Recognition & Measurement concepts

Constraints
Assumptions Principles 1. Cost benefit Third level how
1. Economic entity 1. Historical cost implementation
2. Materiality
2. Going concern 2. Revenue recognition (related with
3. Industry practice
3. Monetary unit 3. Matching
accounting
4. Conservatism theories and
4. Periodicity 4. Full disclosure practices)
Elements
Qualitative Characteristics 1. Assets
1. Primary qualities 2. Liabilities
A) Relevance 3. Equity
# Predictive value 4. Investment by owners
# Feedback value 5. Distribution to owners
# Timeliness 6. Comprehensive income
B) Reliability 7. Revenues
# Verifiability 8. Expenses 2nd level bridge
# Representational faithfulness 9. Gains between level 1 & 3.
# Neutrality 10. Losses
2. Secondary qualities
a) Comparable
b) Consistency

Objectives:
Provide information
1. Useful in investment
& credit decisions
Conceptual 2. Useful in assessing
future cash flows
framework of 3. About enterprise 1st level The
accounting resources, claims to why goals &
recourses & changes in purpose of
them
accounting
Q. Conceptual framework of accounting:
• Q.
Q. The objective of general purpose financial reporting:
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying, selling or holding equity and
debt instruments, and providing or settling loans and other forms of credit.
This objective of general purpose financial reporting forms the foundation of the
Conceptual Framework.
Objectives of Financial Reporting by Business Enterprises: User Perspective
Financial reporting should provide:(1) information useful in investment & credit
decisions(2) information useful in assessing cash flow prospect (amount, timing &
uncertainty), &(3) information about enterprise resources, claims to those resources, &
changes therin.*** ... individuals who have a reasonable understanding of business &
economic activities & are willing to study the information with reasonable diligence.
 Elements of the financial statements
Financial position
• An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
• A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits
• Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
Performance
• Income is increased in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.
• Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
Q. State the CFA or 1st phase or 3rd phase or qualitative characteristics of accounting information according to 2nd
phase or objectives of accounting information according to 3rd stage of CFA etc..
Definition of Conceptual Framework of Accounting (CFA):
According to FASB (Financial Accounting standard board), A conceptual framework is a coherent system of
interrelated objectives & fundamentals that can lead consistent standard & prescribes the nature, function &
limit of financial standard.
Q. What is Accounting Theory?
Accounting theory is a set of frameworks, assumptions, and methods that are used in the application and study of financial reporting
principles. The accounting theory study comprises a review of essential practicalities of accounting practices. These practices are
altered and added to the supervisory framework that regulates financial reporting and statements.
All accounting theories are assured by the theoretical framework of accounting, which is provided by a specific entity to outline and
establish primary objectives of financial reporting by both public and private businesses. Furthermore, accounting theory can also be
regarded as the logical reasoning that helps to assess and guiding practices of accounting. Not just that, but it also helps develop new
methods and procedures. One essential aspect of this theory is its usefulness. In the corporate world, all financial statement should have
crucial information that readers can use to make informed and cautious decisions for businesses.
Objectives of Accounting Theory: Different objectives fulfilled by the theory of accounting are-
• Evaluation and Explanation of Accounting Principles
• Simplifying Complex Phenomena
• Solving Problems Created by Different Scenarios
• Calculating the Effect of an Event on the Future Beforehand
• Predicting Future Events
• Helping the Investigation, Explanation, and Conclusion of an Event
 Q. Qualitative Characteristics of Accounting Information:

• Understandability:
# Decision makers must be able to interpret Accounting information.
• Usefulness:
# Accountants must provide information that is used in making decisions.
• General purpose:
# External Financial Statements
# Comparability & consistency
# Materiality
# Conservatism
# Full disclosure
# Cost- benefit
Relevance:
# Predictive value
# Feedback value
# Timeliness
Reliability:
# Representational faithfulness
# Verifiability
# Neutrality
Q. Qualitative Characteristics
• Primary Qualities:
• (1) Relevance
• (a) Predictive value,
• (b) Feedback value &
• (c) Timeliness
• (2) Reliability
• (a) Verifiability
• (b) Representational Faithfulness
• (c) Neutrality
• Secondary Qualities:
• (1) Comparability
• (across firms)
• (2) Consistency
• (over time)
•
• Q. Recognition & Measurement Concepts
• •Assumptions
–Economic Entity
–Going Concern
–Monetary Unit
–Periodiocity
• •Principles
• –Historical Cost
• –Revenue Recognition
• –Matching
• –Full disclosure
• •Constraints
• –Cost-Benefits
• –Materiality
• –Industry Practice
• –Conservatism
Q. What are the objectives/importance of financial information ?
Objectives of financial information

1. To furnish information useful in making investment & credit decisions:

i. Offer information
ii. Information useful to present & potential investors, creditors & others.
iii. Making rational investment & credit decisions

2. To provide information useful in assessing cash flow prospects:

i. Judge the amount
ii. Timing
iii. Risk of expected cash receipt from dividends or interest

3. To provide information about business resources, claims to those resources & changes in them:
i. Information about the asset of a company
ii. Information about the liabilities of a company
iii. Information about the owner’s equity of a company
iv. Information about the effect of transactions that change its assets, liabilities & owner’s equity.
 Q. Describe GAAP with examples.
GAAP (Generally Accepted Accounting Principles): The conventions, rules & procedures necessary to define
accepted Accounting practice at a particular time.
1. Money measure: All business transactions are recorded in terms of money. Money is the only factor
common to all business transactions in Bangladesh.
2. Separate Entities: The ideas that a business is separate entity that is distinct from its owner or owner’s
and from every other business.
3. Going concern: It is assume that business has a unlimited life. The assumptions that a business will
continue to operate & that the assets held for use in the business will not be sold.
4. Objective evidence: The Accounting rule that whatever possible the amounts used in recording
transactions be based on verifiable evidence such as business transactions between independent parties.
5. Materiality concept: Materiality refers to the relative importance of an item or event. If the effect on
financial statements is unimportant to financial statement recorders it can be ignored.
6. Cost concept: All assets & liabilities should be recorded at cost.
7. Realization Principles : The Accounting rules which states that –
The inflow of assets associated with a revenue does not have to be in the form of cash.
Revenue should be recorded as revenue at the time, but not before it is earned.
The amount of revenue should be measured in terms of the cash plus cash equivalent amount
of other assets received.
8. Full disclosure: The Accounting requirements that financial statements including the
footnotes contain all relevant information about the operations & financial position of the
presented in an understandable manner.
 Q. Accounting Assumptions:
Economic Entity:
The business or economic entity exists separate & distinct from its owners, employees,
suppliers & customers. This assumption defines accounting boundaries, but not legal
boundaries.
Going Concern:
General purpose accounting reports are constructed under the assumption that the business
enterprise will continue in business for the foreseeable future. The current relevance of the
historical cost principle is based on the going-concern assumption.
Monetary Unit:
Economic activity of an entity are measured and reported in the Bangladeshi Taka. This
assumes that the Taka has a reasonably constant value over time in terms of purchasing
power. This assumption ignores inflation.
Periodicity:
Assumes that the economic life of a business can be divided into discrete time periods and
that financial reports from each period are interpretable.
• Historical Cost Principle
• Acquisition cost is the most objective and
• verifiable basis upon which to account for
• assets and liabilities. That is, it is reliable.
5 methods to measure assets & liabilities:
–Historical cost
–Current cost
–Current market value
–Net realizable (settlement) value
–Present (discounted) value
 Revenue Recognition Principle
• Recognize Revenue when:
(a) realized or realizable &
(b) earned.........................on the date of sale
exceptions:
(a) during production ... if the production process is long
... Ex: long-term construction contract
(b) end of production ... if selling price & amount is certain
...ex: mining of certain minerals
• (c) receipt of cash ... if the amount to be collected is uncertain.

Recognition
• Revenue............when realized or realizable & earned
• Gains ...............when realized or realizable
• Expenses .......... when economic benefits are consumed in revenue
-earning activities or when future economic benefits are reduced
or eliminated

• Losses ..............when future economic benefits are reduced or eliminated

 Matching Principle
Expenses are matched to the revenue generated in that accounting
period
“let the expenses follow the revenues”
Full Disclosure Principle:
Financial statements should include sufficient information to
permit the knowledgeable reader to make an informed judgment
about the financial condition of the enterprise.
trade-offs:
-sufficient detail to make a difference
-presented in a condensed form for understandability & to
avoid information overload
 Constraints:
Cost-Benefit:
The cost of providing the information should not exceed the benefits that
can be derived from the information.
• Materiality:
An item is material if its inclusion or omission would influence or change
the judgment of a reasonable man. Materiality is based on relative size &
importance.
• Industry Practice:
The unique nature of some industries and business concerns sometimes
(rarely) requires departure from basic theory.
• Conservatism:
Never overstate assets or income.
 Users of Accounting Information
Public Groups
Internal External
⫸ Regulatory agencies.
.Financing
.Managing groups. ⫸ Tax authorities.
groups .Investors.
.Board of .Potential ⫸ Labor Union.
directors Investors.
⫸ Economic Planners
.Partners .Creditors.
.Supervisors .Potential ⫸ Employees
Creditors.
etc. ⫸ Customers.

