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Study material on

Finance For Non Finance Executives For

NDPL Limited ( For Class Room Discussion Only ) Prepared by Cognition Advisory Private Limited Kolkata www.cogniadvisory.com

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For those who believe in Enhancing knowledge.

The intellectual property of the study material belongs to Cognition Advisory Private Limited.

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Index

Chapter No
One Two Three Four Five

Particulars
Introduction Financial Transaction Stock Adjustment Entries Depreciation Preparation of Profit and Loss and Balance Sheet

Page No
4 6 34 46 49

Six Seven Eight Nine

Financial Statement Analysis Fund Flow Analysis Working Capital Management Time Value of Money and Project Evaluation

114 127 135 148

Ten

Economic Value Added- EVA

155

Case Studies : Case No Case I Particulars Preparation of Balance Sheet and Profit Loss Case II Financial Statement Analysis Case III Case IV Fund Flow Statement Operating Cycle Calculation 132 145 121 Page No 98

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we always come across transactions. There are several reasons for this and many people can have several opinions about it. People are not able to learn finance at all during their academic curriculum if they have not pursued any course on Business or Commerce. All the formal books of accounts are very thick and this factor acts as a deterrent for learning. However.Chapter One Introduction Finance is an important part of our day-to-day activities. we find that followings are the reasons for this lack of adequate knowledge of finance in the overall economy: • People are not exposed to finance as a formal subject in their curriculum up to 12th standard. we find that there is scarcity of knowledge in the financial area. in most of the cases. which are having financial implications. All the above-mentioned factors lead to a situation that a candidate trying to learn finance for a short period of time would loose interest after pursuing this 4 . So one must have a decent level of understanding of financial knowledge as it helps to see his/her activities in financial terms. Be it our personal activity. most of the study materials are trying to teach students from uniform perspectives assuming that the people would be undergoing a full course on accounting. no simplified material is available. • During the time of work. if some people want to learn some basic finance. As per our analysis. be it official activities. • Besides.

Our study material and our course on Finance for Non Finance would try to remove this deficiency. We are preparing this study material in such a way that a person without having any knowledge in finance would be able to find the material very interesting and accordingly he/she will be able to gather above average knowledge in Finance after the completion of this study material . 5 . We guarantee that all the participants of the course on Finance for Non Finance by Cognition Advisory Private Limited. would possess above average knowledge of finance.methodology.

Though there is no formal definition for describing financial transactions. these are called business transaction. we carry out a number of activities. The following are the example of fund based business transaction : • A company purchases raw material on credit . A financial transaction can be of two types . So this is a financial transaction. This transaction involves purchase of raw material and this involves the out flow of fund. no financial activities are crystallized. They are : Fund Based financial transactions : If any business transaction results in the implication of fund from a Company’s perspective . But when we purchase raw material from a vendor or we give commitment to a vendor for payment by issuing a letter. So transaction in a business is that activity where generation of fund is involved. We shall not call it as a business transaction.Chapter Two Financial Transactions In a business. this is called a fund based business transactions. So this is a financial transaction. Some of the activities are called financial transactions. This is also a fund based business transaction. For example. • A company pays salary to its employees : This transaction involves payment of salaries to its employees. we can define a transaction as that activity which would result in the generation of fund. when we start talking with a person for selecting the person as vendor. • A company purchases a motor car : This transaction involves the payment of fund for acquiring the motor car. 6 .

We are presenting the concept in a very scientific and simplified manner so that every one can understand.whether to start from Debit entry or credit entry and what entry will go to P&L and what will go to Balance Sheet. the company undertakes to pay the amount if the need arises. Though it is difficult to comprehend . To find out the debit or credit entry . This is called non-fund based commitment. we shall remove this confusion in a very simplified way. The confusion starts from the question . we need to follow the following process : • Step 1 : This consists of two stages : o Stage 1(a) : Identification of the party involved and 7 . this is called a non fund based business transactions.Non-fund based financial transaction: If any business transaction does not result in the implication of fund from a Company’s perspective. Fund Based financial transactions : Debit and Credit Entry: Though this terminology is the starting point of confusion of understanding accountancy. • A company has availed fund from a bank by availing the bill discounting facilities. the following examples would help the company to understand the concepts better: : • A company gives an undertaking to pay an amount after 30 days to a person. This is also a non-fund based business transaction. we have to know this concept. Though there is no fund commitment at the time of taking fund. there is no outflow of funds. Though immediately. Many people would confuse from the starting point of the accounting entries. Do not worry . a commitment is given by the Company.

This is a financial transaction . When we talk about more than 1. Y . Parties involved are : XYZ and Bank of Baroda. We shall proceed by giving enough number of examples of each stages and then we shall solve some of the problem. Example 1 : Suppose ABC Limited is purchasing Raw Materials from Mr. • Step 2 : This consists of three stages where we try to find out the implication of the fund in the transaction from the owners point of view : o Stage 1 : Implication is Outflow/Inflow : o Stage 2 : Outflow or inflow is deferred so no need to go to stage 3. Step1 Stage 1: The first step of the accounting process is the identification of the parties involved in a financial transactions. Parties involved are : ABC Limited and Mr. Let us take some examples and then some problems to make the concepts clear. Parties involved are : XYZ and Co Y. There will always be more than 1 entity in a financial transaction. we mean 2 or more entities not only two entities. Example 2 : Company XYZ is receiving loan from bank Bank of Baroda. 8 . Y. Example 3 : A company XYZ purchases motor Car from Co Y which is a Ford Dealer .o Stage 2 : then finding out the owners of the transaction . The identification is carried out by applying the commonsense.If the outflow or inflow is to be paid immediately then we have to go stage 3 : o Stage 3 : Outflow or inflow is in the form of either cash or bank.

b) All Employees . A Problem 2 : A company XYZ incurs expenditure on Salary for its employees Solution : a) XYZ. Here. c) XYZ and all employees. 9 . Example 5 : Suppose ABC Limited is purchasing Raw Materials from Mr. Solution : a) ABC Limited. b) Mr. b) ABC Limited and B c) ABC Limited .B and C. Y. This is a financial transaction .A. we shall follow a very simple rule. Mr. B and C. The Owner of the transaction is the entity from whose perspective accounts are being made. Solution : a) XYZ.c) XYZ’s cash account and XYZ’s bank account. Problem 4: ABC Limited is purchasing furniture from B and C. Problem 1 : A company XYZ purchases goods from Mr. Example 6 : Company XYZ is receiving loan from bank Bank of Baroda. b) XYZ’s bank account. Owner of the transaction is : ABC Limited. Step1 Stage 2 : The second step of the accounting process is the identification of the owners of financial transactions from the parties involved. A for production purpose.Example 4 : A company XYZ raises capital from Mr. B and Mr. In the following examples we are making accounts from the perspective of company . Parties involved are : XYZ. C. Owner of the transaction is : XYZ Example 7 : A company XYZ purchases motor Car from Co Y which is a Ford Dealer . c) XYZ and Mr. A. Problem 3 : A company XYZ deposits money from its cash to its bank account: Solution : a) XYZ’s cash account. A .

Problem 7 : A company XYZ deposits money from its cash to its bank account: Solution : Owner of the transaction is a) XYZ’s cash account. we do not mean that actual payment or receipt is made. A for production purpose. b) All Employees . A Problem 6 : A company XYZ incurs expenditure on Salary for its employees Solution : Owner of the transaction is a) XYZ. A. Solution : Owner of the transaction is a) ABC Limited. B and C. B and Mr. C. Problem 8 : ABC Limited is purchasing furniture from B and C. Mr. b) XYZ’s bank account. We only mean that the transaction would result in the implication of the fund inflow. c) XYZ and Mr. Problem 5 : A company XYZ purchases goods from Mr. A . Let us take some examples. Owner of the transaction is : XYZ . Step2 Stage 1: In this stage we apply our common sense to find out the implication of the fund of a particular financial transaction from the perspective of owners of transactions. c) XYZ and all employees. 10 . b) ABC Limited and B c) ABC Limited . c) XYZ’s cash account and XYZ’s bank account. All the financial transactions are having an implication of fund inflow or outflow. b) Mr. Solution : Owner of the transaction is a) XYZ.Owner of the transaction is : XYZ Example 8 : A company XYZ raises capital from Mr. By fund.

Example 9 : Suppose ABC Limited is purchasing Raw Materials from Mr. Example 10 : Company XYZ is receiving loan from bank Bank of Baroda. Y . Owner of the transaction : XYZ Limited Implication from XYZ’s point of view : Inflow . So the implication is the outflow of fund. Implication from ABC’s point of view : The above financial transactions imply the outflow of fund as for purchase of raw material the company has to pay the fund for the raw material. This is a financial transaction . Owner of the transaction : XYZ Limited Implication from XYZ’s point of view : Outflow. Y. 11 . Parties involved are : ABC Limited and Mr. Parties involved are : XYZ and Co Y. Example 11: A company XYZ purchases motor Car from Co Y which is a Ford Dealer . Parties involved are : XYZ and Bank of Baroda. Owner of the transaction : ABC Limited ( as in the study material whenever the parties of the transactions are companies and non companies . we shall treat the company as the owner of the transaction) .

A. Mr. Owner of the transaction : XYZ Limited Implication from XYZ’s point of view : Inflow. Let us do some problems so that we can clear our doubts. b) outflow Problem 12 : ABC Limited is purchasing furniture from B and C. A for production purpose. C. b) outflow Problem 10 : A company XYZ incurs expenditure on Salary for its employees Solution : The implication of fund from the Owner of the transaction ( if the owner is XYZ) is a) inflow. Solution : The implication of fund from the Owner of the transaction ( if the owner is XYZ) is a) inflow. 12 . Parties involved are : XYZ. Problem 9 : A company XYZ purchases goods from Mr. B and Mr.B and C.A. b) outflow Problem 11 : A company XYZ deposits money from its cash to its bank account: Solution : The implication of fund from the Owner of the transaction ( if the owner is XYZ’s cash account) is a) inflow.Example 12 : A company XYZ raises capital from Mr.

For writing entry the debit entry . The list is given below : Serial No Description of Transaction Account Statement Head of Accounts 13 . Always remember that the sum total of the Debit entry in terms of amount is equal to the sum total of credit entry in terms of amount. we shall follow a simple procedure. • If the implication of the fund is inflow . So we need to write debit entries .Solution : The implication of fund from the Owner of the transaction ( if the owner is ABC) is a) inflow. then the Debit entry would be : Debit : Balance Sheet: Asset : Debtor . b) outflow Step2 Stage 2 : In this stage. then we shall always start with Debit Entry. So we need to write credit entries . For writing credit entry . We shall supply a list of accounts and heads . we shall follow a simple procedure. If the inflow is deferred . Depending on the nature of the transactions we shall classify the credit entry to match the list of the accounts and heads. then the Credit entry would be : Credit : Balance Sheet: Liability : Creditor . then we are in a position to write the accounting entry. If the outflow is deferred . Depending on the nature of the transactions we shall classify the debit entry to match the list of the accounts and heads. If the outflow/inflow is deferred . then we shall always start with Credit Entry. Always remember that the sum total of the credit entry in terms of amount is equal to the sum total of debit entry in terms of amount. We shall supply a list of accounts and heads . we shall apply the common sense and try to see whether the inflow or outflow is immediate or deferred. • If the implication of the fund is outflow .

1 Purchase of Raw material P&LExpenses Purchase 2 Purchase of Spares P&LExpenses Purchase 3 Electricity P&LExpenses Power & Electricity Salary & wages Other Manufacturing Expenses 4 Salary and Wages P&LExpenses 5 Other Manufacturing Expenses P&L Expenses 6 Selling and Distribution Expenses P&LExpenses Selling and Distribution Expenses 7 Depreciation P&LExpenses - Depreciation 8 Interest on Liability P&LExpenses Interest 9 Sales P&LIncome Sales 10 Interest Income P&LOther Income Sales 11 Provision for Taxes P&L expenses Provision for Taxes Share Capital – 12 Fund raised by the company Balance by issuing equity shares Sheet Liability 14 .

Example 13: On October 1. Y worth of Rs 20000/.13 Fund raised by the company Balance by borrowing loan from bank Sheet Liability Balance Sheet Asset – – Loan 14 The company purchase Fixed Assets Fixed Asset 15 The company makes investment Balance SheetAsset Investment 16 The company gives security deposit Balance Sheet Asset - Other Asset 17 The company gives advance to someone Balance Sheet Asset - Other AssetLoans and advances Bank Account – 18 Cash deposited in the Bank account Balance Sheet Asset Table 2. 2006 A Company ABC purchases raw material from Mr. Now we shall take large number of Examples and then problems to clear our concepts.on 30 days credit ( this means that XYZ would pay the amount after 30 days from the date of purchase ). Heads and Subheads for writing the debit entry in case of financial transactions involving fund outflow implications and for writing the credit entry in case of financial transactions involving fund inflow implications. 15 .1 : List of Accounts .

10. The complete entry we write as below : Date 1. For writing the debit entry .2006 Type Entry Cr of Account Head Statement Balance Liability Sheet Sum total of Credit Entry Dr Profit and Expenses Loss 16 Subheads Creditor Mr.000/..000/. we have to follow the Table 2.1. Writing accounting entry : Since the implication is outflow . the starting entry would be Credit and since the timing of the outflow is deferred . Y – Rs 20..000/( 1. So the sum total of Credit entry is Rs 20.000/Raw . So the Debit entry is P&L. Y. From the table we find out that the purchase of raw material is coming under account statement P&L – Expenses and under head of accounts Purchase of raw material.Expenses.2006 20.Purchase of Raw Material – Rs 20. we can write accounting entries by going up to Step2 Stage 2 and Credit entry would be Balance Sheet – Liability – Creditor – Mr.000/Purchase of 20.10.Entry related to the financial transaction on the date of purchase of the raw material would be as follows : Parties Involved : ABC and Mr. Owner of transaction : ABC Limited Implication from the owner’s perspective : Outflow ( as for purchase of raw material outflow is involved ) Outflow timing : Deferred ( as the payment would be made 30 days after the date of purchase of raw material and we are finding out the financial transaction as on the date of purchase ) . Y Amount in Rs) 20..000/.

1 .Sale – Rs 50. we have to follow the Table 2. Entry related to the financial transaction on the date of sale would be as follows : Parties Involved : XYZ and Mr. A.. From the table we find out that the sale is coming under account statement P&L – Income and under head of accounts Sales . The complete entry we write as below : Date Type of Account Head Subheads Amount ( 17 . a Company XYZ sells goods to Mr. So the Credit entry is P&LIncome. So the sum total of Debit entry is Rs 50.000/. A – Rs 50.Material Sum total of Debit Entry 20. For writing the credit entry . A worth of Rs 50. Writing accounting entry : Since the implication is inflow .000/- Table 2.. 2006 . the Company would receive the sale value ) Inflow timing : Deferred ( as the payment would be received 30 days after the date of sale and we are finding out the financial transaction as on the date of sale ).2 : Depiction of Financial Transaction ( Example 13) Example 14: on October 4. Implication from the owner’s perspective : Inflow ( as from sales. we can write accounting entries by going up to Step2 Stage 2 and Debit entry would be Balance Sheet – Asset – Debtor – Mr.000/.000/.and the payment would be received after 30 days. Owner of transaction : XYZ. the starting entry would be Debit and since the timing of the inflow is deferred ..000/.

000/- Table 2. The out flow /inflow can take place in the form Cheque or Cash . • Similarly if the implication of fund flow is out flow and the out flow will take place in the form of Cash .2006 Statement Balance Asset Sheet Sum total of Debit Entry Cr Profit and Income Loss Sum total of Credit Entry in Rs) Debtor Mr. For the debit entry we have to see the list mentioned in Table 2.000/A 50. then as mentioned above we have to start with a credit entry ( as the implication is still outflow ) and the credit entry would be : Credit : Balance Sheet: Asset : Bank Account of the Company . Inflow : 18 .1.10.10.4. For the debit entry we have to see the list mentioned in Table 2.000/Sales 50.3 : Depiction of Financial Transaction ( Example 14) Step2 Stage 3 : If the implication of inflow or outflow is immediate we have to go to Stage 3.2006 Entry Dr 4. Outflow : • If the implication of fund flow is out flow and the out flow will take place in the form of Cheque . 50. then as mentioned above we have to start with a credit entry ( as the implication is still outflow ) and the credit entry would be : Credit : Balance Sheet: Asset : Cash Account of the Company .1 .000/50.

Owner of transaction : XYZ.1.• If the implication of fund flow is in flow and the in flow will take place in the form of Cheque . Parties Involved : XYZ and Bank of Baroda. 19 . THAT IS ALL ABOUT WRITING THE ACCOUNTING ENTRIES AND YOU HAVE KNOWN ALL THE TECHNIQUES REQUIRED FOR WRITING THE DEBIT AND CREDIT ENTRIES. • Similarly if the implication of fund flow is in flow and the in flow will take place in the form of Cash . then as mentioned above we have to start with a debit entry ( as the implication is still inflow ) and the debit entry would be : Debit : Balance Sheet: Asset : Bank Account of the Company .from bank naming Bank of Baroda and amount is credited in the bank account. Example 15: On November 4. then as mentioned above we have to start with a debit entry ( as the implication is still inflow ) and the debit entry would be : Debit : Balance Sheet: Asset : Cash Account of the Company .000/. For the Credit entry we have to see the list mentioned in Table 2.1 . A Company XYZ is receiving loan of Rs 2.00. We shall take large number of examples of financial transactions and then make the concepts clear. For the Credit entry we have to see the list mentioned in Table2. 2006 .

00.2006 Type Entry Dr 4.50.000/200. So the Credit entry is Balance Sheet .10. The complete entry we write as below : Date 4. we can write accounting entries by going up to Step2 Stage 3 and after finding out the mode of receipt of fund i. For writing the credit entry . we have to follow the Table 2. Mr.e. 2006 . the Company would receive fund ) Inflow timing : Immediate ( as soon as the loan is disbursed the Company would receive the fund in its bank account) .. A Company XYZ raises capital from Mr. the starting entry would be Debit and since the timing of the inflow is immediate . A. From the table we find out that the loan is coming under account statement Balance Sheet – Liability and under head of accounts Loan .000/- Liability Table 2.1. So the sum total of Debit entry is Rs 200..2006 of Account Statement Balance Sheet Sum total of Debit Entry Cr Balance Sheet Sum total of Credit Entry Head Asset Subheads Bank Account Loan Amount ( in Rs) 200.000/200..11.000/.each from all of them in the form of cheque.Implication from the owner’s perspective : Inflow ( as from loan . B and Mr. either Cheque or Cash . Debit entry would be Balance Sheet – Asset – Bank account of XYZ – Rs 2.000/. Writing accounting entry: Since the implication is inflow . 20 .4: Depiction of Financial Transaction ( Example 15 ) Example 16: On August 4 .Liability – Loan – Rs 200.000/.C and the amount is Rs 1.000/.000/200.

