Costs  Introduction

___________________
Factors affecting Levels of Inventory  Economic Value Added (EVA)
 Inventory Measures  Budget
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 Budgetary Control

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Notes
Activity
___________________
Present a detailed report on
Financial Aspects of Supply Chain
n/S
the techniques used to boost
___________________
competitiveness in the supply
Management chain management
___________________
accounting.
___________________
tio
Objectives ___________________
___________________
topics:
uc
___________________
 Supply Chain Accounting
 SCMA in Practice: Sainsbury’s ___________________
rod
 Accounting and Logistics Cost: An Impediment to Supply Chain ___________________
Effectiveness
___________________
 Consignment Accounting ep
Introduction
Management accounting in supply chains (or supply chain
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controlling (SCC)) is part of the supply chain management concept.

This necessitates the need for planning, monitoring, management,
and information provision of logistics and manufacturing processes
throughout the whole value chain. The goal of management
t fo
accounting in supply chains is the optimization of these processes.

Therefore, this strategy is a form of controlling, focused on the
support of management.
No
Supply Chain Accounting

We can examine eight key Supply Chain Management Accounting
(SCMA) techniques that can be used in specific supply chain
.
situations. These techniques are as follows:

ES
Open Book Accounting

This is where management accountants share cost information
UP
about relevant processes in the supply chain, both within and

across organisations. The purpose is to identify non value adding
processes that could be withdrawn without detriment to the
customer – or that could even enhance customer service.
(c)
Open book accounting promotes margin improvement through cost

reduction, which can be shared between partner organisations. If
ale
both supplier and customer share process cost information, they
Notes are more likely to be successful in identifying non-value adding
___________________ processes.
n/S
___________________ Value Chain Costing
___________________
Value chain costing builds on Porter’s value chain analysis which
___________________ argues that competitive advantage in the marketplace results from
tio
___________________
either better customer value for the same cost (a differentiation
strategy) or the same customer value for less cost (a cost leader
___________________
strategy).
uc
___________________
A series of activities, or ‘links in a chain’ occur between a product’s
___________________ design and its distribution. Management accountants need to
identify where in the chain:
rod
___________________
___________________
 customer value can be enhanced
 costs can be reduced or
 differentiation can be achieved in the company’s segment of
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that value chain.
Target Costing
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Here, management accountants must determine a target cost for a

newly designed product or service to satisfy customer need. The
target cost is reached by identifying a selling price for the product
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or service, and then subtracting the amount of profit margin

required from that product or service by the company’s overall
long-term margin requirements.
Target costing is usually implemented during the development and
No
design phases of the manufacturing or service process. If costs are

exceeded after the target cost has been set, management
accountants need to identify process changes to meet the target
cost.
.
ES
Quality Costing
Quality costing is an important SCMA technique that aims to
improve supply chain quality, both in and across organisations. It
UP
has two benefits – to reduce quality costs and to increase the

quality offering to the ultimate customer. Quality costs are:
 the cost of conformance (costs of prevention and costs of
appraisal)
(c)
 the costs of non-conformance (costs of internal and external

failure).
ale
The intention is to reduce poor quality and waste by improved
preventative measures that minimise the recurrence of failure Notes
costs and improve customer experience. Management accounting ___________________
n/S
has a significant role to play because organisations can be unaware
___________________
of the costs of failure.
___________________
Performance Measurement
___________________
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This needs to occur throughout the supply chain, and should
___________________
include both financial and non-financial measures. The balanced
scorecard can be extended to include supply chain partners, ___________________
uc
because the objective is to create a far more competitive supply ___________________
chain than the alternative supply chain providers of that product
___________________
or service.
rod
___________________
The balanced scorecard has its greatest impact when it drives the
___________________
change process in support of the organisation’s strategic
intentions.
ep
The challenge for management accountants is how to extend the
traditional balanced scorecard (financial perspective, customer
perspective, internal perspective, innovation and learning
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perspective) across supply chain members. This demands a sound

understanding of the key performance areas that will drive
competitive advantage.
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Make versus Buy (Outsourcing)

Traditional management accounting techniques such as ‘make
versus buy’ are often used in a supply chain context, particularly
No
when identifying opportunities for outsourcing. However, caution

must be exercised, because outsourcing decisions must be made in
the strategic contexts of ultimate customer satisfaction and
preservation of the company’s core competences – that is, what it
.
must be able to do to survive.

ES
Outsourcing, where it occurs, should enhance the ultimate

customer proposition. ‘Make versus buy’ accounting needs to take
this broader requirement into account.
UP
Benchmarking
Management accountants can use benchmarking to compare
performance of one organisation against the best in class to provide
(c)
a particular product, process or service.

ale
The technique can be extended to benchmark performance across
Notes
supply chains – for example, different supplier performance or
___________________
different customer performance in terms of using a particular
n/S
___________________ product or service.
___________________ Benchmarking is often used in conjunction with other SCMA
___________________ techniques – for example, there are numerous examples of firms
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using Activity-based costing and benchmarking together.
___________________
___________________ Activity-based Costing
uc
___________________ This approach to costing focuses on processes rather than
___________________ functions. Finance professionals can only manage costs by
managing the activities that cause the costs. The key aspect is to
rod
___________________
identify cost drivers and to allocate costs to an activity on the basis
___________________ of that cost driver.
Activity-based costing collects data that cuts across traditional
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organisational functional boundaries. It can be used alongside
continuous improvement programmes such as Six Sigma or Kaizen
to create leaner and more responsive organisations and supply
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chains.
Activity-based costing can also be used with open book accounting
and quality costing to remove non value adding processes. In terms
t fo
of supply chains, it is essential to undertake Activity-based

analysis, both inside and outside of traditional organisational
boundaries.
No
SCMA in Practice: Sainsbury’s

In practice, many of the techniques above are used together.
An example is Sainsbury’s use of Activity-based costing for
benchmarking suppliers as part of a value chain analysis.
.
ES
Suppliers were analysed into three categories depending on the

volume they delivered and the strategic importance of their
products to Sainsbury’s. The three categories were core suppliers,
middle to large suppliers, and small suppliers. Activity-based
UP
costing information was developed – mainly with core suppliers –

to provide benchmark data and to identify development
opportunities.
(c)
So management accountants should not think about SCMA

techniques in isolation, but should consider which could apply to
create value for the ultimate customer.
ale
Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Create a draft of an
n/S
1. ................... is where management accountants share assignment on the accounting
and___________________
logistic cost as an
cost information about relevant processes in the supply obstacle in the supply chain
chain, both within and across organisations. ___________________
effectiveness.
___________________
2. ................... builds on Porter’s value chain analysis
tio
which argues that competitive advantage in the ___________________
marketplace results from either better customer value ___________________
for the same cost
uc
___________________
3. ................... is an important SCMA technique that aims
___________________
to improve supply chain quality, both in and across
rod
organisations. ___________________
___________________
Accounting and Logistics Cost: An Impediment to

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Supply Chain Effectiveness
Supply Chain Management (SCM) is one of the key drivers in
today’s business world with offshore sourcing, foreign competition
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and global markets.

The responsiveness required to keep the inbound supply chain
flowing with materials and products and to keep store shelves
t fo
filled is demanding. SCM requires reducing costs, increasing

inventory velocity and compressing cycle time; and these three
may not be compatible or consistent.
No
Doing all this-and doing it well-takes creativity and management

skill. However there is a factor that limits the design, development
and implementation of such supply chains. That factor is
accounting and how it recognizes and treats logistics costs.
.
Accounting is an impediment for logistics whether for supply chain

ES
management, both international and domestic, for lean and for

outsourcing.
Generally accepted accounting principles create the foundation so
UP
that every company reports its financial data the same way. This
financial snapshot is consistent then from firm to firm. This makes
analysis of the data and comparisons possible.
These accounting standards have a long history. They date back to
(c)
Henry Ford and the Model A. Companies then may have been
vertically integrated with a primary focus on domestic sales,
ale
sourcing and production. That business model has become nearly
Notes extinct, especially for large companies. As a result, accounting
___________________ rules have not kept up with present business operations and
n/S
practices.
___________________
___________________ Some differences with supply chain management and accounting

are:
___________________
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 Process versus Transactions: SCM flows across the
___________________
organization. As a process, it flows across many of the
___________________ company departments and boundaries. Accounting is
uc
___________________ transactions-oriented with its focus on identifying and
___________________
summarizing vertical sales and make-or-buy activities.
 Organization Direction: Supply chain management is
rod
___________________
horizontal and crosses departments and organization
___________________
boundaries. Transactions are vertical and are consistent with
organization silos.
ep
 Scope: SCM extends into suppliers and logistics service
providers to gain inventory velocity and to reduce cycle time.
Accounting stays within the company facilities and boundaries
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and looks inward.

 Outward or Inward: Supply chain management looks both
company–inward and outward to deal with suppliers,
t fo
transport firms, warehouses and other logistics service

providers. Collaboration is important to managing the
complex, global supply chain. Accounting is traditional and
focuses within the corporate boundaries.
No
 Continuous versus Discrete: SCM is ongoing. Product is

always flowing. Accounting looks at different summaries
which create supply chain disconnects. Logistics costs are
individually recognized, not recognized at all or recognized in
.
ES
different places. For example, freight and warehouses show on

the income statement and are recapped monthly. Inventory
appears on the balance sheet and is presented annually. So
three key logistics elements are dissected and shown in
UP
different financial reports. And nowhere does “time”, a vital

business driver and the action that creates inventory and
service, appear on any financial statement. To some extent
this view of logistics costs makes accounting obsolete for
(c)
supply chain management.

ale
 Dynamic versus Static: Supply chain management is
Notes
constantly changing – as suppliers, customers, plants and
warehouses, shipment sizes and order mix and as store ___________________
n/S
locations change. This contrasts with accounting which has the ___________________
historical perspective of what has already happening. As a
___________________
result, accounting does not understand changes in
transportation costs, for example, because of changes in the ___________________
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distance inbound and outbound shipments must travel, or in ___________________
the shipment size or in the mix of commodities being shipped. ___________________
uc
These differences make it difficult to develop meaningful ___________________
performance metrics for supply chain management that are
___________________
recognized in the board room and that are aligned with the
rod
company strategic plan. Financial metrics, while commonly used, ___________________
have limited application to supply chain management performance ___________________

improvement.
For example, inventory velocity, inventory turns and inventory
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yield maximization are important to achieving the best returns on
inventory and on the capital that it represents. Cycle time, from
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purchase order to sale or time within the total supply chain, are
measure of company performance with strong bottom line
implications. Yet none of these are part of traditional accounting
measures which are rooted in the past.
t fo
Today’s business world is focused on the customer. The perfect

customer order is a key performance metric for gaining and
maintaining customers and for achieving deeper customer
No
penetration. But again, these are not standard financial measure.

Similarly developing unique supply chain programs that
differentiate by A vs. B vs. C inventory, or by customer or by
product family segment or other delineator are not supported by
.
accounting. Financial standards do not readily recognize such

ES
stratifications. Sourcing right decisions are also restricted by

accounting which has blinders as to the potential impact of the
outsourcing decision on the company and transforming its
UP
processes, operations and results.

(c)
ale
Notes
Check Your Progress
Activity
Fill in the blanks:
___________________
Develop an assignment on
n/S
consignment accounting.
___________________
1. ................... is one of the key drivers in today’s business
world with offshore sourcing, foreign competition and
___________________
global markets.
___________________
2. SCM extends into suppliers and logistics service
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___________________ providers to gain inventory velocity and to reduce
___________________ ....................
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___________________
___________________
Consignment Accounting
The word consignment can be generally defined as the act of
rod
___________________
sending a quantity of goods by the manufacturers and producers of
___________________
one country or place to their agents in another at the risk of the
principals for the purpose of sale.
ep
Goods so sent are known as “consignment”. The sender of the goods
is called the consignor. Generally the manufacturers or producers
are consignors. The person to whom goods are forwarded for the
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purpose of sale is known as the consignee. The consignment can be

classified as:
 Outward consignment.
t fo
 Inward consignment.
It is called “outward” when the dispatch of a quantity of goods from
one country to another is made for the purpose of sale and is called
No
“inward” when the receipt of the quantity of goods is made for the
purpose of sale.
Difference between Consignment and Sale

.
The following are the main points of the difference between

ES
consignment and sale.

1. Transfer of Legal Ownership of the Goods: In case of sale,
the legal ownership of the goods sold is transferred to the
UP
purchaser of goods. Whereas in case of a consignment of goods,

the legal ownership of the goods is not transferred to the
consignment but the ownership of the goods remains vested in
the consignor till the goods consigned are sold by the
(c)
consignee.
ale
2. Relationship between Consignor and Consignee: In case
Notes
of a sale of goods, the relationship between the seller and the
purchaser of the goods is that of a creditor and a debtor ___________________
n/S
whereas in case of a consignment the relationship between the ___________________
consignor and the consignee is that of a principal and agent,
___________________
because the consignee is to sell goods on behalf of the
consignor. ___________________
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___________________
3. Expenses Incurred: In consignment, expenses incurred by
the consignee in connection with the goods consigned to him ___________________
uc
are usually borne by the consignor whereas in case of a sale, ___________________
expenses incurred after sale of goods are born by the
___________________
purchaser.
rod
___________________
4. Risk Attached to the Goods: In case of consignment, risk
___________________
attached to the goods sold lies with the consignor till the goods
consigned are sold by the consignee. But in case of a sale, risk
attached to the goods sold is transferred to the buyer of goods.
ep
5. Return of Goods: In case of consignment, return of goods is
possible if the goods are not sold by the consignee. But in case
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of sale, return of goods is not possible as goods once sold are

not returnable.
6. Requirement of Account Sale: In case of consignment,
t fo
account sale is required to be submitted periodically by the

consignee to the consignor. But in case of sales no account sale
is required to be submitted by the purchaser to the seller.
No
Check Your Progress

Fill in the blanks:
1. ................... consignment is when the dispatch of a
quantity of goods from one country to another is made
.
ES
for the purpose of sale.

2. ................... consignment is when the receipt of the
quantity of goods is made for the purpose of sale.
UP
Summary
Management accounting in supply chains (or supply chain
controlling (SCC)) is part of the supply chain management concept.
(c)
ale
The goal of management accounting in supply chains is the
Notes
optimization of these processes. Therefore, this strategy is a form
___________________
of controlling, focused on the support of management.
n/S
___________________
Activity-based costing collects data that cuts across traditional
___________________ organisational functional boundaries. It can be used alongside
___________________ continuous improvement programmes such as Six Sigma or Kaizen
tio
to create leaner and more responsive organisations and supply
___________________
chains.
___________________
Suppliers were analysed into three categories depending on the
uc
___________________
volume they delivered and the strategic importance of their
___________________ products to Sainsbury’s. The three categories were core suppliers,
middle to large suppliers, and small suppliers. Activity-based
rod
___________________
costing information was developed – mainly with core suppliers –
___________________
to provide benchmark data and to identify development
opportunities.
ep
Lesson End Activity
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Visit a supplier and analyse the supply management accounting

techniques adopted by him.
Keywords
t fo
Benchmarking: It is used to compare performance of one

organisation against the best in class to provide a particular
product, process or service.
No
Consignment Account: The consignment account is one which

shows what profit or loss is made out of the dealing of the goods
sent on consignment. It is the combination of the trading and profit
and loss account of any particular consignment.
.
ES
Consignment: It is defined as the act of sending a quantity of

goods by the manufacturers and producers of one country or place
to their agents in another at the risk of the principals for the
purpose of sale.
UP
Open Book Accounting: It promotes margin improvement

through cost reduction, which can be shared between partner
organisations.
(c)
ale
Quality Costing: It aims to improve supply chain quality, both in
Notes
and across organisations. It has two benefits – to reduce quality
costs and to increase the quality offering to the ultimate customer. ___________________
n/S
Value Chain Costing: It is built on Porter’s value chain analysis ___________________
which argues that competitive advantage in the marketplace ___________________

results from either better customer value for the same cost (a
___________________
tio
differentiation strategy) or the same customer value for less cost (a
___________________
cost leader strategy).
___________________
uc
Questions for Discussion ___________________
___________________
1. How accounting in supply chain can boost competition?
rod
___________________
2. “Inventory measures reflect in part, the success in structuring
supplier relationship to optimize inventory at the buying ___________________
company”. Discuss the aptness of the statement with example
to justify your response.
ep
3. Distinguish between a sales and consignment.
4. Explain accounting and logistics cost: an impediment to supply
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chain effectiveness.
Further Readings
t fo
Books
No

.

ES

Delhi.
UP

Chand, New Delhi.
(c)
ale
Web Readings
Notes
www.aamu.edu/academics/bpa/accountinglogistics/pages/default.as
___________________ px
n/S
___________________
www.agribusiness-mgmt.wsu.edu/.../IventoryMgmtControl. pdf
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
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. No
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UP
(c)
UNIT 17: Inventory Management’s Techniques and Control
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Notes
Activity
___________________
Inventory Management’s
n/S
inventory costs in supply chain
___________________
management.
Techniques and Control ___________________
___________________
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Objectives ___________________
___________________
topics:
uc
___________________
 Inventory Costs
 Factors affecting Levels of Inventory ___________________
rod
 Inventory Measures ___________________
___________________
Introduction
ep
Inventory is the major source of cost in the supply chain and also
the basis for improving customer service and enhancing customer
satisfaction. For example, high inventory at retail outlets may help
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in making the goods easily available to customers and also result

in a growth in sales, but it will also increase costs and bring down
profitability. These are two major issues in conflict with each other
t fo
that need to be resolved, in order to optimize the inventory carried

by the organization.
Inventory Costs
No
Excess inventory is a cost burden to industry in terms of capital

tied up, the cost of obsolescence and the cost of servicing product in
the supply chain. However, having the right amount of inventory
to meet customer requirements is critical. Inventory management
.
ES
is about two things: not running out, and not having too much.
Essentially, inventory is a reserve system to prevent stockouts.
However, as important as it is to prevent such a stockout, you also
UP
don’t want to hold onto too much inventory because holding costs
can become a major encumbrance. So how do you balance the two
and what is the right amount? More importantly, when should you
reorder in order to prevent a stockout? The answer to this can be
determined by obtaining and applying the appropriate inventory
(c)
models in decision-making.
ale
The heart of inventory decisions lies in the identification of
Notes
inventory costs and optimizing the costs relative to the operations
___________________
of the organization. As inventory is a necessary but idle resource,
n/S
___________________ stock levels and inventory costs in manufacturing need to be
___________________ minimized. Large holdings of inventory also cause long cycle times
which may not be desirable.
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
Figure 17.1: Cost of Inventory with Time
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The total inventory held is additive in nature. Raw materials are

converted to finished goods through a number of incremental
processes. Regardless of the operating process, all production costs
incurred during a particular period to the jobs or products
t fo
produced during that time period are assigned to the inventory.