⫸ Retirees.
Q. What is Accounting? Write features of Accounting.(define)
Q. “Accounting is an information system”– justify your answer, or how or show your argument
or explain the statement with example.
Accounting is an information system that measure,
process & communicates financial information about an
identifiable economic entity to permit users of the system
to make informed judgments & decisions.

• In 1970, the AICPA (American Institute of Certified

Public Accountants) stated that the function of
accounting is “To provide quantitative information,
primarily financial in nature, about economic that is
intended to be useful in making economic decisions.
 Q. What r the Functions of accounting ?
• i. To manage the recourse held by specific entities.
• ii. To reflect the claims against and the interest in those entities.
• iii. To measure the changes in those resources, claims and interest.
• iv. To assign the changes to specifiable periods of time.

Q. What r the Objectives of Accounting ? Explain the objectives of Acc

i. Change in financial position resulting from the income producing efforts
of an enterprise.
ii. Earning of an enterprise, presented in a manner that emphasizes sources
and trend of earnings.
iii. Economic resources and obligations of an enterprise.
iv. Change in net financial resources which result from the financial and
investment activities of an enterprise.
Q. Explain Accounting Equation (AE) with example or
Q. The elements of Basic Accounting
Assets(A) = Liabilities(L) + Owners’ equity(OE)
Accounting Equation represents the relationship
between the assets, liabilities, and owner's equity of a
person or business. Accounting equation describes that
the total value of assets of a business is always equal to
its liabilities plus owner's equity. Thus the statement
which shows
Assets = Liabilities + Owners’ equity
is called AE
1. Assets (what it owns) /has future economic value.

2. Liabilities (what it owes to other)the claims of third parties

3. Owners’ Equity (the difference between assets and liabilities)/owner’s claims

• Assets ---are a company’s resources-things the company owns. Examples of assets

include cash, accounts receivable, inventory, prepaid insurance, investments, land,
buildings, equipment and goodwill. From the accounting equation, we see that the
amounts of assets must equal the combined amount of liabilities plus owners (or
stockholders) equity. (B/S items)
• Liabilities-- of a company’s obligations-amounts the company owes. Examples of
liabilities include notes or loans payable, accounts payable, salaries and wages
payable, interest payable and income taxes payable (if the company is a regular
corporation). (B/S items).
• Owner’s equity or stockholder equity is the amount left over after liabilities are
deducted from assets (B/S items)
Assets – Liabilities = Owners (or Stockholders’) Equity

Owner’s investment/capita & income/revenue/profit increase the OE, and owner’s

withdraw/expenses/loss decrease OE.
 Q. Define/what is/short notes on Assets, Liabilities,
Owners’ equity, Expenses, Business transactions, Book keeping,
Double entry system, journal, ledger, trial balance, financial
statements,
• Equity:
The residual interest in the assets of an entity that
remains after deducting its liabilities. E=A-L. Equity
is anything that is invested in the company by its
owner .
Retained Earnings – It is the portion of the income
that is retained in the company to invest in the
business.
 Q. What is Accounts/types of account
The basic storage units for data in accounting
systems there is a separate accounts for each asset,
liability, component of owners equity, revenue &
expense.
• Accounts:
# Personal accounts (x,y etc)
#Property or real accounts (machine, furniture etc)
#Nominal accounts (wages, salaries, discount etc)
Q.What r the Rules for determination of debit & credit (/Golden rules of accounting):
• Debit:
• -Receiver of benefits
• -What comes in?
• -Expenses & losses
• Credit:
• -Giver of benefits
• -What goes out?
• -Gains & incomes
• Debit indicates: Credit indicates:
• Assets increases -Assets decreases
• Liabilities decreases Liabilities increases
• Proprietorship decreases Proprietorship increases
• -Income decreases Income increases
• Expenses increases -Expenses decreases
• Purchase increases -Purchase decreases
• Drawing increases -Drawing decreases
• Losses increases -Losses decreases
• Sales decreases Sales increases
• Capital decreases Capital increases
• Profit decreases Profit increases
Q. Explain accounting cycle/Process / steps of
Accounting Cycle: The order or sequence in
which Accounting procedures are performed is
known as Accounting cycle.
• Recording (in journal)/1st step
• Classifying (in ledger)/2nd step
• Summarizing (in trial balance)/3rd Step
• Preparing financial statements/4th step
• Interpretation & Analysis (through accounting
ratios)/5th step
 Recording: Recording the transactions in the journals or books of original entry

Si. Date Particulars Ledger Debit Credit

No. folio(LF) (Tk.) (Tk.)

01 1.1.2 Cash A/C Dr 500000

0 Mr. Z’s Capital A/C Cr 500000

• Classifying: Transferring the entries from the journals to the ledger or “T” account

Date Description J.F Amount Date Description J.F Amount

To TK. To TK.
1.Jerry Dow cap 9000 2.Library books 2500
2200 5.Office equipment 5600

B.F(balancing figure)
SN Date Description Amount Debit/tk Credit/ Balancing
tk amount/tk

01.12.2019
• Summarizing: Preparing a trial balance from the debit & credit balances of ledger accounts .
Trial balance
• For 31st, December2019

Sl. No. Particulars Debit (TK) Credit (TK)

1 Cash 5400

2 Accounts payable 3000

Preparing Financial Statements: Preparing the trading account, profit &

loss account, the balance sheet also taking into account all adjustments
affecting the period concerned.

• Interpreting & Analysis those Statements: Giving requisite information

to the interested groups by calculating accounting ratios & by
interpreting the performance of the company concerned.
• Q. Explain Types of ratios:
• Liquidity ratio:
Current assets
Current ratio=
Current liabilities
Current assets−Inventory
Quick ratio=
Current liabilities

• Leverage ratio:
Total debt
• Total debt ratio= Capital employed= Net worth + Borrowings
Capital employed
Total debt
• Debt-Equity ratio=
Equity
Earning before interest & 𝑡𝑎𝑥
• Interest coverage ratio=
Interest
• Activity ratio:
Cost of goods sold or sales
• Inventory turnover=
Average inventory
Credit sales
• Debtor turnover=
Debtors

Sales
Assets turnover=
Net assets
• Profitability ratio:
Gross profit
• Gross margin=
Sales
Profit after tax
• Net margin=
Sales
EBIT (I−T)
• Return on investment=
Net assets
• Assets:
a) Current assets
1. Cash in hand, 2. Cash at Bank, 3. Accounts
Receivables, 4. Note Receivables, 5. Closing
Inventories, 6.Supplies in hand, 7.
Investment (short term), 8. Stationary
at hand, 9. Prepaid expenses, 10.
Outstanding/accrued/earned revenue/ incomes.
b) Fixed Assets
1. Land & Building, 2. Plant & Machinery 3.
Furniture’s & Fixtures, 4. Office Equipment, 5.
Motor Vehicles, 6. Leaseholds etc.
• Liabilities:
a) Current liabilities
1. Accounts payables, 2. Note payables, 3. Loans,
4. Mortgages, 5. Bank overdraft,
6. Outstanding/unearned revenue expenses.
b) Fixed / Long Term Liabilities
1. Long term loans, 2. Debentures or bonds.
• Owner’s Equity:
1. Capital / Common Stocks, 2. Net profit, 3.
Retained Earnings, 4. Reserves, 5. Any Specific
Funds, 6. Drawings.
• Expenses– (I/S items) the money spent, or costs incurred, by a business in
their effort to generate revenues. Expenses represent the cost of doing
business; they are the sum of all the activities that result in (hopefully) a
profit.
a) Office & Administrative
1. Office Staff Salary, 2. Directors Fees, 3, Legal Charges, 4. Printing &
stationary, 5. Postage & Telegram, 6. Accounting Charges, 7. Computer Hire
Expenses, 8. Car Expenses- Office, 9. Office manager salary, 10. Auditor Fees,
11. Professional Fees, 12. Office rents & rates, 13. Depreciation-Office
Assets, 14. Office Supplies & Expenses, 15. Donation- Office, 16. Postage,
telex & Telegram.
b) Selling & Distribution Expenses
1. Sales Manager Salary, 2. Marketing Director Fees, 3. Travelling
Expenses – Sales Manager, 4. Delivery Expenses, 5. Packing Expenses , 6.
Cost of sample, 7. Depreciation- Delivery Van, 8. Entertainment Expenses,
9. Salaries – Salesman, 10.Commission-Salesman, 11. Advertising, 12. Bad
debts, 13. Fair Expenses.
• c) Financial Expenses
1. Interest on Loan, 2. Interest on overdraft, 3. Interest on capital.
• Incomes: (I/S items) money received, especially on a regular basis, for
work or through investments. Accounting ---income is the profit a
company retains after paying off all relevant expenses from
sales revenue earned. It is synonymous with net income.
• Operating income = Total Revenue – Direct Costs – Indirect Costs
or
• Operating income = Gross Profit – Operating Expenses – Depreciation
or
• Operating income = Net Earnings + Interest Expense + Taxes