C Owner of transaction : XYZ. the Company would receive fund ) Inflow timing : Immediate ( as soon as the capital is paid by subscribers Company would receive the fund in its bank account since the payment made by A. So the Credit entry is Balance Sheet . Implication from the owner’s perspective : Inflow ( as from capital . either Cheque or Cash .000/- 21 .1. A – Rs 1. B.000/.50. Mr.000/4. C – Rs 1.Parties Involved : XYZ . the starting entry would be Debit and since the timing of the inflow is immediate ..50. we have to follow the Table 2..000/.50. Debit entry would be Balance Sheet – Asset – Bank account of XYZ – Rs 4.and Share Capital Mr. For the complete entry we write as below : Date 4. Share Capital Mr.000/.50.000/.000/.. Writing accounting entry: Since the implication is inflow .8.50..50. B and Mr. we can write accounting entries by going up to Step2 Stage 3 and after finding out the mode of receipt of fund i.B and C is in the form of Cheque) .50. Mr.Rs 1. A .Liability – Share Capital Mr.2006 Type Entry Dr of Account Statement Balance Sheet Sum total of Debit Entry Head Asset Subheads Bank Account Amount ( in Rs) 4. For writing the credit entry . From the table we find out that the capital is coming under account statement Balance Sheet – Liability and under head of accounts Share Capital .e. So the sum total of Debit entry is Rs 4.

A Company XYZ purchases goods from Mr.2006 Cr Balance Sheet Balance Sheet Balance Sheet Liability 4.000/Capital – Mr A Share 1. A for production purpose.000/.000/. Owner of transaction : XYZ Implication from the owner’s perspective : Outflow ( as for purchase of raw material outflow is involved ) Outflow timing : immediate Writing accounting entry : Since the implication is outflow . Credit entry would be Balance Sheet – Asset – Cash Account of the Company – Rs 50.000/- Table 2.000/. Parties Involved : XYZ and Mr... So the sum total of Credit entry is Rs 50.8.50.50.4.and the amount to be paid immediately by cash.8.000/Capital. The cost of the goods is Rs 50. For writing the debit entry .2006 Cr Liability Sum total of Credit Entry Share 1.5 : Depiction of Financial Transaction ( Example 16 ) Example 17 : On October 12.e. A. either Cheque or Cash .8.50. we can write accounting entries by going up to Step2 Stage 3 and after finding out the mode of payment of fund i.Mr C 4. the starting entry would be Credit and since the timing of the outflow is immediate .Mr B Share 1.50.2006 Cr Liability 4. we have to 22 .000/Capital. 2006.

000/Raw Material 50.6 : Depiction of Financial Transaction ( Example 17) Example 18 : On October 14.000/.2006 Sum total of Credit Entry Dr Profit and Expenses Loss Sum total of Debit Entry 50.000/( 12.10.000/Purchase of 50. The complete entry we write as below : Date 12.The amount to be paid at the end of the month.A Company XYZ incurs expenditure on Salary for its employees and the total salary as on a particular day is Rs 45000/.1. 2006 .2006 Type Entry Cr of Account Statement Balance Sheet Head Asset Subheads Cash Account of Company Amount in Rs) 50. 23 .Purchase of Raw Material – Rs 50. From the table we find out that the purchase of raw material is coming under account statement P&L – Expenses and under head of accounts Purchase of raw material.10.Expenses.follow the Table 2. Parties Involved : XYZ and its employess.000/- Table 2... So the Debit entry is P&L. Owner of transaction : XYZ Implication from the owner’s perspective : Outflow ( as for purchase of raw material outflow is involved ) Outflow timing : Deferred ( as the payment would be made on 31st October 2006 and we are drawing the financial transaction as on 14th October 2006) .

A Company XYZ deposits money amounting to Rs 50. From the table we find out that the purchase of raw material is coming under account statement P&L – Expenses and under head of accounts Salaries.000/.000/..7 : Depiction of Financial Transaction ( Example 18) Example 19 : On 18th October 2006. the starting entry would be Credit and since the timing of the outflow is deferred .000/45...000/.Writing accounting entry : Since the implication is outflow .1.000/. For writing the debit entry . The complete entry we write as below : Date 14.Expenses.000/- Table 2. we can write accounting entries by going up to Step2 Stage 2 and Credit entry would be Balance Sheet – Liability – Creditor – All Employees – Rs 45.000/45. So the Debit entry is P&L.000/- ( 14.10. Owner of transaction : XYZ’s Cash Account.2006 Type Entry Cr of Account Statement Balance Sheet Head Liability Subheads Creditor All Employees Salaries Amount in Rs) 45.Salaries– Rs 45. So the sum total of Credit entry is Rs 45.10.from its cash account to its bank account. we have to follow the Table 2. Parties Involved : XYZ ‘s Cash Account and XYZ’s Bank Account.2006 Sum total of Credit Entry Dr Profit and Expenses Loss Sum total of Debit Entry 45. Implication from the owner’s perspective : Outflow ( as the money is going out of the cash account to the bank account) 24 .

000/( 18.10.000/- Table 2. 25 .10. either Cheque or Cash .to be paid after 30 days.2006 Type Entry Cr of Account Statement Balance Sheet Head Asset Subheads Cash Account of Company Amount in Rs) 50. For writing the debit entry .e. Parties Involved : ABC and B and C .000/.2006 Sum total of Credit Entry Dr Balance Sheet Sum total of Debit Entry Asset 50.000/. Credit entry would be Balance Sheet – Asset – Cash Account of the Company – Rs 50.1.to be paid after 15 days –Purchase from C Rs 35000/.000/.Bank Account . From the table we find out that the cash deposit in bank account is coming under account statement Balance Sheet – Assets. So the sum total of Credit entry is Rs 50.. the starting entry would be Credit and since the timing of the outflow is immediate .000/Bank 50.000/Account of Company 50. we can write accounting entries by going up to Step2 Stage 3 and after finding out the mode of payment of fund i.Outflow timing : immediate Writing accounting entry : Since the implication is outflow . The complete entry we write as below : Date 18. So the Debit entry is Balance Sheet – Asset – Bank Account – Rs 50... ABC Limited is purchasing raw material from B and C in the following fashion : Chapter 1 Purchase from B Rs 20000/.8: Depiction of Financial Transaction ( Example 19) Example 20 : On September 20. 2006. we have to follow the Table 2.

The complete entry we write as below : Date 20.9.2006 Type Entry Cr 20..1..000/35.09.Owner of transaction : ABC . For writing the debit entry .2006 of Account Statement Balance Sheet Cr Balance Sheet Sum total of Credit Entry Dr Profit and Loss Sum total of Debit Entry Head Liability Liability Subheads Creditor B Creditor C Amount in Rs) 20. From the table we find out that the purchase of raw material is coming under account statement P&L – Expenses and under head of accounts Purchase of raw material. So the sum total of Credit entry is Rs 55. we have to follow the Table 2. Writing accounting entry : Since the implication is outflow .000/Raw Material 55..2006 20.000/.000/Purchase of 55.Purchase of Raw Material – Rs 50.000/-.000/.Expenses. the starting entry would be Credit and since the timing of the outflow is deferred . C.000/.000/- ( Expenses 55. we can write accounting entries by going up to Step2 Stage 2 and Credit entry would be Balance Sheet – Liability – Creditor – B – Rs 20.000/- 26 .Rs 35. So the Debit entry is P&L. Implication from the owner’s perspective : Outflow ( as for purchase of raw material outflow is involved ) Outflow timing : Deferred ( as the payment would be made 15 days and 30 days after the date of purchase of raw material respectively for B and C and we are finding out the financial transaction as on the date of purchase ) .09.

Writing accounting entry: Since the implication is inflow . Bank B and Y . Inflow : Parties Involved : XYZ’s Bank Account and Bank B Implication from the owner’s perspective : Inflow ( as from loan .000/. the Company takes a loan of Rs 4.000/.00. a Company XYZ purchases motor Car from Co Y which is a Ford Dealer . Remaining Rs 1. Owner of transaction : XYZ’s Bank Account.000/. the Company would receive fund ) Inflow timing : Immediate ( as soon as the loan is disbursed the Company would receive the fund in its bank account) . One is inflow ( transaction on the date of September 16th 2006 ) and the other ( September 18th 2006 ) is out flow.00. the Company pays from its own bank account on September 18th 2006 along with the loan amount of Rs 4.000/.. On September 16th 2006. Let us first take the inflow transaction.. Implication from the owner’s perspective : In this transaction.from a bank B. The cost of the motor car is Rs 5. Parties Involved : XYZ’s Bank Account.. This is when XYZ receives loan from Bank B.00. we can write 27 . there are two implication of fund flows . the starting entry would be Debit and since the timing of the inflow is immediate .Table 2.00.9: Depiction of Financial Transaction ( Example 20) Example 21: On September 18th 2006. The total amount is paid to Ford Dealer by cheque on the day of purchase.

2006 Balance Asset Bank 400. ( for purchase of motor cat the amount is Writing accounting entry: Since the implication is outflow . Owner of transaction : XYZ’s Bank Account. we have to follow the Table 2.00.. either Cheque or Cash .accounting entries by going up to Step2 Stage 3 and after finding out the mode of receipt of fund i.10: Depiction of Financial Transaction ( Example 21) Outflow : Date Type Entry Dr Parties Involved : XYZ’s Bank Account and Y. So the sum total of Debit entry is Rs 400. we can write 28 .Liability – Loan – Rs 400. For writing the credit entry .e. the starting entry would be Credit and since the timing of the outflow is immediate .9.000/Sheet Sum total of Credit Entry 400.000/.. From the table we find out that the loan is coming under account statement Balance Sheet – Liability and under head of accounts Loan .000/.000/16..1. The complete entry we write as below : of Account Head Subheads Amount ( Statement in Rs) 16. Debit entry would be Balance Sheet – Asset – Bank account of XYZ – Rs 4. So the Credit entry is Balance Sheet .000/Sheet Account Sum total of Debit Entry 400.2006 Cr Balance Liability Loan 400. the Company would be required to pay the fund ) Outflow timing : Immediate immediately disbursed ) . Implication from the owner’s perspective : outflow ( as for purchase of Motor Car .000/.9.000/Table 2.

we have to follow the Table 2.00.00.2006 of Account Statement Balance Sheet Cr Balance Sheet Sum total of Credit Entry Dr Balance Sheet Sum total of Debit Entry Head Asset Asset Subheads Bank Account Bank Account Fixed Asset Amount ( in Rs) 4.000/1.9.9.000/.. For writing the debit entry .000/4.9.000/.000/.2006 18.00.000/5.000/- 29 .000/5.000/400.9.11: Depiction of Financial Transaction ( Example 21) The complete transactions spanning over 2 days are given as follows : Date 16. either Cheque or Cash .00.accounting entries by going up to Step2 Stage 3 and after finding out the mode of payment of fund i. From the table we find out that the motor car will come under purchase of asset and the account statement Balance Sheet – Asset and under head of accounts Fixed Asset .1.000/- Asset Table 2.2006 Sum total of Debit Entry Cr Balance Sheet Cr Balance Liability Asset Loan Bank 9.2006 Type Entry Cr 18.2006 18. So the sum total of Credit entry is Rs 5.00..9.00.000/- 16.9. The complete entry we write as below : Asset – Date 18.9.00. So the Debit entry is Balance Sheet Fixed Asset – Rs 500.00. Credit entry would be Balance Sheet – Asset – Bank account of XYZ – Rs 5..00.e.2006 18.2006 Type Entry Dr Dr of Account Statement Balance Sheet Balance Sheet Head Asset Asset Subheads Bank Account Fixed Asset Amount ( in Rs) 400.000/5.00.000/5.

000/- 30 .and Rs 7. The Credit entry is : Chapter 1 Balance Sheet.12: Depiction of Financial Transaction ( Example 21) Now we shall do some problems to check our conceptions.Furniture – Rs 12.000/.000/- b) Balance Sheet.000/.and from C is Rs 50.Amounts to be paid to C Rs 7.000/- b) –P&L – Expenses – Purchase of Raw Material – Rs 95.000/.Asset. The debit entry is : Chapter 1 –P&L – Expenses – Purchase of Material – Rs 12.Liability – Creditor – Rs 7.respectively.000/Table 2.. Problem 13 : ABC Limited is purchasing furniture from B and C at a cost of Rs 5. Payment to B to be made after 3 days and to C after 7 days.00.9. The Debit Entry is : Chapter 1 –Balance Sheet – Asset – Raw Material – Rs 95.000/c) –Balance Sheet – Asset.000/..The cost of raw material purchased from B is Rs 45000/.Asset. ABC Limited is purchasing raw material from B and C.18.00.Cash Rs 5.000/- b) –Balance Sheet.000/Chapter 1 None of the above d) Both the above Problem 14 : On September 4th 2006. For B it has to pay by cheque and for C it will after 30 days.000/- Sum total of Credit Entry 9.2006 Cr Sheet Balance Sheet Asset Account Bank Account 1.

Balance Sheet – Liability – Creditor – Rs 4..000/c) –Dr..Expenses –Manufacturing Expenses : Rs 45.000/c)–Balance Sheet – Liability – Creditor C Rs 50.Liability.000/.Liability –Creditors Rs 4000/.000/.000/- Problem 16 : On August 28th .. – P&L – Expenses – Electricity Rs 4000/- b) –Dr – P&L – Expenses – Electricity – Rs 4.000/. The complete entry is : Chapter 1 –Dr – Balance Sheet.The Credit Entry is : a)–P&L.Raw Material Rs 95.& Cr.Creditor B Rs 45.000/- 31 .000/- b) –Dr : Balance Sheet – Liability – Creditor : Rs 45. 2006 . C Rs 50. ABC needs to pay X the amount immediately by cash and Y and Z after 15 days.000/.each to all the parties. 2006ABC Limited is incurring expenses for availing manufacturing services from X.Cash –Rs 4. This amount is to be paid on the 1st working day of the next month.000/d)None of the above Problem 15 : On August 12.& Balance Sheet – Asset – Cash Rs 45.P&L – Expenses – Electricity – Rs 4.. The complete entry is : Chapter 1 –Dr : P&L.Asset.& Cr.Balance Sheet.Cr : P&L: Expenses – Manufacturing Expenses : Rs 45.000/.000/.000/-& Cr.Expenses. Y . Out of which .000/b)–Balance Sheet. ABC Limited is incurring electricity expenses to electricity board SEB and the total amount in a day is Rs 4000/. Z and for that ABC Limited has to pay Rs 15. Cr : Balance Sheet – Liability –Creditor Rs 45.

000/- Problem 17 : ABC Limited invests rupees in the bank A in the form of fixed deposits and also invest some amount in Shares of Bank A.00.Liability.Shares Rs 1.000/.000.Expenses.000. The amount invested in Fixed Deposit is Rs 2. Shares Rs 1. The complete entry is : Chapter 1 –Dr : Balance Sheet: Liability : Fixed Deposit Rs 2.and amount invested in shares is Rs 1.000/.Cr:P&L-Expenses – Interest Rs 1000/- b) –Dr : P&L.c) –Dr : P&L.to whom sale was made on 10th 32 .Cr: Balance Sheet –Asset..Asset-Bank Rs 1000/c) –Dr : P&L – Expenses – Interest Rs 1000/.00.000/.000/.00.00.Cr : Balance Sheet. This amount is Rs 1000/.and is paid immediately by cheque.000 Cr Balance Sheet : Asset : Bank Rs 3..00.000 Cr:Balance Sheet : Asset : Bank Rs 3.000.Interest Rs 1000/. for Rs 500/. receives cheque from Company Z September 2006..00. b) –Dr : Balance Sheet : Asset : Fixed Deposit Rs 2. Cr Balance Sheet. Problem 18 : ABC Limited pays interest on the borrowed money to bank A.Cash : Rs 15.whom the Company has made a sale one month back .00.. Cr : Balance Sheet. The amount invested is by way of cheque.. The complete entry is : Chapter 1 –Dr : Balance Sheet – Liability – Loan Rs 1000/.Liability..Loan Rs 1000/- Problem 19 : On 12th September 2006 ABC Limited receives cash from Co Y of Rs 1000/.00.Creditor : Rs 30.000.Expenses – Manufacturing Expenses: Rs 45.

.Z Rs 500/- Problem 20 : On 12 September 2006. th All the above entries represent the normal types of financial entries take place in the business.Bank Rs 500/.AssetBank Rs 500/. Besides this normal entries. These entries are called as normal entries.Cr : Balance Sheet – Asset. 33 . Capitalization entries.to Co Y to whom the Company has made a purchase one month back .AssetBank Rs 1000/-.Asset.Dr Balance Sheet.Bank Rs 500/Cr: Balance Sheet – Asset –Bank Rs 1000/–Dr : Balance Sheet – Liability – Creditor Y Rs 1000/.Receivable Y Rs 1000/. ABC Limited pays Rs 1000/. Cr : Balance Sheet.Cr: Balance Sheet – Asset –Bank Rs 1000/- b) –Dr : Balance Sheet – Asset – Cash Rs 1000/.Asset. 2. Depreciation entries 3.... the payment is made by cheque.The Correct Entry is : Chapter 1 –Dr : P&L – Income – Sales Rs 1500/. there are three other types of financial entries to complete the financial entries. These are : 1.The Correct Entry is : –Dr : P&L – Income – Sales Rs 1500/.Cr Balance Sheet. . Cr : Balance Sheet. Stock adjustment entries.

the same raw material is lying with the Company and from it .000/. it can generate income either by selling directly or by converting it into Work In Progress and Finished Goods and then selling Finished Goods with a margin.000/Purchase of 25. 000/- Table 3.or below Rs 25.or above Rs 25. We can capture this by recognizing the 34 .000/.1: Depiction of Financial Transaction ( Example 22) Now though the Company has incurred an expenses on account of purchase of raw material .Chapter Three Stock Adjustment Entries Stock Adjustment entries : This is the entry which is passed to follow the matching principle. Let us take an example. 2006 a Company XYZ purchases a raw material of Rs 25000/. On May 23rd the entry for the purchase of raw material is given in the following table : Date 24.2006 Type Entry Cr of Account Head Statement Balance Liability Sheet Sum total of Credit Entry Dr Profit and Expenses Loss Sum total of Debit Entry Subheads Creditor Amount in Rs) 25. The raw materials which are purchased by the Company at Rs 25.000/( 24.can be sold at Rs 25. It may be mentioned that in accounts the value is recognized on a conservative basis.2006 25.000/Raw Material 25.000/.9.9. The matching principle of accounting means that the expenses and income are apportioned in the same period..on credit from Mr Y. Example 22: On May 23rd .000/. The conservative policy states that if there is any gain from the uncertainty of the Company the same should not be taken into account while the loss from the uncertainty should be taken into account.

the same raw material would cost Rs 22.000/Asset – Raw material 22.9.9.2006 24.000/Raw Material 22.000/.. So if the value of the goods has declined by Rs 2000/.9.000/( 24.Stock adjustment entry ( Example 22) The complete entry is given below : Date 24.000/- 35 .2006 Increase in 22.9.9..Income – Increase in Stock of Raw material – Rs 22.2: Depiction of Financial Transaction.000/Raw Material 47.2006 Type Entry Cr Cr of Account Head Statement Balance Liability Sheet Profit and Income Loss Subheads Creditor Amount in Rs) 25.000/Cr : Profit and Loss.000/Raw Material Current 22. So we pass the following entry : Dr : Balance Sheet – Asset – Current Asset – Raw Material – Rs 22.000/Current 22.2006 Sum total of Credit Entry Dr Balance Asset Sheet Sum total of Debit Entry Table 3.and this should be reflected in the Company’s financial transaction. 000/Subheads 24.000/.000/Purchase of 25.loss but not registering the gain.2006 Type Entry Cr of Account Head Statement Profit and Income Loss Amount ( in Rs) Increase in 22. This is called the stock adjustment entry. This is depicted below : Date 24.2006 Sum total of Credit Entry Dr Profit and Expenses Loss Dr Balance Asset 24.9.