These processes also add to the cost of inventory held by the
organization. Therefore, the cost of inventory increases with time.
No
This is shown in Figure above.
Various costs that are associated with inventories are:
Average Inventory
.
Average inventory is defined as half the batch size plus safety

ES
stock.
Average inventory = (Order quantity + Safety stock)/2

UP
The assumption made is that at any point in time, the cycle stock
(stock planned to be used excluding safety stock) is on an average
half the recipient quantity i.e. it is half-way in-between the receipt
quantity and zero left. The practical implication of this is that it
reduces order quantity and the average cycle stock by half. If a
(c)
part is manufactured in smaller batches, the inventory goes down.

ale
Safety stock is determined from such factors as customer service
Notes
level required, demand variability and replenishment lead-time.
Once the customer service level required is agreed upon, safety ___________________
n/S
stock is calculated. ___________________
___________________
Holding (or Carrying) Costs
___________________
The very fact that an item is held in stock accrues cost. These are
tio
the real costs to hold inventory. Such costs are called inventory ___________________
holding costs or carrying costs. This broad category includes the ___________________
costs for:
uc
___________________
1. Storage and Handling: This includes the total warehousing
___________________
facility. This is typically 6 per cent. It is estimated that the
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total cost to the company is 35 per cent per annum of the value ___________________
of inventory held, or 3 per cent a month. ___________________
2. Insurance: Insurance accounts for a portion of the inventory

ep
costs. Since it is better to be safe than sorry, companies
generally get the material insured. It generally works out to 1
per cent.
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3. Pilferage and Spoilage: This accounts for anything from 2

per cent upwards, depending on the industry and the type of
inventory that is being carried.
t fo
4. Obsolescence and Deterioration: This is inventory which is

classified as being unfit to sell, or lying in the storage waiting
for the appropriate use. It is typically estimated to be about 1
per cent of the Inventory carrying cost.
No
5. The Opportunity Cost of Capital: This is the cost to set-up

the warehousing facility. This is charged at the “Lost
opportunity cost” and not the interest rate. Typically rated at
25 per cent, this “Lost opportunity cost” is the return that
.
ES
could have been obtained if the capital had been invested in

anything other than inventory.
In addition, there are some other charges that may among other
UP
things include depreciation and taxes.

These costs increase proportionately with the increase in the
inventory level. Obviously, if the holding costs are high, the
organization should try to carry lower inventory and frequently
(c)
replenish the stock.

ale
Though holding costs are represented by a straight line, there are
Notes
some fixed and variable costs of holding inventory i.e. some of the
___________________
costs will not change by increase or decrease in inventory levels,
n/S
___________________ while some costs are dependent on the levels of inventory held. The
___________________ general breakdown for inventory holding costs has been shown in
Table 17.1.
___________________
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Table 17.1: Fixed and Variable Holding Costs
___________________
Fixed costs Variable cost
___________________
Capital costs of warehouse or store Cost of capital in inventory
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___________________ Cost of operating the warehouse or Insurance on inventory value
store
___________________
Personnel costs Losses due to obsolescence, theft and
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___________________ spoilage
___________________ Cost of renting warehouse or storage

space
Capital costs and costs of operating the warehouse including the

ep
personnel are fixed, but interest costs of capital held in inventory
etc. are variable. The reason why the cost curve for holding
inventory is a straight line is that the contribution of the variable
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costs in the total holding costs is much greater than that of the
fixed costs.
Ordering Costs
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What is the real cost of placing and processing a purchase order?

The total cost includes the cost of purchasing, receiving, incoming
inspection and the accounts payable. Each of these departments
No
exists to satisfy continuous demand for material. We arrive at a

simple equation to calculate the Avg. cost per order as:
Avg. Cost per Order = Total Budget/Number of Orders placed per
year
.
ES
Although it costs money to hold inventory, it also, unfortunately,

costs money to replenish inventory, either through the purchase
cycle or through the manufacturing cycle.
UP
Inventory Ordering Costs are those costs that are incurred in the
purchase cycle are called procurement costs or inventory ordering
costs. Ordering costs have two components:
(a) One component that is relatively fixed, and
(c)
(b) Another component that will vary.

ale
Table 17.2: Fixed and Variable Ordering Costs
Fixed costs Variable cost Notes
Staffing costs (payroll, benefits, etc.) Shipping costs ___________________
n/S
Fixed costs on IT systems Cost of placing and order (phone,
___________________
postage, order forms)
Office rental and equipment costs Running costs of IT systems ___________________
Fixed costs of vendor development Receiving and inspection costs ___________________
tio
Variable costs of vendor development
___________________
The fixed and variable components of the ordering or procurement
___________________
costs are shown in Table 17.2.
uc
___________________
One major component of cost associated with inventory is the cost
___________________
of replenishing it. If a part or raw material is ordered from outside
rod
suppliers, and places orders for a given part with its supplier three ___________________
times per year instead of six times per year, the costs to the ___________________
organization that would change are the variable costs, and which
would probably not are the fixed costs.
ep
There are costs incurred in maintaining and updating the
information system, developing vendors, evaluating capabilities of
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vendors. Ordering costs also include all the details, such as

counting items and calculating order quantities. The costs
associated with maintaining the system needed to track orders are
also included in ordering costs. This includes phone calls, typing,
t fo
postage, and so on.

Though vendor development is an ongoing process, it is also a very
expensive process. With a good vendor base, it is possible to enter
No
into longer-term relationships to supply needs for perhaps the

entire year. This changes the “when” to “how many to order” and
brings about a reduction both in the complexity and costs of
ordering.
.
Clearly, the fixed costs related to procurement or order placement

ES
are significantly greater than the variable costs associated with

placing orders.
UP
Setup (or Production Change) Costs

Ordering costs are incurred in the purchase cycle, while setup costs
are incurred in the manufacturing cycle. Therefore, the set-up cost
is actually represented by the inventory ordering costs. These two
costs are considered to be exclusive.
(c)
ale
For manufactured items, the equivalent cost is known as set-up. In
Notes
the case of subassemblies, or finished products that may be
___________________
produced in-house, the costs associated with changing over
n/S
___________________ equipment from producing one item to producing another is
___________________ usually referred to as setup costs.
___________________ This includes all the costs that are not related to the order
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quantity (the costs incurred to prepare the order paperwork,
___________________
processing and tracking the order operations, the cost of setting up
___________________ the machine, and first off inspection). This total
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___________________ ordering/processing cost is eventually passed on to the products.
___________________ Set-up costs reflect the costs involved in obtaining the necessary
materials, arranging specific equipment setups, filling out the
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___________________
required papers, appropriately charging time and materials, and
___________________
moving out the previous stock of materials, in making each
different product. If there were no costs or loss of time associated
in changing from one product to another, many small lots would be
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produced, permitting reduction in inventory levels and the
resultant savings in costs.
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Shortage or Stock-out Costs

No manufacturing facility can afford to keep sufficient stock to
meet every demand. Stock-outs occur at some point. Stock-outs
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result in either a lost sale, or if the customer is prepared to wait, a

back order. Lost sale reflects the risk of losing the business to
competition. In addition, back orders cause additional costs, viz.
extra paperwork, the time spent handling this extra paperwork, a
No
system to handle the back orders, extra delivery notes, and

invoices, extra packing and delivery costs.
When the stock of an item is depleted, an order for that item must
.
either wait until the stock is replenished or be cancelled. There is a

ES
trade-off between carrying stock to satisfy demand and the costs

resulting from stock-out. The costs that are incurred as result of
running out of stock are known as stock out or shortage costs.
UP
Understanding the cost of a stock-out is critical to the

implementation of any inventory model. Unless these costs are
known, the organization cannot balance the costs (and risk) of
holding inventory with the loss of profits when an item is out of
(c)
stock.
ale
For a retailer, the costs include both the lost profits from the
Notes
immediate order because of cancellations, and the long-run costs if Activity
stockouts reduce the likelihood of future orders. For a ___________________
Prepare an informative report
n/S
on the factors affecting the
manufacturer, these include the loss of production as well as ___________________
levels of inventory.
capacity. In addition, the ultimate consequence is that sales of
___________________
goods may be lost, and finally customers can be lost.
___________________
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If the unfulfilled demand for the items can be satisfied at a later
___________________
date (back order case), in this case, cost of back orders are assumed
to vary directly with the shortage quantity (in rupee value) and the ___________________
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cost involved in the additional time required to fulfil the backorder ___________________
( / /year).
___________________
However, if the unfulfilled demand is lost, the cost of shortages is
rod
___________________
assumed to vary directly with the shortage quantity ( /unit
___________________
shortage). When this is related to the total cost of inventory, the
cost decreases increasingly with the increase in inventory, as this
cost is relatively fixed with respect to the value of the inventory.
ep
Frequently, the assumed shortage cost is little more than a guess,
although it is usually possible to specify a range of such costs.
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Check Your Progress

Fill in the blanks:
t fo
1. Raw materials are converted to ................... through a

number of incremental processes.
2. ................... is defined as half the batch size plus safety
No
stock.
3. ................... are the real costs to hold inventory.
Factors affecting Levels of Inventory

.
ES
The factors affecting levels of inventory are as follows:

 Production Rate: The production rate can be defined as
number of units manufactured over a period of time.
UP
 Production Rate = No. of Units Manufactured/time.

 The time can be measured in days, weeks, or on an annual
basis. Production rate is also influenced by the demand for the
product, which could be either periodic (seasonal/cyclic) or a
(c)
constant.
ale
 Lead-time: Lead-time is defined as time period from initiation
Notes
Activity of an activity to its completion. For inventory management, we
___________________
Create an assignment on the need following lead times: Purchase lead-time, Manufacturing
n/S
inventory measures.
___________________ lead-time and Delivery lead-time.
___________________  Rework/Scrap Rate: This rate is dictated by the efficiency of
___________________ the manufacturing process. It involves knowing the number of
tio
defective units that are produced by a manufacturing unit. This
___________________
is a highly empirical rate and very much depends upon the skill
___________________ of the labour operating the machine and the accuracy offered by
uc
___________________ the machine.
___________________  Excess inventory is the quantity of material in stock or on
order that is greater than the anticipated demand for an agreed
rod
___________________
time period.
___________________
 Obsolete inventory on the other hand is the inventory that
results from an unanticipated demand. This inventory typically
ep
occurs due to model run outs, engineering change notes, or
supplier minimum/multiple order quantities. Companies tend
to be reluctant to write off this value as it is a loss in the books
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of accounting, and so affects the profit.
Inventory Measures
t fo
Inventory measures reflect, in part, the success in structuring

systems to optimize the production rate, the lead time and the
scrap rate. Several aggregate performance measures can be used to
No
judge how well a company is able to control these factors and

utilizing its inventory resources.
 Average Inventory Investment: The rupee value of a
company’s average level of inventory is one of the most common
.
measures of inventory. The information is easily available and

ES
it is easy to interpret. It represents the average investment of

the company. However, it does not take into account the
differences between companies. For example, a larger company
UP
will generally have more inventory than a smaller company,

though it could be using its inventory more efficiently. This
makes it difficult for the company to make comparisons with
other companies.
(c)
 Inventory Turnover Ratio: In order to overcome this

problem, inventory turnover ratio is used. This measure allows
ale
for better comparison among companies. This is calculated as a
ratio of company’s sales to its average inventory investment: Notes
___________________
Inventory turnover = annual cost of goods sold/average
n/S
inventory investment ___________________
This is a measure of how many times during a year the inventory ___________________
turns around. It is the ratio of the cost of annual sales to the ___________________
tio
average inventory level. The higher the inventory turns, the better
___________________
the firm uses its inventory assets. Another common measure is
days of supply. A firm’s days of supply is found by dividing the ___________________
uc
average inventory level by the cost of one day’s sales. ___________________
___________________
Check Your Progress
rod
___________________
Fill in the blanks:
___________________
1. ................... can be defined as number of units
manufactured over a period of time.
ep
2. ................... is defined as time period from initiation of
an activity to its completion.
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3. ................... rate is dictated by the efficiency of the

manufacturing process.
Summary
t fo
The heart of inventory decisions lies in the identification of

inventory costs and optimizing the costs relative to the operations
of the organization: When items should be ordered, how large the
No
order should be, and “when” and “how many to deliver.”

The following costs are generally associated with inventories:
Holding (or carrying) costs, Cost of ordering, Setup (or production
change) costs, and Shortage or Stock-out Costs.
.
ES
Holding costs increase proportionately with the increase in the

inventory level. Obviously, if the holding costs are high, the
organization should try to carry lower inventory and frequently
UP
replenish the stock.

Setup or ordering costs are involved in placing an order or setting
up the equipment to make the product. The ordering cost includes
the cost of purchasing, receiving, incoming inspection and the
(c)
accounts payable. The costs associated with changing over

equipment from producing one item to producing another are
usually referred to as setup costs.
ale
Lesson End Activity
Notes
Prepare a presentation on the inventory management techniques
___________________
and control in supply chain management.
n/S
___________________
___________________
Keywords
___________________
Average Inventory: Defined as half the batch size plus safety
tio
___________________ stock.
___________________
Excess Inventory: The quantity of material in stock or on order
uc
___________________ that is greater than the anticipated demand for an agreed time
___________________ period.
Lead-time: Lead-time is defined as time period from initiation of
rod
___________________
an activity to its completion. For inventory management, we need
___________________
following lead times: Purchase lead-time, manufacturing lead-time,
Delivery lead-time.
ep
Obsolete Inventory: It is the inventory that results from an
unanticipated demand.
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Production Rate: The production rate can be defined as number

of units manufactured over a period of time.
Rework/Scrap Rate: This rate is dictated by the efficiency of the

t fo
manufacturing process. It involves knowing the number of

defective units that are produced by a manufacturing unit. This is
a highly empirical rate and very much depends upon the skill of
the labour operating the machine and the accuracy offered by the
No
machine.

1. What is “consignment of goods”? Is it the same as “goods on
.
sale or return”?
ES
2. Describe how the consignment account is maintained in the

books of (a) consignor (b) the consignee.
UP
3. If a consignment remains partly unsold (closing stock or

unsold stock) at the time of balancing the books, how do you
deal with it?
(c)
ale
Further Readings
Notes
Books ___________________
n/S
___________________
___________________
tio
___________________
uc
rod
Delhi.
___________________
New Delhi.
ep
Delhi.
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t fo
Chand, New Delhi.
Web Readings
www.management-hub.com/inventory-management-intro. html
No
shodhganga.inflibnet.ac.in/bitstream/10603/703/12/12_chapter6.pdf
.
ES
UP
(c)
ale
Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
ep
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t fo
. No
ES
UP
(c)
UNIT 18: Cost Accounting
ale
Notes
Activity
___________________
Prepare a report on the scope
Cost Accounting
n/S
of cost accounting in the chain
___________________
management.
___________________
Objectives
___________________
tio
topics: ___________________
 Scope of Cost Accounting in Chain Management ___________________
uc
 Objectives of Cost Accounting ___________________
 Functions of Cost Accounting
___________________
 Essentials of Cost Accounting System
rod
___________________
 Costing Systems
 Role of Cost in Cost Accounting ___________________
 Elements of Cost
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Introduction
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Cost accounting involves the application of costing principle,

methods and techniques for ascertaining costs and their control by
comparing actual costs with the budget or standard. Cost
accounting is an art also, because it includes the ability and skill
t fo
with which a cost accountant has to apply his basic knowledge to

particular circumstances. It involves the use of various costing
techniques and methods such as marginal costing, standard
costing, budgetary control, etc. The applications of these
No
techniques help him in dealing with various problems such as cost

reduction, cost control, ascertainment of profitability, etc.
Cost accounting is also the practice of a cost accountant because he
has to make constant efforts in the field of cost accounting. Such
.
ES
efforts include the information presentation to the top

management for the purpose of managerial decision-making and
keeping various records of business.
UP
Scope of Cost Accounting in Chain Management