Revenue is the money that a company receives from selling goods or services
throughout the course of business. ... Net income equals the total company
revenues minus total company expenses.
• Non Operative Income-
1. Commission received,
2. Other service revenues,
3. Discount received
• Q. Why engineering students need accounting ?
Accounting for Engineers --As an engineer may apply a combination of maths and science to
solve technical problems. As accountants, may solve financial, tax and business planning
problems. ... However, an accountant may have to manage cash flow, prepare budgets, obtain
finance and do some financial modeling.
There are new inventions coming every year and engineer need to update with all the information
floating around. Now, engineering is a very broad term.
To stay competitive in the job market, engineers and those who want to advance need a strong,
diverse set of skills.
Some of the top skills for engineers include:
• Technology skills, including understanding various analytical and scientific software
• Mathematics and scientific problem-solving
• Critical thinking
• Effective communication
• Management
• Negotiation
• Decision-making
 As senior engineers acquire responsibilities like managing teams, projects, and
budgets. To reach those positions and perform their duties effectively, they need to have
a strong set of business skills.
“Senior engineers and division and department heads all use more business skills in
day-to-day work than engineering skills,” engineers needed to understand accounting
tools, financial reports, and markets to compete.”
From understanding financial basics to engaging in creative problem-solving, there
are business skills that every engineer needs.

• 1. Effective Communication

Because their work is so technical, it can sometimes be harder for others in the
organization to understand engineers’ true impact. Knowing how to translate technical
topics into more simplified terms and properly articulate and support their ideas across
the organization is critical to success.
2. Management Essentials
Understanding what motivates colleagues and knowing how to exercise influence,
effectively implement strategies, and develop learning initiatives that can help the
organization innovate are skills that can take an engineer’s career to the next level.
3. Creativity
An engineer’s day-to-day solving complex problems. Understanding the
social/global needs & wants they try to innovate new and new customized
products/services.
4. Financial Accounting

Accounting knowledge can help engineers measure the impact of their work in
terms of revenue, but also control the cost of particular projects and better understand
the organization’s overall budget.
5.The Ability to Spot Opportunities and Validate Ideas
As technology is continuously disrupting industries so in today’s increasingly
complex global business environment engineers will have to play a pivotal role in
problem solving through taking/facing new challenges.
 6. Negotiation
Engineers very often need to work in a team to achieve business goals.
Understanding and negotiating with each other helps to realize the common goals of
stakeholders ,build trust among decision makers and successfully motivate others to
secure maximum value for the organization.

7. Ethics
Engineers have to build products and services that can have a direct impact on society.
It’s important to approach each problem with integrity and, ultimately, do what’s right
for the business.

By acquiring essential business skills, engineers can better equip themselves to

meet changing workforce demands and gain a competitive edge.

In case of engineering, there are mainly six functions which are of prime importance.
 • Research: This is one of the primary things you need to do for you to invent
something new. Using different experimentation techniques, applying inductive
reasoning and employing mathematical concepts into your research would yield you
greater benefits.
• Development: Once the engineer researches and gathers information that can
be useful, it’s time to apply those ideas in development of a product or a new idea that
can help the company/society/as well as country.
• Design: In designing a product or any structure like building or bridge, the
engineer designs each and every part of the structure or the product. It is first done on
paper and then a prototype /image/paradigm is being built.
• Construction: An engineer constructs the building or the structure by following
the design crafted by him or by his colleague.
• Operation: Engineers who handle machines, equipment, take care of the overall
operation of these machines. He takes care of the procedures and supervises the
personnel to see whether every part of the machine or equipment is working properly.
• Management functions: Along with taking care of the above functions, an engineer
needs to take care of planning, organizing, controlling and leading. But they are not
given to perform any management functions before they get some experience.
• Q. What is double entry system? Double-entry book keeping
Double-entry bookkeeping, in accounting, is a system of book keeping where every entry to an
account requires a corresponding and opposite entry to a different account. The double-
entry has two equal and corresponding sides known as debit and credit. The left-hand side is
debit and right-hand side is credit.
• Q. Distinguish between double entry and single entry system.

S.N./Points Single entry Double entry

Duality Not based on duality Based on duality

User Sole proprietors &partnership Large corporations
Costs involved Cheap Costly
Accounts maintained Simple personal accounts Personal, property and nominal
accounts
Detection of errors Difficult to detect errors Easy to detect errors
Preparation of trial Not useful Useful
balance
Profit and loss account Not useful Useful
Single entry, double entry, business entity, then sole proprietorship, partnership and joint venture concept
may come across.
Q. sole proprietorship as–
A business enterprise exclusively owned, managed and controlled by a single person with all authority,
responsibility and risk.
Characteristics of Sole Proprietorship: i. Single Ownership ii. No sharing of Profit and Loss iii. One-
man’s Capital iv. One-man Control v. Unlimited Liability vi. Less legal formalities
i. Single Ownership: A single individual always owns sole proprietorship form of business organization..
Consequently, he alone bears all the risk of the business.
ii. No sharing of Profit and Loss : If there is any loss it is also to be borne by the sole proprietor alone.
Nobody else shares the profit and loss of the business with the sole proprietor.
iii. One man’s Capital : He provides it either from his personal resources or by borrowing from friends,
relatives, banks or other financial institutions.
iv. One-man Control: The owner or proprietor alone takes all the decisions to run the business. Of
course, he is free to consult any body as per his liking.
v. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in case of loss
the business assets along with the personal properties of the proprietor shall be used to pay the business
liabilities.
vi. Less Legal Formalities: It also does not require to be registered.
Q. Advantages of Sole Proprietorship
i. Easy to Form and Wind up: A sole proprietorship form of
business is very easy to form. With a very small amount of
capital you can start the business.. Just like formation it is also
very easy to wind up the business. It is your sole discretion to
form or wind up the business at any time.
ii. ii. Direct Motivation: The profits earned belong to the sole
proprietor alone and he bears the risk of losses as well. Thus,
there is a direct link between effort and reward. This provides
strong motivation for the sole proprietor to work hard.
iii. iii. Quick Decision and Prompt Action: In a sole
proprietorship business the sole proprietor alone is responsible
for all decisions.. But he is free to take any decision on his
own..
• iv. Better Control: In sole proprietorship business the proprietor has full control over each and every
activity of the business. He is the planner as well as the organizer, who co-ordinates every activity in
an efficient manner.
• v. Maintenance of Business Secrets:. It refers for keeping the future plans, technical competencies,
business strategies, etc,. secret from outsiders or competitors. In the case of sole proprietorship
business, the proprietor is in a very good position to keep his plans to himself since management and
control are in his hands.
• vi. Close Personal Relation: The sole proprietor is always in a position to maintain good personal
contact with the customers and employees. Also, it helps in maintaining close and friendly relations
with the employees and thus, business runs smoothly.
• vii. Flexibility in Operation: A sole proprietor can expand or curtail his business according to the
requirement.
• viii. Encourages Self-employment: Sole proprietorship form of business organization leads to creation
of employment opportunities for people.. Thus, it helps in reducing poverty and unemployment in the
country
Q. Limitations of Sole Proprietorship:
i. Limited Capital: ii. Unlimited Liability iii. Lack of Continuity: iv. Limited Size v.
Lack of Managerial Expertise
Lets sum up
Advantages: • Easy to form and wind up • Direct Motivation • Quick Decision and Prompt
Action • Better Control • Maintenance of Business Secrets • Close Personal Relation •
Flexibility in Operations

Limitations: • Limited Capital • Unlimited Liability • Lack of Continuity • Limited Size •

Lack of Managerial Expertise
Q. A partnership is a business structure wherein two or more persons (in general business it does not
exceeding 20, but in banking it will not more than 10), coming together as partners, decide to share profits
or losses in an agreed proportion, carrying an unlimited liability.
Features of Partnership:
✓ More Persons having an unlimited liability except for minor.
✓ Profit and loss in an agreed proportion.
✓ Oral or written agreement.
✓ Lawful Business.
✓ Absolute trust and belief in each other.
✓ Restriction on transfer of share without the consent of the other partners.
✓ Responsible for other partner’s deeds.
Q. Advantages of Partnership:
✓ There will be combined capital, talents, skills, opinions.
✓ The ability of funds rising becomes easier.
✓ Borrowing capacity will increase.
✓ All the partners with different skills will work efficiently in their own way. So, this will
result in higher profits and greater sustainability and productivity.
✓ Everyone shares control and management.
✓ The distribution of the risks lead will be lower.
• Q. Disadvantages of Partnership:
• ✓ Since the partnership is not a separate legal entity, liabilities are unlimited for the
• partners except minors.
• ✓ The differences in the opinion and thoughts of one or more partners.
• ✓ If the other partner has committed a mistake, the other partners will also have to face its
• consequences.
• ✓ In partnership, the ideas, thoughts, secrets, are confidential. So, it will create problems
• when the information is disclosed.