Income – Increase in Stock of Raw material – Rs 25.00..Sheet Asset Raw material – Sum total of Debit Entry 47. For establishment of the factory the Company purchased land admeasuring 100 cottahs with the value per cottah of land is Rs 25000/.00.000/.3: Depiction of Financial Transaction with stock adjustment entry ( Example 22) In case the cost of the goods is Rs 25.00. 000/- Table 3. the Company spent Rs 2.000/. 000/.. The stock adjustment entry is present both in Work in progress stage as well as the Finished goods stage . the following entry is passed as stock adjustment entry : Dr : Balance Sheet – Asset – Current Asset – Raw Material – Rs 25.and above .000/- Cr : Profit and Loss.( Rupees Thirty Lacs only) and installed machinery worth Rs 1.on stamp duty and registration of the land.000/. All the stages are given with the help of the following example where a complete picture of accounts is given : Let us assume that a Company X has established a factory for production of garments. The Company financed this entire capital expenses with both debt and equity in the ratio of 2:1.50. After the purchase. 36 .( Rupees One Crore Fifty Lacs only ) .000/. The Company then constructed factory premises with an investment of Rs 30.

3: First Balance Sheet of the Company Now for starting of the production . 37 .( Rupees Ten Lacs only) at t= 2 day. at t=30. Workers and Supervisors 4. Power Now. Raw Materials 2. we shall introduce the time scale. on t=2 days. Suppose at time t=0. This is a point when the construction of the factory is complete and the factory is ready in all purposes to start production. let us draw a balance sheet up to this point.00. the Company requires the following : 1. the Company has hired 20 workers and supervisors with an average salary of Rs 30000/. The salary would be paid on the last day of the month i. The Company has also purchased Raw Material worth Rs 10.Before we proceed further.000/. Since the purchase is carried out at t= 2 days.e. Consumables 3. the purchase entry would reflect in the P&L and the Bank/Cash/Credit entry would reflect in the balance sheet. ( All in Rs Lacs) Liability Particulars Equity Debt Amount 69 138 Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset Amount 27 30 150 207 Total Liability 207 Table 3. Now we shall draw the balance sheet and P&L on different time scale. The Company has got electricity connections and the bills during t=1 to 30 days would be paid on t= 45 days .( Rupees Thirty Thousand only) per month.

This is shown as below : Profit & Loss Account Expense Particulars Amount 38 Particulars ( Rs in lacs) Income Amount . So the Company deposits Rs 10. it is very difficult to arrange credit for its raw materials.we shall write purchase entry in connection with the purchase of Raw Material.4 : Balance Sheet of the Company Now . After this entry the balance sheet would look like as follows : ( All in Rs Lacs) Liability Particulars Equity Equity Debt Amount 69 10 138 Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset Cash at Bank Total Asset Amount 27 30 150 Total Liability 217 207 10 217 Table 3.00 lacs in bank from its own source. So it needs to put cash in the bank for this raw material amount. Both the entries would be on the balance sheet.Since the Company is new one. The Debit Purchase would be in the P&L Account and the Credit entry would be in Cash and Bank Account.

Rs 1200/. The electricity for one day is .000/.Purchase of Raw Material t=2 Total 10 10 By Closing Stock t=2* 10 10 Total Balance Sheet Liability Particulars Equity Equity Debt Amount 69 10 138 ( All in Rs Lacs) Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset Cash at Bank t=2 Raw Material t=2* Total Asset Amount 27 30 150 Total Liability 217 207 (10-10)=0 10 217 Table 3.. from the stock of Rs 10 lacs raw materials . say . Assuming no other cost incurred. the amount of Rs 1lac would be treated as consumption and the same amount would be reduced from Stock . the effort of one entire day of entire work force is used for this production. There would be 39 . the above entries need to be taken care by passing the following entries : For Raw Material . Besides. So the total salary for one day would be Rs 20. This is because these are payable only after the month. Rs 1 lacs raw materials is issued for production. Work in Progress transaction : Now At t=3.. The salary and power would be debited to P&L and the amount would be outstanding in balance sheet as creditor.5: P&L and Balance Sheet after the purchase transaction but after stock adjustment transaction up to Raw Material stage.

21 Total Liability 217. Now say t=4.0 lac.closing stock of Work in Progress on account made from the raw material consumed of Rs 1.21 Table 3. after stock adjustment transaction up to Work in Progress stage.01 10.21 217.6: P&L and Balance Sheet after the purchase transaction.21 10.21 By WIP t=3 Total ( All in Rs Lacs) Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset Cash at Bank t=2 Raw Material t=2* Raw Material Consumed t=3 WIP t=3 Total Asset Amount 69 10 138 Amount 27 30 150 Salary outstanding t=3 Electricity outstanding t=3 . you see apart from Raw Material Inventory. Raw material worth Rs 2 lacs has 40 .21 To Closing Stock t=3 Salary t=3 Electricity t=3 Total Balance Sheet Liability Particulars Equity Equity Debt .20 . The Entire set of entry is shown below : Profit & Loss Account Expense Particulars Purchase of Raw Material t=2 Amount 10 ( Rs in lacs) Income Particulars By Closing Stock t=2* Amount 10 (1) 1. Finished Goods Stage : Now.20 .01 207 (10-10)=0 10 (1) 1. WIP Inventory has also appeared in the Balance Sheet.

19 (1.01 10. the Company spends Rs 15000/.04 By Closing Stock of FG t=4 1.20 .gone to the production and WIP of the previous day has been converted into the Finished goods.46 Liability Particulars Amount Equity 69 Equity 10 Debt 138 Amount 27 30 150 41 .on account of salary and Rs 1000/. For converting the raw material of Rs 2 lacs issued on t=4.46 Total ( All in Rs Lacs) Asset Particulars Land Factory Building Plant & Machinery 10.27 .15 By WIP t=3 By WIP t=4 To WIP t=4 .on account of electricity.21) To Closing Stock t=3 To Closing Stock t=4 Salary t=3 Electricity t=3 Salary for conversion of raw material to WIP t=4 Electricity for conversion of raw material to WIP t=4 Salary for conversion of WIP to Finished Goods Electricity for conversion of WIP to Finished Goods Total Balance Sheet .on account of salary and Rs 4000/.21 2.on account of electricity.01 . At the end of t= 4. For converting the WIP into Finished goods. all the entries would be as follows : Profit & Loss Account Expense Particulars Amount Purchase of Raw 10 t=2 Material ( Rs in lacs) Income Particulars By Closing Stock t=2* Amount 10 (1) (2) 1. the Company spends about Rs 5000/.05 .

21+.05 Raw Material Consumed t=4 (2) .05+.21) Finished Goods t=4 1.46 Total Asset Table 3.21 New WIP converted from Raw Material t=4 WIP converted to Finished Goods t=4 2.Salary outstanding t=3 Electricity outstanding t=3 Outstanding Salary for conversion of raw material to WIP t=4 Outstanding Electricity for conversion of raw material to WIP t=4 Outstanding Salary for conversion of WIP to Finished Goods t=4 Outstanding Electricity for conversion of WIP to Finished Goods t=4 .01 .27 217. We see the following statement of accounts at the end of t=3 day : 42 .7: P&L and Balance Sheet after the purchase transaction. after stock adjustment transaction up to Finished Goods stage.19 (1.01 WIP t=3 1. In the traditional statement of accounts . lot of entries are reclassified and shown .01=1.04 Raw Material Consumed t=3 (1) .15 Total Fixed Asset Cash at Bank t=2 Raw Material t=2* 207 (10-10)=0 10 .20 .46 Total Liability 217.

21 Table 3.Profit & Loss Account Expense Particulars Consumption of Raw Material Salary t=3 Electricity t=3 Total Balance Sheet Liability Particulars Equity Equity Debt Amount 69 10 138 Amount 1 .21 217.20 .01 1.21 Amount 27 30 150 Salary outstanding t=3 Electricity outstanding t=3 .20 . after the purchase transaction. after stock adjustment transaction up to Finished Goods stage. We also see the following statement of accounts at the end of t=4 Profit & Loss Account Expense Particulars Amount Particulars ( Rs in lacs) Income Amount 43 .8 : Formats of P&L and Balance Sheet we see.21 Total ( All in Rs Lacs) Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset 1.21 Total Asset 9 1.21 Particulars By WIP ( Rs in lacs) Income Amount 1.01 207 Raw Material WIP t=3 Total Liability 217.

after the purchase transaction.Consumption of Raw Material 3 Change in WIP Change in Finished Goods 2.19 2.27 217.46 Total Liability 217.40 .9 : Formats of P&L and Balance Sheet we see.19 1.40 . Now if the Company incurs an expenditure of Rs 0.19 1.20 lacs on account of sales and marketing expenses for this amount of Finished Goods and the Finished Goods is sold at Rs 2. after stock adjustment transaction up to Finished Goods stage.46 Amount 69 10 138 .46 Total ( All in Rs Lacs) Asset Particulars Land Factory Building Plant & Machinery Total Fixed Asset Raw Material WIP Finished Goods Total Asset 3.46 Table 3.10 lacs and the entire sales is on cash basis the statement of accounts is shown below : Profit & Loss Account Expense Particulars Consumption of Raw Material Salary Electricity Amount 3 ( Rs in lacs) Income Particulars Change in WIP By Sales .06 3.10 44 .06 Amount 2.06 Amount 27 30 150 207 7 2.40 .27 Salary Electricity Total Balance Sheet Liability Particulars Equity Equity Debt Salary outstanding Electricity outstanding .

06 .Selling and Distribution overhead To Profit Transferred to Reserve Total Balance Sheet Liability Particulars Equity Equity Debt By Profit Salary outstanding Electricity outstanding Selling and Administrative Expenses O/S . after stock adjustment transaction up to sales stage.20 Particulars Land Factory Building Plant & Machinery Total Fixed Asset Raw Material WIP Amount 27 30 150 207 7 2. after the purchase transaction. 45 .63 .19 Total Liability 218.29 Amount 69 10 138 .29 Cash at Bank & Hand Total Asset 2.10 : Formats of P&L and Balance Sheet we see.29 Total ( All in Rs Lacs) Asset 4.63 4.29 Table 3.40 .10 218.20 .

on April 1. At the time of purchase i. the value would be deducted. Cr : Balance Sheet : Asset : Bank : Rs 10 lacs . This credit entry is called the accumulated depreciation .e. The financial statement of the Company must capture this incidence for the machinery.Chapter Four Depreciation When a Company purchases machinery the machinery would be used for several years. 46 . To reduce the value from Rs 10 lacs to Rs 8 lacs . the value of the machinery would not be Rs 10 lacs but to be reduced by the value for the period for which the machinery is used. At the time of purchase the Company has estimated that the machinery would be in use for a period of 5 years after which the machinery would be sold at no value. Company XYZ purchases the machinery with Rs 10 lacs by issuing a cheque from its bank account. 2007 . the value of the machinery should be Rs 8 lacs. Now as on March 31. 2006 the accounting entry would be as follows : Dr : Balance Sheet : Asset : Fixed Asset : Rs 10 lacs. Since the value to be reduced in 1 year is Rs 2 lacs ( the value of the machinery after the use of 5 year is 0 ) . we need to pass an entry which must be deducted from the fixed assets by this amount. The Fixed asset is always a debit balance and if any credit entry is passed in the fixed asset. Let us assume that on 1st April 2006. The debit entry would be on account of Depreciation in the Profit and Loss account of the Company . if we want to make a financial statement which should reflect the true value of the machinery .

Let us take an example to make it clear : 47 . expenses : Depreciation : Rs 2 lacs Cr : Balance Sheet : Asset : Fixed Asset. Since the depreciation is an expenses it reduces the tax incidence.Dr : Profit and Loss. the accounting body of India for Company’s act . Accumulated depreciation : Rs 2 lacs. the same process would be followed and the amount would be further reduced by Rs 2 lacs. The depreciation amount is different for different types of fixed assets. .cumulative depreciation ) is zero faster than the other types of assets where the rate of obsolescence is relatively lower. This rate of wear and tear is prescribed by the ICAI . . So during this period the following entry would be passed: Dr : Profit and Loss. For Income Tax purpose the rates of wear and tear is prescribed by the Income Tax Department. expenses : Depreciation : Rs 2 lacs Cr : Balance Sheet : Asset : Fixed Asset. The depreciation in the profit and loss represents the amount of wear and tear incurred by the Company during the year for its operation and the accumulated depreciation represents the cumulative amount of wear and tear incurred by the machinery since inception of the Company . For certain assets where the rate of obsolescence is high. the rate of depreciation is high so that the net value of the assets ( gross value. 2008. Now as on March 31. Accumulated depreciation : Rs 2 lacs.

However .Suppose a Company has purchased an asset of Rs 6 lacs . So the profit after depreciation is Rs 3 lacs – Rs 2 lacs = Rs 1 lac. the Company earns a profit before depreciation and tax of Rs 3 lacs in its first year of use . It is not associated with any actual fund outflow. Now the assets will have no value after 3 years. 48 . the value of the asset would be Rs 4 lacs so the depreciation would be Rs 2 lacs. If the tax rate is 30% . the applicable tax is Rs 30. So this is called a non fund expenses and the same should be added with the Profit After Tax for finding out the cash generation from the business. this can act as an incentive for selling of certain category of incidence. Another important point about depreciation is that this is a notional entry. To prevent that the Income Tax department prescribes a depreciation rate which all companies must abide by . If the depreciation amount is Rs 3 lacs instead of Rs 2 lacs there would be no profit and accordingly no taxes. Now the income tax is calculated on profit after depreciation. So there would be the tendency of the Company to charge more on the depreciation in the initial years. By using the asset.000/. At the end of 1st year ..

So we can have several entries under same heads of accounts. 3. we follow the following practice : 1. For example the Company can purchase raw materials for 12 days in a month and if the accounting period (the decided period of P&L ) is 12 months . For example. 2. now we can capture each of these financial transactions by adopting methodology ( Step 1 and Step 2 ) mentioned in Chapter 2. every day several number of financial transactions take place. So we sum up all these entries and present the total as purchase of raw material . during this period also there can be several entries under a single head. Deciding the period of P&L Statement : The P&L statement consists of Income and expenses head. the Company has incurred total 145 49 . This consolidation is called the drawing up of P&L and Balance Sheet. This period can be 1 day or can be 18 months. we can have 12 *12= 144 debit entries of different amount . Once the period for P&L is decided. In the balance sheet. For drawing up the P&L and Balance Sheet . we have to capture the financial entries for each day during this period by applying the methodology described in chapter 2. So we need to put a total effect for this period on account of purchase. Generally the P&L period is 12 months. we have discussed the methodology for capturing financial transactions on a daily basis. In each day . P&L can be permitted up to 15 months as well as 18 months under extreme circumstances. So first the Company has to decide the period for which it will draw the P&L statement. In a business entity. For all other P&L subheads we follow the same procedure. Now we can capture such transactions for several number of days . Now we need to consolidate this transactions .Chapter Five Preparation of P&L and Balance Sheet Till now. We need to draw the income and expenses earned by the Company for a period. But in certain cases .

So net balance is arrived at by deducting the credit from the debit entries on all subheads from the asset side.Z decided to start a small manufacturing unit for manufacturing of jeans to be supplied to Pantaloons. Besides. The profit amount will transfer from the Profit and Loss account to the Balance Sheet by passing the following entry : Dr : Profit & Loss : Amount Transferred to Balance Sheet Cr : Balance Sheet : Liability : Retained Earning. On April 1. X. 4. we make stock adjustment entry and depreciation entry and the surplus of Income over expenses is profit. 50 . the Company opened an account and XYZ deposits cheque of Rs 2 lacs each against which they are allotted equity shares 20000 each with a face value of Rs 10/.transactions under the head of Bank Account ( the determination of Bank account will come from methodology adopted in Chapter 2 ) out of which 45 is on account of receipt and the sum total of these 45receipts together is Rs 25 lacs and the sum total of the remaining 100 payments is Rs 23 lacs.Y. They found out that they need to purchase plant and machinery worth of Rs 15 lacs whose life period is 5 years. 5. Let us explain the entire process with the help of an example so that the entire process is very clear. Egmore branch. 2005. 2005 . We shall draw the P&L and Balance Sheet for two period. At the end of the accounting period .Z decides to start the business under the name of Apparel India Limited and these three decides to bring Rs 2 lacs each as Equity to the Company .per share . the Company wants to take factory cum office under rent for which it needs to give a security deposits of Rs 1 lac. We arrive this by adopting this principle : any asset subhead would have debit balance and any credit on that subhead would be deducted. So at the end of the year the net amount is Rs 2 lacs. Three people X. They formed the Company and decides to open a bank account with Syndicate Bank. On April 6. Besides they will also sell some product locally .Y.

2005 and the Company pays the amount of Rs 15 lacs on April 19 . 2005. Z as Chief Marketing officer. 2005. The loan amount is credited in the bank account of the Company . the amount left is Rs 9 lacs. 2005 the Company appoints X as Chief Financial Officer.On April 7. On April 22. Since the total plant requirement for purchasing the machinery is Rs 15 lacs . 2005 and the Company takes disbursement on April 16.2005 by issuing a cheque from the bank account. The Company now recruits 10 people whose average salary is Rs 5000/and all the persons will join work on May 1. The Company has also given Rs 1 lacs to land lord in the form of security deposit by writing a cheque on April 23 . Y as Chief Production Officer. 2005 the installation of the machine is complete . 2005. Now the Company purchases the machine worth of Rs 15 lacs on April 19. The bank issues sanction letter on April 12. The Company incurs the following expenses on monthly basis : ( In Rs lacs) Purchase of Raw material on 30 days credit – all purchase are made in the 1 st day of the month from Mr. X decides to raise the remaining fund for starting the project in the form of bank loan. X applies to Syndicate Bank and Syndicate bank sanctions term loan of Rs 11 lacs which is to be paid over a period 5 years. Y only Salary to be booked on the last day of each month and the amount to be paid on the 7th of Next Month Electricity Expenses to be booked on the last day of the month and to be paid on the 15th of Next Month Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar 2005 2005 2005 2005 2005 2005 2005 2005 2005 2006 2006 2006 25 25 25 25 25 25 25 25 25 25 25 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 51 .

3 1 0.3 1 0.3 1 0.3 The monthly sale of the Company is given below : ( In Rs lacs) Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar 2005 2005 2005 2005 2005 2005 2005 2005 2005 2006 2006 2006 Sales from Pantaloons the sales is booked at the end of the month and the payment is receipt after 21 days by way of bank cheque Sale from Local market the sale is booked at the end of the month and the amount is received in cash 55 55 55 55 55 55 55 55 55 55 55 5 5 7 8 10 12 12 14 15 17 20 52 .Other Manufacturing expenses incurred from Company A only and all the manufacturing expenses are booked on the last day of the month and to be paid on 21st day of the succeeding month Selling and Distribution expenses incurred and the same is booked at the end of the month and the same is to be paid on 15th of the succeeding month to Company Z .3 1 0. Interest amount paid to the bank on the borrowing 0.3 1 0.3 1 1 1 1 1 1 1 1 1 1 1 1 0.3 1 0.3 1 0.3 1 0.3 1 0.3 1 0.