The scope of any subject refers to the various areas of study
included in that subject. As regards, the scope of cost accounting is
(c)
very wide and includes the following:

ale
(i) Technique and Process of Costing: The technique of costing
Notes
involves two distinct steps, namely, (a) classification of costs
___________________
according to various elements and (b) allocation and
n/S
___________________ apportionment of the expenses which cannot be directly
___________________ charged to production. As a process, costing is concerned with
the routine ascertainment of cost with a formal and selected
___________________
procedure.
tio
___________________
(ii) Cost Control: Cost control is the guidance and regulation by
___________________ executive action of the costs of operating and undertaking.
uc
___________________ This guidance and regulation is done by the executive who is
___________________
responsible for causing the deviation. This process will become
clear by enumerating the steps involved in any technique of
rod
___________________
cost control. Cost control is exercised through a variety of
___________________ techniques such as inventory control, product control, quality
control, budgetary control, standard costing, etc.
(iii) Ascertainment of Cost: It deals with the collection and
ep
analysis of expenses, the measurement of production at
different stages and linking up of production with the
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expenses. To achieve the first step, costing has developed

different systems such as Historical or Actual Cost, Estimated
Cost and Standard Cost. For achieving the second step, costing
has developed different methods such as single or output
t fo
costing, job costing, contract costing, etc. Finally, for achieving

the last step costing has developed important techniques such
as, Marginal Costing, Standard Costing, Budgetary Control,
Total Absorption Costing and Uniform Costing.
No
(iv) Cost Audit: The terminology of ICMA, London, defines cost

audit, as “the verification of the correctness of cost accounts
and of the adherence to the cost accounting plan”. Cost audit
.
has a much wider role to play in an industry or organisation

ES
than people could imagine. The aim of cost audit is to highlight

the shortcomings inherent in the cost accounting system.
(v) Budgetary Control: According to Heiser, budgetary control
UP
can be defined as “an overall blue print of a comprehensive

plan of operations and actions expressed in financial terms”.
According to him, budgeting process involves the preparation
of a budget, comparison of budgeted and actual expenditure
(c)
and income, planning and coordinating for control, etc.

ale
Objectives of Cost Accounting
Notes
The objectives of cost accounting are ascertainment of cost, fixation Activity
of selling price of product, proper recording and presentation of ___________________
Construct a written
n/S
assignment on the objectives
cost data to the management for measuring efficiency and for cost ___________________
of cost accounting.
control. Following are the main objectives of cost accounting:
___________________
(i) Ascertainment of Cost: Ascertainment of cost is primary ___________________
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objective of cost accounting in the initial stages of its
___________________
development. However, in modern times this has assumed the
secondary objective of cost accounting. Cost ascertainment ___________________
uc
involves the collection and classification of expenditures at the ___________________
first instance. Those items of expenditures or expenses which
___________________
are capable of charging directly to the products manufactured
rod
___________________
are allocated. Then the other expenses which are not capable
of direct allocation are apportioned on some suitable basis. ___________________
Thus the cost of production of goods manufactured is
ascertained. In this process, cost accounting involves
ep
maintenance of different type of books to record various cost
elements. Cost of production is ascertained by using any of the
costing technique and method such as historical costing,
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standard costing, marginal costing, job costing, unit costing,

etc.
(ii) Fixation of Selling Price: Every business enterprise aims at
t fo
maximising profit. The total cost of production constitutes the

basis on which selling price is fixed by adding a part of profit.
Cost accounting furnishes both the total cost of production as
well as cost incurred at each and every stage of production. No
No
doubt other factors are taken into consideration before fixing

of selling price such as market conditions, the area of
distribution, volume of sales, etc. But cost plays the
dominating role in the price fixation.
.
ES
(iii) Cost Control: At one time cost control was considered as

secondary objective of cost accounting. But in modern business
it constitutes the primary objective. Cost control is exercised at
UP
different stages in an industry, viz., acquisition of materials,

recruiting of labour, during the production process and so on.
As such, we have material cost control, labour cost control,
production cost control, quality control and so on. However,
control over cost is exercised through the techniques of
(c)
budgetary control, historical costing and standard costing. The

ale
control techniques enable the management in knowing the
Notes operating efficiency of a business organisation.
Activity
___________________
Make a detailed report on the (iv) Provide Various Policies: Cost data to a great extent helps
n/S
functions of cost accounting.
___________________ in formulating the various policies of a business or industry
___________________ and in decision-making. As every alternative decision involves
investment of capital outlay, costs play an important role in
___________________
decision-making of organisation. Therefore, availability of cost
tio
___________________ data is a must for all levels of management.
___________________ (v) Preparation of Accounts and Reports: The management of
uc
___________________ every business or organisation constantly rely upon the reports
___________________
on cost data in order to know the level of efficiency relating to
purchase, production, sales and operating positions. Financial
rod
___________________
accounts provide various information only at the end of the
___________________ year because closing stock value is available only at the end of
the year. But cost accounts provide the value of closing stock
time to time by a system of continuous stock verification.
ep
Using the value of closing stock, it is possible to prepare final
accounts and know the operating results of the business or
industry.
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Check Your Progress

Fill in the blanks:
t fo
1. Cost accounting involves the application of costing

principle, methods and techniques for ascertaining
costs and their control by comparing actual costs with
the ...................
No
2. ................... is the guidance and regulation by executive

action of the costs of operating and undertaking.
3. ................... is defined as the verification of the
.
correctness of cost accounts and of the adherence to the

ES
cost accounting plan.
Functions of Cost Accounting

UP
According to Weltemer and Blocker, cost accounting is to serve

management in the execution of various policies and in comparison
of actual and estimated results in order that the value of each
policy may be appraised and changed to meet the future
(c)
conditions. Following are the main functions of cost accounting:

ale
(a) To establish various cost centres in the business or industry.
Notes
Activity
(b) To provide necessary data to the management for fixing the
___________________
Create a draft on the
selling price.
n/S
essentials of cost accounting
___________________
system.
(c) To prepare various reports on wastages, loss of labour, idle
___________________
capacity of machines so as to improve profitability of business
or industry. ___________________
tio
(d) To ascertain the cost of every product, job or process both in ___________________
terms of total cost and per unit cost of product. ___________________
uc
(e) To implement various cost control techniques such as ___________________
budgetary control, historical costing and standard costing. ___________________
(f) To design suitable system for defining responsibilities and
rod
___________________
controlling cost.
___________________
(g) To prepare cost schedules to assist management in decision-
making.
ep
(h) To prepare cost statements and profit and loss account for
giving advice to management.
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(i) To assist management in the valuation of closing stock of raw

materials and work-in-progress so that too much of capital is
not locked up in unnecessary inventories.
t fo
Essentials of Cost Accounting System

An ideal system of costing is that which achieves the objectives of a
costing system and brings all advantages of costing to the business.
No
The following are the main essentials of an ideal cost accounting

system:
1. Simplicity: The system of costing should be simple and plain
.
so that it may be easily understood even by a person of average

ES
intelligence. Cost accounting system involves detailed analysis

of cost. To avoid complications in the procedure of cost
ascertainment an elaborate system of costing should be
UP
avoided and every care must be taken to keep it as simple as

possible.
2. Suitability to the Business: The cost accounting system
should be capable of adopting itself to the changing situations
(c)
of business. It must be capable of expansion or contraction

depending upon the needs of the business.
ale
3. Accuracy: The system of cost accounting must provide for
Notes
accuracy in terms of both ascertainment of cost and
___________________
presentation of cost data. Otherwise it will prove to be
n/S
___________________ misleading.
___________________ 4. Comparability: The records to be maintained must facilitate
___________________ comparison over a period of time. The past records must serve
tio
as a basis to guide the future.
___________________
5. Economical: The costs of production costing system must be
___________________
less. It must result in increased benefit when compared to the
uc
___________________
expenses incurred in installing it.
___________________
6. Uniformity: The various forms and documents used under
rod
___________________ costing system must be uniform in size and quality of paper.
___________________ Printed forms must be used to avoid delay in the preparation
of various reports. This also reduces the unnecessary burden of
clerical staff. Forms of different colours can be used in
ep
different documents or reports.
7. Reconciliation of Cost and Financial Accounts: It
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possible the cost and financial accounts should be interlocked

into one internal accounting scheme. The system of cost
accounts must be capable of reconciling with financial accounts
so as to check accuracy of both the system of accounts.
t fo
8. Promptness: An ideal costing system is one which provides

cost data in an analytical form to the management. So all the
departments of an industry must analyse and record the
relevant items of cost promptly in order to furnish cost
No
information on a regular basis to various levels of

management. This helps in checking up the progress of the
business activities on a regular basis.
.
9. Equity: The basis of apportioning overheads to products,

ES
departments or jobs must be fair and equitable.

10. Duties and Responsibilities of the Cost Accountant:
Under a good system of cost accounting the duties and
UP
responsibilities of the cost accountant should be clearly

defined. The cost accountant should have access to all works
and departments.
(c)
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Make a chart on the main
n/S
1. The system of cost accounting must provide for costing systems available for
___________________
chain management.
................... in terms of both ascertainment of cost and
presentation of cost data. Otherwise it will prove to be ___________________
misleading. ___________________
tio
2. The basis of apportioning overheads to products, ___________________
departments or jobs must be ................... and ___________________
....................
uc
___________________
___________________
Costing Systems
rod
___________________
Costing systems defined an accounting system as “an organisation
___________________
of forms, records and reports, closely co-ordinated to facilitate
business management through determining certain basic and
ep
required information. A cost system is an aspect of the accounting
system designed specifically to provide information concerning
costs and efficiency”. The following are main costing systems:
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(i) Estimated Cost System: It is a system under which the

various elements of costs are estimated or predetermined for
recording the costs in the books of accounting. Estimated costs
t fo
are established on an average basis taking into account the

past performance. Estimated cost system helps in comparing
such cost with actual cost to know variations between
estimated cost and actual cost. Estimated cost serves as a
No
basis for selling price fixation. A major limitation of estimated

cost system is that estimated costs are seldom accurate.
Estimated costs only constitute statistical information and are
not recorded in the books.
.
(ii) Historical Cost System: A historical system is one which

ES
accumulates actual costs after the operations have taken

place. So under historical cost system, cost of a product is
ascertained after they have been actually incurred. This
UP
system is not so popular because it suffers from the following

limitations:
 It is an expensive system as a large number of records and
forms are to be maintained under this system.
(c)
 It does not provide any basis against which efficiency can

be measured.
ale
 As historical costs are recorded after the event takes place
Notes
Activity it is not possible to rectify the defect until the inefficiency.
___________________
Give a report on the role of
 It does not facilitate preparation of tender and quotations.
n/S
cost in cost accounting.
___________________
(iii) Standard Cost System: It is a system of cost accounting
___________________
which makes use of predetermined standards relating to
___________________ elements of cost. Having fixed the standard costs, they are
tio
___________________ compared with actual costs to develop variances to know the
efficiency of industry or business. Standard cost system is
___________________
applicable where the production process is standardized.
uc
___________________
Standard costs are recorded in the accounting books.
___________________
Role of Cost in Cost Accounting
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___________________
___________________
The role of cost in cost accounting is the following:
1. It helps in fixation of pricing decisions.
ep
2. It helps to make or buy decisions in respect of cost
components.
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3. It helps in deciding whether an asset is to be bought or hired.

4. It is useful in deciding the acquisition of permanent assets.
5. It helps in choosing from among various alternatives.
t fo
6. It helps in matters relating to replacement of fixed type of

equipment by a new one.
7. It helps in determining the optimum level of production
No
depending upon the behaviour of cost in relation to scale of

production.
8. It helps in evaluating the incurrence of various elements of
cost on different projects or jobs.
.
ES
9. It helps in deciding whether to sell a product at a particular

stage of production and sell at the stage of its completion.
10. It helps in deciding to shut down or continue the production
UP
operation of a certain department.
Elements of Cost
The correct of interpretation of the term ‘cost’ may also be
(c)
understood by having knowledge about basic elements of cost.

These elements have been shown in the following figure:
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
Figure 18.1: Elements of Cost
___________________
The following is the brief description of these elements of cost:
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___________________
(i) Direct Material: Direct material is material that can be
___________________
directly identified with each unit of the product. Direct
material can be conveniently measured and directly charged to
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the product. For example, raw cotton in textile manufactures
sugarcane in sugar industry and leather for shoe-making
industry. The cost of direct material includes the following:
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 All type of raw materials issued from the store,

 Raw materials specifically purchased for the specific job or
project,
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 Raw materials transferred from one cost centre to another

cost centre.
 Primary packing material, like cartons, cardboard boxes
No
etc.
(ii) Indirect Material: They are those materials which do not
normally form a part of the finished product. It has been
defined as “materials which cannot be allocated but which can
.
ES
be apportioned to or absorbed by cost centres or cost units”.

These are:
 Stores used in maintenance of machinery, buildings etc.,
UP
like lubricants, cotton waste, bricks and cements.

 Stores used by the service departments i.e., non-
productive departments like Power house, Boiler house
and Canteen, etc.
(c)
 Materials which due to their cost being small, are not

considered worthwhile to be treated as direct materials.
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(iii) Direct Labour: Direct labour is labour that can be identified
Notes
directly with a unit of finished product. All the labour charges
___________________
expended in altering the construction, composition,
n/S
___________________ confirmation or condition of the product is included in it. It
___________________ includes the payment of direct wages made to the following
groups of direct labour:
___________________
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 Direct labour engaged on the actual production of the
___________________
product.
___________________
 Direct labour engaged in adding this manufacture by way
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___________________
of supervision, maintenance and tool setting, etc.
___________________
 Inspectors, analysts, etc. specially required for such
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___________________ production.
___________________ (iv) Indirect Labour: The wages of that labour which cannot be
allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour. In other
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words, wages paid to labour which are employed other than or
production constitute indirect labour costs.
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(v) Direct or Chargeable Expenses: They include all

expenditures other than direct material and direct labour that
are specifically incurred for a particular product or job. Such
expenses are charged directly to the particular cost account
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concerned as part of the prime cost.

(vi) Indirect Expenses: Indirect expenses are expenses which
cannot be allocated but which can be apportioned to or
No
absorbed by cost centres or cost units as rent, insurance,

municipal taxes, salary of manager, canteen and welfare
expenses, power and fuel, cost of training for new employees,
lighting and heating, telephone expenses, etc.
.
(vii) Overheads: Overheads may be defined as the cost of indirect

ES
materials, indirect labour and such other expenses including

services as cannot conveniently be charged direct to specific
cost units. Thus, overheads are all expenses other than direct
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expenses. Overheads may be divided into following categories:

 Factory or works overheads cover all indirect expenditure
incurred by the undertaking from the receipt of the order
until its completion is ready for dispatch either to the
(c)
customer or to the finished goods store.

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 Office and administrative overhead consists of all
Notes
expenses incurred in the direction, control and
administration of a factory. ___________________
n/S
 Selling overheads comprise the cost of products or ___________________
distributors of soliciting and recurring orders for the ___________________

articles of commodities dealt in and of efforts to find and
___________________
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retain customers.
___________________
 Distribution overheads comprise all expenditure incurred
___________________
from the time the product is completed in the work until it
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reaches its destination. ___________________
___________________
Check Your Progress
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___________________
Fill in the blanks:
___________________
1. ................... an organisation of forms, records and
reports, closely
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2. ................... is defined as an organisation of forms,
records and reports, closely co-ordinated to facilitate
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business management through determining certain

basic and required information.
3. ................... is material that can be directly identified
with each unit of the product.
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4. ................... are those materials which do not normally

form a part of the finished product.
No
Summary
Cost accounting is an important development in the field of
accounting. It is the process of accounting for costs. It embraces the
accounting procedures relating to recording of all income and
.
ES
expenditure and the preparation of various statements and reports

with the object of ascertaining and controlling costs The objectives
of cost accounting are ascertainment of cost, fixation of selling
price of product, proper recording and presentation of cost data to
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the management for measuring efficiency and for cost control.
Lesson End Activity

(c)
Prepare an informative presentation on cost accounting and the

elements of cost.
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Keywords
Notes
Cost Accounting: It involves the application of costing principle,
___________________
n/S
___________________
comparing actual costs with the budget or standard.
___________________
Cost Centre: It refers to a part of a factory for which costs are
___________________ accumulated separately.
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___________________ Cost Unit: It is defined by the ICMA as “a quantitative unit of
___________________ product or service in relation to which costs are ascertained”.
Costing Systems: Defined an accounting system as “an
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___________________
organisation of forms, records and reports, closely coordinated to
___________________
facilitate business management through determining certain basic
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___________________ and required information.
___________________ Direct Material: Material that can be directly identified with
each unit of the product.
ep
Indirect Labour: The wages of that labour which cannot be
allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour.
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Job Costing: This refers to a system of costing where the items of

direct costs are traced to specific jobs or orders.
Overheads: Defined as the cost of indirect materials, indirect
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labour and such other expenses including services as cannot

conveniently be charged direct to specific cost units.

No
1. “Cost accounting is becoming more and more relevant in the

emerging economic scenario in India”. Explain this statement.
2. “Cost accounting system that simply records costs for the
.
purpose of fixing sale price has accomplished only a small part

ES
of its mission”. Explain.