• Q. Rights of Partner in Partnership:

• 1. Right to manage business
• 2. Right to express views and ideas
• 3. Right to inspect books account
• 4. Right to share profit
• 5. Right to be indemnified/compensation
• 6. Right to use property
• 7. Right to join the ownership
• 8. Right to get retirement
• 9. Right to bind other partners
• 10. Right to dissolve the business
Q. Company: A registered association which is an artificial legal person, having an independent legal, entity
with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable
shares and carrying limited liability.
• Features of a Company:
• 1. Separate Legal Identity – A company is a separate legal identity, different from its members
• or shareholders.
• 2. Limited liability of members – The liabilities upon the company’s shareholders is limited only
• to the unpaid amount on the shares bought by them. Thus for a fully paid-up shares, a
• member cannot be asked to contribute more, even if the company goes for liquidation.
• 3. Perpetual Existence – A Company has a perpetual existence, irrespective of its shareholders
• coming and leaving the company till the point of its wound up.
• 4. Common Seal – A company has its common seal which acts as the signature of the company.
• 5. Transferable Shares – Shares of a company are transferable in nature. And the transfer of its
• shares from one person to another does not affect it at all.
• 6. Separate ownership of the property – Since the company has its own separate legal identity,
• it can own and dispose property under its own name. Moreover, the property owned by
• a company cannot be the property of its shareholders.
• 7. Capacity to sue or being sued – Since the company has its own separate legal identity, it can
• enter into contracts and has capacity to sue or being sued.
• Q. Advantages of a company include that:
• ✓ Liability for shareholders is limited
• ✓ It's easy to transfer ownership by selling shares to another party
• ✓ Shareholders (often family members) can be employed by the company
• ✓ Taxation rates can be more favorable
• ✓ It has access to a wider capital and skills base.
• Disadvantages of a company include that:
• ✓ Expensive to establish, maintain and wind up
• ✓ The reporting requirements can be complex
• ✓ if directors fail to meet their legal obligations, they may be held personally liable for the
• company's debts
• ✓ Profits distributed to shareholders are taxable.
The difference between Private Limited Company and Public Limited Company:
• Q. The difference between Private Limited Company and Public Limited Company :
S.N. Point of Difference Private Company Public Company

Members Minimum – 02 Minimum – 07

Maximum – 50 Maximum – Unlimited
Minimum number of 02 03
Directors
Mode of raising Private Arrangement Private Arrangement
capital Public Subscription
Nature of shares Not Transferable, unless Completely
otherwise mentioned in Transferable
Articles
Suffix with the Private Limited Public Limited or
Company’s name Limited
Q. What is Business Transaction?/Characteristics of Business Transactions

Economic events that affect the financial position of the business entity.
A business transaction must have the following characteristics:
• 1.It must be for a sum certain in money (i.e., of a financial value)

• 2. It must be supported by a source document (e.g. sales invoice, official receipt,

disbursement voucher, remittance advice, etc.)

• 3.It must have a two-fold effect in the elements of accounting

• A business transaction can either be an exchange transaction (involves physical
exchange of values such as sale, purchase, payment, etc.) or a non-exchange
transaction (does not involve physical exchange (e.g. loss from flood, fire loss,
internal production, depreciation, etc.)
• Q. What is financial accounting/cost accounting/ management accounting?
Compare and contrast among them, write some features/characteristics of
them, ….
• Management Accounting:
Management accounting also called a field of accounting that provides economic &
financial information for managers & other internal users.

• Cost Accounting:
Cost accounting analysis the transactions in an objective manner, for the purpose of
planning, control and decision making.
Cost accounting is the identification, accumulation, assignment and analysis of
production and activity cost data to provide information for external reporting, internal
planning and control of ongoing operations and special decisions
Financial Accounting Serial No. Managerial Accounting
External users: Stockholders, Primary users of Internal Users: Officers, head of the
Creditors, regulators department, managers, supervisors.
reports
statements Issued quarterly & annually Types& frequency Internal reports Issued as frequently
Classified financial as needed
of reports

General purpose information for all users Purpose of Special purpose information for a
particular user for a specific
reports
decision.

Pertains to business as a whole & is highly
aggregated. Limited to double entry
accounting system & cost data.
Reporting standard is generally accepted
accounting principle.
Contents of Pertains to sub-units of the business
& may be very detailed.
reports
May extend beyond double entry
accounting system to any type of
relevant data,
Reporting standard is relevance to
the decision to be made.

Annual independent audit by certified public Verification No independent audits.

accountant.
Process
Q. Financial Accounting vs. Managerial Accounting
Managerial Accounting
Financial Accounting Managerial Accounting
Points

Purpose of information To communicate the company’s financial To help management make better
position to external users (i.e. investors, decisions to fulfill the company’s overall
banks, regulators, government) strategic goals

Primary users External users Internal (management)

Focus and emphasis Past oriented Future oriented

Time span Annual or quarterly financial reports Varies from hourly to years of information
depending on company
The following are the journal entries recorded earlier for Printing Plus.
1: On January 3, 2019, issues $20,000 shares of common stock for cash.

2.On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.
3. Continues

4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.

5: On January 12, 2019, pays a $300 utility bill with cash.

6. Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders.

7. On January 17, 2019, receives $2,800 cash from a customer for services rendered.

8. On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.
9. On January 20, 2019, paid $3,600 cash in salaries expense to employees.

10. On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.

11. On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.
12. On January 30, 2019, purchases supplies on account for $500, payment due within three months.

T-Accounts Summary: Once all journal entries have been posted to T-accounts, we can check to make sure the
accounting equation remains balanced.
Journal: You have the following transactions the last few days of April.
Apr. 25 You stop by your uncle’s gas station to refill both gas cans for your company,
Watson’s Landscaping. Your uncle adds the total of $28 to your account.
Apr. 26 You record another week’s revenue for the lawns mowed over the past week. You
earned $1,200. You received cash equal to 75% of your revenue.
Apr. 27 You pay your local newspaper $35 to run an advertisement in this week’s paper.

Apr. 29 You make a $25 payment on account.

Ans
Con 1.

2.

3.
1. Company A was incorporated on January 1, 20X0 with an initial capital of 5,000 shares of common stock
having $20 par value. During the first month of its operations, the company engaged in the following
transactions:

Date Transaction
Jan 2 An amount of $36,000 was paid as advance rent for three months.

Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining amount was recognized as
Jan 3
a one year note payable with an interest rate of 9%.

Jan 4 Purchased office supplies costing $17,600 on account.

Jan 13 Provided services to its customers and received $28,500 in cash.
Jan 13 Paid the accounts payable on the office supplies purchased on January 4.
Jan 14 Paid wages to its employees for the first two weeks of January, aggregating $19,100.
Provided $54,100 worth of services to its customers. They paid $32,900 and promised to pay the remaining
Jan 18
amount.
Jan 23 Received $15,300 from customers for the services provided on January 18.
Jan 25 Received $4,000 as an advance payment from customers.
Jan 26 Purchased office supplies costing $5,200 on account.
Jan 28 Paid wages to its employees for the third and fourth week of January: $19,100.
Jan 31 Paid $5,000 as dividends.
Jan 31 Received an electricity bill of $2,470.
Jan 31 Received a telephone bill of $1,494.
Jan 31 Miscellaneous expenses paid during the month totaled $3,470
Ans: Date
Jan 1
Account
Cash
Debit
100,000
Credit

Common Stock 100,000

Jan 2 Prepaid Rent 36,000
Cash 36,000
Jan 3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
Jan 4 Office Supplies 17,600
Accounts Payable 17,600
Jan 13 Cash 28,500
Service Revenue 28,500
Jan 13 Accounts Payable 17,600
Cash 17,600
Jan 14 Wages Expense 19,100
Cash 19,100
Jan 18 Cash 32,900
Accounts Receivable 21,200
Service Revenue 54,100
Jan 23 Cash 15,300
Accounts Receivable 15,300
Jan 25 Cash 4,000
Unearned Revenue 4,000
Jan 26 Office Supplies 5,200
Accounts Payable 5,200
Jan 28 Wages Expense 19,100
Cash 19,100
Jan 31 Dividends 5,000
Cash 5,000
Jan 31 Electricity Expense 2,470
Utilities Payable 2,470
Jan 31 Telephone Expense 1,494
Utilities Payable 1,494
Jan 31 Miscellaneous Expense 3,470
Cash 3,470
Basis of Financial Accounting Cost Accounting
comparison
1. Objective Determination of profit or loss Mainly, communication of financial
and financial position information to management for
planning, controlling and evaluating
resources.
2.For whom For owners & external users Predominantly for internal users
prepared
3.Limitations Direct regulations Indirect regulations
4.Basis of Historical Cost Any form of monetary and physical
valuation units
5.When Periodically mostly at the end of As and when needed by the
Prepared accounting period. management.
6.Perspective Entire Organization Department, division, unit or any
fraction of the entire organization.
7.Time period Current Both current & future
 Examples of Business Transactions
• Investment of cash or other assets by the owners
• Withdrawal of cash or other assets by the owners, and distribution of dividends
• Borrowing of cash from other entities for business use
• Payment of borrowings
• Sale of goods or services (either for cash or on credit/account)
• Collection of receivables from customers and other entities
• Acquisition of assets or services (either for cash or on credit/account)
• Payment of payables to suppliers or other entities
• Consumption or expiration of assets (such as use of office supplies and expiration of insurance, expiration
of rent, depreciation of equipment, etc.)
• Q. Financial Accounting vs Cost Accounting