4.Let us first start drawing the financial transaction in each day of the period : Date 6.2005 Outflow Immediate Chapter 2 Cr BSBank 23.2005 Implication Inflow Timing Immediate Source Chapter 2 Entry Dr Subhead BSBank 6.2005 Cr BS-Ast.4.1 Dr BS-Ast.2005 Table 2.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BSBank 19.4.4.4.2005 Table 2.2005 Inflow Immediate Chapter 2 Dr BSBank 16.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.4.5.1 Dr P&LExpensPurchase of 25 25 1 Ast1 15 in 15 in 15 Ast15 11 Ast11 6 AstAmount 6 53 .4.2005 Table 2.Liability – Loan 19.Fxt Asset Progress 22.Fxt Asst 23.1 Dr BS-AsstSecurity Depst 1.1 Cr BS.2005 Table 2.2005 Dr BS.4.5.1 Cr BSLiabilityCapital 16.4.Ast.4.Fxt Asset Progress 22.

5.3 Ast0.5.A 31.1 Dr P&LExpensOther manufacturi ng exp 31.2005 Table 2.1 Dr P&LExpensElectricity 31.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 31.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 31.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 55 0.RM 31.1 Dr P&LExpenses – Selling Expens 31.2005 Table 2.5.5.1 Dr P&LExpensSalary 31.3 1 1 1 1 1 1 2 2 54 .5.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.5.2005 Outflow Immediate Chapter 2 Cr BSBank Table 2.5.2005 Table 2.5.5.Z Table 2.1 Dr P&L-ExpInterest 31.

6.6.6.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 5 31.2005 Table 2.2005 Cr P&L Income Sales – - 5 1.6.5.2005 Dr BS-AsstLiabilityAll Employees 2 15.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.2005 Dr BS-Asst- 1 55 .2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 25 1.6.6.6.6.1 Dr P&LExpensPurchase of RM 25 7.5.2005 Dr BS-AsstLiabilityElectricity 1 15.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 25 1.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 2 7.31.2006 Dr BS-AsstLiabilityCreditor Y 25 1.6.2005 Cr P&LIncomeSales 55 31.6.5.

6.6.Liability.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 30.A 30.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Dr BS-AsstLiability.6.1 Dr P&LExpenses – Selling 1 1 1 1 1 1 2 2 55 55 1 1 56 .6.6.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.A 21.6.6.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 21.1 Dr P&LExpensOther manufacturi ng exp 30.6.2005 Table 2.2005 Table 2.Z Table 2.1 Dr P&LExpensSalary 30.6.Z 21.6.2005 Cr BS-AsstReceivable 30.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.2005 Table 2.1 Dr P&LExpensElectricity 30.6.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 30.

Expens 30.2005 Table 2.6.7.6.3 Ast0.2005 Dr BS-AsstLiabilityCreditor Y 1.7.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 30.2005 Outflow Immediate Chapter 2 Cr BSBank Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.2005 Dr BS-AsstLiabilityAll Employees 2 2 25 25 25 25 – 5 5 55 55 0.7.6.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 30.6.2005 Cr P&L Income Sales 1.3 57 .7.1 Dr P&L-ExpInterest 30.7.1 Dr P&LExpensPurchase of RM 7.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.2005 Cr P&LIncomeSales 30.6.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 7.7.

2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.7.7.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 1 31.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 2 31.2005 Dr BS-AsstLiability.A 1 31.7.7.2005 Table 2.2005 Dr BS-AsstLiability.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 55 21.7.7.7.7.2005 Table 2.7.7.A 1 21.2005 Cr BS-AsstReceivable 55 31.7.1 Dr P&LExpensElectricity 1 31.7.15.1 Dr P&LExpensSalary 2 31.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 21.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.1 Dr P&LExpens- 1 58 .7.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.Z 1 21.7.2005 Dr BS-AsstLiabilityElectricity 1 15.

8.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.7.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.8.8.7.3 Ast0.2005 Cr P&L Income Sales 1.7.7.1 Dr P&L-ExpInterest 31.1 Dr P&LExpenses – Selling Expens 31.2005 Outflow Immediate Chapter 2 Cr BSBank 31.3 1 1 59 .2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 31.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Table 2.2005 Cr P&LIncomeSales 31.1 Dr P&LExpens25 25 25 25 – – 5 5 55 55 0.2005 Table 2.7.7.2005 Table 2.7.Other manufacturi ng exp 31.7.2005 Dr BS-AsstLiabilityCreditor Y 1.Z 31.8.

8.2005 Dr BS-AsstLiability.Purchase of RM 7.2005 Table 2.Z 21.2005 Cr BS-AsstReceivable 31.8.2005 Dr BS-AsstLiabilityElectricity 15.1 Dr P&LExpensSalary 31.8.8.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor1 2 2 55 55 1 1 1 1 1 1 2 2 60 .8.8.8.2005 Dr BS-AsstLiabilityAll Employees 15.8.8.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 31.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.2005 Dr BS-AsstLiability.8.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.8.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 21.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.8.A 21.8.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 7.

2005 Table 2.A 31.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.1 Dr P&LExpensOther manufacturi ng exp 31.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 25 – – 5 5 55 55 0.8.8.1 Dr P&LExpenses – Selling Expens 31.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 31.8.1 Dr P&L-ExpInterest 31.8.8.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.3 Ast0.2005 Table 2.3 1 1 1 1 1 61 .8.Electricity 31.2005 Table 2.1 Dr P&LExpensElectricity 31.8.2005 Cr P&L Income Sales 1.8.8.2005 Outflow Immediate Chapter 2 Cr BSBank 31.2005 Cr P&LIncomeSales 31.8.8.9.Z 31.

2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.1 Dr P&LExpensPurchase of RM 25 7.9.9.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 25 1.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 21.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.9.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 55 21.A 1 21.9.9.2005 Outflow Deferred Chapter 2 Cr BS-Liability 2 62 .2005 Dr BS-AsstLiability.9.9.Z 1 21.2005 Dr BS-AsstLiabilityAll Employees 2 15.2005 Dr BS-AsstLiabilityCreditor Y 25 1.9.9.9.2005 Dr BS-AsstLiability.2005 Table 2.9.1.9.2005 Cr BS-AsstReceivable 55 30.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 2 7.9.9.2005 Dr BS-AsstLiabilityElectricity 1 15.

2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Outflow Immediate Chapter 2 Cr BSBank 30.9.Z 30.2005 Table 2.1 Dr P&LExpenses – Selling Expens 30.9.9.1 Dr P&LExpensSalary 30.9.2005 Cr P&LIncome55 55 0.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Table 2.– Creditor – All Employees 30.1 Dr P&L-ExpInterest 30.2005 Table 2.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 30.3 1 1 1 1 1 1 2 63 .2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 30.A 30.1 Dr P&LExpensOther manufacturi ng exp 30.9.9.3 Ast0.2005 Table 2.9.1 Dr P&LExpensElectricity 30.2005 Table 2.9.9.9.9.

10.Sales 30.10.10.2005 Dr BS-AsstLiabilityAll Employees 15.10.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.10.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.9.2005 Cr P&L Income Sales 1.1 Dr P&LExpensPurchase of RM 10.9.10.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.Z 21.2005 Dr BS-AsstLiabilityCreditor Y 1.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 30.2005 Dr BS-AsstLiabilityElectricity 15.2005 Dr BS-AsstLiability.2005 Outflow Immediate Chapter 2 Cr BS-Asst1 1 1 1 1 2 2 25 25 25 25 – – 5 5 64 .2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 10.10.10.10.10.10.

2005 Table 2.10.2005 Cr BS-AsstReceivable 31.2005 Table 2.1 Dr P&LExpensElectricity 31.10.1 Dr P&LExpensOther manufacturi ng exp 31.2005 Table 2.10.10.10.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Outflow Immediate Chapter 2 Cr BSAst0.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.10.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 31.Bank 21.A 31.2005 Dr BS-AsstLiability.10.10.Z 31.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.10.3 1 1 1 1 1 1 2 2 55 55 1 65 .1 Dr P&LExpensSalary 31.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 31.10.2005 Table 2.1 Dr P&LExpenses – Selling Expens 31.A 21.10.10.

2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 31.1 Dr P&LExpensPurchase of RM 7.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.10.11.2005 Cr P&LIncomeSales 31.10.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.11.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 7.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.2005 Dr BS-AsstLiabilityAll Employees 15.11.2005 Cr P&L Income Sales 1.10.2005 Table 2.11.11.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 2 2 25 25 25 25 – – 5 5 55 55 0.3 66 .2005 Dr BS-AsstLiabilityCreditor Y 1.11.10.1 Dr P&L-ExpInterest 31.11.Bank 31.10.2005 Table 2.

2005 Cr BS-AsstReceivable 55 30.11.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 21.2005 Table 2.11.11.11.11.15.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 1 30.11.1 Dr P&LExpensElectricity 1 30.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 2 30.11.1 Dr P&LExpensSalary 2 30.11.11.2005 Dr BS-AsstLiability.A 1 30.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.11.1 Dr P&LExpensOther manufacturi 1 67 .A 1 21.Z 1 21.11.11.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 55 21.2005 Dr BS-AsstLiabilityElectricity 1 15.2005 Dr BS-AsstLiability.11.2005 Table 2.

1 Dr P&LExpensPurchase of RM 25 25 25 25 – – 5 5 55 55 0.11.12.2005 Cr P&LIncomeSales 30.ng exp 30.1 Dr P&L-ExpInterest 30.11.2005 Table 2.11.11.2005 Dr BS-AsstLiabilityCreditor Y 1.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Table 2.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 30.2005 Table 2.2005 Cr P&L Income Sales 1.3 1 1 68 .3 Ast0.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 30.Z 30.12.12.12.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.11.2005 Outflow Immediate Chapter 2 Cr BSBank 30.1 Dr P&LExpenses – Selling Expens 30.11.11.11.

12.12.12.12.12.2005 Dr BS-AsstLiability.2005 Dr BS-AsstLiabilityAll Employees 2 15.12.2005 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 2 31.12.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 1 31.2005 Dr BS-AsstLiability.2005 Dr BS-AsstLiabilityElectricity 1 15.12.2005 Cr BS-AsstReceivable 55 31.2005 Inflow Immediate Chapter 2 Dr BS-AsstBank 55 21.12.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 2 12.12.2005 Table 2.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.12.2005 Table 2.Z 1 21.1 Dr P&LExpensSalary 2 31.12.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 21.1 Dr P&L- 1 69 .A 1 21.12.2005 Outflow Immediate Chapter 2 Cr BS-AsstBank 1 15.12.12.

ExpensElectricity 31.12.12.A 31.1 Dr P&LExpensOther manufacturi ng exp 31.12.2005 Cr P&LIncomeSales 31.3 1 1 1 1 70 .12.12.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.1 Dr P&L-ExpInterest 31.2005 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.2005 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2005 Table 2.1.2005 Inflow Immediate Chapter 2 Dr BS-AsstCash 31.12.2005 Table 2.2006 Dr BS-AsstLiability25 25 – – 5 5 55 55 0.1.2005 Cr P&L Income Sales 1.2005 Outflow Immediate Chapter 2 Cr BSBank 31.12.1 Dr P&LExpenses – Selling Expens 31.12.12.12.3 Ast0.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.2005 Table 2.Z 31.

1.2006 Table 2.1.1.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 21.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.1 Dr P&LExpensPurchase of RM 1.2006 Dr BS-AsstLiabilityAll Employees 15.2006 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.1.Creditor Y 1.A 21.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.1.2006 Cr BS-AsstReceivable 31.1.1.2006 Dr BS-AsstLiability.1.2006 Dr BS-AsstLiability.1.1.Z 21.1.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.2006 Dr BS-AsstLiabilityElectricity 15.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.1.1.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All 2 55 55 1 1 1 1 1 1 2 2 25 25 71 .

1 Dr P&LExpenses – Selling Expens 31.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 31.2006 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.1.2006 Table 2.1 Dr P&LExpensOther manufacturi ng exp 31.1 Dr P&LExpensSalary 31.1 Dr P&L-ExpInterest 31.1.1 Dr P&LExpensElectricity 31.1.2006 Inflow Immediate Chapter 2 Dr BS-Asst5 55 55 0.1.2006 Outflow Immediate Chapter 2 Cr BSBank 31.2006 Table 2.A 31.1.2006 Table 2.1.3 Ast0.Employees 31.2006 Table 2.2006 Cr P&LIncomeSales 31.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.1.2006 Table 2.1.3 1 1 1 1 1 1 2 72 .1.Z 31.1.1.1.

2006 Cr P&L Income Sales 1.02.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.2006 Dr BS-AsstLiability.1 Dr P&LExpensPurchase of RM 7.02.02.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 21.02.2006 Dr BS-AsstLiabilityCreditor Y 1.2006 Table 2.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.2006 Dr BS-AsstLiabilityElectricity 15.02.02.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.Cash 31.2006 Dr BS-AsstLiabilityAll Employees 15.02.Z 21.02.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 7.02.02.2006 Dr BS-Asst1 1 1 1 1 1 2 2 25 25 25 25 – – 5 73 .2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.02.02.1.

2006 Table 2.1 Dr P&LExpensSalary 28.1 Dr P&LExpensOther manufacturi ng exp 28.3 Ast0.02.2006 Outflow Immediate Chapter 2 Cr BSBank 28.1 Dr P&LExpenses – Selling Expens 28.02.2006 Table 2.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 28.02.2006 Table 2.1 Dr P&L-Exp0.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.02.A 21.Z 28.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor.2006 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.A 28.02.Liability.02.02.2006 Table 2.02.02.3 1 1 1 1 1 1 2 2 55 55 74 .1 Dr P&LExpensElectricity 28.2006 Cr BS-AsstReceivable 28.2006 Table 2.02.2.2.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 28.

2006 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 28.2006 Dr BS-AsstLiabilityAll Employees 15.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.3.2.3.3.3.2006 Cr P&LIncomeSales 28.3.3.3.2.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.1 Dr P&LExpensPurchase of RM 1.2006 Dr BS-AsstLiability1 1 2 2 25 25 25 25 – – 5 5 55 55 75 .2.2006 Table 2.2006 Dr BS-AsstLiabilityCreditor Y 1.2.2006 Inflow Immediate Chapter 2 Dr BS-AsstCash 28.Interest 28.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor Y 1.3.2006 Cr P&L Income Sales 1.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 1.

Electricity 15.3.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 15.3.2006 Dr BS-AsstLiability- Z 21.3.2006 Outflow Immediate Chapter 2 Cr BS-AsstBank 21.3.2006 Dr BS-AsstLiability- A 21.3.2006 Inflow Immediate Chapter 2 Dr BS-AsstBank 21.3.2006 Cr BS-AsstReceivable 31.3.2006 Outflow Deferred Chapter 2 Cr BS-Liability – Creditor – All Employees 31.3.2006 Table 2.1 Dr P&LExpensSalary 31.3.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditorElectricity 31.3.2006 Table 2.1 Dr P&LExpensElectricity 31.3.2006 Outflow Deferred Chapter 2 Cr BS-LiabilityCreditor- A 31.3.2006 Table 2.1 Dr P&LExpensOther manufacturi ng exp 31.3.2006 Outflow Deferred Chapter 2 Cr BS-Liability1 1 1 1 1 2 2 55 55 1 1 1 1

76

Creditor- Z 31.3.2006 Table 2.1 Dr P&LExpenses – Selling Expens 31.3.2006 Outflow Immediate Chapter 2 Cr BSBank 31.3.2006 Table 2.1 Dr P&L-ExpInterest 31.3.2006 Inflow Deferred Chapter 2 Dr BS-AsstReceivablePantaloons 31.3.2006 Cr P&LIncomeSales 31.3.2006 Inflow Immediate Chapter 2 Dr BS-AsstCash 31.3.2006 Cr P&L Income Sales – – 5 5 55 55 0.3 Ast0.3 1

Now we shall complete the P&L and Balance Sheet for the period from 1st April 2005 to 31st March 2006. The first step would be to identify the Subheads and then find out the financial effect on each of these subheads through out this period. Let us first list the sub heads . This we get from the 5th column of the above mentioned table. Category Head Subhead Further Bifurcation Balance Sheet Asset Bank All would plus Debit be and Remarks

77

credit would be minus Balance Sheet Liability Capital Share Holders All Name would plus debit credit be and would

be minus Balance Sheet Liability Loan Bank Name All would plus debit credit be and would

be minus Balance Sheet Asset Fixed Asset in Asset name – All Progress Like machinery etc would plus debit be and

credit would be minus Balance Sheet Asset Fixed Asset Asset name – All Like machinery etc would plus debit be and

credit would be minus Balance Sheet Asset Other Asset Security Deposit All would plus debit be and

credit would be minus Balance Sheet Liability Creditor Creditor name All credit

78

–Y would plus debit be and would be minus Profit and Loss Expenses Purchase Type of All debit be purchase Raw would material plus and all credit would be minus Profit Loss and Expenses Salary Type of salary All would debit be plus and all credit would be minus Balance Sheet Liability Creditor Creditor name All – Employess All would plus debit credit be and would be minus Profit Loss and Expenses Electricity Type Electricity of All would debit be plus and all credit would be minus Profit Loss and Expenses Other Manufacturing Expenses Type of All debit be Manufacturing would Expenses plus and all credit would 79 .

be minus Balance Sheet Liability Creditor Creditor name All –X would plus debit credit be and would be minus Profit Loss and Expenses Selling and Types of All and would debit be Administration selling expenses administration expenses plus and all credit would be minus Profit Loss and Expenses Interest Types Interest of All would debit be plus and all credit would be minus Balance Sheet Asset Current Asset Receivable Name parties – All of would plus debit be and credit would be minus Profit Loss and Income Sales Name parties of All would plus debit credit be and would be minus Balance Sheet Asset Cash Cash All would debit be 80 .

plus and credit would be minus Now we shall present the financial transactions of each sub head during the period as per the following format: Date 1.3 To Creditor Electricity 1 -26.3 26.3 To Creditor Z 1 -27.4.4.6 To Creditor Electricity 1 -1.2005 31.2005 15.3 1.6.2005 1.8.8.1 To Interest 0.2005 6.6.2005 31.2005 16.1 To Creditor A 1 21.7.2005 15.4 To Interest 0.4.7.1 To Creditor Electricity 1 23.7.1 To Creditor All Emp 2 24.9.2005 15.8.2005 31.4 To Creditor All Emp 2 -0.2005 7.8 81 .9.2005 15.2005 1.2005 15.6.2005 15.6.4.2005 19.6.3 To Creditor All Emp 2 -25.3 To Creditor A 1 -28.4 To Creditor Y 25 1.8.2005 1.8.3 By Receivable 55 26.3 75.7 To Interest 0.2005 7.2005 21.7 To Creditor Y 25 -23.2005 21.2005 21.2005 21.2005 15.3 51.2005 7.8 To Creditor Y 25 50.2005 7.2005 21.6 To Creditor Z 1 -2.7.6 To Creditor A 1 -3.6.7.2005 Balance Sheet Asset Bank A/C Particulars Dr Cr Balance Opening Balance 0 By Capital 6 6 By Loan 11 17 To Asset 15 2 To Interest 0.8 To Creditor All Emp 2 48.8 To Creditor Electricity 1 47.1 To Creditor Z 1 22.8.2005 1.7.7.2005 21.1 To Creditor Y 25 26.9.2005 31.5.1 By Receivable 55 76.6.8.6 By Receivable 55 51.