3. What is costing? What are the objectives of cost accounting?
UP
4. Explain the importance of costing in supply chain

Management.
9. Write short notes on the following:
(a) Cost unit and cost centre
(c)
(b) Costing systems

(c) Role of cost in cost accounting
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Further Readings
Notes
Books ___________________
n/S
___________________
___________________
tio
___________________
uc
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Delhi.
___________________
New Delhi.
ep
Delhi.
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t fo
Chand, New Delhi.
Web Readings
No
.
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
ep
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. No
ES
UP
(c)
UNIT 19: EVA and Budgets
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Notes
Activity
Make___________________
a report on the
EVA and Budgets
n/S
economic value added and
the ___________________
method of its calculation.
___________________
Objectives
___________________
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topics: ___________________
 Economic Value Added (EVA) ___________________
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 Budget ___________________
 Budgetary Control
___________________
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___________________
Introduction
___________________
In corporate finance, Economic Value Added or EVA, a registered
trademark of Stern Stewart & Co and of EVA Dimensions LLC, is
ep
an estimate of a firm’s economic profit – being the value created in
excess of the required return of the company’s investors (being
shareholders and debt holders).
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Economic Value Added (EVA)

t fo
EVA is the profit earned by the firm less the cost of financing the
firm’s capital. The idea is that value is created when the return on
the firm’s economic capital employed is greater than the cost of
that capital. This amount can be determined by making
No
adjustments to GAAP accounting. There are potentially over 160

adjustments that could be made but in practice only five or seven
key ones are made, depending on the company and the industry it
competes in.
.
ES
Calculating EVA
EVA is net operating profit after taxes (or NOPAT) less a capital
charge, the latter being the product of the cost of capital and the
UP
economic capital. The basic formula is:
EVA (r c).K NOPAT c.K
where:
(c)
NOPAT
r , is the Return on Invested Capital (ROIC);
K
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Notes C is the weighted average cost of capital (WACC);
___________________ K is the economic capital employed;
n/S
___________________ NOPAT is the net operating profit after tax, with adjustments and
___________________ translations, generally for the amortization of goodwill, the
capitalization of brand advertising and others non-cash items.
___________________
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EVA = net operating profit after taxes – a capital
___________________
charge [the residual income method]
___________________
therefore EVA = NOPAT – (c × capital), or alternatively
uc
___________________
EVA = (r x capital) – (c × capital) so that
___________________
EVA = (r-c) × capital [the spread method, or excess
rod
___________________ return method]
___________________
where:
r = rate of return, and
c = cost of capital, or the Weighted Average Cost
ep
of Capital (WACC).
NOPAT is profits derived from a company’s operations after cash
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taxes but before financing costs and non-cash bookkeeping entries.

It is the total pool of profits available to provide a cash return to
those who provide capital to the firm.
t fo
Capital is the amount of cash invested in the business, net of

depreciation. It can be calculated as the sum of interest-bearing
debt and equity or as the sum of net assets less non-interest-
bearing current liabilities (NIBCLs).
No
The capital charge is the cash flow required to compensate

investors for the riskiness of the business given the amount of
economic capital invested.
The cost of capital is the minimum rate of return on capital
.
ES
required to compensate investors (debt and equity) for bearing

risk, their opportunity cost.
Another perspective on EVA can be gained by looking at a firm’s
UP
return on net assets (RONA). RONA is a ratio that is calculated by

dividing a firm’s NOPAT by the amount of capital it employs
(RONA = NOPAT/Capital) after making the necessary adjustments
of the data reported by a conventional financial accounting system.
(c)
EVA = (RONA – required minimum return) × net investments

If RONA is above the threshold rate, EVA is positive.
ale
Added value: Added value in financial analysis of shares is to be
Notes
distinguished from value added. Used as a measure of shareholder
value, calculated using the formula: ___________________
n/S
Added Value = Price that the product/service is sold at – cost of ___________________
producing the product ___________________
Added Value can also be defined as the difference between a ___________________
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particular product’s final selling price and the direct and indirect ___________________
input used in making that particular product.
___________________
The difference is profit for the firm and its shareholders after all
uc
___________________
the costs and taxes owed by the business have been paid for that
financial year. Value added or any related measure may help ___________________
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investors decide if this is a business that is worthwhile investing ___________________
on, or that there are other and better opportunities (fixed deposits, ___________________
debentures).
Market value added: Market Value Added (MVA) is the
ep
difference between the current market value of a firm and the
capital contributed by investors. If MVA is positive, the firm has
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added value. If it is negative, the firm has destroyed value. The

amount of value added needs to be greater than the firm’s
investors could have achieved investing in the market portfolio,
adjusted for the leverage (beta coefficient) of the firm relative to
t fo
the market.
The formula for MVA is:
MVA = V – K
No
where:
MVA is market value added
V is the market value of the firm, including the value of the firm’s
.
ES
equity and debt
K is the capital invested in the firm

MVA is the present value of a series of EVA values. MVA is
UP
economically equivalent to the traditional NPV measure of worth

for evaluating an after-tax cash flow profile of a project if the cost
of capital is used for discounting.
Relationship to Market Value Added: The firm’s market value

(c)
added, or MVA, is the discounted sum (present value) of all future

expected economic value added:
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Notes EV A t
Activity
MVA V K0
t 1 (1 c)t
___________________
Write an article on budget and
n/S
its features and objectives. Note that MVA = PV of EVA.
___________________
___________________ More enlightening is that since MVA = NPV of Free cash flow
(FCF) it follows therefore that the NPV of FCF = PV of EVA; since
___________________
after all, EVA is simply the rearrangement of the FCF formula.
tio
___________________
___________________
Check Your Progress
Fill in the blanks:
uc
___________________
___________________ 1. ................... is the profit earned by the firm less the cost
of financing the firm’s capital.
rod
___________________
2. ................... is the amount of cash invested in the
___________________
business, net of depreciation.
3. The capital charge is the ................... flow required to
ep
compensate investors for the riskiness of the business
given the amount of economic capital invested.
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Budget
Planning and control are the most important functions of Supply
Chain management. For assisting business management in these
t fo
two functions, the techniques of budgetary control and standard

costing are applied. Of course, budgeting is not something new to
government departments where every year, there is an attempt to
No
equate revenue with expenditure. In private life also, there is an

attempt to balance expenditure with earnings. In the business
world, a budget is the formal expression of the expected earnings
and expenditure for a particular period or future period. In a word,
budget has become an important tool of management in all
.
ES
business activities today.

A budget is a predetermined detailed plan of action developed as a
guide for future operations. Budget also serves as a basis for
UP
performance evaluation and control and budgetary control is a

system of controlling costs through budgets.
The word ‘Budget’ is derived from a French word ‘Bougette’
representing leather pouch into which funds are appropriated to
(c)
meet the anticipated expenses. A budget is a plan and blueprint for

future management action. It is expressed in monetary terms. It is
ale
a financial or quantitative statement, prepared prior to a defined
period of time, of the policy to be pursued during that period for Notes
the purpose of attaining a given objective. The following are some ___________________
n/S
of the important definitions:
___________________
Features of a Budget ___________________
The following are the main features of a budget: ___________________
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1. A budget is prepared for a definite future period of time. ___________________
Generally, budgets are prepared for one year. However, in the ___________________
case of seasonal business like sugar, ice-cream, apparels, etc.,
uc
___________________
there may be two budgets for each year.
___________________
2. The figures in the budget are expressed in monetary and
rod
quantitative terms. ___________________
___________________
3. Budget is a plan for the operations and resources of the
business or firm.
ep
4. Budget is a tool for developing the cooperation, coordination
and control between the various departments.
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5. It shows how much profit or loss a business organisation is

expected to make and thereby reveals its profit potential.
6. The budget proposal which is prepared by the budgetee is
revived and approved by an authority higher than the
t fo
budgetee.
7. After the budget has been approved by the top management of
the organisation, the same cannot be altered except under
No
specified conditions, and

8. It indicates the business policy which has to be followed so as
to achieve a given objective.
.
Objectives of Budget
ES
The main objectives of budget are:

1. It directs the attention of all concerned to the attainment of a
common objective or goal.
UP
2. It contributes to coordinated efforts of all departments in order

to achieve an integrated goal.
3. It aims at careful control over the performance and cost of
(c)
every function.
ale
4. Budgets grow from bottom and are controlled from top-level,
Notes
and
___________________
5. The budgets are compared with actual performance.
n/S
___________________
___________________ Budgeting
___________________ Budgeting means the process of preparing budgets. In other words,
tio
budgeting refers to the management action of formulating budgets.
___________________
Preparation of budgets involves study of business situations and
___________________
understanding of management goals as also the capacity of the
uc
___________________ organisation.
___________________ According to Welsch, “Budgeting is the principal tool of planning
and control offered to management by accounting functions.”
rod
___________________
___________________ In the words of J. Batty, “The entire process of preparing the

budgets is known as budgeting.”
Rowland and Harr has defined budgeting as, “Budgeting may be
ep
said to be the act of building budgets.”
Objectives of Budgeting
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The main objectives of budgeting are:

1. To obtain more economical use of capital.
t fo
2. To bring about coordination between different functions of an

organisation.
3. To plan and control the earnings and expenditure of the
organisation.
No
4. To create a good business practice by planning for future.

5. To ensure the matching of sales with production.
6. To fix departmental responsibilities on different department
.
ES
managers.
7. To prevent wastages or losses and reduce the expenditures, and
8. To ensure the availability of working capital in the
UP
organisation.
(c)
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Prepare a chart for your
n/S
1. ................... is a predetermined detailed plan of action display board on the
___________________
budgetary control and its
developed as a guide for future operations. objectives.
___________________
2. Budgeting refers to the management action of
___________________
...................
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___________________
Budgetary Control ___________________
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Budgetary control is a system of planning and controlling costs. It ___________________
has been defined as the establishment of budgets relating the ___________________

responsibilities of executives to the requirements of a policy, and
rod
___________________
the continuous comparison of actual with budgeted results, either
___________________
to secure by individual action the objective of that policy or to
provide a basis for its revision. In other words, budgetary control is
ep
applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as
possible and actual results when known are compared with budget
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estimates.
According to Wheldon, “Budgetary control is the planning in
advance of the various function of a business, so that business as a
t fo
whole can be controlled.”

In the words of Niles, “Budgetary control is an important tool of
management. It is fact a tool of planning which reaches through
coordination into control and ties the three aspects firmly together.
No
It stimulates thinking in advance by requiring specific planning

and the anticipation of operating problems.”
J.A. Scott has defined budgetary control as, “The term budgetary
control is applied to the system of management control and
.
ES
accounting in which all operations are forecast and so far as

possible planned ahead, and the actual results compared with the
forecast and planned ones.”
UP
In view of the above, the following steps are involved in budgetary

control:
1. Preparation of budgets for each function of the organisation.
2. Measurement of actual performance at the end of the budget
(c)
period.
ale
3. Calculation of the variances and analysing the reasons for
Notes
them.
___________________
4. Revision of budgets in the light of changed circumstances, and
n/S
___________________
5. Taking suitable or prompt action to achieve the desired
___________________
objective.
___________________
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___________________ Objectives of Budgetary Control
___________________
After defining the term budgetary control, it is necessary to
explain the objectives of it. The main objectives of a budgetary
uc
___________________
control can be stated in the following way:
___________________
1. To incorporate the ideas of all levels of management in
rod
___________________ preparing a budget.
___________________
2. To lay down a plan to implement the policy of the organisation.
3. To coordinate the activities of the departments of an
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organisation.
4. To provide sufficient working capital for effective operation of
the organisation.
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5. To control direct and indirect expenses of the organisation.

6. To execute capital expenditures in the most profitable manner.
t fo
Check Your Progress

Fill in the blanks:
1. ................... is the planning in advance of the various
No
function of a business, so that business as a whole can

be controlled.
2. ................... has defined budgetary control as, “The term
budgetary control is applied to the system of
.
ES
management control and accounting in which all

operations are forecast and so far as possible planned
ahead, and the actual results compared with the
forecast and planned ones.”
UP
Summary
Budgetary control is a system of planning and controlling costs. It
(c)
has been defined as the establishment of budgets relating the

responsibilities of executives to the requirements of a policy, and
ale
the continuous comparison of actual with budgeted results, either
to secure by individual action the objective of that policy or to Notes
provide a basis for its revision. In other words, budgetary control is ___________________
n/S
applied to a system of management and accounting control by
___________________
which all operations and output are forecasted.
___________________
Lesson End Activity ___________________
tio
___________________
Prepare an effective presentation to be presented in the class on
the concept and measures of economic value added and the basics ___________________
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of budget. ___________________
___________________
Keywords
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___________________
Budgetary Control: Planning in advance of the various function ___________________
of a business, so that business as a whole can be controlled.”
ep
Budgeting: The principal tool of planning and control offered to
management by accounting functions.
Market Value Added (MVA): It is the difference between the

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current market value of a firm and the capital contributed by

investors.
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1. What is budgetary control? Explain briefly the objectives of
budgetary control.
No
2. What is the purpose served by the introduction of a budgetary

control system in any organisation having manufacturing and
selling activities?
3. Explain the concept of economic value added and market value
.
added.
ES
4. Describe the concept of budget and its objectives.

UP
Further Readings
Books
(c)

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Notes
___________________
n/S
___________________
___________________
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___________________ Delhi.
uc
___________________
New Delhi.
___________________
rod
___________________
Delhi.
___________________
ep
Chand, New Delhi.
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Web Readings
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. No
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UP
(c)
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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___________________
Case Study 1: Private Enterprises Inc.
uc
___________________
This publication presents an example of non-consolidated and
consolidated financial statements prepared in accordance with ___________________
pre-changeover accounting standards – XFI Version and financial
rod
___________________
statements restated in accordance with accounting standards for
private enterprises (ASPE). This example, Private Enterprises ___________________
Inc., is based on a number of assumptions that do not encompass
all aspects of financial reporting matters but include many of the
common concepts that would be encountered in a private company
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environment.
The comparisons provided in this example are not comprehensive
and do not attempt to cover all of the differences between the two
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sets of standards. Readers should consult the text in ASPE and

pre-changeover accounting standards – XFI Version to fully
understand the implications of preparing financial statements in
accordance with ASPE. It is important to note that the example of
financial statements restated in accordance with ASPE is not
t fo
illustrating the company’s first set of financial statements in

accordance with ASPE and therefore does not reflect the
disclosures required by Section 1500, “First-Time Adoption.”
Private Enterprises Inc. is a private enterprise that has:
No
 private operating subsidiaries;

 defined benefit pension plans covering certain of its senior
management employees;
 debt to service the expansion of operations;
.
 previously issued preferred shares in an estate freeze; and

ES
 an investment in a private company subject to significant

influence and investments in equity
 instruments that are quoted in an active market.
UP
The following assumptions and/or decisions were made in

restating the non-consolidated statements in accordance with
ASPE:
 Management made an accounting policy choice to account for
defined benefit pension plans using the immediate
(c)
recognition approach. For simplicity, it is assumed that the

actuarial valuation for accounting purposes in accordance
Contd…
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with pre-changeover accounting standards – XFI Version
Notes approximates the actuarial valuation for funding purposes.
___________________
 Instead of consolidating subsidiaries, management made an
accounting policy choice to account for subsidiaries using the
n/S
___________________ cost method.
___________________
income taxes using the future income taxes method. For
___________________ simplicity, refundable taxes were ignored.
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___________________  The following assumptions and/or decisions were made in
restating the consolidated statements in accordance with
___________________ ASPE:
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___________________
defined benefit pension plans using the immediate
___________________ recognition approach. For simplicity, it is assumed that the
actuarial valuation for accounting purposes in accordance
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___________________ with pre-changeover accounting standards – XFI Version
___________________
approximates the actuarial valuation for funding purposes.
income taxes using the future income taxes method. For
simplicity, refundable taxes were ignored.
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Question:
Analyse the case and recommend a suitable solution.
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Source: http://www.cica.ca/applying-the-standards/accounting-standards-for-private-
enterprises/site-utilities/item49821.pdf
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. No
ES
UP
(c)
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Case Study 2: New Lease Accounting Standard: Is your
organisation prepared to cope with the new standard? Notes
Introduction ___________________
n/S
A New Sri Lankan lease accounting standard has been developed ___________________
in a joint project between the International Accounting Standards
Board (IASB) and the Institute of Chartered Accountants of Sri ___________________
Lanka (ICASL) that could result in a complete overhaul of the
___________________
way in which leases are reported in financial statements,
tio
commencing 1 January 2012. ___________________
Industry projections estimate over $1.3 trillion would be
___________________
transferred to U.S. corporate balance sheets, with roughly 70%
uc
being real estate leases. The impact on the Sri Lankan leasing ___________________
industry had not been quantified yet and the objective of this
paper is to enlighten the reader of the consequences arising from ___________________
the new standard to corporate financial statements.
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___________________
Presented below are the significant changes that are anticipated
in the new standard, some issues and impact they create, and ___________________
some of the ways the management accountant can add value to
the organisation in coping with these changes.
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Synopsis of the standard reviewed
A. What is the area of application of this standard?
This accounting standard would deal with the accounting
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treatment that would be necessary for a leasing company (i.e. the

lessor) and the entity that had obtained the lease, (i.e. the lessee).
As it is common for any accounting standard, LKAS 17 also would
contribute to fulfil the accounting concept of consistency in
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financial statements, with regard to accounting treatment of a

lease.
B. What is the scope of the standard?
The standard excludes application to non-regenerative resources
and certain licensing agreements such as films, manuscripts,
No
patents etc. Also the standard cannot be applied as a basis of

measurement for property held by lessees that is accounted for as
investment property or for investment property provided by
lessors under operating leases or for biological assets held by
lessees under finance leases. Such exclusions would be dealt
.
under separate accounting standards.