S.
Financial Accounting Cost Accounting
N.
Records and summarizes cost information and data.
Records financial data of the organization. This includes information about labour, materials
1
So it records all relevant monetary data and various overheads of the manufacturing
process.
Financial accounting only deals in
Cost accounting uses both historical and pre-
2 historical costs (only actual costs and
determined costs (standard costs, estimates etc.)
figures)
The users of the information provided by Information provided by cost accounting is only
3 financial accounting are both internal and meant for people within the firm like management,
external users employees etc.
Financial accounting is mandatory for all
Cost accounting is only done by manufacturing
4 firms. Every organization has to keep some
firms. And in most cases, it is not mandatory.
record of its financial transactions
The emphasis here is on recording the
Other than recording data it also provides a system
5 transactions/data and presenting it in the
of cost control of labour, material, overhead costs
given format.
Financial accounts deal with the business
Costing will enable us to get the profit or loss for
6 in its entirety. So it provides us with profit
individual products, process, job etc.
or loss for the whole concern
In financial accounting, there is no aspect
In Cost accounting, forecasting is possible using
7 of forecasting. It is simply a record of the
some of the budgeting techniques
financial position of the firm
Financial accounting is strictly a positive
Cost accounting is both a positive and normative
8 science. There is rigidity in the process due
science.
to legal requirements
 Transactions Assets = Liabilities + Capital
C+E+F+AR AP+NP R+I—Exp--D

1. Cash investment of owner + Cash = N/A + + as Owner's Capital

2. Borrowed cash from bank + Cash = + Payable + N/A

3. Purchased equipment for + Equipment

= N/A + N/A
cash - Cash

4. Paid business licenses - Cash = N/A + - as Expenses

5. Paid water and electricity
- Cash = N/A + - as Expenses
used

6. Purchased tables, 50% cash + Furniture + Payable

= + N/A
and 50% on account - Cash (50%) (50%)

7. Received cash for services

+ Cash = N/A + + as Revenue
rendered
8. Rendered services on
+ Receivable = N/A + + as Revenue
account

+ Cash
9. Collected customer accounts = N/A + N/A
- Receivable

10. Owner withdrew cash from

- Cash = N/A + - as Drawings
the business
 Following are the accounting transactions relating to Mr. P's business. Use the accounting equation to show their effect on
Accounting equation:
1. Commenced business with a Capital of 50,000
2 Bought Machinery for cash 10,000
3. Purchased goods for cash 15,000
4. Purchased goods from A on credit 5,000
5. Sold goods for cash 10,000
6. Paid to A 2,000
7. Sold goods to B on credit 3,000
8. Paid into Bank 6,000
9. Paid to A by cheque 1,000
10. Received from B a cheque for 2,000
• Journal entries
1.Mr. Karim started business with Tk.200000
2, Bought office furniture from B on credit for Tk.12000
3. Bought office equipment of Tk. 100000
• Bought goods worth Tk.10000 for cash from Mr. X
• Sold goods to Y worth Tk.12500 for cash
• Bought goods from & on credit for Tk.10500
• Sold goods on credit to Mr. Ali for Tk.2555
• Paid Mr.X Tk.12000 on account
• Received from Mr. Ali Tk.4500 on account
• Received interest from Mr. Y Tk.1250
• Paid salaries Tk.8750
• Paid Tk.5000 into Bank from office cash
• Paid office rent Tk.2500
• Bought office stationery on credit from Alam & Co. Tk.750
• Paid for office stationery Tk.1500
• Received interest on investment Tk.2000
• Paid electric charges Tk.550
Si. Date Particulars Debit (Tk.) Credit (Tk.)
No.

01 Cash A/C Dr 200000

Mr.Karim’s Capital Cr 200000
(As investment/started business)
02 Office furniture A/C Dr 12000
B’s/AP Cr 12000
(As buy furniture on credit)
03 Office equipment A/C Dr 10000
Cash Cr 10000
04 Purchase A/C Dr 10500
Cash Cr 10500
05 Cash A/C Dr 12500
Sales Cr 12500
06 Purchase A/C Dr 10500
B’s A/C /Account payable Cr 10500
07 Mr. Ali’s A/C /Account receivable A/C Dr 2555
Sales Cr 2555
08 Mr. X’s/ Account payable A/C Dr 12000
Cash Cr 12000
09 Cash A/C Dr 4500
Mr. Ali’s A/C /Account receivable Cr 4500
10 Cash A/C Dr 1250
Interest received Cr 1250
11 Salaries Expenses A/C Dr 8750
Cash Cr 8750
12 Bank A/C Dr 5000
Cash Cr 5000
13 Office rent expense A/C Dr 2500
Cash Cr 2500
14 Stationery A/C Dr 750
Alam & Co. Cr 750
15 Stationery A/C Dr 1500
Cash Cr 1500
16 Cash A/C Dr 2000
Interest on investment Cr 2000
17 Electric charge expenses A/C Dr 550
Cash Cr 550
Q. What Are Financial Statements?
Financial statements are written records that convey the business activities and the
financial performance of a company. Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and for tax,
financing, or investing purposes. Financial statements include:
@Balance sheet @ Income statement @Cash flow statement.

• Financial Statements are useful for the following reasons:

• To determine the ability of a business to generate cash, and the sources and
uses of that cash.
• To determine whether a business has the capability to pay back its debts.
• To track financial results on a trend line to spot any looming profitability
issues.
• To derive financial ratios from the statements that can indicate the condition of
the business.
• To investigate the details of certain business transactions, as outlined in the
disclosures that accompany the statements.
• To use as the basis for an annual report, which is distributed to a company’s
investors and the investment community.
• Income Statement :The income statement presents the revenues, expenses, and
profits/losses generated during the reporting period. This is usually considered the most
important of the financial statements, since it presents the operating results of an entity.
• Balance Sheet :The balance sheet presents the assets, liabilities, and equity of the entity
as of the reporting date. Thus, the information presented is as of a specific point in time.
The report format is structured so that the total of all assets equals the total of all
liabilities and equity (known as the accounting equation). This is typically considered the
second most important financial statement, since it provides information about the
liquidity and capitalization of an organization.
• Statement of Cash Flows : The statement of cash flows presents the cash inflows and
outflows that occurred during the reporting period. This can provide a useful
comparison to the income statement, especially when the amount of profit or loss
reported does not reflect the cash flows experienced by the business. This statement may
be presented when issuing financial statements to outside parties.
• Statement of Retained Earnings :The statement of retained earnings presents changes in
equity during the reporting period. The report format varies, but can include the sale or
repurchase of shares, dividend payments, and changes caused by reported profits or
losses. This is the least used of the financial statements, and is commonly only included
in the audited financial statement package.
• When the financial statements are issued internally, the management team usually only
sees the income statement and balance sheet, since these documents are relatively easy to
prepare.
Summary Comparison

Income Statement Balance Sheet Cash Flow

Time Period of time A point in time Period of time
Purpose Profitability Financial position Cash movements
Measures Revenue, expenses, Assets, liabilities, Increases and
profitability shareholders' equity decreases in cash
Starting Point Revenue Cash balance Net income
Ending Point Net income Retained earnings Cash balance

Gross Profit = Revenues – Cost of Goods Sold. Operating Income = Gross Profit – Operating
Expenses.
Amortization Expenses: These are also called depreciation expenses, and account for any long-term assets over
the life span of their use (such as cars or expensive technology)
Q. Income Statement Example
Q. Prepare Adjustment Entries, Adjusted Trial Balance and three Informal Financial Statements excluding
cash flow statement.
• Adjustments
• Inventory on 31st, December 2015 was valued at Rs. 68,000.
• Depreciation Machinery by 10 % and Amortization of Patents by 20 %.
• Unexpired Insurance at the end financial year was Rs. 2,000.
• Wages includes Rs. 7,000 paid as advance to employees (Prepaid Wages Debit).
Ans: Adjustment Entries
Adjusted Trial Balance
Financial Statements (Informal)
continues
• continues
• Preparation of Balance Sheet – Horizontal and Vertical Style:
The following trial balance is prepared after preparation of income statement for F. Green as at 31 March 2015.