2006 15.11.2 96.9 120.2005 21.2005 15.3 224.2 95.11.2005 15.2006 21.6 199.03.2006 31.10.01.2006 21.2005 7.9.2 98.3 169.02.2005 21.3 172.02.11.02.12.2006 To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable 1 1 55 0.5 75.03.5 73.12.2006 21.12.02.3 170.10.6 147.02.2006 21.2005 1.9 174.02.2006 15.6 145.3 224 199 197 196 195 194 249 82 .2005 21.2006 15.10.12.5 71.8 100.12.3 25 2 1 1 1 55 46.02.11.01.2005 21.10.12.10.5 70.9.2005 1.2 97.2005 30.11.10.11.10.6 199.2006 7.2005 21.2 150.3 171.9 124.2005 1.2006 21.03.3 25 2 1 1 1 55 0.2 100.11.2 149.3 174.9 122.2005 21.5 72.6 144.3 25 2 1 1 1 55 0.2005 21.2006 1.3 25 2 1 1 1 55 0.2005 7.2005 15.9 119.03.01.2006 15.01.12.9 121.2005 30.9.01.2005 7.2005 15.5 125.5 125.8 100.3 25 2 1 1 1 55 0.2005 21.2006 1.9 174.2005 15.03.15.2005 15.6 146.2005 31.2006 7.8 45.2006 28.2005 31.01.6 149.2006 21.2006 15.01.2006 15.3 25 2 1 1 1 55 0.2005 1.9.2006 7.03.

5.2006 1.2005 1.2005 16.7.10.8.2006 1.2005 6.2005 1.3.1.2005 1.11.4.2005 1.2005 1.2005 Balance Sheet Liability Loan Bank Particulars Dr Cr Balance Opening Balance To Bank 11 0 11 Date 1.2005 22.4.4.2005 1.2006 1.31.2006 Balance Sheet Liability Creditor Y Particulars Dr Cr Balance Opening Balance To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 By Bank 25 To Purchase 25 0 25 0 25 0 25 0 25 0 25 0 25 0 25 0 25 0 25 0 25 0 25 83 .2005 Balance Sheet Asset Fixed Asset in Progress Particulars Dr Cr Balance Opening Balance 0 By Purchase of machinery 15 15 To Fixed Asset 15 0 Date 1.10.3 248.2005 1.9.7 Date 1.3.2005 1.4.2006 1.4.2006 To Interest 0.7.2.2005 1.8.4.6.2005 1.2005 1.11.4.1.12.03.6.9.2005 19.2005 1.4.2005 1.12.2006 1.2005 1.2005 1.2005 Balance Sheet Liability Share Capital Particulars Dr Cr Balance Opening Balance To bank 6 0 6 Date 1.2005 1.2.

2005 31.2005 31.2005 7.2005 15.8.6.2005 15.1.10.12.2.5.7.11.2005 30.2005 7.12.2005 7.6.2005 31.2006 7.2005 7.2.2005 30.2005 30.2005 15.8.2005 31.2005 7.2005 30.5.2005 15.11.2005 31.2005 31.9.2006 31.2005 31.9.2006 Balance Sheet Liability Creditor All Employees Particulars Dr Cr Balance Opening Balance To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 To Bank 2 To Salary 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 Date 1.7.2005 15.7.6.2005 7.10.9.3.4.1.7.12.2005 15.8.6.2005 31.2005 30.2005 31.2006 31.1.12.4.2005 7.2005 30.2006 7.11.11.10.8.2005 15.2005 15.2005 7.Date 1.2006 28.10.3.2005 31.2006 Balance Sheet Liability Creditor Electricity Particulars Dr Cr Balance Opening Balance To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 To Electricity 1 To bank 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 84 .9.

2005 30.2006 21.2005 28.2005 31.9.2005 31.4.2006 31.2005 30.2005 21.2.2005 21.3.2006 15.2005 15.2006 28.1.2006 15.2.9.2005 30.11.10.9.10.2005 21.3.3.10.12.5.6.4.7.2006 15.2006 To Electricity To bank To Electricity To bank To Electricity 1 1 1 1 1 1 0 1 0 1 Date 1.1.7.2005 31.12.2005 21.7.2005 21.6.9.2005 21.2006 Balance Sheet Liability Creditor A Particulars Dr Cr Balance Opening Balance To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 To Bank 1 To Other Manufacturing Exp 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 Date 1.2005 15.1.31.2005 31.2005 30.8.2005 31.2.3.2006 31.2005 21.2005 30.2005 31.2005 31.2.2006 31.2005 Balance Sheet Liability Creditor Z Particulars Opening Balance To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank Dr Cr Balance 1 1 1 1 1 1 1 1 1 1 0 1 0 1 0 1 0 1 0 1 0 85 .2005 21.2006 15.8.6.2005 31.11.2006 15.8.6.5.2006 21.8.7.

3.2005 31.2006 28.2005 30.2005 1.31.2007 15.1.2005 1.2.11.2005 31.2005 1.2.2005 1.3.2005 28.2005 1.2006 31.7.2006 1.2.2005 30.5.2005 1.2005 1.11.2006 31.11.6.2005 31.2005 31.2005 31.2006 Profit and Loss Expenses Salary Particulars Dr Cr Balance Opening Balance 0 To Salary All Emp 2 2 To Salary All Emp 2 4 To Salary All Emp 2 6 To Salary All Emp 2 8 To Salary All Emp 2 10 To Salary All Emp 2 12 To Salary All Emp 2 14 To Salary All Emp 2 16 To Salary All Emp 2 18 To Salary All Emp 2 20 To Salary All Emp 2 22 Profit and Loss Expenses Electricity 86 .10.9.2006 15.2005 31.2005 30.1.2.2006 1.11.1.3.12.2006 15.10.10.6.12.3.8.4.12.2006 15.9.8.2007 To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses 1 1 1 1 1 1 1 1 1 1 1 1 0 1 0 1 0 1 0 1 0 1 Date 1.5.2006 31.4.2005 1.2005 31.7.2007 15.2005 30.2005 1.12.1.2006 Profit and Loss Expenses Purchase Particulars Dr Cr Balance Opening Balance 0 To Creditor Y 25 25 To Creditor Y 25 50 To Creditor Y 25 75 To Creditor Y 25 100 To Creditor Y 25 125 To Creditor Y 25 150 To Creditor Y 25 175 To Creditor Y 25 200 To Creditor Y 25 225 To Creditor Y 25 250 To Creditor Y 25 275 Date 1.

2005 31.2005 To OME 1 2 31.3.7.2005 To S&D 1 1 30.2.8.2.5.2006 To S&D 1 10 31.2005 30.2005 30.3.2005 To OME 1 7 31.2005 To OME 1 6 30.5.2006 To OME 1 9 28.Date 1.10.6.2005 To S&D 1 6 30.2.10.8.11.11.1.2005 31.9.5.2005 To S&D 1 4 30.6.2006 To S&D 1 9 28.7.2005 31.1.2005 To S&D 1 7 31.2006 28.2005 31.4.2005 To S&D 1 5 31.12.2006 31.2006 To S&D 1 11 87 .8.12.7.2005 To S&D 1 2 31.2005 To OME 1 5 31.4.9.3.1.11.2005 Opening Balance 0 31.2005 To OME 1 1 30.2005 To OME 1 3 31.2005 To OME 1 8 31.4.2005 Opening Balance 0 31.10.2005 To OME 1 4 30.2005 To S&D 1 8 31.2006 To OME 1 10 31.2006 Particulars Opening Balance To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity Dr Cr Balance 1 1 1 1 1 1 1 1 1 1 1 0 1 2 3 4 5 6 7 8 9 10 11 Profit and Loss Expenses Other Manufacturing expenses Date Particulars Dr Cr Balance 1.2005 31.6.2005 30.2005 31.2005 To S&D 1 3 31.9.12.2006 To OME 1 11 Profit and Loss Expenses Selling and Distribution Date Particulars Dr Cr Balance 1.

3 1.5.3 3 To Bank 0.2 To Bank 0.2006 31.3 To Bank 0.8.2005 31.6.2005 31.3 2.7 To Bank 0.2005 31.2005 30.2005 31.3 Date 1.3.2005 21.3 0.4 To Bank 0.8 To Bank 0.11.4.Date 1.2005 31.2005 30.7.3 0.2005 31.3.2005 31.2005 31.1.2005 21.10.9 To Bank 0.9.2005 30.2005 31.11.2005 31.2006 28.7.1.2006 Balance Sheet Asset Receivable Pantaloons Particulars Dr Cr Balance Opening Balance By Sales 55 To Bank 55 By Sales 55 To Bank 55 By Sales 55 To Bank 55 By Sales 55 To Bank 55 By Sales 55 0 55 0 55 0 55 0 55 0 55 88 .2005 30.2006 21.1 To Bank 0.5 To Bank 0.2005 31.2005 30.4.8.2005 31.2006 21.9.3 2.7.2005 31.2.9.3 2.4.2006 31.2005 31.6.2006 Profit and Loss Income Sales Pantaloons Particulars Dr Cr Balance Opening Balance To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 To Sales 55 0 55 110 165 220 275 330 385 440 495 550 605 Date 1.7.2005 30.2005 31.2005 30.6.6.2006 28.8.2005 30.3 1.3 0.3 3.12.5.9.12.10.6 To Bank 0.3 1.8.2.5.2006 Profit and Loss Expenses Interest Particulars Dr Cr Balance Opening Balance 0 To Bank 0.

12.2006 Profit and Loss Income Sales .2007 21.11.2.2006 Balance Sheet Asset Cash Dr Cr Balance Opening Balance 0 To cash Sales 5 5 To cash Sales 5 10 To cash Sales 5 15 To cash Sales 5 20 To cash Sales 5 25 To cash Sales 5 30 To cash Sales 5 35 To cash Sales 5 40 To cash Sales 5 45 To cash Sales 5 50 To cash Sales 5 55 89 .2006 31.10.2005 30.2005 31.3.2005 30.12.11.9.10.11.2.2005 31.6.2005 31.10.2007 To Bank By Sales To Bank By Sales To Bank By Sales To Bank By Sales To Bank By Sales To Bank By Sales 55 55 55 55 55 55 55 55 55 55 55 55 0 55 0 55 0 55 0 55 0 55 0 55 Date 1.2005 31.7.2.2005 31.5.3.1.1.2005 30.3.2005 30.2005 31.2005 31.2006 31.2006 21.6.12.4.8.2005 31.2005 30.2005 31.2005 31.4.5.12.2006 28.11.2006 28.2005 30.Other Particulars Dr Cr Balance Opening Balance To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 To Sales 5 0 5 10 15 20 25 30 35 40 45 50 55 1.10.21.2.2007 21.7.9.8.2005 31.1.2005 30.3.2006 21.1.2006 21.2006 31.2005 31.2006 28.2005 31.2005 31.2006 31.

Balance Sheet as on March 31.2006 Expenses Particulars Purchase Salary Electricity OME S&D Interest Profit Transferred 660 660 Sch 2 Amount 275 22 11 11 11 3.2005 to 31.3.7 11 30 Particulars Fixed Asset Receivable Cash Bank Asset Sch 3 4 Amount 15 55 55 248.3 326.4.7 90 .7 Particulars Sales Income Sch 1 Amount 660 The Balance sheet would be drawn by putting all the Balance Sheet account in the same category and showing their closing balance .Now we shall draw the profit and loss account by putting all the Income account under profit and loss in the right hand side as income and all the expenses in the left hand side as expenses: Profit and Loss Account for the period from 1. 2005 Liability Particulars Capital Reserves Loan Creditor 6 7 Sch 5 Amount 6 326. The liability is shown on the left hand side and the asset in the right hand side.

Now if we analyse the financial statement . X – 20000 shares of face value Rs 10/.373. The schedule is represented as follows : Schedule 1 : Sales Rs 660 lacs. Mr Z – 20000 shares of face value Rs 10/. Out of which it has yet to pay Rs 30 lacs which is on account of creditor. Mr A : Rs 1 lacs.each : Rs 2 lacs . Schedule 6 : Loan from Syndicate Bank ( against charge on machinery ) – Rs 11 lacs.Pantaloons Sale Rs 605 lacs and Other sales Rs 55 lacs. Mr Y – 20000 shares of face value Rs 10/. Electricity : Rs 1 lac. Employees : Rs 2 lacs.each : Rs 2 lacs . Mr Z: Rs 1 lac. Schedule 7 : Creditor : Y : Rs 25 lacs.7 The schedule will give more description about the each sub head. we find out the following : • The company has incurred expenses of Rs 334.7 373. Schedule 3 : Fixed Asset : Plant and Machinery Rs 15 lacs. • The company has earned Rs 660 lacs out of which it has realised Rs 605 lacs and the amount of Rs 55 lacs is not realised. 91 . Schedule 4 : Receivable : Pantaloons of less than 180 days Rs 55 lacs Schedule 5 : Capital : Mr.3 lacs so this is the amount of fund out flow occurred.each : Rs 2 lacs .

7.2005 1. You have to complete the problem by introducing the concepts of Depreciation and Stock Adjustment if the Raw material amount is Rs 5 lacs. There are two sets of accounts for each stage of inventories.2005 Balance Sheet Asset Raw Material Particulars Dr Cr Balance Opening Balance 0 By Purchase 25 25 To Issued 20 5 By Purchase 25 30 To Issued 25 5 By Purchase 25 30 To Issued 25 5 92 .2005 1. We need to present the entries for all these accounts .5.4.2005 31. WIP amount is Rs 2 lacs and Finished Goods amount is Rs 4 lacs.5.6.2005 1. • For Finished Goods stage : o Balance Sheet Asset Finished Goods o Profit and Loss Income Finished Goods.• The Company has cash balance of Rs 55 lacs and Bank Balance of Rs 248. o Invest in further assets to increase the production. The same is given below : Date 1. The same is given as below : • For Raw Material Stage : o Balance Sheet Asset Raw material o Profit and Loss Income Raw Material • For Work In Progress stage: o Balance Sheet Asset Work in Progress o Profit and Loss Income Work in Progress.2005 30. • The Company has also incurred an outflow of Rs 15 lacs for purchase of fixed asset.6.2005 31.7 lacs and the Company can use this fund to do the following : o Pay the liability holder . The stock adjustment entries would happen at the end of each month .7.

11.2006 31.1.11.10.2005 1.12.9.12.2005 30.2006 1.2005 1.2005 31.2005 1.2006 1.1.2006 31.2.1.2005 31.10.2005 1.2005 1.2.1.5.2006 31.2005 1.2006 By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 30 5 30 5 30 5 30 5 30 5 30 5 30 5 30 5 Date 1.3.2005 1.8.4.2.5.9.2005 1.2006 1.8.9.2006 31.2005 1.2005 1.2005 1.3.3.2006 28.11.10.2.8.2005 31.2006 1.7.3.10.2005 31.2005 1.2005 1.2005 30.2005 1.12.7.2005 30.2006 P&L Income Raw Material Particulars Dr Cr Balance Opening Balance By Purchase 25 To Issued 20 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 By Purchase 25 To Issued 25 0 25 5 30 5 30 5 30 5 30 5 30 5 30 5 30 5 30 5 30 5 30 5 Balance Sheet Asset WIP 93 .6.12.2005 30.1.2005 31.9.2005 30.2005 31.6.8.2005 31.11.2005 31.2006 28.

2005 30.2006 31.2006 28.2005 31.9.9.2006 31.11.10.Date 1.2005 31.2005 30.2.7.2005 31.2005 30.2005 31.9.2005 30.2005 31.2005 30.2005 31.5.3.2006 Particulars Opening Balance By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued Dr Cr Balance 20 18 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 0 20 2 27 2 27 2 27 2 27 2 27 2 27 2 27 2 27 2 27 2 27 2 Date 1.2005 31.7.2005 30.6.11.2005 31.10.6.2006 31.5.2005 31.2005 30.2005 30.2005 31.12.6.10.2005 31.2006 28.2005 P&L Income WIP Particulars Dr Cr Balance Opening Balance By RM 20 To Issued 18 By RM 25 To Issued 25 By RM 25 To Issued 25 By RM 25 To Issued 25 By RM 25 To Issued 25 By RM 25 To Issued 25 By RM 25 To Issued 25 By RM 25 To Issued 25 0 20 2 27 2 27 2 27 2 27 2 27 2 27 2 27 2 94 .12.11.7.2005 31.8.8.5.2005 31.2005 30.2005 31.2005 31.8.2.10.2005 31.2005 30.12.6.2005 31.1.2005 30.1.2005 31.3.12.4.2005 31.7.2005 31.4.9.2005 31.2005 30.5.8.11.

2005 30.5.6.2006 By RM To Issued By RM To Issued By RM To Issued 25 25 25 25 25 25 27 2 27 2 27 2 Date 1.2006 31.4.2006 31.3.7.9.3.1.2005 30.2005 30.2005 31.1.31.2005 30.2005 31.2005 31.2006 31.2006 28.9.2006 31.2005 30.2005 31.8.2.6.10.2.2005 31.2005 31.2005 31.2005 31.2005 30.1.2.2006 Balance Sheet Asset Finished Goods Particulars Dr Cr Balance Opening Balance By WIP 20 To Issued 16 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 By WIP 25 To Issued 25 0 20 4 29 4 29 4 29 4 29 4 29 4 29 4 29 4 29 4 29 4 29 4 Date 1.2005 31.6.5.2006 28.2005 31.2005 30.2005 31.2005 31.6.7.11.12.2005 P&L Income Finished Goods Particulars Dr Cr Balance Opening Balance 0 By WIP 20 20 To Issued 16 4 By WIP 25 29 To Issued 25 4 By WIP 25 29 To Issued 25 4 95 .7.2.2005 30.7.2006 28.3.2006 31.12.8.2005 31.10.3.2006 31.2006 28.2005 31.4.5.5.1.11.2005 31.