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Scope covers the following standards:

 Leases – LKAS 17
 Determining whether an arrangement contains a lease –
UP
IFRIC 4
 De-recognition of finance lease receivables – LKAS 39
 Embedded derivatives in lease contracts – LKAS 39
 Impairment
(c)
 LKAS 36 (for leased assets)

 LKAS 39 (for recognised lease receivables)
Contd…
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 Disclosures – SLFRS 7
Notes
 Investment property – LKAS 40
___________________
C. Definition of terms
n/S
___________________ The standard would define the following key terms inherent to
leases:
___________________
Lease; finance lease; operating lease; non-cancellable lease;
___________________ inception of a lease; commencement of the lease term; lease term;
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minimum lease payments; fair value; economic life; useful life;
___________________
guaranteed residual value; unguaranteed residual life; initial
___________________ direct costs; gross investment in the lease; net investment in the
lease; unearned finance income; interest rate implicit in the lease;
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___________________ lessee’s incremental borrowing rate of interest; contingent rent.
___________________ D. Regulatory framework for lease
The leasing industry in Sri Lanka is regulated via the Finance
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___________________
Leasing Act (FLA), No 56 of 2000, with the Central Bank of Sri
___________________ Lanka acting as its regulator. It is interesting to note that only
the finance leases that gets regulated under this statute (and not
the operating leases). However the hire purchase transactions are
regulated via the Consumer Credit (Amended) Act No 7 of 1990.
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Impact on Management Accounting
Key issues arising from the standard which are relevant to
management accountants
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1. Transfer of the right to use the assets: This is a common

area where the management accountant would be confused as
to the extent to which the right to use the asset had got
transferred. On the other end of the spectrum would be
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contracts for services that provide the services provided by

assets, but does not substantially transfer the right to use the
asset.
This area of confusion usually drives the management
accountant to consider a contractual service for example a
No
vehicle hiring company that provides transportation services,

to be a lease. This mere arrangement to hire could be
distinguished easily when one examines the arrangement in
the light of the following section, i.e. transfer of risks and
rewards.
.
2. The locus of risks and rewards incidental to the right to

ES
use: Together with the right to use the asset, what gets
transferred (or not transferred) would be the risks and
rewards arising from the leased asset. The difficulty of
identifying the locus would also be an issue for the
UP
management accountant in the quest for disseminating the

appropriate management information to the management.
Question:
Recommend a suitable solution that can be adopted by the
company to cope with the new lease standard.
(c)
Source: http://www.cimaglobal.com/Documents/Our%20locations%20docs/Sri%20Lanka/
LKAS%2017%20_%20Leases%20V3.pdf
UNIT 21: Corporate Financial Reporting
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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BLOCK-V
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(c)
Detailed Contents
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Notes
UNIT 21: CORPORATE FINANCIAL REPORTING
___________________ UNIT 23: INTERNATIONAL ACCOUNTING
STANDARDS-I
n/S
 Introduction
___________________  Introduction
 Prescribed Format
___________________  International Accounting Standards
 Balance Sheet Grouping
___________________
 Profit & Loss Account UNIT 24: INTERNATIONAL ACCOUNTING
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___________________ STANDARDS-II
UNIT 22: INTERNATIONAL FINANCIAL
___________________  Introduction
REPORTING STANDARDS
 Other Accounting Standards
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 ___________________
Introduction
 ___________________
International Financial Reporting Standards UNIT 25: CASE STUDY
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___________________
___________________
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Notes
Activity
___________________
Corporate Financial Reporting
n/S
prescribed format for reports
and___________________
the mandatory reporting.
___________________
Objectives
___________________
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topics: ___________________
 Prescribed Format ___________________
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 Balance Sheet Grouping ___________________
 Profit & Loss Account
___________________
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___________________
Introduction
___________________
The form of presentation of financial reports of non-corporate
business organisations suffers from non-conformity. Rigid rules
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and regulations, as to the manner of presenting financial reports,
do not bind the individual businessman in a sole trading or the
partners in a firm. They enjoy a higher degree of individuality,
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which is reflected in the myriad of forms in which financial reports

are prepared. In fact, there is no legal compulsion for these
organisations to present the financial reports at all. The reports
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are prepared for the own use of the businessman and are made
available only to select groups, such as lenders of resources and to
tax authorities. Corporates, which are governed by their respective
acts, have not been given this latitude. The reasons are obvious in
No
corporate ownership is divorced from management. With a view to

ensure that the funds made available by the shareholders (a
majority of whom will not have a say in the day to day
management of the business) are properly utilised by the
.
managers, law has prescribed specific forms in which the financial

ES
reports are to be prepared and presented.
Prescribed Format
UP
The Companies Act, 1956 has laid down specific form in which
balance sheet of a company has to be presented and the period
within which it has to be laid before the shareholders. It has also
prescribed parameters for preparing profit and loss account.
(c)
Separate formats have been prescribed for banking and insurance

companies and companies engaged in the generation and supply of
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electricity by their separate acts. The annual reports are to be
Notes signed by the managing director and at least one more director.
___________________
Mandatory Reporting
n/S
___________________
Section 210 of the Companies Act, 1956 stipulates that the board of
___________________
directors of every company should submit, before the annual
___________________ general meeting of the company, a duly audited profit and loss
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___________________ account and balance sheet. These documents should be placed
before the meeting within six months of the expiry of the financial
___________________
year. Three copies of the annual reports as approved by the
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___________________ shareholder are to be filed with the Registrar of Companies within
___________________ thirty days of the meeting in which they were approved. It may be
mentioned that the message conveyed by these statements are
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___________________
similar to that of non-corporate reports, except for the greater
___________________
degree of disclosure, which are on the lines of the generally
accepted accounting principles.
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The format for balance sheet is quite exhaustive with detailed
instructions as to how assets and liabilities are to be displayed.
The corporates can choose either horizontal form or vertical form of
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presentation. Marshalling of assets and liabilities are done as per

the permanence preference method. Many of the items are to be
explained through detailed schedules. Explanatory notes are given
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wherever necessary. Contingent liabilities are to be disclosed as a

footnote to the balance sheet. Contingent liabilities are probable
liabilities that may arise on the happening of an event. For
example, giving financial guarantee to the bank in respect of its
No
sister concern’s fulfilment of a contract, is a contingent liability. As

long as the sister concern fulfils its obligations, no liability arises.
In the event of the sister concern’s failure to fulfil the contract, the
guarantor company will be called upon to fulfil the commitment or
pay damages, as the case may be in terms of contract. A
.
ES
summarized version of the profit and loss account and balance

sheet of Tata Steels Ltd. for the year 2008 is given in Table 21.1.
UP
Balance Sheet Grouping

An examination of the prescribed format for corporate balance
sheet would reveal that liabilities are grouped into five major
blocks share capital, reserves and surpluses, secured loans,
(c)
unsecured loans and current liabilities and provisions and assets

are grouped into four–block assets, investments, current–assets
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and miscellaneous expenditure. A brief description of the groups is
given below. Notes
___________________
Liabilities
n/S
___________________
Share Capital ___________________
The balance sheet should furnish details of the kinds of shares a ___________________
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corporate has issued and the stages of the issue. After the coming
___________________
into force of the Companies Act, 1956, corporates can issue only
two kinds of shares – equity and preference. The status of issue of ___________________
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these capitals is to be indicated in the balance sheet under the ___________________
heads of authorised, issued, subscribed and paid up.
___________________
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Format 21.1: Balance Sheet of Tata Steels Ltd. ___________________
for the year 2008
___________________
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Authorised
Notes
Also called nominal or registered share capital, it is the maximum
___________________
extent up to which a corporate can issue shares to the public, at a
n/S
___________________ particular point of time. It is the ceiling limit. Authorised capital is
___________________ specified in the Memorandum and Articles of Association of the
corporate. It is an enabling provision, in the sense that the entire
___________________
amount authorised need not be issued at one stroke. It can be (and
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___________________ is usually) issued in parts, a number of times, till the limit is
___________________ exhausted. However, no company can issue shares in excess of the
authorised capital.
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___________________
___________________ Issued
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___________________
Issued share capital is that part of the authorised capital, which is
___________________ offered to the public for subscription. Nowadays, companies prefer
to raise funds through private placement. The offer to the public is
made through a document called prospectus. Prospectus is an
ep
invitation to the public to offer for the issue. The issue may be any
size. But corporates are aware that small issues cost up to 10% of
the value of the issue compared to about 6% in case of larger
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issues. Hence, they do not enter the market every now and then
with smaller issues.
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Subscribed
It is that part of the issued capital, which has been agreed to be
taken up by the public. Subscription or offer by the public might be
for a number equal to the volume issued or for more or less. In a
No
bullish capital market, subscription will be more than the offer,

when it is called oversubscription. Usually, companies reserve a
right to accept excess subscription to an extent. Such options are
called green shoe options.
.
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Called Up
A special feature of share issue is that the entire issue price is not
usually called upon to be paid in one lump sum. The subscribers
UP
are required to remit, along with their application, a part of the

issue price. This is application money. When the application for
subscription is accepted by the corporate, the subscriber is asked to
pay another part of issue price. This is allotment money. The
(c)
balance of the issue price may be called up for payment in one or

more instalments – these are calls and the money paid at each call
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is the call money. The called-up share of a corporate, therefore, is
that part of the issue price, which the investors have to pay. It Notes
includes application money, allotment money and call money. ___________________
n/S
Assets ___________________
Having acquainted with the nature of liabilities, let us have a ___________________
closer look at the segments of assets. Assets are classified into four ___________________
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distinct categories— fixed or block assets, investments or non-
___________________
current assets, current assets and miscellaneous expenses to the
___________________
extent not written off.
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___________________
Block Assets (Fixed Assets)
___________________
Fixed assets are fixed in time. That is, they have a fixed number of
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___________________
useful years. Gross block is the original or historic value of all the
___________________
fixed assets that are in use as at the end of the accounting year. In
the balance sheet, it is shown in the inner column and depreciation
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thereon up to that date is deducted therefrom.
Investments
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Also called non-current assets, indicates investments of surplus

funds of the corporate outside the business. The investment may
be for a short-term or a long-term. It may be for treasury purposes,
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when it is made with the sole objective of making profits on the

fluctuations in its prices.
Or investments are made in the stocks of subsidiaries for effective
control. Securities in which a company invests may be quoted in a
No
stock exchange or not. Market value of securities quoted is given as

a footnote below the investments.
Current Assets
.
These include cash, inventories, bills receivables, debtors, loans

ES
and advances and prepaid expenses. In case of bills receivables and

debtors, it should be indicated whether they are good or doubtful
and a period-wise breakup of the outstanding such as debtors
UP
outstanding for more than six months, less than six months, etc.,
has to be given.
Miscellaneous Expenses
(c)
It represents intangibles such as preliminary expenses, deferred

advertisement, issue expenses, discount on issue of shares, carried
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forward loss balance of the previous years, etc., not written off.
Notes These are to be written off from the future profits of the business
Activity
___________________
Make a brief report on the
as per the admissible limitation periods.
n/S
profit and loss account.
___________________
Additional Exposures
___________________
In addition to listing of assets and liabilities, a corporate balance
___________________
sheet also gives, by way of separate statements, details of fixed
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___________________ assets brought forward, acquired and disposed during the year and
___________________ revaluation, if any, made, depreciation of the past years and the
year under consideration. In case the corporate has subsidiaries,
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___________________
the audited financial reports of each of the subsidiaries are also to
___________________ be given as annexure. Efforts are on to incorporate the financial
data of subsidiaries into the financial statements of holding
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___________________
companies. ICAI is shaping the requisite standard to give effect to
___________________
this. Further, list of executives entitled to monthly remuneration
in excess of certain amount should also to be furnished. An
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auditor’s report, as to the compliance, by the corporate, of the
various legal requirements, is attached to the financial reports.
Directors report, another important document accompanying
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corporate reports, spells out the performance of the unit, problems,

if any faced, the steps proposed to overcome the problems future
prospects and the recommendation for dividend to shareholders.
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Check Your Progress

Fill in the blanks:
1. ................... are probable liabilities that may arise on
No
the happening of an event.

2. After the coming into force of the Companies Act, 1956,
corporates can issue only two kinds of shares –
................... and ....................
.
ES
3. ................... capital is that part of the authorised

capital, which is offered to the public for subscription.
UP
Profit & Loss Account

Law is not very severe on the format in which the profit and loss
account of a corporate has to be presented. Part II of Schedule VI
stipulates the requirements to be complied with by corporates
(c)
while preparing profit and loss account. One of the major

differences between a corporate and a non-corporate income
ale
statement is that in a non-corporate report, the value of the inputs
is given as costs. Incorporates, however, in addition to value, Notes
quantitative information also has to be furnished. This ___________________
n/S
quantitative information may form part of the profit and loss
___________________
account or though a note attached thereto. Usually, companies
furnish quantitative data in a separate schedule. ___________________
___________________
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Issue Expenses
___________________
Corporates have the privilege to invite the public to subscribe to
___________________
their share and debt capitals. For this purpose, a corporate has to
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obtain the consent of the shareholders in a general meeting. The ___________________
procedure for issue needs elaborate arrangement. One or more ___________________
merchant bankers are engaged, depending upon the size of the
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___________________
issue, to handle the issue.
___________________
Underwriting Commission
Underwriting commission and brokerage payable by a company
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differs inversely to the rating of the corporate by the investors.
Higher the rating, lower is the rate of the underwriting
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commission. Law has fixed a ceiling of 5% on the share issues and

2.5% on bonds and debentures as underwriting commission. As
regards brokerage, which is payable on the amount devolved on
underwriters, the ceiling is 2.50% and 1.25% respectively.
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Segmental Reporting
With increasing tempo of globalisation, the trend in Indian
corporates is to adopt international standards in financial
No
reporting. The Institute of Chartered Accountants of India has

issued standard on segmental reporting AS17. Indian corporates,
listed or proposed to be listed on the stock exchanges has to adopt
segmental reporting. Companies with multiple products or services
.
and those with area of operation extending beyond the boundaries

ES
of the country would have to present separate financial report for

each of the activities and for each territory. Each segmental report
will contain information as to the sales, costs, assets and liabilities
UP
pertaining to that segment.

(c)
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Notes
Check Your Progress
Fill in the blanks:
___________________
n/S
___________________
1. Underwriting commission and brokerage payable by a
company differs ................... to the rating of the
___________________
corporate by the investors.
___________________
2. One of the major differences between a corporate and a
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___________________ non-corporate income statement is that in a non-
___________________ corporate report, the value of the inputs is given as
...................
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___________________
___________________
Summary
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___________________
Financial reporting in corporate organisations is regulated by the
___________________
laws under which the organizations are registered. As such, these
reports are more transparent compared to non-corporate financial
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reports. The Companies Act, 1956 has prescribed a format in which
corporates are to present their balance sheet. For profit and loss
account, the act has laid down parameters to be followed. A
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corporate can present its financial reporting in a horizontal ‘T’

form or in a vertical statement form. Details on each of the items of
balance sheet and profit and loss account are required to be
furnished as schedules or notes. The prescribed corporate balance
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sheet follows the permanency method for marshalling assets and

liabilities.
No
Lesson End Activity

Make a presentation on the corporate financial reporting.
Keywords
.
ES
Authorised Capital: It is the maximum extent up to which a

corporate can issue shares to the public, at a particular point of
time.
UP
Contingent Liabilities: These are probable liabilities that may

arise on the happening of an event.
Issued Share Capital: It is that part of the authorised capital,
which is offered to the public for subscription.
(c)
Subscribed Capital: It is that part of the issued capital, which

has been agreed to be taken up by the public.
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Notes
1. Are non-corporate business organizations legally obliged to
___________________
prepare financial statements?
n/S
___________________
2. Why should law prescribe format for financial reporting to
corporates? ___________________
___________________
3. How are assets and liabilities of corporate organisations
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marshalled? ___________________
4. Describe the asset side of corporate balance sheet. ___________________
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___________________
Further Readings ___________________
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___________________
Books
___________________
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Delhi.
No
New Delhi.
Delhi.
.

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Chand, New Delhi.
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Web Readings
220.227.161.86/19328sm_finalnew_cp3.pdf
www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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(c)
UNIT 22: International Financial Reporting Standards
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Notes
___________________
International Financial Reporting
n/S
___________________
Standards ___________________
___________________
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Objectives ___________________
___________________
topics:
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___________________
 IFRS 1: First-time Adoption
 IFRS 2: Share-based Payment ___________________
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 IFRS 3: Business Combinations ___________________
 IFRS 4: Insurance Contracts ___________________
 IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6: Exploration for and Evaluation of Mineral Resources
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 IFRS 7: Financial Instruments: Disclosures
 IFRS 8: Operating Segments
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Introduction
International Financial Reporting Standards (IFRS) is fast
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becoming the global accounting language. Over 100 countries have

now adopted IFRS and many more have committed to make the
transition in the next few years. The benefits of global standards
are widely acknowledged. For companies, however, the conversion
No
to IFRS is a major change both for the finance function and for the
wider business.
The International Accounting Standards Board (IASB) has
recognised the need for guidance. In 2003 it published IFRS1 First-
.
time adoption of International Financial Reporting Standards

ES
(IFRS 1). IFRS 1 covers the application of IFRS in a company’s

first IFRS financial statements. It starts with the basic premise
that an entity applies IFRS for the first time on a fully
UP
retrospective basis. However, acknowledging the cost and

complexity of that approach, it then establishes various
exemptions in areas where retrospective application would be too
burdensome or impractical.
(c)
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International Financial Reporting Standards
Notes
Activity
___________________
Write an article on the IFRS 1: First-time Adoption
n/S
international financial
___________________
reporting standards.
IFRS 1 requires an entity to do the following in the opening IFRS
___________________
statement of financial position that it prepares as a starting point
for its accounting under IFRSs: (a) Recognize all assets and
___________________
liabilities whose recognition is required by IFRSs; (b) Not recognize
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___________________ items as assets or liabilities if IFRSs do not permit such
___________________ recognition; (c) Reclassify items that it recognized under previous
GAAP as one type of asset, liability or component of equity, but are
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___________________
a different type of asset, liability or component of equity under
___________________ IFRSs; and (d) Apply IFRSs in measuring all recognized assets and
liabilities.
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___________________
___________________
IFRS 2: Share-based Payment
The objective of this IFRS is to specify the financial reporting by an
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entity when it undertakes a share-based payment transaction. In
particular, it requires an entity to reflect in its profit or loss and
financial position the effects of share-based payment transactions,
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including expenses associated with transactions in which share

options are granted to employees.
IFRS 3: Business Combinations

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The objective of the IFRS is to enhance the relevance, reliability

and comparability of the information that an entity provides in its
financial statements about a business combination and its effects.
No
It does that by establishing principles and requirements for how an

acquirer (a) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a
.
ES
gain from a bargain purchase; and (c) determines what information

to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
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IFRS 4: Insurance Contracts