Required: Prepare balance sheet for F. Green as at 31 March 2015 in both horizontal and vertical style.
Working: In the absence of information about the date of repayment of a liability, then it may be assumed that
loan is a non-current liability and a trade payable is a current liability.
• Con Balance Sheet (Horizontal Style)
As at 31 March 2015
As mentioned earlier that vertical style of balance sheet is in fact another way of expressing accounting
equation, i.e.,

This relationship is shown in the following balance sheet:

Balance Sheet (Vertical Style)

As at 31 March 2015
• Continues
Q. Preparation of Income Statement and Balance Sheet:
The following balances are taken from the books of George Anderson at the end of his first year trading on 31
December 2014.
The following additional information is available:
• Inventory at 31 December 2014 was valued at $4500.
Required: (a) Prepare income statement for the year ended 31 December 2014.(b) Prepare a balance sheet as at
31 December 2014.
• Ans: a) Income Statement
For the year ended 31 December 2014
Continues
b) Balance Sheet as at 31 December 2014
Q. Worksheet format
Following data extracted from the books of Mahnoor Malik.
Adjustments : 1. Stock at 31st, December was valued at Rs. 320. 2. General
Expenses of Rs. 300 paid for two years, first year had expired. 3. A Debt of Rs. 100
is to be written off as bad by direct method. 4. Unpaid Salaries during the 2008
was Rs. 140. Requirements 1. Pass Adjusted Entries 2. Pass Closing
Entries 3. Prepare Worksheet
Ans:
Continues
Q. Following data extracted from the books of Abdul Fattakh Ltd.
Adjustments : 1. Inventory on 31st, December 2015 was valued at Rs. 68,000. 2. Depreciation Machinery by
10 % and Amortization of Patents by 20 %. 3. Unexpired Insurance at the end financial year was Rs. 2,000.
4. Advance Wages paid to of Rs. 7,000. Requirements 1. Pass Adjusted Entries 2. Pass Closing Entries
3. Prepare Work Sheet
Ans:
Continues (again)
continues
Q. Trading Account : Prepare Trading Account for the year ending 31st March 2018 for
Precious Ltd. 1. Opening stock Rs. 170,000 2. Purchases return Rs. 10,000 3. Sales Rs. 250,000
4.Wages Rs. 50,000 5. Sales return Rs. 20,000 6. Purchases Rs. 100,000 7. Carriage inward
Rs. 20,000 8.Closing stock Rs. 160,000
Ans:
Q. Profit and Loss Account : Prepare Profit and Loss Account, from the following balances
of Precious Ltd. for the year ending 31.03.2018:
1. Office rent Rs. 30,000 2. Salaries Rs. 80,000 3. Printing expenses Rs. 2,000
4. Stationeries Rs. 3,000 5.Tax, Insurance Rs. 4,000 6.Discount allowed
Rs. 6,000 7. Advertisement Rs. 36,000 8. Travelling expenses Rs. 26,000
9. Gross Profit Rs. 250,000 10.Discount received Rs. 4,000
Ans:
Q. Trading and Profit and Loss Account; Balance Sheet
From the following trial balance of Abdul Rehman Khan & Brothers, prepare trading
and profit and loss account for the year ending on 31 st March, 2017 and balance sheet as
on the date:
Continues Ans:
• con
Q. Let us look at another example of preparation of final accounts of a sole proprietor. Mr. Munir Ahmed
runs a general store. His Trial Balance as on 30th September, 2018 was as follows:
Con
Additional Information: (a) Closing stock as on 30th September, 2018 was 86,000.
(b) Provision for doubtful debts is to be maintained at 7% on debtors.
(c) Purchases include purchases of furniture worth Rs. 45,000.
(d) Insurance paid on Feb 1st for full year and outstanding wages of Rs. 7,000.
You are required to prepare the Trading Account and the Profit and Loss Account for the year
ended 30th September, 2018 and also a Balance Sheet as on the same date.

Ans:
Note 1: Insurance expense Rs. 24,000 i.e. 24,000/12 = 2,000 per month.
• This accounting year contains eight month (Feb to September) = 2,000 * 8 = 16,000
• So insurance expense is in this accounting year is Rs. 16,000 and Rs. 8,000 Prepaid insurance.
• Note 2: Provision for doubtful debts = Bad Debts (T.B) + New Provision (Adj.) – Old Provision (T.B)
• Provision for doubtful debts = 19,500 + [265,000 *7%] – 15,000
• Provision for doubtful debts = 23,050
continues
con
• Question of financial statements:
• Q. 1. At the end of its first month of operations, Waston answering services has the following unadjusted trial balance:
Waston answering services
August 31st, 2012
Trial balance

Sl. No. Particulars Debit (TK) Credit (TK)

1 5400
Cash
2 2800
Accounts receivables
3 2400
Prepaid insurances
4 1300
supplies
5 60000
equipment
6 40000
note payable
7 2400
Account payable
8 30000
Capital
9 1000
Drawing
10 4900
Service revenue
11 3200
Salary expenses
12 800
Utilities expenses
13 400
Advertising expenses
Total 77300 77300
• Others data:/adjusting/adjustments
1.Insurances expires @ TK.200 per month
2. TK. 1000 of supplies are on hand at august 31st
3. Monthly depreciation on the equipment is TK. 900
4. Interest due to TK.500 on the notes payable has accrued during August.

Requirements: Prepare income statement & balance sheet, /complete the final account.
Solution.

Income statement
For August 31.2012
Dr Cr
Particulars/ expenses Tk Particulars/income Tk
To Salary expense 3200 By service revenue 4900
Utility expense 800
Advertising expense 400
Insurance expense(1) {2400-2200} 200
Supplies expense(2) {1300-1000} 300 Net loss ( balancing figure)
Depreciation ex-equipt(3) 900 transferred to capital/Balance
Interest Expense(4) 500 c/d (carried down)
1400
Total 6300 Total 6300
 • Balance sheet
• As on 31st August, 2012

Assets TK Liabilities + Owner’s Equity Tk

Asset: Liabilities:
Current Assets 5400 Current Liabilities 2400
Cash 2800 Account Payable 500
Account receivable 2200 Interest Payable 40000
Prepaid insurance Note Payable
Supplies 1000 Long-term Liabilities
Long-term assets:
Equipment 60000 Owner’s equity:
(-) depreciation 900 59100 Capital 30000
(-)Net Loss (1400) 27600
(-)Drawing (1000)

Total 70500 Total 70500

• Adjusting entries

Credit(T
S.N particulars Debit (TK)
K)
Insurance Expense A/c Dr 200
1 Prepaid insurance A/C Cr 200
( As insurance expires )
Supplies expense A/c Dr 300
2 Supplies A/C Cr 300
( As supplies expensed)
Depreciation ex- equipment A/c Dr 900
3 Accumulated Dep- Equipment A/C Cr 900
( As depreciation expensed)
Interest expense A/c Dr 500
4 Interest payable A/C Cr 500
( As interest-due )
• Closing entries

Debit
S.N particulars Credit(TK)
(TK)
Service revenue A/c Dr 4900
1 Income summary A/C Cr 4900
( To close revenue account)
Income summary A/c Dr 6300
Salary A/C Cr
3200
Depreciation A/C Cr
900
Utility Expenses A/C Cr
800
Interest Expense A/C Cr
2 500
Advertising Expense A/C Cr
400
Supplies Expense A/C Cr
300
Insurance Expense A/C Cr
200

(To close expenses)

Capital (Net loss) A/c Dr 1400
Income summary A/C Cr
3 1400

( To close net loss to capital)

Capital A/c Dr 1000
4 Drawing A/C Cr 1000
( To close drawing to capital )
• 2. Question: Prepare Financial Statements and give the Adjusting entries and Closing entries from the following Trial
Balance and adjustments.
Trial balance

Serial Particulars Debit Credit (Tk.)

No. (Tk.)
1. Cash 8750
2 Account Receivable 6000
3 Supplies 2000
4 Prepaid insurance 2400
5 Office equipments 15000
6 Account Payable 4500
7 Unearned service revenue 4000
8 Capital 21750
9 Salaries 4000
10 Rent 1000
11 Service revenue 13400
12 Drawing 4500
Total 38150 43650
 Adjustments:
1. Supplies on hand are Tk. 1300. 2. Utility bill for Tk. 150 to be paid next month.
3. The insurance policy is for a year. 4. Tk. 2500 of unearned service revenue has been earned at the end of the month.
5. Salary accrued Tk. 1500. 6. Bill Tk. 3000 for service performed.
7. Monthly depreciation office equipment is Tk. 250
Solution:
Adjusting entries:

Serial Particulars Debit (Tk.) Credit

No. (Tk.)
1 Supplies expense A/C 700
Supplies A/C 700
(As expired/expense)
2 Utility expense A/C 150
Utility payable A/C 150
(As due)
3 Insurance expense A/C 200
Prepaid insurance A/C 200
(As expense/expired)
4 Unearned service revenue A/C 2500
Service revenue A/C 2500
(As earned)
5 Salaries expense A/C 1500
Salaries payable A/C 1500
(As due/accrued)
6 AR/Accrued service revenue A/C 3000
Service revenue A/C 3000
(As due)
7 Depreciation expense -- equipment A/C 250
Accumulated depreciation --equipment A/C 250
((As depreciation)
Closing entries
Serial Particulars Debit (Tk.) Credit (Tk.)
No.
1. Service revenue A/C 13400
Income summary A/C 13400
2 Income summary A/C 7800
Insurance expense A/C 200
Supplies expense A/C 700
Salaries expense A/C 5500
Rent expense A/C 1000
Depreciation expense A/C 250
Utility expense A/C 100
3 Income summary A/C 5600
Capital 5600
 Income statement
For the year ended 31st December, 2012

Particulars
Dr Tk. Particulars Cr Tk.
Insurance expense 200 Service revenue 13400
Supplies expense 700
Salaries expense 5500
Rent expense 1000 (13400+2500+3000)
Depreciation expense 250 18900
Utility expense 150
Total expense 7650
Net profit-transferred to
capital(balancing figure/ c/d) 11250
Total 13400 13400
Owner’s Equity statement: 31850-4500=28500
(Capital + Net income)- Drawing = (21750 + 11250)-4500 = 28500

Balance sheet
For the year ended 31st Dec, 2012

Assets Tk. Liabilities & Owner’s Equity Tk.