31.8.2005 31.8.2005 30.9.2005 30.9.2005 31.10.2005 31.10.2005 30.11.2005 30.11.2005 31.12.2005 31.12.2005 31.1.2006 31.1.2006 28.2.2006 28.2.2006 31.3.2006 31.3.2006

By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued

25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25

29 4 29 4 29 4 29 4 29 4 29 4 29 4 29 4

So we complete the P&L and Balance Sheet as follows : Profit and Loss Account for the period from 1.4.2005 to 31.3.2006 Expenses Particulars Purchase Salary Sch 2 Amount 275 22 Particulars Sales Increase in Raw Material Electricity OME S&D To Depreciation Interest Profit Transferred 671 671 3.3 334.7 11 11 11 3 Increase in WIP Increase in FG 2 4 Income Sch 1 Amount 660 5

96

Balance Sheet as on March 31, 2006 Liability Particulars Capital Reserves Loan Creditor 6 7 Sch 5 Amount 6 334.7 11 30 Particulars Fixed Asset Less Depreciation Net Fixed Asset Raw Material WIP FG Receivable Cash Bank 4 Asset Sch 3 Amount 15 3 12 5 2 4 55 55 248.7

381.7

381.7

97

Case I
You have to do the P&L and Balance Sheet for the period 2006- 07 if the following information is given :

( In Rs lacs) Purchase of Raw material on 30 days credit - all purchase are made in the 1 st day of the month from Mr. Y only Salary to be booked on the last day of each month and the amount to be paid on the 7th of Next Month Electricity Expenses to be booked on the last day of the month and to be paid on the 15th of Next Month Other Manufacturing expenses incurred from Company A only and all the manufacturing expenses are booked on the last day of the month and to be paid on 21st day of the succeeding month Selling and Distribution expenses incurred and the same is booked at the end of the month and the same is to be paid on 15th of the succeeding month to company Z . Interest amount paid to the bank on the borrowing

Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar 2006 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007

25

30

35

40

45

50

55

60

65

70

75

2

2

2

2

2

2

2

2

2

2

2

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1 0.3 0.3 0.3

1 0.3

1 0.3

1 0.3

1 0.3 50.3

1 0.3 55.3

1 0.3

1 0.3

1 0.3 70.3

1 0.3 75.3

1 0.3 80.3

30.3 35.3

40.3 45.3

60.3 65.3

98

7.8.6.2005 1.6.2005 21.2005 15.2005 15.2005 31.4.2005 21.2005 21.2005 31.4.5.2005 7.2005 16.2005 6.2005 Balance Sheet Asset Bank A/C Particulars Dr Cr Balance Opening Balance 248.4.4.2005 31.6.2005 7.6.2005 15.6.6.7 By Capital By Loan To Asset To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z 99 .7.8.7.8. WIP Rs 4 lacs and Finished Goods Rs 3 lacs.( In Rs lacs) Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar 2006 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 Sales from Pantaloons the sales is booked at the end of the month and the payment is receipt after 21 days by way of bank cheque Sale from Local market the sale is booked at the end of the month and the amount is received in cash 55 60 65 70 75 80 85 90 95 100 105 5 5 5 5 5 5 5 5 5 5 5 The Closing stock of inventory in each month would be .7. Solution for Case I Date 1.2005 19.2005 21.2005 15.7.Raw material Rs 6 lacs.2005 15.7.8.2005 15.2005 1. The depreciation is on a straight line basis.6.2005 1.7.2005 7.

10.12.2005 7.2005 31.2005 15.2006 21.01.2006 7.2006 15.12.02.12.10.9.02.2005 15.01.2005 1.12.2005 21.2005 30.10.11.2005 15.10.2006 15.02.8.9.01.2005 1.2006 31.2005 15.9.2006 15.01.10.2005 1.2005 21.9.11.02.2005 15.2006 21.2005 7.2005 21.11.2006 21.8.2005 21.21.11.9.2005 7.2005 1.2005 21.8.2005 31.01.2005 7.2005 15.2006 To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest 100 .11.12.02.02.2005 21.11.2006 28.2005 21.01.11.10.2005 21.2006 15.2005 31.12.2005 15.2006 21.2005 30.10.9.2005 21.01.2006 7.2005 1.2006 1.12.02.2005 15.9.

2005 1.03.5.4.2005 16.8.2005 Balance Sheet Liability Share Capital Particulars Dr Cr Balance Opening Balance To bank 6 Date 1.2006 15.7.11.2005 22.9.2005 1.2005 19.6.2005 Balance Sheet Liability Creditor Y Particulars Dr Cr Balance Opening Balance To Purchase By Bank To Purchase By Bank To Purchase By Bank To Purchase By Bank To Purchase By Bank To Purchase By Bank To Purchase 25 101 .2005 1.03.2006 7.03.2006 21.2005 1.03.8.4.2005 1.9.4.2006 21.6.2005 1.2005 Balance Sheet Liability Loan Bank Particulars Dr Cr Balance Opening Balance To Bank 11 Date 1.7.2006 15.11.4.03.4.2005 1.2005 1.4.2006 31.4.2005 6.2005 1.2005 1.03.2005 1.2005 1.2005 Balance Sheet Asset Fixed Asset in Progress Particulars Dr Cr Balance Opening Balance By Purchase of machinery To Fixed Asset 0 Date 1.2006 To Creditor Y To Creditor All Emp To Creditor Electricity To Creditor Z To Creditor A By Receivable To Interest Date 1.03.10.1.4.2005 1.10.

2.2006 7.5.10.2005 31.2005 7.2005 1.2006 Balance Sheet Liability Creditor All Employees Particulars Dr Cr Balance Opening Balance To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary To Bank To Salary 2 Date 1.2006 31.6.6.2006 31.3.2005 7.2005 30.2005 30.2005 7.8.1.7.3.2005 30.2006 1.2.11.2005 7.2006 1.3.1.12.1.2005 7.2005 30.2.2005 7.11.2005 15.2.2005 15.1.7.2006 1.12.9.2005 31.6.5.2006 1.7.2005 Balance Sheet Liability Creditor Electricity Particulars Dr Cr Balance Opening Balance To Electricity To bank To Electricity To bank To Electricity To bank To Electricity 1 102 .2005 7.2005 31.6.2005 31.9.4.2005 31.7.3.2005 15.2006 By Bank To Purchase By Bank To Purchase By Bank To Purchase By Bank To Purchase Date 1.2005 1.8.2005 31.12.2005 7.2005 31.1.2006 1.4.2005 31.2006 7.10.2006 28.12.8.8.

2005 31.2005 31.2005 30.3.2005 28.2005 31.11.12.2006 31.2006 31.2005 Balance Sheet Liability Creditor Z Particulars Opening Balance To Selling & Distribution expenses Dr Cr Balance 1 103 .2005 31.2005 30.10.2005 15.1.2.12.5.8.2005 31.3.15.2005 15.1.2005 21.7.4.2006 31.2006 21.9.2005 21.2.2005 21.2005 31.2006 31.9.11.2005 21.2006 15.2006 21.2005 21.2006 Balance Sheet Liability Creditor A Particulars Dr Cr Balance Opening Balance 1 To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp To Bank To Other Manufacturing Exp Date 1.2005 21.12.2005 31.9.2006 15.2005 15.2005 30.2005 31.11.3.2005 30.5.8.1.1.10.10.6.3.11.2005 15.2006 28.12.2.2006 To bank To Electricity To bank To Electricity To bank To Electricity To bank To Electricity To bank To Electricity To bank To Electricity To bank To Electricity Date 1.7.10.2005 21.2.2005 21.2005 30.9.4.6.

2006 15.8.6.9.10.12.2005 1.12.2.2006 31.2005 1.2005 Profit and Loss Expenses Salary Particulars Dr Cr Balance Opening Balance To Salary All Emp To Salary All Emp To Salary All Emp To Salary All Emp 0 104 .2007 To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses To bank To Selling & Distribution expenses Date 1.8.6.10.2005 31.2005 31.4.2006 Profit and Loss Expenses Purchase Particulars Dr Cr Balance Opening Balance To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y To Creditor Y 0 Date 1.2005 28.2005 31.10.2007 15.7.3.6.2005 31.7.2005 1.2005 30.7.11.2005 15.8.3.7.2007 15.2006 15.2005 31.2005 1.11.15.2005 31.4.2005 1.2005 1.2006 15.2005 31.12.2006 15.2006 15.11.2005 1.8.6.2.9.5.2006 31.2005 30.5.9.2006 1.2005 30.2005 30.3.2005 1.2006 15.1.2006 1.1.2.2005 1.1.

2.2005 To OME 31.3.1.5.2006 31.2006 To OME 0 105 .2006 Profit and Loss Expenses Electricity Particulars Dr Cr Balance Opening Balance To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity To Electricity 0 Profit and Loss Expenses Other Manufacturing expenses Date Particulars Dr Cr Balance 1.4.30.2005 To OME 31.8.2005 31.2006 To OME 28.6.9.2005 31.10.2005 To OME 31.2005 30.12.7.2005 31.2005 31.12.5.2005 31.2.8.2005 31.10.11.2005 To OME 31.2005 30.7.6.3.2005 31.11.2005 To OME 30.2006 31.3.12.2005 30.1.2006 To Salary All Emp To Salary All Emp To Salary All Emp To Salary All Emp To Salary All Emp To Salary All Emp To Salary All Emp Date 1.11.9.2005 Opening Balance 31.2005 To OME 30.2006 28.2.9.2005 31.2005 To OME 30.2006 To OME 31.10.2005 31.2005 To OME 31.2006 28.4.1.2005 30.

2006 To S&D 31.Profit and Loss Expenses Selling and Distribution Date Particulars Dr Cr Balance 1.10.1.6.12.2005 To Sales 30.2005 To S&D 31.2005 31.2.2005 To Sales 30.2005 To Sales 31.4.1.2005 To Sales 30.2005 To S&D 30.5.12.4.2006 31.11.6.2005 To S&D 31.2005 To Sales 31.1.2005 To S&D 31.2006 To Sales 106 .2005 To S&D 30.2006 To Sales 28.2005 To Sales 31.11.2005 31.2005 31.2005 Opening Balance 31.11.2005 31.2006 To S&D 28.2006 To S&D 0 Date 1.2005 To S&D 31.2.2005 To Sales 31.9.4.3.3.2006 To Sales 31.2005 30.2005 30.6.7.2005 To S&D 30.10.10.2.2005 To Sales 31.9.2005 To S&D 31.12.2005 31.7.8.5.2005 30.7.3.5.8.2006 28.8.2005 Opening Balance 31.2006 Profit and Loss Expenses Interest Particulars Dr Cr Balance Opening Balance To Bank To Bank To Bank To Bank To Bank To Bank To Bank To Bank To Bank To Bank To Bank 0 Profit and Loss Income Sales Pantaloons Date Particulars Dr Cr Balance 1.9.2005 31.

2.3.2.10.8.2006 31.9.6.2006 By Sales 21.3.2005 To Bank 30.2005 To Bank 31.7.8.2006 To Bank 31.2006 By Sales 21.6.2006 By Sales 21.11.2005 30.7.Balance Sheet Asset Receivable Pantaloons Date Particulars Dr Cr Balance 1.5.2005 To Bank 31.2005 By Sales 21.2006 By Sales 21.12.12.10.11.2005 31.10.2006 By Sales 21.2005 31.7.2007 By Sales 21.2.2006 Profit and Loss Income Sales .2005 Opening Balance 55 31.2005 30.9.Other Particulars Dr Cr Balance Opening Balance To Sales To Sales To Sales To Sales To Sales To Sales To Sales To Sales To Sales To Sales To Sales 0 107 .6.12.2007 By Sales 21.8.2005 To Bank 30.2005 To Bank 31.2005 31.1.4.1.11.2005 To Bank 30.2005 By Sales 21.2005 30.2005 To Bank 31.2005 31.2006 To Bank 28.2006 28.9.2005 31.4.5.1.2006 To Bank 31.3.2007 By Sales Date 1.2005 31.2006 By Sales 21.

1.4.2005 31.5.2005 30.6.2005 31.7.2005 31.8.2005 30.9.2005 31.10.2005 30.11.2005 31.12.2005 31.1.2006 28.2.2006 31.3.2006

Balance Sheet Asset Cash Dr Cr Balance Opening Balance 55 To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales To cash Sales

Date 1.4.2005 1.5.2005 31.5.2005 1.6.2005 30.6.2005 1.7.2005 31.7.2005 1.8.2005 31.8.2005 1.9.2005 30.9.2005 1.10.2005 31.10.2005 1.11.2005 30.11.2005 1.12.2005 31.12.2005 1.1.2006 31.1.2006 1.2.2006 28.2.2006 1.3.2006 31.3.2006

Balance Sheet Asset Raw Material Particulars Dr Cr Balance Opening Balance By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued

5

Date

P&L Income Raw Material Particulars Dr Cr Balance

108

1.4.2005 1.5.2005 31.5.2005 1.6.2005 30.6.2005 1.7.2005 31.7.2005 1.8.2005 31.8.2005 1.9.2005 30.9.2005 1.10.2005 31.10.2005 1.11.2005 30.11.2005 1.12.2005 31.12.2005 1.1.2006 31.1.2006 1.2.2006 28.2.2006 1.3.2006 31.3.2006

Opening Balance By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued By Purchase To Issued

0

Date 1.4.2005 31.5.2005 31.5.2005 30.6.2005 30.6.2005 31.7.2005 31.7.2005 31.8.2005 31.8.2005 30.9.2005 30.9.2005 31.10.2005 31.10.2005 30.11.2005 30.11.2005 31.12.2005 31.12.2005 31.1.2006

Balance Sheet Asset WIP Particulars Dr Cr Balance Opening Balance By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM

2

109

31.1.2006 28.2.2006 28.2.2006 31.3.2006 31.3.2006

To Issued By RM To Issued By RM To Issued

Date 1.4.2005 31.5.2005 31.5.2005 30.6.2005 30.6.2005 31.7.2005 31.7.2005 31.8.2005 31.8.2005 30.9.2005 30.9.2005 31.10.2005 31.10.2005 30.11.2005 30.11.2005 31.12.2005 31.12.2005 31.1.2006 31.1.2006 28.2.2006 28.2.2006 31.3.2006 31.3.2006

P&L Income WIP Particulars Dr Cr Balance Opening Balance By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued By RM To Issued

0

Date 1.4.2005 31.5.2005 31.5.2005 30.6.2005 30.6.2005 31.7.2005 31.7.2005 31.8.2005 31.8.2005 30.9.2005

Balance Sheet Asset Finished Goods Particulars Dr Cr Balance Opening Balance By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP

4

110

11.2006 28.7.2005 30.1.12.1.2005 31.2005 30.30.12.2005 31.6.2006 28.2.2005 30.2005 31.2006 31.2006 31.2006 31.3.1.4.11.7.2005 30.2006 31.2005 31.2005 31.10.2005 30.12.10.2006 28.2005 30.3.2005 30.11.5.8.2005 31.2.2005 31.8.3.2005 30.10.11.2006 To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued Date 1.2006 P&L Income Finished Goods Particulars Dr Cr Balance Opening Balance By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued By WIP To Issued 0 111 .1.5.2005 31.2005 31.2006 28.2005 31.2005 31.10.3.2006 31.9.6.2005 31.2005 31.9.9.2.2005 31.12.2.2005 31.2006 31.2005 31.

2006 to 31.2007 Expenses Particulars Purchase Salary Sch 2 Amount Particulars Sales Increase in Raw Material Electricity OME S&D To Depreciation Interest Profit Transferred 671 671 Increase in WIP Increase in FG Income Sch 1 Amount Balance Sheet as on March 31.Profit and Loss Account for the period from 1. 2007 Liability Particulars Capital Reserves Loan Creditor 6 7 Sch 5 Amount Particulars Fixed Asset Less Depreciation Net Fixed Asset Raw Material WIP FG Asset Sch 3 Amount 112 .4.3.

7 381.Receivable Cash Bank 4 381.7 113 .

the more the income of the Company . As we have seen . we have seen that the increase in asset side means the outflow of the fund where as the increase in the liability side means the inflow of the fund. This is also required for increasing more income from the fixed assets. the profit and loss account of a company represents the income and expenses of a company over a particular period and this is called the accounting period. the expenses are also booked on accrual basis. But in the case of outflows associated with the increase in fixed asset has the capability of producing more income. Now just in the above paragraph we have seen that outflow of fund is not good for a company . Does that mean that increase of asset is bad for the company ? Now there is a fundamental difference between these two outflows. It is booked as income as and when the transaction is registered. Now in the balance sheet . Balance Sheet and Cash Flow and Fund Flow statement. For funding the 114 . Similarly. the more it is better. Now we shall try to see the meaning of these financial statements and try to analyse the different parameters of these financial statements. The expenses of the P&L accounts represents the outflow of fund and the income of the P&L represents the inflow of fund. In the first case the out flow will not produce any further income. Since inflow is good for the company . The income generated from the company is based on accrual policy that is it is booked irrespective of the time of receipt. we see that this is the portion of expenses incurred by the company but not realised in cash and this is required to achieve the targeted sales as planed from the fixed assets.Chapter Six Financial Statement Analysis By now we know that the financial statement consists of Profit and Loss Account. Now for current asset. So increase in income side means more of inflow of funds and increase in expenses means more of outflow of fund. the outflow would generate more income and so more inflow of cash. So in this case.

Creditor and provisions. In the case of equity the return from investment given by the Company is the dividend it pays and when the Company buys back the share it returns the principle. Since there are two parts of any financial investment namely the return from the investment and the investment itself. Please remember that the certain part of a company as a going concern is to pay to its liability holders and the same would be paid from the incomes generated from the utilization of assets. any liability means costs associated with it. But in case of Net Owned fund. The only difference between these two is that in case of total out side liability there is no flexibility in the hand of the Company as the company has to pay both the principal and interest irrespective of whether the company earns profit or not. liability as the liability is the source of fund and fund is required for acquisition of fixed assets. Since nothing is free to the company .assets we require . the return on debt consisting of out side liability consists of interest payment and principal repayment. So if the Company acquires more assets than required then it has to raise more liability than required and for that it has to pay more cost and it would show lower amount of profitability than its competitors . The company would pay to the liability holder by registering profits from the sale of services generated from the use of fixed assets and current assets. On the other hand . So building up of asset is good but not beyond a point. But the uncertain part is the income to be generated 115 . In case of Company’s not earning any profit the company is not obligated to pay the dividend to the equity holder . Now on the liability front the total liability can be segregated into two category : • • Net Worth : it consists of Equity Capital and Reserves. Bank Borrowing for working capital . Debenture . It has to pay back everything to the liability holder. Ultimately the share holders earning is reduced. the Company has the flexibility of payment towards the liability holder. Please keep it in mind that a Company does not own any money on its own. Total Outside liability : Term Loan.

profit to asset ratio etc. we have to apply common sense and mainly we use the following few principles only: • The income is commensurate with expenses : Denoted by absolute value of Gross Profit.Equity Ratio : Debt/Equity –Debt/ Asset Ratio : Debt/Asset –Interest Coverage ratio: (PAT+I)/I –DSCR : ( PAT+D+I)/(I+ (P/(1-tax)) •Turn over Ratio : –Inventory turn over ratio : Net Sales/Inventory –Average collection period: Receivable/ Average sales per day –Fixed Asset Turn Over : Net sales/ Fixed Asset 116 . Besides the cushion between uncertainty and certainty is reduced so that the payment commitment is met with relative ease.from the utilization of assets. To find out the ratio. • Proper utilization of assets : This can be found out by asset turn over ratio. : This is denoted by the Liquidity ratio. • The operational efficiency is determined by way of return on assets and return on equity ratio. the leverage ratio etc. Net Profit etc. After doing this let us talk some ratios and discuss about their formulas: •Liquidity Ratio : –CR : CA/CL –Acid Test Ratio : Quick Asset/Current Liability •Leverage Ratio : –Debt. • The shareholders are rewarded as per their expectations and this is earned by the earning per share. good or bad . • The payment obligations are fulfilled to liability holder: In case of debt liability holder company does not have much flexibility and accordingly the company may look for more flexibility in its financing structure.

the more the income of the Company .–Total Asset turn over : Net Sales/ Total Asset •Profitability ratio : –Gross profit margin : Gross Profit/ Net Sales –Net Profit margin ratio : Net Profit/ net Sales –Return on Investment : EBIT/ Total Asset –Return on Equity : Equity Earnings/ Net Worth •Valuation ratio : –Price – earning ratio : market price / EPS –Yield : (Dividend + Price Change)/Initial Price –Market Value to book value = Market price per share /Book Value per share By now we know that the financial statement consists of Profit and Loss Account. It is booked as income as and when the transaction is registered. The expenses of the P&L accounts represents the outflow of fund and the income of the P&L represents the inflow of fund. Similarly. Now we shall try to see the meaning of these financial statements and try to analyse the different parameters of these financial statements. So increase in income side means more of inflow of funds and increase in expenses means more of outflow of fund. the profit and loss account of a company represents the income and expenses of a company over a particular period and this is called the accounting period. Balance Sheet and Cash Flow and Fund Flow statement. Since inflow is good for the company . we have seen that the increase in asset side means the outflow of the fund where as the increase in the liability side means the inflow of 117 . Now in the balance sheet . The income generated from the company is based on accrual policy that is it is booked irrespective of the time of receipt. the expenses are also booked on accrual basis. As we have seen . the more it is better.

