UNIT - IV

INTRODUCTION TO FINANCIAL ACCOUNTING & FINANCIAL ANALYSIS

Definition of Accounting:
Smith and Ashburne: “Accounting is a means of measuring and reporting the results of economic activities.”

R.N. Anthony: “Accounting system is a means of collecting summarizing, analyzing and reporting
in monetary terms, the information about the business.

American Institute of Certified Public Accountants (AICPA): “The art of recording, classifying and
summarizing in a significant manner and in terms of money transactions and events, which are in
part at least, of a financial character and interpreting the results thereof.”

BOOK-KEEPING

According to G.A. Lee the accounting system has two stages.

1. The making of routine records in the prescribed from and according to set rules of all
events with affect the financial state of the organization and
2. The summarization from time to time of the information contained in the records, its
presentation in a significant form to interested parties and its interpretation as an aid to
decision making by these parties.
First stage is called Book-Keeping and the second one is accounting.

Book – Keeping: Book – Keeping involves the chronological recording of financial transactions
in a set of books in a systematic manner.

Accounting: Accounting is concerned with the maintenance of accounts giving stress to the
design of the system of records, the preparation of reports based on the recorded date and the
interpretation of the reports. Distinction between Book – Keeping and Accountancy

Thus, the terms, book-keeping and accounting are very closely related, through
there is a subtle difference as mentioned below.

1. Object: The object of book-keeping is to prepare original books of Accounts. It is restricted

to journal, subsidiary book and ledge accounts only. On the other hand, the main object of
accounting is to record analyze and interpret the business transactions.
2. Level of Work: Book-keeping is restricted to level of work. Clerical work is mainly
involved in it. Accountancy on the other hand, is concerned with all level of management.
3. Principles of Accountancy: In Book-keeping Accounting concepts and conventions will be
followed by all without any difference. On the other hand, various firms follow various methods
of reporting and interpretation in accounting.
4. Final Result: In Book-Keeping it is not possible to know the final result of business every year,
 ADVANTAGES FROM ACCOUNTING
The role of accounting has changed from that of a mere record keeping during the 1st
decade of 20th century of the present stage, which it is accepted as information system and decision
making activity. The following are the advantages of accounting.

1. Provides for systematic records: Since all the financial transactions are recorded in the
books, one need not rely on memory. Any information required is readily available from
theserecords.
2. Facilitates the preparation of financial statements: Profit and loss accountant and balance
sheet can be easily prepared with the help of the information in the records. This enables the
trader to know the net result of business operations (i.e. profit / loss) during the accounting
period and the financial position of the business at the end of the accountingperiod.
3.Provides control over assets: Book-keeping provides information regarding cash in had,
cash at bank, stock of goods, accounts receivables from various parties and the amounts
invested in various other assets. As the trader knows the values of the assets he will have
control overthem.
4. Provides the required information: Interested parties such as owners, lenders, creditors etc.,
get necessary information at frequentintervals.
5. Comparative study: One can compare the present performance of the organization with that
of its past. This enables the managers to draw useful conclusion and make properdecisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of the
balancing of the books of accounts periodically. As the work is divided among many persons,
there will be check and countercheck.
7. Tax matters: Properly maintained book-keeping records will help in the settlement of all tax
matters with the taxauthorities.
8. Ascertaining Value of Business: The accounting records will help in ascertaining the correct
value of the business. This helps in the event of sale or purchase of abusiness.
9. Documentary evidence: Accounting records can also be used as an evidence in the court to
substantiate the claim of the business. These records are based on documentary proof. Every
entry is supported by authentic vouchers. As such, Courts accept these records asevidence.
10. Helpful to management: Accounting is useful to the management in various ways. It enables
the management to asses the achievement of its performance. The weakness of the business
can be identified and corrective measures can be applied to remove them with the
helpsaccounting.
LIMITATIONS OF ACCOUNTING
The following are the limitations of accounting.
1. Does not record all events: Only the transactions of a financial character will be recorded
under book- keeping. So it does not reveal a complete picture about the quality of human
resources, locational advantage, business contacts etc.
2. Does not reflect current values: The data available under book-keeping is historical in
nature. So they do not reflect current values. For instance, we record the value of stock at
cost price or market price, which ever is less. In case of, building, machinery etc., we adopt
historical cost as the basis. In fact, the current values of buildings, plant and machinery may
be much more than what is recorded in the balance sheet.
3. Estimates based on Personal Judgment: The estimate used for determining the values of
various items may not be correct. For example, debtor are estimated in terms of
collectability, inventories are based on marketability, and fixed assets are based on useful
working life. These estimates are based on personal judgment and hence sometimes may
 not be correct.
4. Inadequate information on costs and Profits: Book-keeping only provides information
about the overall profitability of the business. No information is given about the cost and
profitability of different activities of products or divisions.