Current assets: Current liabilities:
Cash 8750 Account payable 4500
Accounts receivable 6000 Unearned service revenue 1500
Prepaid insurance 2200 (4000-2500)
Supplies on hand 1300 Salaries payable 1500
Accrued service revenue 3000 Rent payable 150
Total current assets 21250 Total current liabilities 7650
Equipment: Long term liabilities:
Equipment minus depreciation Capital
(15000-250) 14750 28500
Total assets 35000

Total 35000 Total Liabilities & Equity 35000

• Q..3. Financial statement . The following is the Trial balance of XYZ as on Dec, 31st 2012:

Si. Particulars Debit Credit

No (TK.) (TK.)
.
1 Drawings 5000
2 Furniture & Fittings 3000
3 Business Premises 30,000
4 Stock on 1st January 2012/opening inventory 22,000
5 Debtors/AR 18,600
6 Purchases 110000
7 Sales return 2000
8 Discount 1600
9 Taxes & Insurances 2000
10 General Expenses 4000
11 Salaries 9000
12 Commission 2200
13 Carriage-/transport-in 1800
14 Bad debts 800
15 Capital 40,000
16 Bank overdraft 4600
17 Creditors/AP 13,800
18 Rent 1000
19 sales 150000
20 Discount 2000
21 Provision for doubtful debts 600
Total TK. TK.
2,12000 2,12000
• Other data: 1. Stock in hand 31 st December, 2012 was estimated at tk. 20000.
2. Carriage included tk. 22 spent on furniture bought. 3. General expenses include purchases of stationary tk. 200 of which
stationary worth tk. 50 remained unused at the end of year. 4. Rent tk. 300 is still due. 5. Salaries tk.800
are also still due. 6. Write off bad debts tk.600. 7. Depreciate business premises by tk. 500 &furniture &
fittings by tk. 303. 8. Make a provision of 5% on debtors for bad debts & doubtful debts and
9. Provide provision of 2% for discounts at bad & doubtful debts.
10. Allow interest on capital at 5%. 11. Carry forward tk.700 for unexpired insurance.
• 12. The manager is entitled to a commission of 10% on profit after charging his commission.
• Requirements: Prepare trading account, profit & loss account and Balance Sheet as at that data.
Solution: Trading Account , For the year ended 31st December, 2012
Dr=133778 Cr

Particulars Taka Particulars Taka

To (1)opening Stock 22000 By (2)Sales 150000

To (2)Purchase 110000 (-)Sales return (2000) 148000
To Carriage 1800 By(1) Closing Stocks 20000
(-)Carriage for furniture (22) 1778
Gross profit(Balancing 34222
figure)/transferred to P/L,I/S
168000 Total 168000
Total
Profit & Loss Account For the year ended 31st Dec.2012
Dr =23695 13827 Cr=37522
Particulars Taka Particulars Taka

To(1) Salaries 9000 By Gross Profit B/d(T/A) 34222

(+)Due (800) 9800 By Rent received 1000
(+)Due 300 1300
To (2)General Exp 4000
(-)Purchase stationary (200) 3800 By discount received 2000
To Stationary 200
(-)Unused (50) 150
To commission 2200

To Tax & insurance 2000

(-)Prepaid (700) 1300
To Provision for bad & doubtful debts:
New (adjus - 6) 600
(+)Old ( T/B) 800
(+)5% provision 900

(-)Old provision (600) 1700

Particulars Taka Particulars Taka

To discount 1600
(+)provision for discount 342 1942

To Depreciation:
Business premise 500
803
Furniture & fittings 303

To interest on capital
2000
To commission payable to managers
(13827*10)/110 1257
To Net profit transferred to
capital(Balancing figure)
12570
Total

37522 Total 37522

 Calculation of provision for bad debts: Debtors 18600 (-)New bad debts (600) Equals(=) 18000 @5%=900 (New
provision for bad debts) . New provision for discount (18000-900)=17100 @ 2% = 342 taka. (13827*10=138270/110=1257.)
Balance Sheet As on 31 st December, 2012
Assets Taka Liabilitie s+ owners Equity Taka

Debtors 18600 Bank over draft 4600

(-)New bad debts (600) Creditors 13800
= 18000 Salaries due 800
(-)provision for bad debts (900) Commission due 1257
= 17100 2057
(-)provision for discount (342) 16758 Capital:
Opening 40000
Stock in trade/closing inventory 20000 (+)Interest on capital 2000
Stationary in hand 50 (+)Net profit 12570
Rent(receivable)due 300 (-)Drawing (5000) 49570
Business premises 30000
(-) Depreciation (500)
29500
Furniture 3000
(+)Carriage 22 2719
(-)Depreciation ( 303)
Prepaid insurance
700
70027 Total 70027
Total
 Q What is cost? Classify costs
Cost: Investments/expenditure made for purchasing
assets/property.
Accountants define cost as a resource sacrificed or forgone to achieve
specific objectives. It is usually measured as the monetary that must be
paid to acquire goods and services.
Classification of cost: Costs can be classified from different point of
views.
1. From the view point of cost tracing and cost allocation:
a.) Direct cost. b.) Indirect cost.
2. From the view point of cost behavior patterns:
a. )Variable cost. b) Fixed cost.
3. From the view point of relevant range:
a) Semi variable cost. b)Semi fixed cost.
4. From the view point of others:
a.) Historical cost. b) Opportunity cost. c) Out of pocket cost.
d) National cost. e) Sunk cost.
• Direct cost:
Direct cost of a cost object is related to the particular cost object & can be
traced to it in an economically feasible way, example- Direct material cost.
• Indirect cost:
Indirect cost of a cost object are related to the particular cost object but
cannot be traced to it in an economically feasible way. Example- lighting
of administrative building.
• Fixed cost:
Cost that remains unchanged in total for a given period deposit with
changes in the related level of total activity or volume.
• Period cost:
All cost in the income statement other than cost of goods sold.
• Product cost:
Sum of the costs assigned to a product for a specific purpose.
• Variable cost: Cost that change in the total proportion to changes in the
related level of total activity or volume.
• Semi Variable Cost:
Costs that have both variable & fixed cost components.
FC: Fixed costs are those that remain the same regardless of sales volume or production. Rent, insurance, supervisory salary and real estate taxes
are usually examples of fixed cost.
• Fixed cost remains the same whether the business produces nothing or is working at full capacity
• Fixed cost per unit is variable, when production increase it decrease and vice versa.

VC: Variable costs are those which change as sales volume or production changes. They are expressed usually as a percent of sold
units like 8% of sales. Inventory, raw materials and direct production labor, for example, are usually variable costs.
• Variable Cost = Variable Cost per Unit x Sold Units
• Variable cost per unit is fixed

Total Cost: By adding fixed and variable cost we derive total cost
• Total Cost = Fixed Cost + Variable Cost
 Q. Distinguish between costs and expenses/Compare and contrast between cost and expenses/Write
some features of them/ how can you distinguish costs from expenses ?