So building up of asset is good but not beyond a point. liability as the liability is the source of fund and fund is required for acquisition of fixed assets. This is also required for increasing more income from the fixed assets. Since nothing is free to the company . Does that mean that increase of asset is bad for the company ? Now there is a fundamental difference between these two outflows. Now on the liability front the total liability can be segregated into two category : • • Net Worth : it consists of Equity Capital and Reserves. we see that this is the portion of expenses incurred by the company but not realised in cash and this is required to achieve the targeted sales as planed from the fixed assets. Now just in the above paragraph we have seen that outflow of fund is not good for a company . In the case of equity the return from investment given by the Company is the dividend it pays and when the Company buys back the share it returns the principle. It has to pay back everything to the liability holder. any liability means costs associated with it. Please keep it in mind that a Company does not own any money on its own. Bank Borrowing for working capital . Debenture . Creditor and provisions. But in the case of outflows associated with the increase in fixed asset has the capability of producing more income. Now for current asset. the return on debt consisting of out side liability consists of interest payment and principal repayment. In the first case the out flow will not produce any further income. For funding the assets we require . The only difference between these two is that in case of total out side liability there is no 118 . Ultimately the share holders earning is reduced. Since there are two parts of any financial investment namely the return from the investment and the investment itself. So if the Company acquires more assets than required then it has to raise more liability than required and for that it has to pay more cost and it would show lower amount of profitability than its competitors .the fund. the outflow would generate more income and so more inflow of cash. Total Outside liability : Term Loan. On the other hand . So in this case.

we have to apply common sense and mainly we use the following few principles only: • The income is commensurate with expenses : Denoted by absolute value of Gross Profit. Please remember that the certain part of a company as a going concern is to pay to its liability holders and the same would be paid from the incomes generated from the utilization of assets. Besides the cushion between uncertainty and certainty is reduced so that the payment commitment is met with relative ease.flexibility in the hand of the Company as the company has to pay both the principal and interest irrespective of whether the company earns profit or not. In case of Company’s not earning any profit the company is not obligated to pay the dividend to the equity holder . But in case of Net Owned fund. But the uncertain part is the income to be generated from the utilization of assets. After doing this let us talk some ratios and discuss about their formulas: •Liquidity Ratio : –CR : CA/CL 119 . Net Profit etc. the Company has the flexibility of payment towards the liability holder. • The payment obligations are fulfilled to liability holder: In case of debt liability holder company does not have much flexibility and accordingly the company may look for more flexibility in its financing structure. The company would pay to the liability holder by registering profits from the sale of services generated from the use of fixed assets and current assets. profit to asset ratio etc. the leverage ratio etc. : This is denoted by the Liquidity ratio. • The operational efficiency is determined by way of return on assets and return on equity ratio. • Proper utilization of assets : This can be found out by asset turn over ratio. To find out the ratio. good or bad . • The shareholders are rewarded as per their expectations and this is earned by the earning per share.

As we have just seen that the financial statement consists of P&L and Balance Sheet . the input is from P&L and Balance Sheet.–Acid Test Ratio : Quick Asset/Current Liability •Leverage Ratio : –Debt. ratio involves numerator and denominator.Equity Ratio : Debt/Equity –Debt/ Asset Ratio : Debt/Asset –Interest Coverage ratio: (PAT+I)/I –DSCR : ( PAT+D+I)/(I+ (P/(1-tax)) •Turn over Ratio : –Inventory turn over ratio : Net Sales/Inventory –Average collection period: Receivable/ Average sales per day –Fixed Asset Turn Over : Net sales/ Fixed Asset –Total Asset turn over : Net Sales/ Total Asset •Profitability ratio : –Gross profit margin : Gross Profit/ Net Sales –Net Profit margin ratio : Net Profit/ net Sales –Return on Investment : EBIT/ Total Asset –Return on Equity : Equity Earnings/ Net Worth •Valuation ratio : –Price – earning ratio : market price / EPS –Yield : (Dividend + Price Change)/Initial Price –Market Value to book value = Market price per share /Book Value per share As the name suggests. The input can take place in any of the following forms : 120 .

different governing principle would be applied and then we shall infer that whether the company has fared well or not. We have to analyse the ratio from the following P&L and Balance Sheet : Case Study 2 P&L for M/S ABC Limited for the period from 1st April to 31st March ( Rs in lacs) Expenses 2005 Consumption Other Manufacturing Expenses 125 25 2006 135 28 Sales Increase in SIP Income 2005 250 3 2006 270 4 121 .Serial No1 2 3 Numerator P&L Income P&L Income Balance Sheet – Liability Denominator P&L Income P& L Expenses Balance Sheet – Liability Balance Sheet – Asset Balance Sheet – Liability Balance Sheet – Asset 4 Balance SheetAsset 5 Balance Sheet – Asset 6 P&L – Income 7 P&L – Income Balance SheetLiability Depending on the type of input.

Selling and Distribution Expenses Depreciation Interest Provision for Tax Profit Carried to Balance Sheet Total 15 18 Increase in FG 3 5 20 5 3 22 8 4 63 64 256 279 Total 256 279 Profit and Loss for 2 years Balance Sheet as on March 31. ( All Rs in lacs) 122 .

Liability 2005 Capital 120 2006 120 Gross Fixed Asset Reserves 185 249 Less Accumulated Depreciation Term Loan 85 65 Net Fixed Assets Over draft 25 30 Raw Material Creditor Provisions 5 6 10 7 WIP FG Receivable Cash & Bank Balance 426 481 Total Asset 2005 325 2006 375 155 177 170 198 90 100 25 23 95 23 29 28 105 21 426 481 123 .

profit the better the performance .Closing stock of FG ) Net Sales Ratio -Operating profit margin ( Operating Profit/Net Sales ) Interest PAT Interest Coverage Ratio ( PAT+I)/I Remarks 2006 Inputs from Balance Sheet : Both entries are from Liability side .Net Profit/Net Sales Operating Profit ( Sales – (Consumption+ Other Manufacturing Expenses+ Depreciation+ Opening Stock of WIP . Inputs are from P&L Alone Particulars 2005 Net Profit Net Sales Ratio .Ratio analysis : Inputs are from P&L alone : The more the income.Closing Stock of WIP+ Opening Stock of FG. Inputs from Balance Sheet Liability Side Particulars 2005 TOL ( Term Loan + Debenture+ Creditor + Bank OD+ Provisions ) TNW ( Equity + Reserves ) The more the flexibility of repayment the better Remarks 2006 124 .

One from Asset other from liability Particulars 2005 CA CL ( Bank OD + Creditor + Provisions ) Remarks 2006 The higher the level of assets of same tenure the better it is within a tolerable limit. the logic operates in opposite directions. If the ratio is high . 125 .Leverage Ratio= TOL/TNW TCL ( Bank OD + Creditor + Provisions ) LTOL ( Term Loan + Debenture ) Short term to long term liability ( TCL/LTOL) Viewed from this parameter alone Both entries from Asset side : The lower the current assets for a given level of fixed assets for generating the same amount of sales is better. Input from Balance Sheet . Inputs from Balance Sheet Asset Side Particulars 2005 CA ( Raw Material+ Work in Progress + Finished Goods + Receivable + Other Current Asset + Cash and Bank Balance ) FA ( Net Fixed Asset ) CA/FA Remarks 2006 One entry from Asset Side other is from liability side .

asset. the more the profit the better it is. The governing principle is that with a lower amount of fund . Inputs from Balance Sheet and P&L Particulars 2005 CA 256 Sales CA/Sales FA Sales FA/Sales EBIT Capital Employed ( Equity + Reserve + Term Loan ) ROCE ( EBIT/ROCE) PAT TNW ROE ( PAT/TNW) Remarks 2006 283 126 . the better it is . The greater the income . the more the sales .Current Ratio ( CA/CL) One entry is from P&L and other is from Balance Sheet : This is the most important measures among all the different types of ratios. the greater the profit with a given level of liability .

In the case of cash and bank .2005. Increase in any liability head is the sources of fund.Chapter Seven Fund Flow Statement P& L gives the picture of income and expenses over a period. Then we take the PAT and Depreciation figure for the that particular year. it represents the net inflow of cash since inception of the company till that date. For example . Balance Sheet represents the Liability and Assets as on a date. Decrease in any asset head is the sources of fund. Then we add with this sources of fund and deduct the uses of fund. if we have to calculate the fund flow for the financial year 2005-06 then we have to see the difference between the balance outstanding of each head of assets and liabilities of 2005 and 2006 and then apply the above mentioned principle. We need a statement which would represent the sources and uses of cash and this is captured from Fund Flow statements. In the P&L income represents the inflow and the expenses represents the outflow. This balance should be tallied with the closing cash and bank balance as reflected in 127 . After that we have to see the P&L for the year 2005-06 and take the retained earnings and depreciation figure. Decrease in any liability head is the use of fund. The asset ( except the cash and bank balance ) represents the net balance arrived at from inflow and out flow of funds since inceptions and it represents the net outflow. The liability represents the net balance arrived at from inflow and outflow of funds since inception of the Company till that date and it represents the net fund inflow. For that we first take the each item of liability and assets ( except the cash and bank balance ) for two years and see their increase or decrease and then we identify the following principle : • • • • Increase in any asset head is the uses of fund. We start with the opening cash and bank balance which is the closing cash and bank balance as on March 31. Then we come to closing balance of cash and bank .

one deducted and another figure taken from the balance sheet) are not same then the fund flow statement is not correct. 2006. If both ( i. Let us try with an example and then it would be made very clear: Profit and Loss Statement Expenses 2005 Consumption 125 Other Manufacturing expenses Selling and Distribution expenses Depreciation Income 2005 250 2006 135 Sales 2006 283 25 20 Increase in SIP 3 4 15 20 18 25 Increase in FG 3 5 Interest Provision for Tax Profit carried to balance Sheet Total 5 3 63 256 8 4 82 292 Total 256 292 128 .the balance sheet as on March 31.e.

10 If increase Sources but if the increase is of the same Increase by Rs 102 amount as lac out of which profit after taxRetained earnings no additional is Rs 82 lacs . So sources as we source would be take Retained Rs 20 lacs.Balance Sheet Balance Sheet Liability 2005 Capital 120 2006 130 Asset 2005 Gross Fixed Asset Less Accumulated Depreciation Net Fixed Assets Raw Material WIP FG Receivable Cash & Bank Balance 325 2006 375 Reserves Term Loan Overdraft Creditor Provisions 185 85 25 5 6 287 40 30 10 7 155 170 90 25 23 95 23 180 195 120 29 28 110 22 Total 426 504 Total 426 504 Liability 2005 120 2006 130 Increase Decrease Source Uses Capital Reserves 185 287 Increase/Decrease Sources/Uses IncreaseSource. Earnings 129 .

Term Loan Overdraft Creditor Provisions 85 25 5 6 40 30 10 7 Decrease Increase Increase Increase Use – Rs 45 lacs Sources.Rs 15 lacs NA Now you classify all the sources and uses separately in the following format : Serial No Particulars Sources/Uses Amount 1 PAT for FY 2005.separately.Rs 5 lacs Sources – Rs 1 lacs Asset 2005 Gross Fixed Asset Less Accumulated Depreciation Net Fixed Assets Raw Material WIP FG Receivable Cash & Bank Balance 325 2006 375 Increase Decrease Uses Source Increase/Decrease Sources/Uses Uses – Rs 50 Increase lacs 155 170 90 25 23 95 23 177 198 120 29 28 110 21 NA NA Increase Increase Increase Increase NA NA NA Uses – Rs 30 lacs Uses – Rs 4 lacs Uses – Rs 5 alcs Uses.Rs 5 lacs Sources.Sources 82 06 130 . If this amount is more than the Retained Earning then the difference should be the source under this head. Source Rs 20 lacs.

2 3 4 5 6 Depreciation Increase in Equity Increase in Reserves Increase in OD Increase in Creditor Increase in Provisions Sources Sources Sources Sources Sources Sources 25 10 20 5 5 1 148 50 30 4 5 15 45 149 1 1 2 3 4 5 6 Total Sources ( A) Increase in Fixed Uses Assets Increase in RM Uses Increase in WIP Uses Increase in FG Uses Increase in Uses Receivable Repayment of Uses term loan Total Uses ( B) Total Deficit during the year 2006 Opening Cash Balance Closing Cash Balance = Opening Cash Balance + Surplus or Opening Cash Balance – Deficit (C ) Closing Cash balance from Balance Sheet ( D ) If both C and D are tallied You have completed the task correctly 23 23-1 =22 22 Correct 131 .

Case Study 3 Draw the fund flow statement from the following : P&L for M/S ABC Limited for the period from 1st April to 31st March ( Rs in lacs) Expenses 2005 Consumption Other Manufacturing Expenses Selling and Distribution Expenses Depreciation Interest Provision for Tax Profit Carried to Balance Sheet Total 256 279 Total 256 279 63 64 20 5 3 22 8 4 15 18 Increase in FG 3 5 125 25 2006 135 28 Sales Increase in SIP Income 2005 250 3 2006 270 4 Profit and Loss for 2 years 132 .

Balance Sheet as on March 31, ( All Rs in lacs) Liability 2005 Capital 120 2006 120 Gross Fixed Asset Reserves 185 249 Less Accumulated Depreciation Term Loan 85 65 Net Fixed Assets Over draft 25 30 Raw Material Creditor Provisions 5 6 10 7 WIP FG Receivable Cash & Bank Balance 426 481 Total 426 481 25 23 95 23 29 28 105 21 90 100 170 198 155 177 Asset 2005 325 2006 375

Balance Sheet for two years.

133

We can segregate the above mentioned cash flows into three parts namely : • Cash flow from operation [ PAT+ Depreciation + Decrease in Working capital + Increase in Other current liability – Increase in Current Asset – Decrease in Other current liability ] =A • Cash flow from Investment activity [ Sale/Reduction of Fixed Asset + Dividend received + Interest received+ Investment matured – Increase in Fixed Asset-Investment made ]=B • Cash flow from Financing activity [ Increase in term loan+ Increase in Debenture+ Increase in Equity+ Increase in Bank Borrowing from Working Capital -Decrease in term loan- Decrease in Debenture- Decrease in Equity- Decrease in Bank Borrowing from Working Capital ]=C • Opening Cash Balance + A+B+C= Closing Balance

134

Chapter Eight Working Capital Management
From the discussion of chapter four , we get the following key points, which will be useful for understanding the concepts of Working Capital Management:

1) The expenses on the P&L of a company would either appear on the liability side of the balance sheet in case it is not paid immediately or would appear as negative in the bank or cash account in the asset side if it is to be paid immediately. 2) The current asset in the form of stock of Raw Material, Work in Progress, Finished Goods, that is appearing in the balance sheet of the company represents the amount of expenses the company incurred but not realized in cash. Similarly, the current asset in the form of Receivable represents the expenses incurred in connection with the sale of the goods plus the profit portion but the amount is not realized . Other composition of the current assets represents the amount paid before the realization of money against which such payment is made. If we sum total the above characteristics of current asset , we can say the following : The Current Asset of the company ( Excluding the Cash and Bank Balances in Demand Deposit, in Term Deposits with an option of the company to withdraw as and when basis) represents the expenses which is incurred by the company and also the payment made by the company for both of which the company has not realized the cash. Now the next question is that how the company is meeting these expenses. Some of the expenses are met by the company by deferring the payment . This is achieved through the process of building up the creditor and also the building up of other current liability. The portion of expenses which can not be deferred needs to be paid by resort to

135

Selection of Means of Finance 3. So the components of project cost is as follows : 1. Quantum of different types of Means of Finance 4. Total Cost of Fixed Assets 2. a portion of working capital is also taken into account apart from the cost of fixed assets. A Portion of Current Assets This is shown graphically as below : 136 . Arrival at the marginal Weighted Average Cost of Capital ( WACC) 5. While at the time of arrival at the project cost . Selection/ Rejection of the project. Arrival at the Net Present Value of the Project 7. Arrival at the incremental cash flow for the duration of the project 6. As we are all aware that the process of Capital Budgeting consists of the following steps : 1.borrowing. Besides. In this Chapter. So the borrowing represents the portion of expenses represented in the current liability side which is not deferred. we shall see the relationship of working capital from the perspective of capital budgeting. we shall also make ourselves aware some of the important terminology used widely in the Working Capital Management. Arrival at the Project Cost 2.

1 The means of finance is that portion of Liability side of the balance sheet which finance the project cost.Total Asset T P C O R O T O S Fixed Asset A J T L E C T Current Asset Fig 8. So this is equal to the project cost. This is shown graphically below : 137 .

Equity 2.2 In other words . Debentures 138 . Preference Shares 4. Reserves 3. The composition of long term liability can be any or combination of the following : 1.Total Liability Means Of Finance Long Term Liability Total Asset Total Project Fixed Asset Cost Current Liability Current Asset Fig 8. the means of finance of a project cost represents the long term liability of a company.

Sundry Creditors b. Bank Borrowing for Fund Based Working Capital 2. the margin money for the term loan/debenture is the money brought in by the lender other than the term loan lender/debenture holder. Provisions Now we shall introduce a very important terminology which is frequently used in finance. the margin for working capital is the money brought in by the entity other than the lender.5. the full question is : What is Margin Money for Working Capital /Term Loan /Public Issue ? Now the correct answer to the question is the Margin Money is the Money brought in by the entity other than the lender for which margin money is asked for. In this case. Other Current Liabilities : a. Similarly. Other other Current Liability c. the margin money for working capital is the money brought in by the surplus of long term liability over the long term assets. While arriving at the identification of margin money the following criteria is maintained : 139 . So the margin money for term loan /debenture is the money brought in by the equity holder. Fir example. the margin money for Public Issue is the money brought in by those equity holders other than the public. This is also called Promoters Contribution. Current Liability consists of the following : 1. Term Loan The remaining portion of the liability side of the balance sheet consists of Current Liability. On completion. Similarly. What is “Margin Money” ? The answer to the question can be answered only if we complete the above mentioned question. This terminology is called “ Margin Money”.