BASIC ACCOUNTING CONCEPTS

Accounting is a system evolved to achieve a set of objectives. In order to achieve the goals, we need
a set of rules or guidelines. These guidelines are termed here as “BASIC ACCOUNTING
ONCEPTS”. The term concept means an idea or thought. Basic accounting concepts are the
fundamental ideas or basic assumptions underlying the theory and profit of FINANCIAL
ACCOUNTING. These concepts help in bringing about uniformity in the practice of accounting. In
accountancy following concepts are quite popular.
1. BUSINESS ENTITY CONEPT: In this concept “Business is treated as separate from the
proprietor”. All the Transactions recorded in the book of Business and not in the books of
proprietor. The proprietor is also treated as a creditor for the Business.

2. GOING CONCERN CONCEPT: This concept relates with the long life of Business. The
assumption is that business will continue to exist for unlimited period unless it is dissolved due to
some reasons or the other.

3. MONEY MEASUREMENT CONCEPT: In this concept “Only those transactions are recorded in
accounting which can be expressed in terms of money, those transactions which can not be
expressed in terms of money are not recorded in the books of accounting”.
4. COST CONCEPT: Accounting to this concept, can asset is recorded at its cost in the books of
account. i.e., the price, which is paid at the time of acquiring it. In balance sheet, these assets appear
not at cost price every year, but depreciation is deducted and they appear at the amount, which is
cost, less classification.

5. ACCOUNTING PERIOD CONCEPT: every Businessman wants to know the result of his
investment and efforts after a certain period. Usually one-year period is regarded as an ideal for this
purpose. This period is called Accounting Period. It depends on the nature of the business and object
of the proprietor of business.

6. DUAL ASCEPT CONCEPT: According to this concept “Every business transactions has two
aspects”, one is the receiving benefit aspect another one is giving benefit aspect. The receiving
benefit aspect is termed as “DEBIT”, where as the giving benefit aspect is termed as “CREDIT”.
Therefore, for every debit, there will be corresponding credit.

7. MATCHING COST CONCEPT: According to this concept “The expenses incurred during an
accounting period, e.g., if revenue is recognized on all goods sold during a period, cost of those
good sole should also
Be charged to that period.

8. REALISATION CONCEPT: According to this concept revenue is recognized when a sale is made.
Sale is Considered to be made at the point when the property in goods posses to the buyer and he
becomes legally liable to pay.
ACCOUNTING CONVENTIONS

Accounting is based on some customs or usages. Naturally accountants here to adopt that usage or custom.
They are termed as convert conventions in accounting. The following are some of the important
accounting conventions.

1. FULL DISCLOSURE: According to this convention accounting reports should disclose fully and
fairly the information. They purport to represent. They should be prepared honestly and sufficiently
disclose information which is if material interest to proprietors, present and potential creditors and
investors. The companies ACT, 1956 makes it compulsory to provide all the information in the
prescribed form.

2. MATERIALITY: Under this convention the trader records important factor about the commercial
activities. In the form of financial statements if any unimportant information is to be given for the
sake of clarity it will be given as footnotes.

3. CONSISTENCY: It means that accounting method adopted should not be changed from year to
year. It means that there should be consistent in the methods or principles followed. Or else the
results of a year Cannot be conveniently compared with that of another.