The objective of this IFRS is to specify the financial reporting for
insurance contracts by any entity that issues such contracts
(described in this IFRS as an insurer) until the Board completes
(c)
the second phase of its project on insurance contracts. In

particular, this IFRS requires (a) limited improvements to
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accounting by insurers for insurance contracts; (b) disclosure that
identifies and explains the amounts in an insurer’s financial Notes
Activity
statements arising from insurance contracts and helps users of ___________________
Prepare a presentation on
n/S
those financial statements understand the amount, timing and non-current assets held for
sale___________________
and discontinued
uncertainty of future cash flows from insurance contracts. operations.
___________________
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Fill in the blanks:
___________________
1. IFRS 1 requires an entity to do the following in the ___________________
opening IFRS statement of financial position that it
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___________________
prepares as a ................... for its accounting under
IFRSs ___________________
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2. The objective of IFRS 2 is to specify the financial ___________________
reporting by an entity when it undertakes a ___________________

............................ payment transaction.
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IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations
The objective of this IFRS is to specify the accounting for assets
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held for sale, and the presentation and disclosure of discontinued

operations. In particular, the IFRS requires (a) assets that meet
the criteria to be classified as held for sale to be measured at the
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lower of carrying amount and fair value less costs to sell, and
depreciation on such assets to cease; and (b) assets that meet the
criteria to be classified as held for sale to be presented separately
in the statement of financial position and the results of
No
discontinued.
IFRS 6: Exploration for and Evaluation of Mineral Resources

The IFRS (a) permits an entity to develop an accounting policy for
.
exploration and evaluation assets without specifically considering

ES
the requirements of paragraphs 11 and 12 of IAS8. Thus, an entity

adopting IFRS 6 may continue to use the accounting policies
applied immediately before adopting the IFRS. This includes
UP
continuing to use recognition and measurement practices that are

part of those accounting policies; (b) requires entities recognising
exploration and evaluation assets to perform an impairment test
on those assets, when facts and circumstances suggest that the
carrying amount of the assets may exceed their recoverable
(c)
amount; and (c) varies the recognition of impairment from that in

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IAS 36 but measures the impairment in accordance with that
Notes Standard once the impairment is identified.
___________________
IFRS 7: Financial Instruments: Disclosures
n/S
___________________
The IFRS applies to all entities, including entities that have few
___________________
financial instruments (for example: a manufacturer whose only
___________________ financial instruments are accounts receivable and accounts
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___________________ payable) and those that have many financial instruments (for
example: a financial institution most of whose assets and liabilities
___________________
are financial instruments).
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___________________
The objective of this IFRS is to require entities to provide
___________________
disclosures in their financial statements that enable users to
rod
___________________ evaluate (a) the significance of financial instruments for the
___________________ entity’s financial position and performance; and (b) the nature and
extent of risks arising from financial instruments to which the
entity is exposed during the period and at the end of the reporting
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period, and how the entity manages those risks. The qualitative
disclosures describe management’s objectives, policies and
processes for managing those risks. The quantitative disclosures
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provide information about the extent to which the entity is exposed

to risk, based on information provided internally to the entity’s key
management personnel. Together, these disclosures provide an
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overview of the entity’s use of financial instruments and the

exposures to risks they create.
IFRS 8: Operating Segments

No
Core principle — an entity shall disclose information to enable

users of its financial statements to evaluate the nature and
financial effects of the business activities in which it engages and
the economic environments in which it operates.
.
This IFRS shall apply to (a) the separate or individual financial

ES
statements of an entity: whose debt or equity instruments are

traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets),
UP
or (ii) that files, or is in the process of filing, its financial

statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in
a public market; and (b) the consolidated financial statements of a
group with a parent: (i) whose debt or equity instruments are
(c)
traded in a public market (a domestic or foreign stock exchange or

an over-the-counter market, including local and regional markets),
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or (ii) that files, or is in the process of filing, the consolidated
financial statements with a securities commission or other Notes
regulatory organisation for the purpose of issuing any class of ___________________
n/S
instruments in a public market.
___________________
Fill in the blanks: ___________________
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1. The objective of this IFRS is to specify the accounting ___________________
for assets held for sale, and the presentation and ___________________
disclosure of discontinued operations.
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___________________
2. IFRS 6 ................... includes continuing to use
___________________
recognition and measurement practices that are part of
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those accounting policies. ___________________
___________________
Summary
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Accounting standards are, as we have already seen, prescribed
with the objective of ushering in a sense of conformity in
accounting practices. However, the rigidity with which the
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standards are being implemented uniformly to all enterprises

without having regard to the differing nature of the enterprises,
requiring differential treatment, has raised many an eyebrow both
t fo
in the US and in India about the efficacy of these standards.

Accounting professionals feel that transparency should be built
into the standards to make these more realistic. It is the personal
view of the author that it would be highly impracticable to have
No
separate standards for each industry or each size of the enterprise

to meet their specific requirements. On the other hand, in the
name of transparency should any latitude be shown and the
standards relaxed, the purpose of the entire exercise of bringing
.
about comparability in financial reporting will be defeated and the

ES
reliability of the accounting information will be back to square one.
Lesson End Activity

UP
Make a detailed report on the International Financial Reporting

Standards of accounting. Enlist the objective of each reporting
standard.
(c)
ale
Keywords
Notes
Accounting Standards: An accounting standard is a guideline
___________________
for financial accounting, such as how a firm prepares and presents
n/S
___________________
its business income and expense, assets and liabilities.
___________________
International Financial Reporting Standards: A set of
___________________ international accounting standards stating how particular types of
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___________________ transactions and other events should be reported in financial
statements. IFRS are issued by the International Accounting
___________________
Standards Board.
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___________________
rod
___________________
1. Explain the IFRS 1: First-time Adoption
___________________
2. Describe the concept of share-based payment standard.
3. Discuss about IFRS 3.
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4. What is the objective of IFRS 4?
5. Explain the exploration for and evaluation of mineral
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resources.
Further Readings
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Books
No

.
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Delhi.
(c)
Chand, New Delhi.

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Web Readings
Notes
www.ifrs.org/
___________________
www.charteredclub.com/what-is-ifrs/
n/S
___________________
___________________
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___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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(c)
UNIT 23: International Accounting Standards-I
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Notes
Activity
___________________
Write a report on the IAS 1 to
International Accounting
n/S
IAS 11.
___________________
Standards-I ___________________
___________________
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Objectives ___________________
___________________
topics:
uc
___________________
 International Accounting Standards
 Standards on Income tax, property, land, leases, revenue, and employee ___________________
benefits, etc.
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___________________
___________________
Introduction
An older set of standards stating particular types of transactions
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and other events should be reflected in financial statements. In the
past, international accounting standards (IAS) were issued by the
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Board of the International Accounting Standards Committee

(IASC).
International Accounting Standards

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In this unit, you will study the IAS 1 to IAS 23.
IAS 1: Presentation of Financial Statements

No
The objective of this IFRS is to ensure that an entity’s first IFRS

financial statements, and its interim financial reports for part of
the period covered by those financial statements, contain high
quality information that (a) is transparent for users and
.
comparable over all periods presented; (b) provides a suitable

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starting point for accounting under International Financial

Reporting Standards (IFRSs); and (c) can be generated at a cost
that does not exceed the benefits to users.
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IAS 2: Inventories
The objective of this Standard is to prescribe the accounting
treatment for inventories. A primary issue in accounting for
(c)
inventories is the amount of cost to be recognised as an asset and

carried forward until the related revenues are recognised. This
Standard provides guidance on the determination of cost and its
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subsequent recognition as an expense, including any write-down to
Notes net realisable value. It also provides guidance on the cost formulas
___________________ that are used to assign costs to inventories. Inventories shall be
n/S
measured at the lower of cost and net realisable value.
___________________
___________________ IAS 7: Cash Flow Statements

___________________ The objective of this Standard is to require the provision of
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___________________ information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows,
___________________
which classifies cash flows during the period from operating,
uc
___________________ investing and financing activities. Cash flows are inflows and
___________________ outflows of cash and cash equivalents. Cash comprises cash on
hand and demand deposits. Cash equivalents are short-term,
rod
___________________
highly liquid investments that are readily convertible to known
___________________
amounts of cash and which are subject to an insignificant risk of
changes in value.
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IAS 8: Accounting Policies, Changes in Accounting Estimates
and Errors
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The objective of this Standard is to prescribe the criteria for

selecting and changing accounting policies, together with the
accounting treatment and disclosure of changes in accounting
policies, changes in accounting estimates and corrections of errors.
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The Standard is intended to enhance the relevance and reliability

of an entity’s financial statements and the comparability of those
financial statements over time and with the financial statements of
other entities. Accounting policies are the specific principles, bases,
No
conventions, rules and practices applied by an entity in preparing

and presenting financial statements. When an IFRS specifically
applies to a transaction, other event or condition, the accounting
policy or policies applied to that item shall be determined by
.
applying the IFRS and considering any relevant Implementation

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Guidance issued by the IASB for the IFRS.
IAS 10: Events after the Balance Sheet Date

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The objective of this Standard is to prescribe (a) when an entity

should adjust its financial statements for events after the reporting
period; and (b) the disclosures that an entity should give about the
date when the financial statements were authorised for issue and
(c)
about events after the reporting period.

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The Standard also requires that an entity should not prepare its
Notes
financial statements on a going concern basis if events after the
reporting period indicate that the going concern assumption is not ___________________
n/S
appropriate. ___________________
___________________
IAS 11: Construction Contracts
___________________
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treatment of revenue and costs associated with construction ___________________
contracts. Because of the nature of the activity undertaken in ___________________
construction contracts, the date at which the contract activity is
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___________________
entered into and the date when the activity is completed usually
fall into different accounting periods. Therefore, the primary issue ___________________
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in accounting for construction contracts is the allocation of contract ___________________
revenue and contract costs to the accounting periods in which
___________________
construction work is performed. This Standard shall be applied in
accounting for construction contracts in the financial statements of
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contractors.
Check Your Progress

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Fill in the blanks:

1. The objective of ................... Standard is to require the
provision of information about the historical changes in
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cash and cash equivalents of an entity by means of a

statement of cash flows, which classifies cash flows
during the period from operating, investing and
financing activities.
No
2. The objective of ................... Standard is to prescribe the

accounting treatment of revenue and costs associated
with construction contracts.
.
IAS 12: Income Taxes

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treatment for income taxes. For the purposes of this Standard,
income taxes include all domestic and foreign taxes, which are
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based on taxable profits. Income taxes also include taxes, such as

withholding taxes, which are payable by a subsidiary, associate or
joint venture on distributions to the reporting entity. The principal
issue in accounting for income taxes is how to account for the
(c)
current and future tax consequences of (a) the future recovery

(settlement) of the carrying amount of assets (liabilities) that are
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recognised in an entity’s balance sheet; and (b) transactions and
Notes other events of the current period that are recognised in an entity’s
Activity
___________________
Make an assignment on the
financial statements.
n/S
IAS 16 to IAS 23.
___________________
IAS 16: Property, Plant and Equipment
___________________
___________________ treatment for property, plant and equipment, so that, users of the
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___________________ financial statements can discern information about an entity’s
investment in its property, plant and equipment and the changes
___________________
in such investment. The principal issues in accounting for
uc
___________________ property, plant and equipment are the recognition of the assets,
___________________ the determination of their carrying amounts and the depreciation
charges and impairment losses to be recognised in relation to
rod
___________________
them.
___________________
Property, plant and equipment are tangible items that (a) are held
for use in the production or supply of goods or services, for rental to
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others, or for administrative purposes; and (b) are expected to be
used during more than one period.
The cost of an item of property, plant and equipment shall be
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recognised as an asset if, and only if (a) it is probable that future

economic benefits associated with the item will flow to the entity;
and (b) the cost of the item can be measured reliably.
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IAS 17: Leases

The objective of this Standard is to prescribe, for lessees and
lessors, the appropriate accounting policies and disclosure to apply
No
in relation to leases. The classification of leases adopted in this

Standard is based on the extent to which risks and rewards
incidental to ownership of a leased asset lie with the lessor or the
lessee. A lease is classified as a finance lease if it transfers
.
substantially, all risks and rewards incidental to ownership. A

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lease is classified as an operating lease if it does not transfer

substantially all risks and rewards incidental to ownership. Lease
payments under an operating lease shall be recognised as an
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expense on a straight-line basis over the lease term unless another

systematic basis is more representative of the time pattern of the
user’s benefit.
IAS 18: Revenue

(c)
The primary issue in accounting for revenue is determining when

to recognise revenue. Revenue is recognised when it is probable
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that future economic benefits will flow to the entity and these
benefits can be measured reliably. This Standard identifies the Notes
circumstances in which these criteria will be met and, therefore, ___________________
n/S
revenue will be recognised. It also provides practical guidance on
___________________
the application of these criteria. Revenue is the gross inflow of
economic benefits during the period arising in the course of the ___________________
ordinary activities of an entity when those inflows result in ___________________
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increases in equity, other than increases relating to contributions
___________________
from equity participants.
___________________
This Standard shall be applied in accounting for revenue arising
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___________________
from the following transactions and events (a) the sale of goods; (b)
the rendering of services; and (c) the use by others of entity assets ___________________
yielding interest, royalties and dividends.
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___________________
___________________
IAS 19: Employee Benefits
Employee benefits are all forms of consideration given by an entity
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in exchange for service rendered by employees.
The objective of this Standard is to prescribe the accounting and
disclosure for employee benefits. The Standard requires an entity
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to recognise (a) a liability when an employee has provided service

in exchange for employee benefits to be paid in the future; and (b)
an expense when the entity consumes the economic benefit arising
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from service provided by an employee in exchange for employee

benefits.
This Standard shall be applied by an employer in accounting for all
employee benefits, except those to which IFRS 2 Share-based
No
Payment applies.
IAS 20: Accounting for Government Grants and Disclosure of

Government Assistance
.
This Standard shall be applied in accounting for, and in the

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disclosure of, government grants and in the disclosure of other

forms of government assistance. A government grant may take the
form of a transfer of a non-monetary asset, such as land or other
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resources, for the use of the entity. In these circumstances, it is

usual to assess the fair value of the non-monetary asset and to
account for both grant and asset at that fair value.
(c)
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IAS 21: The Effects of Changes in Foreign Exchange Rates
Notes
An entity may carry on foreign activities in two ways. It may have
___________________ transactions in foreign currencies or it may have foreign
n/S
___________________ operations. In addition, an entity may present its financial
statements in a foreign currency. The objective of this Standard is
___________________
to prescribe how to include foreign currency transactions and
___________________
foreign operations in the financial statements of an entity and how
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___________________ to translate financial statements into a presentation currency. The
___________________ principal issues are which exchange rate(s) to use and how to
report the effects of changes in exchange rates in the financial
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___________________
statements.
___________________
This Standard does not apply to hedge accounting for foreign
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___________________
currency items, including the hedging of a net investment in a
___________________ foreign operation. IAS 39 applies to hedge accounting.
This Standard does not apply to the presentation in a statement of
cash flows of the cash flows arising from transactions in a foreign
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currency, or to the translation of cash flows of a foreign operation
(see IAS 7 Statement of Cash Flows).
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IAS 23: Borrowing Costs

Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the
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cost of that asset. Other borrowing costs are recognised as an

expense. Borrowing costs are interest and other costs that an
entity incurs in connection with the borrowing of funds.
No
An entity shall capitalise borrowing costs that are directly

attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in
which it incurs them.
.
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A qualifying asset is an asset that necessarily takes a substantial

period of time to get ready for its intended use or sale.
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(c)
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Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. The objective of ................... Standard is to prescribe the
___________________
accounting treatment for property, plant and
equipment, so that, users of the financial statements ___________________
can discern information about an entity’s investment in ___________________
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its property, plant and equipment and the changes in
___________________
such investment.
___________________
2. The objective of ................... Standard is to prescribe,
uc
___________________
for lessees and lessors, the appropriate accounting
policies and disclosure to apply in relation to leases. ___________________
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3. A lease is classified as a/an ................... if it transfers ___________________
substantially, all risks and rewards incidental to ___________________

ownership.
4. A lease is classified as a/an ...................if it does not
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transfer substantially all risks and rewards incidental
to ownership.
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5. ................... costs are interest and other costs that an

entity incurs in connection with the borrowing of funds.
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Summary
In the past, international accounting standards (IAS) were issued
by the Board of the International Accounting Standards
No
Committee (IASC). The accounting standards are listed as: IAS 1:

Presentation of Financial Statements, IAS 2: Inventories, IAS 7:
Cash Flow Statements, IAS 8: Accounting Policies, Changes in
Accounting, Estimates and Errors, IAS 10: Events After the
Balance Sheet Date, IAS 11: Construction Contracts, IAS 12:
.
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Income Taxes, IAS 16: Property, Plant and Equipment, IAS 17:
Leases, IAS 18: Revenue, IAS 19: Employee Benefits, IAS 20:
Accounting for Government Grants and Disclosure of Government
Assistance, IAS 21: The Effects of Changes in Foreign Exchange
UP
Rates, and IAS 23: Borrowing Costs.
Lesson End Activity

(c)
Prepare a presentation on the accounting standards IAS 1 to IAS

23.
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Keywords
Notes
Borrowing Costs: These are directly attributable to the
___________________
acquisition, construction or production of a qualifying asset form
n/S
___________________
part of the cost of that asset
___________________
Employee Benefits: These are all forms of consideration given by
___________________ an entity in exchange for service rendered by employees.
tio
___________________ International Accounting Standards: An older set of standards
___________________ stating how particular types of transactions and other events
should be reflected in financial statements. In the past,
uc
___________________
International Accounting Standards (IAS) was issued by the Board
___________________
of the International Accounting Standards Committee (IASC).
rod
___________________

1. Explain the accounting for Government Grants and disclosure
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of Government assistance.
2. Describe the effects of changes in foreign exchange rates.
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3. Discuss about the events after the balance sheet date.