For example. 2.3 140 . the margin money is superior in the nature of debt characteristics with respect to the finance against which margin money is defined. Generally . the maturity of margin money for working capital is more than one year. For example.1. in the case of margin money for term loan. margin money of working capital consists of that portion of liability which has a maturity of more than the current liability. The tenure of maturity of margin money is greater than that of the finance with respect to which margin money is defined. The margin money for working capital finance is also called as Net Working Capital ( NWC). Now we shall define the margin money for working capital finance. the margin money should be in the form of equity which is superior than the debt . Since the maturity of current liability is one year . The NWC is explained below: Liability Asset LTL LTA NWC CA CL Fig 8.

The difference between CA and CL is also equal to NWC but it is derived from the definition of NWC. Raw Material 141 . Eqn 2. The difference is the surplus of long term fund after its use for building up of long term assets. Other important terminology of Working Capital Management : There are some important semantics associated with the working capital management . this is because LTL is the source of fund and LTA is the use of this fund.2 Long Term Liability+Current Liability=Long Term Asset+ Current Asset Long Term Liability ( LTL) –Long Term Asset ( LTA)= Current Asset ( CA) – Current Liability ( CL) Putting the value of RHS of Eqn 2.1 In a balance sheet . we get NWC= CA-CL ……………. We shall discuss all these one by one : Current Asset ( CA) : The Current Asset is that portion of asset which is to be realized within a maximum time frame of one year. This is the money which goes for building up a portion of working capital . So this is margin money by definition of margin money. NWC= LTL. The typical composition of Current Asset is as follows : 1.1.From the above figure it is quite clear that NWC= LTL-LTA. Total Liability = Total Asset ……… Eqn 2. Eqn 2.3 But always keep in mind that NWC is the difference between LTL and LTA .LTA ………………….

Actually this is the time required by a company to realize its cash . We have also seen that a portion of the expenses is deferred and this portion represents the other current liability. this represents the expenses which is not realized and can not be deferred. If we recall the concept build up in the first chapter. Cash & Bank Balances Gross Working Capital ( GWC) :This is equal to Current Asset of the company . Putting these two in the perspective of the definition of Operating Cycle.The composition of OCL is as follows : 1. Other Current Asset 6. Work In Progress 3. Provisions for Taxation and Dividends 3. In the balance 142 . Sundry Creditors 2.2. Other Current Liability (OCL) : This is the part of current liability other than the bank borrowing for fund based working capital . Finished Goods 4. Receivable 5. this represents some thing related to time. Other Other Current Liability Working Capital Gap ( WCG) : This represents that portion of the current assets which is not financed by the Other Current Liability. So WCG = Current Asset ( CA) – Other Current Liability ( OCL) Operating Cycle ( OC) : As the term Cycle suggests.As we have already seen in the Chapter I that the Current Asset of a Company represents the expenses incurred but not realized by the company. we can arrive at the operating cycle provided we convert the time required for such current assets to get converted in to cash.

Now in the working capital cycle. This is possible only when we replace the unit of money with unit of time. Finished Goods and Receivables.sheet. we have to search the accounting statement which represents time and monetary unit. the current asset is appearing mainly in the form of Raw Material. The units of presentation of these current assets are in monetary terms say in rupees. The Profit and Loss statement of a company represents the expenses or income in monetary units over a particular period. Work In Progress . in the case of raw materials only the expenses which can be allocated to the raw materials can be taken for such conversion. generally for 12 months. Now. we have to convert this into units of time say in days or in months. Now. For example . one care has to be taken that we use the appropriate expenses and income in each stage of current assets. if we represent the individual item of current assets in terms of expenses and income of Profit and Loss statement . we can convert the representation of individual items of current assets from monetary units to time units. So we get the operating cycle with the help of the following methods: Raw Material Cycle ( RM) = Average Raw Material Balance / Raw Material Consumption for the year …( Amnt/(Amnt/time) Work In Process ( WIP) Cycle = Average WIP Balance /( Cost of Production for the Year) Finished Good ( FG) Cycle= Average FG Balance/( Cost of Sales for the Year) Receivable ( R) Cycle = Average Receivable Balance/( Annual Gross Sales for the Year ) Accounts Payable Cycle ( AP) = Average Creditor Balance /( Annual Purchase for the Year) OC= RM+WIP+FG+R Cash Cycle (CC) = RM+WIP+FG+R-AP 143 . However.

The link between a company’s cash cycle and it’s profitability can be easily seen by recalling one of the basic determinants of profitability and growth for a firm is its total asset turnover . The Size of the Firm’s Investment in Current Assets: This is usually measured relative to the firm’s level of total operating revenues. it can be shown that the cash cycle depends on the inventory . the greater is the firm’s accounting return on assets. The Financing of current assets: This is measured as the proportion of short term debt ( that is . current liabilities ) and long term debt used to 144 . Some Aspects of Short Term Financial Policy : The Short term financial policy that a firm adopts will be reflected in at least two ways: 1. The cash cycle increases as the inventory and receivable periods get longer. It decreases if the company is able to defer payment of payables and thereby lengthen the payables period. the shorter the cash cycle is .Also. short-term financial policy would maintain a relatively high ratio of current assets to sales. receivable and payable periods. A restrictive policy would involve a low ratio of current assets to sales. or accommodative. the lower is firm’s investments in inventories and receivables . the more financing is required . A flexible. the firm’s total assets are lower.From the above . ROA and return on Equity . Most of the firms are having a positive cash cycle and they thus require financing for inventories and receivables. which is defined as Sales/Total assets.As a result . 2. The higher the ratio is .ROE. The longer the cash cycle. and total turnover is higher. The lengthening of a cycle means that the firm is having trouble in moving inventory or collecting on its receivables. changes in the firm’s cash cycle are often monitored as an early warning measure. Thus all other things being the same .

A restrictive short term financial policy means a high proportion of short term debt relative to long term financing and a flexible policy means less short term debt and more long term debt. If we take these two areas together. The net effect of a flexible policy is thus a relatively large level of net working capital.finance the current asset. we see that a firm with a flexible policy would have a relatively large investment in current assets and it would finance its investment with relatively less in short term debt. Case 4 P&L for M/S ABC Limited for the period from 1st April to 31st March ( Rs in lacs) Expenses 2005 Consumption Other Manufacturing Expenses Selling and Distribution Expenses Depreciation Interest Provision for Tax Profit Carried to Balance Sheet Total 256 279 Total 256 279 63 64 20 5 3 22 8 4 15 18 Increase in FG 3 5 125 25 2006 135 28 Sales Increase in SIP Income 2005 250 3 2006 270 4 Profit and Loss for 2 years 145 .

Balance Sheet as on March 31. ( All Rs in lacs) Liability 2005 Capital 120 2006 120 Gross Fixed Asset Reserves 185 249 Less Accumulated Depreciation Term Loan 85 65 Net Fixed Assets Over draft 25 30 Raw Material Creditor Provisions 5 6 10 7 WIP FG Receivable Cash & Bank Balance 426 481 Total 426 481 25 23 95 23 29 28 105 21 90 100 170 198 155 177 Asset 2005 325 2006 375 Solution : Operating Cycle calculation For FY 2005-06: Conumption of Raw Material Other Manufacturing expesnes Depreciation Opening stock of WIP Closing stock of WIP Total Cost of Production Opening Stock of FG 1 2 3 4 5 6= SUM(1:4)-5 7 146 .

Closing stock of FG Cost of Sales Sales Opening Stock of Raw material Closing Stock of Raw Material Purchase 8 9= 6+7-8 10 11 12 13=1+12-11 Closing Stock as on March 31 2006 12 months Figures No of Months A Interms of Month of Consumption Interm of Months of COP Interms of Month of COS Interms of Months of Sales Interms of Months of Purchase B (A/B)*12 RM 1 WIP FG 2 3 Receivable 4 Creditor Operating Cycle Cash Cycle 5 OC=SUM(1:5) OC-5 147 .

received today is more than the value of Rs 100/.Chapter Nine Time Value of money and project evaluation techniques When a company acquires fixed asset. the company looks for the amount required to acquire the fixed asset and the amount of surplus to be generated from the fixed assets. when the value of money is compared for two situation. This would lead to the moot question Is cash flow at different time is of same value ? The value of money changes depending on the timing of receipt of money. I can invest the money received today for 2 days in some interest earning instrument and get some interest for 2 days. So while comparing we are comparing cash inflow versus cash out flow at different time frame. we need to compare the value in two situation by bringing the both timing in the same time scale. For example. if I receive Rs 100/.today and if I receive Rs 100/. The reason being. This is explained with the help of the following diagram : 148 . If the surplus generated is more than the cost of acquirement then the Company would go ahead with the acquisition of the fixed assets.to be received after 2 days. The major problem with the cash inflow from a fixed asset is that the inflow would take place not in one period but through several periods where as the cash out flow takes place generally at the beginning of the period.after 2 days the value of Rs 100/.

This is called the Future value of money.after the second year from now. So while comparing . what will be the value of investment of Rs 110/.for one year from one year hence and then compare the same with Rs 115/.today which one is of more value? This can only be done if all the amount is brought to a single point of time. This can only be done if we calculate the what will be the value of investment of Rs 100/. Since we know that the value of investment would determine on the return generated from the investment and different types of investment would generate different type of return depending on the riskiness of that type of investment.for 2 years .after two years versus Rs 110/after one year and Rs 100/.T= 0 T= 1 T=2 115 100 ( 1+r1)(1+r2) 100 110 110(1+r2) Suppose we are comparing today that Rs 115/. 149 . we must compare identical types of investments where the risk is same.

• Now you find out cash inflows in each year . The entire process is depicted below stepwise: The characteristics of cash flow of a project is as follows : • • • • You identify the nature of project today.The opposite is called the Present Value of money . you identify fixed assets. • The remaining part is the money to be added with the cost of fixed asset. This is equal to sales minus costs associated with for achieving the sales . we need to find the value of several cash flows occurring in different time frame into a common time frame then compare with the outflow at the same time. You add other non cash expenses which you take in the finding out the traditional cost. 150 . Then find out the cost of such fixed assets. • You find out the current assets required for achieving this sales and then find out how much of current asset would be arranged from the banks for working capital and from sundry creditors. Each cash flows bringing today is called the discounted cash flows and this is then compared with the present out flow. T= 0 115/( ( 1+r1)(1+r2) T= 1 T=2 115 100 ( 1+r1)(1+r2) 110/( 1+r1) 110 100 To evaluate a project . This portion is called margin money from working capital. For implementation of the project. You find out the projected earnings from fixed assets.

The cost of capital means the cost associated with the capital employed. The capital employed means Equity + Reserves + Long term debt. β represents the risk of the company with respect to market and Rm is called the return from the capital market ( equity market). the remaining would be funded at an interest rate of 10 % p. Out of the above the company would bring in 25% of the current asset requirement from the project cost.• Now you bring all these cash inflows into the time of cash outflow by discounting it with the appropriate discount rate. At any point of time . By appropriate discount rate we mean that the discount rate should reflect the correct risk associated with such project. it requires the following fixed assets : • • Land : Rs 30 lacs Plant and Machinery : Rs 100 lacs Besides for efficient production and selling of the additional goods the company requires additional current assets of Rs 80 lacs for next 5 years. Let us take an example : A company A is considering an expansion plan for its production capacity .a. The company has decided that from this additional expansion plan the following revenue can be generated against the expenses to be incurred over the period of next 5 years : 151 . we go ahead with the proposal. • If the net value is positive . the cost of capital of the Company represents the existing risk of the business of the company . The same amount of current asset would be liquidated at the end of the 5 year. The cost of equity is calculated by using the Capital Asset Pricing Model ( CAPM) in the form of following equation Ke = Rf +β ( Rm-Rf) where Rf is the risk free rate . For expansion of its production facility . The cost of long term debt can be found out by the interest charged by the lender and is in the form of I(1-t) where I is the interest rate and t is the tax rate because tax shield is there in the case of interest.

5 20 37.5 14% 38 20 58 15% 56 20 76 16% 67 20 87 17% 20 44 20 84 18% (150) 152 .5 15 45 15 60 18 72 18 78 5 5 5 5 5 20 6 20 6 20 6 20 6 20 6 4 6 8 10 12 Cash Flows from the investment : 0 Cash Flow Investment Fixed Asset Part of CA PAT Dep Net Cash flow RADR 1 2 3 4 5 (130) (20) 17.1 Sales No of Unit ( 000) Price per unit Value Production cost Variable cost per unit Total Variable cost Fixed Cost Total production cost Sales & distribution cost Depreciation Interest on Working capital Tax 150 60 90 2 200 60 120 3 250 62 155 4 300 60 180 5 300 55 165 15 22.5 15 30 18 45 18 54 20 60 15 37.

the IRR is 30. 153 .5=13.Payback period : This is simple the time required to recover the investment . The cost of capital is the weighted average cost of Debt and Equity . The major draw back is that it does not take into the account the time value of money.5 lacs. Suppose that Rs 150 lacs is funded through Rs 75 lacs debt and Rs 75 lacs equity . In the above example. If the return in equity is 20%.30)=7%. WACC is = 7%*0.71 years of 3rd year : Rs 54. the cost of equity is 20%.5+20%*0.71 years: Fund required is Rs 150 lacs Amount recovered in first two years : Rs 95. So if the IRR is more than the cost of capital of the project then only the company should go ahead with the project. the pay back period is 2. Internal Rate of return : This is the discount rate at which the NPV of the project is 0. In the above example . Advantage is that it is simple to calculate. The cost of debt is : 10% ( 10.25%. The project is accepted. The debt interest rate is 10% and the tax rate is 30%. Cost of equity is the return on equity of any such project of identical risk.5 lacs Amount recovered in 0.5%.

would you go for the investment.a. 154 .Case V : A Company is in the production and selling of tea business. If the Company borrows money from the bank for this project. Other software company of the same operation level in the market is providing a return of 25% p. The company decides to set up a software development unit and for that it requires to acquire fixed assets of Rs 250 lacs and for generating the income from the fixed assets it requires a current asset level of Rs 200 lacs out of which 75% could be arranged from creditor and bank borrowing for working capital . The cash flows from the project is given as below : ( Rs lacs) Sales Cost Interest Working Capital Depreciation Tax PAT -30 60 110 190 350 4 50 4 50 4 50 4 50 4 50 1 100 80 2 250 140 3 350 190 4 450 210 5 650 250 on The existing rate of return from the business of the company is 13% p.a.a. As an investment manager . the company would have to pay interest rate of 10% p.

Traditionally we analyse our performance in terms of different types of profit achieved by the Company. depreciation. Operating income consists of income generated from the main operation mainly from sales and services from its core area of activity. Now let us take the following example : A company is having the following P&L and Balance sheet as on March 31. Similarly. So if we find that operating profit is higher we are happy.Chapter Ten Economic Value Added – New measuring tool for performance By now it is clear that how Profit and Loss and Balance Sheet is created for a company and what does Profit and Loss and Balance Sheet means for the company. selling and administration expenses. The list of operation expenses is consumption of raw material. We have also understood the concepts and techniques of analysis of P&L and Balance Sheet. other manufacturing expenses. the operation expenses means the expenses required to produce and sales of goods and services . wages and salary. 2006: 155 . cane be Profit Before tax or Profit after tax. electricity expenses. The profit can be operating profit . We have also seen that the main aim of any business operation is the maximization of share holders wealth. Operating Profit : The operating profit of a company is defined as Operating Income – Operating expenses. Let us take one by one and see what does this mean.

Profit and Loss from 1st April 2005 to March 31 2006 Expenses Income Sl No 1 2 3 Particulars Amount Consumption of Raw material 700 Salary and Wages 250 Power and Fuel Other Manufacturing expenses Selling & Distribution expenses Depreciation Interest on Working capital Interest on Term Loan Tax Profit After Tax Total 175 Sl No 1 2 3 Particulars Sales Increase in WIP Increase in FG Amount 1500 20 30 4 25 5 6 100 55 7 8 10 11 25 27 50 143 1550 Total 1550 Your competitor is having the following P&L and Balance Sheet : 156 .

Profit and Loss from 1st April 2005 to March 31 2006 Expenses Income Sl No Particulars Amount Sl No Particulars Amount Consumption of 1 Raw material 600 1 Sales 1300 Salary and Increase in 2 Wages 180 2 WIP 10 Increase in 3 Power and Fuel 160 3 FG 5 Other Manufacuring 4 expenses Selling & Distribution 5 expenses 6 Depreciation Interest on 7 Working capital Interest on Term 8 Loan 10 Tax 11 Profit After Tax Total 25 100 43 10 27 45 125 1315 Total 1315 Sl No Balance Sheet As on March 31 2006 ( Rs in lacs) Liability Asset Particulars Amount Sl No Particulars Amount Gross Fixed 1 Asset 1 Equity 150 600 2 Reserves 3 Term Loan 100 50 Accumulated 2 Depreciation Net Fixed 3 Asset 350 250 157 .

Bank Borrowing for Working 4 Capital 5 Creditor 6 Provision 50 25 35 Raw 4 Material 5 WIP Finished 6 Goods 7 Receivable Cash and 8 Bank 50 15 25 50 20 Total 410 Total 410 Sl No Balance Sheet As on March 31 2006 ( Rs in lacs) Liability Asset Particulars Amount Sl No Particulars Amount Gross Fixed 1 Asset 1 Equity 200 700 2 Reserves 3 Term Loan Bank Borrowing for Working 4 Capital 5 Creditor 150 100 Accumulated 2 Depreciation Net Fixed 3 Asset 450 250 75 45 158 Raw 4 Material 5 WIP 100 25 .

So EVA is defined as : EVA= Net operating profit after tax. You will not be as delighted as you had in the past stage. You have more market share. So the return your equity amount is 41% while your competitor is giving return on 50%. you have borrowed fund of Rs 450 lacs and your competitor has borrowed fund of Rs 300 lacs. you have also registered more sales than him . So EVA not only looks for the P&L along but also the balance sheet which is more rational.C% ( Total Capital ) Where C is the cost of capital. So you are very happy. In the net profit . 159 . you have deducted the interest rate on your borrowed funds in terms of debt and same about your competitor. This measurement is called Economic Value Added. For generating this profit. Next let us go to the Net Profit stage. But still you are making more profits and you are not unhappy . If the required return from this type of business is 45% .Besides . you are very happy since you have earned an operating profit of Rs 245 lacs versus your competitor’s operating profit of Rs 207 lacs .6 Provision 55 Finished 6 Goods 7 Receivable Cash and 8 Bank 125 100 25 Total 625 Total 625 If you take the operating profit. Your net profit is Rs 143 lacs versus your competitors net profit of Rs 125 lacs. you are destroying the wealth of the equity holder while your competitor is creating wealth of its equity holder. Now you are earning Rs 143 lacs on your borrowed fund in the form of equity and reserves of Rs 350 lacs while you competitor has earned profit of Rs 125 lacs on borrowed fund in the form of equity and reserves of Rs 250 lacs.

The market value of the capital employed can be more if the return on capital employed is more than the required return which is determined by the weighted average cost of capital . 160 . If you measure your performance .EVA is important because ultimately the aim of any business organisation is to increase the share holders value. your MVA would be more than your competitor and you will create wealth for your investor. So for measuring the performance we must follow the EVA rather than any other profit criteria. Now MVA would be positive only when Market value is more than the capital employed . Market Value of firm = Market value of Debt and Equity . then only if you generate positive EVA . The share holders value can be increased only if the Market Value of the share of the company increases which is determined by the Market Value Added ( MVA). MVA = Market Value of the firm – Capital Invested . This can only be achieved if your EVA is positive.