Costs points Expenses

Investments/expenditure made for 1.Meanin Regular expenses required for
purchasing assets/property. g maintaining the assets/property.
Is a balance sheet item. 2.Place in Is an income statement item
financial
statement
It does not directly affect profit 3.Impact It directly affects profit margins of
margins of the company. on profit the company.
margins
Purchase/addition of an asset. Motive Payment necessary to generate
revenue from these
purchases/assets.
It does impact capital structure if 4.Impact There is no impact on a company’s
the asset is non-current. on capital capital structure.
structure
If current asset impact liquidity 5.Impact There is no impact on liquidity
ratio. on ratio.
liquidity
ratio
Fixed asset, prepaid rent, 6.Exampl Raw material, depreciation, labor
inventory etc. es cost etc.
 Q. How can you measure the performance of a company/What Is the Best Measure of a Company's
Financial Health/How can any one justify the financial conditions of a company ?
To accurately evaluate the financial health and long-term sustainability of a company, a number of
financial metrics must be considered. Four main areas of financial health that should be examined are
liquidity, solvency, profitability, and operating efficiency. However, of the four, likely the best
measurement of a company's health is the level of its profitability.
1.Liquidity
Liquidity is the amount of cash and easily-convertible-to-cash assets a company owns to manage
its short-term debt obligations. Before a company can prosper in the long term, it must first be
able to survive in the short term. The two most common metrics used to measure liquidity are
the current ratio and the quick ratio. Of these two, the quick ratio, also sometimes referred to as
the acid test, is the more precise measure.
• Current ratio = Current assets / Current liabilities
• Quick ratio = (Current assets – Inventories) / Current liabilities
Important point is A company's bottom line profit margin is the best single indicator of its
financial health and long-term viability.
• A ratio under 1 indicates that the company’s debts due in a year or less are greater than its
assets (cash or other short-term assets expected to be converted to cash within a year or less.)
• On the other hand, in theory, the higher the current ratio, the more capable a company is of
paying its obligations because it has a larger proportion of short-term asset value relative to
the value of its short-term liabilities.
• 2. Profitability : These ratios convey how well a company can generate profits from
its operations. Profit margin, return on assets, return on equity, return on capital
employed, and gross margin ratios are all examples of profitability ratios.
Profit Margin = Net Income/Revenue

3.Solvency/ (Leverage Ratio)/(Coverage Ratio)

• Also called financial leverage ratios, solvency ratios compare a company's debt levels with
its assets, equity, and earnings, to evaluate the likelihood of a company staying afloat over the
long haul, by paying off its long-term debt as well as the interest on its debt. Examples of
solvency ratios include: debt-equity ratios, debt-assets ratios, and interest coverage ratios.
Debt-to-Equity (D/E):
Debt to equity = Total debt / Total equity
Debt-to-Assets:
Debt to assets = Total debt / Total assets
Interest Coverage Ratio
Interest coverage ratio = Operating income (or EBIT) / Interest expense
• 4. Operating Efficiency/(Activity Ratio)/(Valuation Ratio)
A company's operating efficiency is key to its financial success. Its operating margin is the best
indicator of its operating efficiency. This metric indicates not only a company's basic operational
profit margin after deducting the variable costs of producing and marketing the company's
products or services, but it also provides an indication of how well the company's management
controls costs.
Price to Earnings = Market Value Per Share/ Earnings Per Share (EPS)

No single metric can identify the overall financial and operational health of a company. Liquidity
will tell you about a firm's ability to ride out short-term rough patches and solvency tells you
about how readily it can cover longer-term debt and obligations. Efficiency and profitability say
something about its ability to convert inputs into cash flows and net income. All of these factors
together, however, are necessary to get a complete and holistic view of a company's stability.
• Q. What Is Capital?
Capital can be held through financial assets or raised from debt or equity financing. Businesses
will typically focus on three types of business capital: working capital, equity capital, and debt
capital. In general, business capital is a core part of running a business and financing capital
intensive assets.
Capital assets can include cash, cash equivalents, and marketable securities as well as
manufacturing equipment, production facilities, and storage facilities.
capital structure equals debt obligations plus total shareholders' equity:
Capital Structure=DO+TSE
Where: DO=debt obligations, TSE=total shareholders’ equity
Types of Capital
1.Debt Capital. 2. Equity Capital , 3. Working Capital
Debt Capital: Sources of capital can include friends, family, financial institutions, online lenders,
credit card companies, insurance companies, and federal loan programs.:
Equity Capital: Public equity capital raises occur when a company lists on a public market
exchange and receives equity capital from shareholders. Private equity usually comes from
select investors or owners.
3. Working Capital
Working capital includes a company’s most liquid capital assets available for fulfilling
daily obligations. It is calculated on a regular basis through the following two
assessments:
Current Assets – Current Liabilities
Accounts Receivable + Inventory – Accounts Payable
Working capital measures a company's short-term liquidity—more specifically, its
ability to cover its debts, accounts payable, and other obligations that are due within
one year.
4. Trading Capital
Trading capital refers to the amount of money allotted to buy and sell various
securities. These methods attempt to make the best use of capital by determining the
ideal percentage of funds to invest with each trade.
 Q. How to Calculate Return on Investment (ROI)
ROI can be calculated using two different methods.
• First method:
ROI =

• Second method:
ROI =

Important: A positive ROI means that net returns are positive because total returns
are greater than any associated costs; a negative ROI indicates that net returns are
negative: total costs are greater than returns.
Q. What are the Techniques /tools of investment decisions
POINT
OF Net Present Value Internal Rate of
DIFFER (NPV) Return (IRR) Payback (PB) Profitability Index Accounting Rate
ENCE of Return

The present value The rate at which the The time The present value
of all future cash present value of within which of future cash
flows, less present future cash flows we will recover inflow, as the Percentage return
MEANIN value of the cash equals the cash the initial cash number of times on the cash
G outflow outflow outflow. of cash outflow invested.

We express NPV in IRR is expressed in We express PB PI is expressed in We express ARR

EXPRES the form of the form of in the form of the form of a in the form of a
SED AS currency returns. percentage returns. a time period. ratio. percentage.

Payback
focuses on
NPV focuses on IRR focuses on determining
determining determining what is the time PI focuses on
whether the the breakeven rate at period within determining how Focused on
investment is which the present which the many times of the determining the
generating surplus value of the future initial initial investment percentage
returns than the cash flows becomes investment can are we going to returns from an
FOCUS expected returns. zero. be recovered. get back. investment

NPV requires the ARR does not

use of a discount IRR doesn’t have PI uses a discount have the difficulty
DISCOU rate which can be this difficulty since it Payback also rate to discount of ascertaining an
NT difficult to ‘calculates’ the rate does not use the future cash appropriate
RATE ascertain. of return. discount rates. flows. discount rate.

CALCU
LATION PB method
OF also ignores The PI method ARR does not
PRESEN NPV calculates the IRR ignores the the present calculates the calculate the
T present value of present value of value of future present value of present value of
VALUE future cash flows. future cash flows. cash flows. future cash flows. future cash flows
The formula :
1.NPV=

Where:
• Rt​ =Net cash inflow at time t
• i= Discount rate
• t= Time of cash flow

2.PBP=

or
B
Payback Period = A +
C

• A is the last period number with a negative cumulative cash flow;

B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the
period A; and
• C is the total cash inflow during the period following period A
• Cumulative net cash flow is the sum of inflows to date, minus the initial outflow.
3 .IRR:

= 
T Ct
− Co
• 0=NPV t =1
(1 + IRR )t

• IRR=NPV=

• Where:
• Ct​= Net cash inflow during the period t
• C0​= Total initial investment costs
• IRR= The internal rate of return
• t= The number of time periods
• r=discount rate​
• Profitability and Safety indicator
• ROI (Return On Investment):Profit ÷ Investment amount
• Equity to Total Assets: Equity capital ÷ Total capital
• Current ratio: Current assets ÷ Current liabilities
• Economical Efficiency Analysis
• ROI method (Return On Investment method)
• PBP method (Pay Back Period method)
• NPV method (Net Present Value method)
• IRR method (Internal Rate of Return method)
• Break-even Point Analysis
Break-even point analysis is a method of analysis which is used to determine the break-even
point, when operating profit is zero and there is no profit or loss. This data is useful for profit
planning and other planning.
(1) Profit planning (2) Direct cost accounting (Fixed cost and Variable cost)
Fixed cost And Variable cost
• Fixed cost Ratio: Fixed cost ÷ Sales
• Variable cost Ratio: Variable cost ÷ Sales
• Marginal profit = Sales − Variable cost
(Operating profit + Fixed cost => Operating profit = Marginal profit − Fixed cost)
Marginal profit ratio :Marginal profit ÷ Sales
Or {1- (Variable cost ÷ Sales)}
Marginal profit (Contribution margin)
Marginal profit = Sales − Variable cost
Or Operating profit + Fixed cost
Marginal profit ratio = Marginal profit ÷ Sales
• Break-even point sales:
 Depreciation
Allocations the assets value over the commercially effective life of Assets.
• The Price of plant is Tk. 100000, It an be used for five years Depreciation for per year Tk.
20000
• Straight-line method:
• Depreciation cost =(Acquisition cost – Salvage value)÷Number of years of useful life
Inventory valuation:(Other topic)
a. First-in first-out method
b. Last in first out method
c. Periodic and Perpetual average method
d. Moving average method
e. Final acquisition cost method (Final purchase cost method)
• Income/ Revenue- Cost/ Expenses
Income statement equality:
a) If there is a profit:
Income = Cost + Profit or
b) If there is a loss: Cost = Income +-- Loss
For product sales
• Cost of sales: Beginning of period goods inventory+ Current period amount of goods
purchased − End of period goods inventory
For manufacturing
Manufacturing cost:
Current period material cost + Current period labor cost + Current period expenses
Product manufacturing cost:
• Beginning of period work in progress inventory+ Current period manufacturing cost− End of
period work in progress inventory
Cost of sales:
• Beginning of period product inventory+ Current period product manufacturing cost − End of
period product inventory