4. Write short notes on
(a) IAS 7: Cash Flow Statements
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(b) IAS 1: Presentation of Financial Statements

(c) IAS 11: Construction Contracts
No
Further Readings
Books
.

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UP

(c)

Delhi.
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Notes
New Delhi.
___________________
n/S
Delhi. ___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan ___________________
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Chand, New Delhi.
___________________
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Web Readings ___________________
www.ifrs.org/ ___________________
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www.charteredclub.com/what-is-ifrs/ ___________________
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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(c)
UNIT 24: International Accounting Standards-II
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Notes
Activity
Make___________________
a report on the IAS 24
International Accounting
n/S
to 36.
___________________
Standards-II ___________________
___________________
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Objectives ___________________
___________________
topics:
uc
___________________
 Other Accounting Standards
 Accounting Standards for related party disclosure, Investments in ___________________
Associates, Interests in Joint Ventures, and many more.
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___________________
___________________
Introduction
The International Accounting Standards Board (IASB) is the
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independent, accounting standard-setting body of the IFRS
Foundation.
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Other Accounting Standards

In the previous unit, you studied IAS 1 to IAS 23. Now in this unit
t fo
you will study the remaining IAS 24 to IAS 41.
IAS 24: Related Party Disclosures

The objective of this Standard is to ensure that an entity’s
No
financial statements contain the disclosures necessary to draw

attention to the possibility that its financial position and profit or
loss may have been affected by the existence of related parties and
by transactions and outstanding balances with such parties.
.
ES
A party is related to an entity if (a) directly, or indirectly through

one or more intermediaries, the party: (i) controls, is controlled by,
or is under common control with the entity (this includes parents,
subsidiaries and fellow subsidiaries); (ii) has an interest in the
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entity that gives it significant influence over the entity; or (iii) has
joint control over the entity; (b) the party is an associate (as
defined in IAS 28 Investments in Associates) of the entity; (c) the
party is a joint venture in which the entity is a venturer (see IAS
(c)
31 Interests in Joint Ventures); (d) the party is a member of the

key management personnel of the entity or its parent; (e) the party
ale
is a close member of the family of any individual referred to in (a)
Notes or (d); (f) the party is an entity that is controlled, jointly controlled
___________________ or significantly influenced by, or for which significant voting power
n/S
in such entity resides with, directly or indirectly, any individual
___________________
referred to in (d) or (e); or (g) the party is a post-employment
___________________
benefit plan for the benefit of employees of the entity, or of any
___________________ entity that is a related party of the entity.
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___________________
IAS 26: Accounting and Reporting by Retirement
___________________
Benefit Plans
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___________________
___________________ This Standard shall be applied in the financial statements of

retirement benefit plans where such financial statements are
rod
___________________
prepared.
___________________
Retirement benefit plans are arrangements whereby an entity
provides benefits for employees on or after termination of service
ep
(either in the form of an annual income or as a lump sum) when
such benefits, or the contributions towards them, can be
determined or estimated in advance of retirement from the
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provisions of a document or from the entity’s practices. The

financial statements of a defined contribution plan shall contain a
statement of net assets available for benefits and a description of
the funding policy.
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IAS 27: Consolidated and Separate Financial Statements

Consolidated financial statements are the financial statements of a
No
group presented as those of a single economic entity.

The objective of IAS 27 is to enhance the relevance, reliability and
comparability of the information that a parent entity provides in
its separate financial statements and in its consolidated financial
.
statements for a group of entities under its control. The Standard

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specifies (a) the circumstances in which an entity must consolidate

the financial statements of another entity (being a subsidiary); (b)
the accounting for changes in the level of ownership interest in a
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subsidiary; (c) the accounting for the loss of control of a subsidiary;

and (d) the information that an entity must disclose to enable
users of the financial statements to evaluate the nature of the
relationship between the entity and its subsidiaries.
(c)
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IAS 28: Investments in Associates
Notes
This Standard shall be applied in accounting for investments in
associates. However, it does not apply to investments in associates ___________________
n/S
held by (a) venture capital organisations, or (b) mutual funds, unit ___________________
trusts and similar entities including investment-linked insurance
___________________
funds that upon initial recognition are designated as at fair value
through profit or loss or are classified as held for trading and ___________________
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accounted for in accordance with IAS 39 Financial Instruments: ___________________
Recognition and Measurement. Such investments shall be
___________________
measured at fair value in accordance with IAS 39, with changes in
uc
___________________
fair value recognised in profit or loss in the period of the change.
___________________
IAS 29: Financial Reporting in Hyper Inflationary Economies
rod
___________________
The financial statements of an entity whose functional currency is
___________________
the currency of a hyper inflationary economy shall be stated in
terms of the measuring unit current at the end of the reporting
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period. The corresponding figures for the previous period required
by IAS 1 Presentation of Financial Statements and any
information in respect of earlier periods shall also be stated in
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terms of the measuring unit current at the end of the reporting

period. Measure of hyperinflation is the cumulative inflation rate
over three years is approaching, or exceeds, 100%.
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IAS 31: Interests in Joint Ventures

This Standard shall be applied in accounting for interests in joint
ventures and the reporting of joint venture assets, liabilities,
No
income and expenses in the financial statements of venturers and

investors, regardless of the structures or forms under which the
joint venture activities take place. However, it does not apply to
venturers’ interests in jointly controlled entities held by (a) venture
capital organisations or (b) mutual funds, unit trusts and similar
.
ES
entities including investment-linked insurance funds that upon

initial recognition are designated as at fair value through profit or
loss or are classified as held for trading and accounted for in
accordance with IAS 39 Financial Instruments: Recognition and
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Measurement.
IAS 33: Earnings per Share

The objective of IAS 33 is to prescribe principles for the
(c)
determination and presentation of earnings per share (EPS)

amounts in order to improve performance comparisons between
ale
different enterprises in the same period and between different
Notes accounting periods for the same enterprise. IAS 33 applies to
___________________ entities whose securities are publicly traded or that are in the
n/S
process of issuing securities to the public. [IAS 33.2] Other entities
___________________
that choose to present EPS information must also comply with IAS
___________________
33. [IAS 33.3] .If both parent and consolidated statements are
___________________ presented in a single report, EPS is required only for the
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___________________ consolidated statements.
___________________
IAS 34: Interim Financial Reporting
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___________________ The objective of IAS 34 is to prescribe the minimum content of an
___________________ interim financial report and to prescribe the principles for
recognition and measurement in financial statements presented
rod
___________________
for an interim period. For the purpose of the reporting, Interim
___________________
period is defined as a financial reporting period shorter than a full
financial year (most typically a quarter or half-year) and Interim
financial report is a financial report that contains either a
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complete or condensed set of financial statements for a period
shorter than an enterprise’s full financial year.
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IAS 36: Impairment of Assets

To ensure that assets are carried at no more than their recoverable
amount, and to define how recoverable amount is calculated.
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IAS 36 applies to all assets except: inventories, assets arising from

construction contracts, deferred tax assets, assets arising from
employee benefits, financial assets, investment property carried at
No
fair value, certain agricultural assets carried at fair value,

insurance contract assets and assets held for sale.
Therefore, IAS 36 applies to (among other assets) land, buildings,
machinery and equipment, investment property carried at cost,
.
intangible assets, goodwill, investments in subsidiaries, associates

ES
and joint ventures and assets carried at revalued amounts under

IAS 16 and IAS 38.
IASC has defined impairment as an asset is impaired when its
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carrying amount exceeds its recoverable amount. Carrying amount

is the amount at which an asset is recognised in the balance sheet,
after deducting accumulated depreciation and accumulated
impairment losses. Recoverable amount is defined as the higher of
(c)
an asset’s fair value, less costs to sell (sometimes called net selling
price) and its value in use. Fair value is defined as the amount
ale
obtainable from the sale of an asset in a bargained transaction
between knowledgeable and willing parties. Value in use is the Notes
Activity
discounted present value of estimated future cash flows expected to ___________________
n/S
arise from the continuing use of an asset and from its disposal at IAS 37 to IAS 41.
___________________
the end of its useful life.
___________________
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Fill in the blanks:
___________________
1. ................... applies to all assets except: inventories, ___________________
assets arising from construction contracts, deferred tax
uc
___________________
assets, assets arising from employee benefits.
___________________
2. The objective of IAS 33 is to prescribe principles for the
rod
determination and presentation of ...................... ___________________
amounts in order to improve performance comparisons ___________________

between different enterprises in the same period and
between different accounting periods for the same
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enterprise.
IAS 37: Provisions, Contingent Liabilities and Contingent

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Assets
The objective of IAS 37 is to ensure that appropriate recognition
criteria and measurement bases are applied to provisions,
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contingent liabilities and contingent assets and that sufficient

information is disclosed in the notes to the financial statements to
enable users to understand their nature, timing and amount. The
key principle established by the Standard is that a provision
No
should be recognised only when there is a liability, i.e., a present

obligation resulting from past events. The Standard thus aims to
ensure that only genuine obligations are dealt with in the financial
statements – planned future expenditure, even where authorised
.
by the board of directors or equivalent governing body, is excluded

ES
from recognition.
IAS 37 excludes obligations and contingencies arising from
financial instruments carried at fair value (but IAS 37 does apply
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to financial instruments carried at amortised cost), non-onerous

executory contracts, insurance company policy liabilities (but IAS
37 does apply to non-policy-related liabilities of an insurance
company), items covered by another IAS.
(c)
IA has defined Provision as a liability of uncertain timing or

amount. Liability has been defined as present obligation as a
ale
result of past events and settlement is expected to result in an
Notes outflow of resources (payment). Contingent liability is defined as a
___________________ possible obligation, depending on whether some uncertain future
n/S
event occurs, or a present obligation but payment is not probable
___________________
or the amount cannot be measured reliably. Contingent asset is a
___________________
possible asset that arises from past events and whose existence
___________________ will be confirmed only by the occurrence or non-occurrence of one
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___________________ or more uncertain future events not wholly within the control of
the enterprise.
___________________
uc
___________________ IAS 38: Intangible Assets
___________________ The objective of IAS 38 is to prescribe the accounting treatment for
intangible assets that are not dealt with specifically in another
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___________________
IAS. The Standard requires an enterprise to recognise an
___________________
intangible asset if, and only if, certain criteria are met. The
Standard also specifies how to measure the carrying amount of
intangible assets and requires certain disclosures regarding
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intangible assets.
IAS 38 applies to all intangible assets other than financial assets,
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mineral rights and exploration and development costs incurred by

mining and oil and gas companies, intangible assets arising from
insurance contracts issued by insurance companies, intangible
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assets covered by another IAS. Intangible asset is an identifiable

non-monetary asset without physical substance. An asset is a
resource that is controlled by the enterprise as a result of past
events. Thus, the three critical attributes of an intangible asset are
No
identifiability, control (power to obtain benefits from the asset) and

future economic benefits (such as revenues or reduced future
costs).
IAS 39: Financial Instruments – Recognition and

.
Measurement
ES
IAS 39 applies to all types of financial instruments except for the

following, which are scoped out of IAS 39: interests in subsidiaries,
associates, and joint ventures accounted for under IAS 27, IAS 28,
UP
or IAS 31; however IASs 32 and 39 apply in cases where under IAS
27, IAS 28, or IAS 31 such interests are to be accounted for under
IAS 39 – for example, derivatives on an interest in a subsidiary,
associate, or joint venture; employers’ rights and obligations under
(c)
employee benefit plans to which IAS 19 applies; contracts for

contingent consideration in a business combination; rights and
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obligations under insurance contracts, except IAS 39 does apply to
financial instruments that take the form of an insurance (or Notes
reinsurance) contract but that principally involve the transfer of ___________________
n/S
financial risks and derivatives embedded in insurance contracts;
___________________
and financial instruments that meet the definition of own equity.
___________________
IAS 40: Investment Property ___________________
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Investment property is property (land or a building or part of a
___________________
building or both) held (by the owner or by the lessee under a
___________________
finance lease) to earn rentals or for capital appreciation or both.
uc
Examples of investment property: land held for long-term capital ___________________
appreciation, land held for undecided future use, building leased ___________________
out under an operating lease, vacant building held to be leased out
rod
___________________
under an operating lease and property that is being constructed or
developed for future use as investment property. ___________________
The following are not investment property and, therefore, are

ep
outside the scope of IAS 40: property held for use in the production
or supply of goods or services or for administrative purposes;
property held for sale in the ordinary course of business or in the
rR
process of construction of development for such sale (IAS 2

Inventories); property being constructed or developed on behalf of
third parties (IAS 11 Construction Contracts); owner-occupied
t fo
property (IAS 16 Property, Plant and Equipment), including

property held for future use as owner-occupied property, property
held for future development and subsequent use as owner-occupied
property, property occupied by employees and owner-occupied
No
property awaiting disposal; and property leased to another entity

under an finance lease.
IAS 41: Agriculture

The objective of IAS 41 is to establish standards of accounting for
.
ES
agricultural activity – the management of the biological

transformation of biological assets (living plants and animals) into
agricultural produce (harvested product of the enterprise’s
biological assets). Biological assets are defined as living animals
UP
and plants, agricultural produce as the harvested product from

biological assets and point-of-sale costs are commissions to brokers
and dealers; levies by regulatory agencies and commodity
exchanges and transfer taxes and point-of-sale costs do not include
(c)
transport and other costs necessary to get the assets to a market.

ale
Accounting standards are, thus, the codified forms of generally
Notes
accepted accounting principles. Standards consist of detailed rules
___________________
to be adopted for treatment of various items in accounting, before
n/S
___________________ the periodic financial reports are presented to the concerned. The
___________________ main objective of setting up standards is to convey the same
meaning of any accounting concept to all people in the same sense
___________________
so that uniformity and comparability in financial reporting is
tio
___________________ achieved. The accounting standard will be useful when it provides
___________________ for a generally understood and accepted measure of phenomenon of
the business and when it aims at reducing any manipulation of the
uc
___________________
financial data.
___________________
Check Your Progress
rod
___________________
___________________ Fill in the blanks:

1. The objective of ...................... is to establish standards
of accounting for agricultural activity.
ep
2. ................... property (land or a building or part of a
building or both) held (by the owner or by the lessee
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under a finance lease) to earn rentals or for capital

appreciation or both.
3. The objective of IAS 38 is to prescribe the accounting
t fo
treatment for ...................... that is not dealt with

specifically in another IAS.
Summary
No
In this unit, you studied the IAS 24: Related Party Disclosures,
IAS 26: Accounting and Reporting by Retirement, IAS 27:
Consolidated and Separate Financial Statements, IAS 28:
Investments in Associates, IAS 29: Financial Reporting in Hyper
.
ES
Inflationary Economies, IAS 31: Interests in Joint Ventures, IAS

33: Earnings Per Share, IAS 34: Interim Financial Reporting, IAS
36: Impairment of Assets, IAS 37: Provisions, Contingent
Liabilities and Contingent Assets, IAS 38: Intangible Assets, IAS
UP
39: Financial Instruments – Recognition and Measurement, IAS

40: Investment Property, and IAS 41: Agriculture.
(c)
ale
Lesson End Activity
Notes
Prepare a presentation on the International Accounting Standards
___________________
from IAS 24 to IAS 41. Also, include the objectives of each
n/S
accounting standard. ___________________
___________________
Keywords ___________________
tio
Carrying Amount: It is the amount at which an asset is ___________________
recognised in the balance sheet, after deducting accumulated ___________________
depreciation and accumulated impairment losses.
uc
___________________
Contingent Asset: It is a possible asset that arises from past
___________________
events and whose existence will be confirmed only by the
rod
occurrence or non-occurrence of one or more uncertain future ___________________
events not wholly within the control of the enterprise. ___________________
Contingent Liability: It is defined as a possible obligation,

ep
depending on whether some uncertain future event occurs, or a
present obligation but payment is not probable or the amount
cannot be measured reliably.
rR
Fair value: It is defined as the amount obtainable from the sale of

an asset in a bargained transaction between knowledgeable and
willing parties.
t fo
Generally Accepted Accounting Principles (GAAP): Groups of

accounting standards that are widely accepted as appropriate e to
the field of accounting.
No
Investment Property: It is property (land or a building or part of

a building or both) held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital appreciation or both.
Liability: It has been defined as present obligation as a result of
.
past events and settlement is expected to result in an outflow of

ES
resources (payment).
Provision: It is defined as a liability of uncertain timing or
amount.
UP
Recoverable Amount: It is defined as the higher of an asset’s fair

value, less costs to sell (sometimes called net selling price) and its
value in use.
(c)
ale
Notes
1. Explain the related party disclosures.
___________________
n/S
___________________
2. Discuss the accounting and reporting by retirement.
___________________ 3. Describe the financial reporting in hyper inflationary

economies.
___________________
tio
4. Write short notes on:
___________________
___________________
(a) IAS 34: Interim Financial Reporting
(b) IAS 36: Impairment of Assets
uc
___________________
___________________ (c) IAS 38: Intangible Assets

(d) IAS 40: Investment Property
rod
___________________
___________________
Further Readings ep
Books
rR

Gupta, R. L. and Ramanathan, Advanced Accountancy, Volume I &
t fo

Hingorani, N. L. and Ramanathan, A. R., Management Accounting,
No

Delhi.
New Delhi.
.
ES
K. K. Verma, Financial Accounting and Analysis, Excel Books,

New Delhi.
R. L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
UP

M. C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
(c)
ale
Web Readings
Notes
www.ifrs.org/
___________________
www.charteredclub.com/what-is-ifrs/
n/S
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
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t fo
. No
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
UNIT 25: Case Study
ale
Notes
___________________
Case Study
n/S
___________________
___________________
Objectives
___________________
tio
After analysing this case, the student will have an appreciation of the
___________________
Case Study: Decision Making Techniques – A CIMA Case
uc
Study ___________________
___________________
Ratio analysis
rod
Businesses generate a huge amount of data. Management ___________________
accountants can use a number of the company’s key accounting
___________________
statements to extract greater meaning from this information.
Prospect plc - Balance Sheet/Statement of Financial

ep
Position as at 31 March 2012
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t fo
The income statement sets out the total sales revenue and
subtracts the costs of generating that revenue to give operating
profit. This is the surplus earned by the normal operations of the
No
company and tells us most about underlying business

performance.
To continue to use the earlier illustrative example, Prospect plc is
expanding rapidly as it builds a commercial property portfolio
consisting mainly of shops and offices. The company receives
rents and also benefits from any profits when it sells property and
.
ES
sites.
Prospect plc - Summarised Income Statement for Year Ending

31 March 2012 (Against Previous Year for Comparison)
UP
(c)
The balance sheet (or statement of financial position) shows the

wealth of a company at a particular date. It lists the company's
Contd…
ale
assets (what it owns) followed by its liabilities (what it owes) – the
Notes difference being the net assets. Assets may be current, such as
cash, or fixed, such as property or equipment. This value
___________________ represents the shareholders' equity – the value in the company
n/S
that the shareholders actually own.
___________________
This looks as if Prospect plc has expanded very fast indeed – but
___________________ how strong is its performance? Accounting ratios allow different
pieces of financial data to be compared. Analysing some key ratios
___________________
helps to explore behind the figures and offer strong clues for the
tio
___________________ business to steer towards its objectives (previous year data in
brackets):
___________________ The chart shows every sign of a firm that has expanded too
quickly:
uc
___________________
 sales have increased by an impressive 50% in one year
___________________
 however, profitability has halved
rod
___________________  liquidity has weakened while gearing is more risky at nearly
___________________
50%.
Question:
Analyse the case and recommend a suitable solution.
ep
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t fo
. No
ES
The result is a danger signal! Management accountants

investigate this sort of data in order to alert managers to
worrying trends, as well as to possible opportunities.
UP
Source: http://dl.is.vnu.edu.vn/bitstream/123456789/272/1/NGUYEN%20THI%20
IM%20THOA.pdf
(c)
Glossary
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Glossary Notes
___________________
n/S
Account: It is a summary of all relevant transactions relating to one ___________________
person at one place for a particular period.
___________________
Accounting Entity: It is also termed as Economic entity assumption
___________________
which means that economic unit/event can be known with a specific unit.
tio
___________________
Accounting Period Concept: This is also known as time period
assumption, and the economic life is divided into different periods for ___________________
preparing financial statements.
uc
___________________
Accounting Standards: An accounting standard is a guideline for
___________________
financial accounting, such as how a firm prepares and presents its
rod
business income and expense, assets and liabilities. ___________________
Accounting Standards: It is a set of certain generally accepted rules, ___________________

principles, concepts and conventions issued by the Institute of Chartered
Accountants of India in consultation with other International Accounting
ep
Bodies.
Accounting: It is the process of identifying, measuring and

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communicating economic information to permit informed judgements and

decisions by users of information.
Adjusted Profit & Loss A/c: Statement devised to determine the cash
from operations.
t fo
Amortization: The term amortization is used in respect of intangible

assets like patents, copyrights, leasehold and goodwill which are recorded
at cost. The process of their writing off is called amortization.
No
Authorised Capital: It is the maximum extent up to which a corporate

can issue shares to the public, at a particular point of time.
Average Inventory: Defined as half the batch size plus safety stock.
Balance Method: Under this method as the name of method suggests,

.
the balance of each account is taken.

ES
Benchmarking: It is used to compare performance of one organisation

against the best in class to provide a particular product, process or
service.
UP
Borrowing Costs: These are directly attributable to the acquisition,

construction or production of a qualifying asset form part of the cost of
that asset
Budgetary Control: Planning in advance of the various function of a

(c)
business, so that business as a whole can be controlled.”

ale
Budgeting: The principal tool of planning and control offered to
Notes
management by accounting functions.
___________________ Carrying Amount: It is the amount at which an asset is recognised in
n/S
___________________ the balance sheet, after deducting accumulated depreciation and
accumulated impairment losses.
___________________
Cash Book: All cash transactions are directly entered into the Cash Book
___________________
and on the basis of Cash Book, ledger accounts are prepared.
tio
___________________
Cash Discount: It is given for prompt payment; hence it is recorded in
___________________ the Cash Book.
uc
___________________ Cash from Operations: Cash resources accrued in the business
operations.
___________________
Combined Method: Under this method, as it is clear from the name of
rod
___________________
the method, both the above explained methods i.e., balance as well as
___________________ total methods are used.
Consignment Account: The consignment account is one which shows

what profit or loss is made out of the dealing of the goods sent on
ep
consignment. It is the combination of the trading and profit and loss
account of any particular consignment.
rR
Consignment: It is defined as the act of sending a quantity of goods by

the manufacturers and producers of one country or place to their agents
in another at the risk of the principals for the purpose of sale.
Contingent Asset: It is a possible asset that arises from past events and
t fo
whose existence will be confirmed only by the occurrence or non-

occurrence of one or more uncertain future events not wholly within the
control of the enterprise.
Contingent Liabilities: These are probable liabilities that may arise on

No
the happening of an event.
Contingent Liability: It is defined as a possible obligation, depending

on whether some uncertain future event occurs, or a present obligation
but payment is not probable or the amount cannot be measured reliably.
.
ES
Cost Accounting: As the name suggests, this type of accounting is

mainly related with the ascertainment of the cost of a product.
Cost Accounting: It involves the application of costing principle,
UP

comparing actual costs with the budget or standard.
Cost Benefit Principle: This principle says that the cost of applying an
accounting principle should not exceed its benefit.
(c)
Cost Centre: It refers to a part of a factory for which costs are

accumulated separately.
Glossary
ale
Cost Unit: It is defined by the ICMA as “a quantitative unit of product or
service in relation to which costs are ascertained”. Notes
Costing Systems: Defined an accounting system as “an organisation of ___________________
n/S
forms, records and reports, closely coordinated to facilitate business ___________________
management through determining certain basic and required
___________________
information.
___________________
Creditors Ledger: It is meant for all the creditors from whom goods are
tio
bought on credit. ___________________
Debtors Ledger: It is meant for all the debtors to whom goods are sold ___________________
on credit.
uc
___________________
Decrease in Working Capital: Decrease in Net working capital i.e. ___________________
Excess of current liabilities over the current assets – Resources side of the
rod
___________________
fund flow.
___________________
Depreciation: It is a measure of the wearing out, consumption, or other
loss of value of depreciable asset arising from use, affluxion of time or
obsolescence through technology and market changes
ep
Diminishing Value (Balance) Method: Under this method
depreciation is calculated as a certain percentage of the value but the rate
rR
of depreciation remains constant.

Direct Material: Material that can be directly identified with each unit
of the product.
t fo
Double-entry Book Keeping: It is a set of rules for recording financial

information in a financial accounting system in which every transaction
or event changes at least two different nominal ledger accounts.
Employee Benefits: These are all forms of consideration given by an

No
entity in exchange for service rendered by employees.
Excess Inventory: The quantity of material in stock or on order that is

greater than the anticipated demand for an agreed time period.
External Users: All persons other than internal users such as Investors,
.
creditors, Government.
ES
Fair value: It is defined as the amount obtainable from the sale of an

asset in a bargained transaction between knowledgeable and willing
parties.
UP
Fictitious Assets: These are those assets which have no value
Financial Accounting: It is mainly concerned with the ascertainment

of profit or loss made during a particular period and also presents the
financial position of the business.
(c)
Financial Statements: These include the Trading and Profit & Loss
Account, and Balance Sheet of the business.
ale
Fixed Instalment Method: Under this method, depreciation is a certain
Notes
percentage of cost which is calculated on the basis of the original cost-
___________________ scrap value if any divided by the number of years
n/S
___________________ Flow: Flow means changes occurred in between two different time
___________________
periods.
___________________ Fund from Operations: Income generated from only operations.
tio
___________________ Fund Loss in Operations: Loss incurred in the operations.
___________________ Fund: Fund means working capital.
uc
___________________ General Ledger: It is meant for all the accounts other than debtors and
creditors.
___________________
Generally Accepted Accounting Principles (GAAP): Groups of
rod
___________________
accounting standards that are widely accepted as appropriate e to the
___________________ field of accounting.
Going Concern Concept: It is assumed that every business would

continue for a long period or have an indefinite life unless it is likely to be
ep
sold or wound up in the near future. This is also known as the concept of
continuity.
rR
Gross Loss: It is the excess of cost of sales over sales.
Gross Profit: It is calculated by comparing the sales and cost of sales. It

is the excess of sales over cost of sales.
t fo
Increase in Working Capital: Increase in Net working capital i.e.

Excess of current assets over the current liabilities- Applications side of
the fund flow.
Indirect Labour: The wages of that labour which cannot be allocated
No
but which can be apportioned to or absorbed by, cost centres or cost units
is known as indirect labour.
Intangible Assets: These are such assets which cannot be seen but only
felt
.
Internal Users: These are the persons who manage the business, i.e.,
ES
management at all the levels–top, middle and lower level.
International Accounting Standards: An older set of standards

stating how particular types of transactions and other events should be
UP
reflected in financial statements. In the past, International Accounting

Standards (IAS) was issued by the Board of the International Accounting
Standards Committee (IASC).
International Financial Reporting Standards: A set of international

(c)
accounting standards stating how particular types of transactions and

other events should be reported in financial statements. IFRS are issued
by the International Accounting Standards Board.
Glossary
ale
Investment Property: It is property (land or a building or part of a
building or both) held (by the owner or by the lessee under a finance Notes
lease) to earn rentals or for capital appreciation or both. ___________________
n/S
Issued Share Capital: It is that part of the authorised capital, which is ___________________
offered to the public for subscription.
___________________
Job Costing: This refers to a system of costing where the items of direct
___________________
costs are traced to specific jobs or orders.
tio
___________________
Journal: Journal is a primary book of original entries for accounting
data. ___________________
uc
Lead-time: Lead-time is defined as time period from initiation of an ___________________
activity to its completion. For inventory management, we need following
___________________
lead times: Purchase lead-time, manufacturing lead-time, Delivery lead-
rod
time. ___________________
Ledger: It is also called as a book of final entry because all transactions ___________________
are finally recorded in the ledger accounts.
ep
Liability: It has been defined as present obligation as a result of past
events and settlement is expected to result in an outflow of resources
(payment).
rR
Management Accounting: This type of accounting is a tool in the hands

of management for various functions; (i) to control costs (ii) to take
important future decisions (forecasting).
t fo
Market Value Added (MVA): It is the difference between the current

market value of a firm and the capital contributed by investors.
Materiality: It is an item should be regarded as material if there is
reason to believe that knowledge of it would influence the decision of
No
informed investor
Memorandum Book: When a transaction takes place in the business it

is first roughly written in the memorandum book chronologically for the
memory only.
.
Monetary Unit Concept: Only such transactions are recorded in

ES
accounting that are of monetary value or that can be measured in terms

of money.
Net Loss: Excess of expenditures over revenues is called net loss.

UP
Net Profit: It is the excess of revenues over expenses. It is depicted by

P&L A/c.
Nominal Accounts: All gains/profits/incomes and losses and expenses

are recorded.
(c)
Non-current Assets: Long-term assets.

ale
Non-current Liabilities: Long-term financial resources.
Notes
Obsolete Inventory: It is the inventory that results from an
___________________ unanticipated demand.
n/S
___________________ Open Book Accounting: It promotes margin improvement through cost
___________________ reduction, which can be shared between partner organisations.
___________________ Outsider’s Capital: The value of investments minus operating expenses

that are held by company stockholders.
tio
___________________
Overheads: Defined as the cost of indirect materials, indirect labour and
___________________ such other expenses including services as cannot conveniently be charged
uc
___________________ direct to specific cost units.
___________________ Owner’s Equity: Total assets minus total liabilities of an individual or

company. For a company, also called net worth or shareholders' equity or
rod
___________________
net assets.
___________________
Personal Accounts: The transactions which involve Cash Receipts or
Cash Payments or transfer of assets from one person or institution to
other persons or institutions, are recorded in this category.
ep
Petty Cash Book: This type of Cash Book is used in such concerns where
small payments are made daily and that too in large numbers.
rR
Private Ledger: It is meant for personal account of the proprietor.
Production Rate: The production rate can be defined as number of units

manufactured over a period of time.
t fo
Provision: It is defined as a liability of uncertain timing or amount.
Quality Costing: It aims to improve supply chain quality, both in and

across organisations. It has two benefits – to reduce quality costs and to
increase the quality offering to the ultimate customer.
No
Real Account: All transactions involving tangible assets or goods are the
subject matter of this category.
Recoverable Amount: It is defined as the higher of an asset’s fair value,

less costs to sell (sometimes called net selling price) and its value in use.
.
ES
Rework/Scrap Rate: This rate is dictated by the efficiency of the

manufacturing process. It involves knowing the number of defective units
that are produced by a manufacturing unit. This is a highly empirical
UP
rate and very much depends upon the skill of the labour operating the
machine and the accuracy offered by the machine.
Statement of Changes in Working Capital: Enlisting the changes
taken place in between the current assets and current liabilities of two
(c)
different time horizons.

Glossary
ale
Subscribed Capital: It is that part of the issued capital, which has been
agreed to be taken up by the public. Notes
Subsidiary Books of Original Records: These subsidiary books are ___________________
n/S
also called sub-division of Journal. ___________________
Subsidiary Books: It is a normal routine to record individually each and ___________________

every transaction which takes place in the business.
___________________
tio
Tangible Assets: These are such assets, which can be seen and felt
___________________
The Cost Principle: Every transaction should be recorded at its actual
___________________
(historical) cost or cost of its acquisition and not its market price.
uc
___________________
Total Assets: These are everything that a business or an individual
owns. Based inherently on the purchase value of an item, total assets are ___________________
listed on a balance sheet.
rod
___________________
Total Method: Under this method, instead of taking balance of each
___________________
account, the total of both the sides of each account is taken.
Trade Discount: It is given for increasing the volume of sales and it is

ep
adjusted in the invoice, hence no entry is passed in the books of the
business, as it is always deducted from the catalogue price.
Transaction: It is defined as an external event or internal event which

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gives rise to a change affecting the operations or finances of an

organisation.
Trial Balance: It is the list of accounts taken from the ledger.

t fo
Value Chain Costing: It is built on Porter’s value chain analysis which

argues that competitive advantage in the marketplace results from either
better customer value for the same cost (a differentiation strategy) or the
same customer value for less cost (a cost leader strategy).
No
Voucher: It is therefore the basic document of an accounting transaction.

.
ES
UP
(c)
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Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
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. No
ES
UP
(c)

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Accounting in Logistics and Supply Chain Sector

Dr Satya Sheet Prof I M Mishra Mr M K Goel

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

without permission in writing from Hydrocarbon Education Research & Society.

Course Code: MBAF-911D

Course Name: Accounting in Logistics and Supply Chain Sector

Version: January 2013

© MPower Applied Learning Enterprise

Unit 8 Ledger ................................ ................................ ................................ ......................... 79

Unit 11 Trial Balance................................ ................................ ................................ ............. 119

Unit 15 Case Studies................................ ................................ ................................ .............. 163

Unit 16 Financial Aspects of Supply Chain Management ................................ .................... 169

Unit 20 Case Studies................................ ................................ ................................ .............. 217

Unit 21 Corporate Financial Reporting................................ ................................ ................. 223

Unit 23 International Accounting Standards-I ................................ ................................ ..... 241

Unit 24 International Accounting Standards-II................................ ................................ .... 251

Glossary................................ ................................ ................................ ................................ .......... 265

 Classification of Accounting Principles

 Characteristics of Accounting ___________________

users are of two types i.e., Internal and External. Accounting is

worth and have taken place during a particular period. It is also

Accounting is defined by different authors and institutions. Some

“Accounting system is a means of collecting, summarizing,

“Accounting is the process of identifying, measuring and

communicating economic information to permit informed

—The American Accounting Association (AAA), 1966

“Accounting is the art of recording, classifying and summarizing in

___________________ Characteristics of Accounting

Recording in definite (certain) units: Only such events are

Business Studies to another bookseller, then the publisher is

recorded properly, all such data are also classified under

avoids unnecessary wastage of money.

This may further be sub-divided into various types of subsidiary

interpreting of economic events.

 Summarizing of transactions, and

Table 1.1: Distinction between Book-keeping and Accounting

S. Basis of Book-keeping Accounting

the transactions of recording of transactions but

economic nature. also analyzing and interpreting

3 Scope The scope of book- The scope of accounting is very

Check Your Progress

___________________ State whether True or False:

that persons interested in the business are of two types: (a)

business, i.e., management at all the levels–top, middle and

necessary information is supplied to the external users

through the following financial statements:

Whereas the internal users can obtain necessary information other

1. Maintenance of records of business.

all financial transactions in to order to calculate profit or loss

about the profit or loss of the business. If there is a profit, the

management can decide to discontinue the production of such

interested, i.e., from management to creditors, investors,

government and society at large including employees of the

3. Presentation of financial position of the business: The

business. It tells about the owned capital as well as borrowed

___________________ accounting is to provide and make available the necessary and

Thus, we see that the accounting can play a very important

insolvency) of the business.

As per Accounting Principles Board (APB), Accounting is defined

“Accounting is a service activity. Its function is to provide

economic activities that is intended to be useful in making economic

Thus, it is clear from the above definition, that accounting