4. CONSERVATISM: This convention warns the trader not to take unrealized income in to account.
That is why the practice of valuing stock at cost or market price, whichever is lower is in vague.
This is the policy of “playing safe”; it takes in to consideration all prospective losses but leaves all
prospective profits.

CLASSIFICATION OF BUSINESS TRANSACTIONS

1. Personal Accounts: Accounts which are transactions with persons are called “Personal Accounts”.
A separate account is kept on the name of each person for recording the benefits received from ,or
given to the person in the course of dealings with him.
E.g.: Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, ObulReddy & Sons
A/C , HMT Ltd. A/C, Capital A/C, Drawings A/Cetc.

2. Real Accounts: T he accounts relating to properties or assets are known as “Real Accounts” .Every
business needs assets such as machinery , furniture etc, for running its activities .A separate account
is maintained for each asset owned by the business.
E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3. NominalAccounts: Accounts relating to expenses, losses, incomes and gains are known as
“Nominal Accounts”. A separate account is maintained for each item of expenses, losses, income or
gain.
E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest A/C,
purchases A/C, rent A/C, discount A/C, commission received A/C, interest received A/C, rent
received A/C, discount receivedA/C.
 Before recording a transaction, it is necessary to find out which of the accounts is to be debited and
which is to be credited. The following three different rules have been laid down for the three classes
of accounts….
1. Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and the
account of the person giving the benefit (given) is to be credited.

Rule: “Debit----The Receiver

“Credit----The giver
c
2. Real Accounts: When an asset is coming into the business, account of that asset is to be debited
.When an asset is going out of the business, the account of that asset is to be credited.

Rule: “Debit----What comes in

“Credit----What goes out

3. Nominal Accounts: When an expense is incurred or loss encountered, the account representing the
expense or loss is to be debited. When any income is earned or gain made, the account representing
the income of gain is to be credited.

Rule: “Debit----All expenses and losses

“Credit---- All incomes and gains

JOURNAL

The first step in accounting therefore is the record of all the transactions in the books of original
entry viz., Journal and then posting into ledges.

JOURNAL: The word Journal is derived from the Latin word ‘journ’ which means a day.
Therefore, journal means a ‘day Book’ in day-to-day business transactions are recorded in
chronological order.

Journal is treated as the book of original entry or first entry or prime entry. All the business
transactions are recorded in this book before they are posted in the ledges. The journal is a complete
and chronological (in order of dates) record of business transactions. It is recorded in a systematic
manner. The process of recording a transaction in the journal is called “JOURNALISING”. The
entries made in the book are called “Journal Entries”.

The proforma of Journal is given below.

Date Particulars L.F. Debit Credit

no RS. RS.
 1998 Jan 1 Purchases account Dr 10,000/-
to cash account 10,000/-
(being goods purchased for cash)

LEDGER
All the transactions in a journal are recorded in a chronological order. After a certain period, if we
want to know whether a particular account is showing a debit or credit balance it becomes very
difficult. So, the ledger is designed to accommodate the various accounts maintained the trader. It
contains the final or permanent record of all the transactions in duly classified form. “A ledger is a
book which contains various accounts.” The process of transferring entries from journal to ledger is
called “POSTING”.

Posting is the process of entering in the ledger the entries given in the journal. Posting into ledger is
done periodically, may be weekly or fortnightly as per the convenience of the business. The
following are the guidelines for posting transactions in the ledger.

1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for each new item
a new account is to be opened.
3. Depending upon the number of transactions space for each account is to be determined in the ledger.
4. For each account there must be a name. This should be written in the top of the table. At
the end of the name, the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the account, by starting with
“TO”.
6. ThecreditsideoftheJournalentryistobepostedonthedebitsideoftheaccount,by starting with “BY”.

Performa for ledger: LEDGER BOOK

Particulars account

Date Particulars J f no Amount Date Particulars J f no Amount

sales account

Date Particulars J f no Amount Date Particulars J f no Amount

 cash account

Date Particulars J f no Amount Date Particulars J f no Amount

1) Journalise the following transactions and post them in ledger.

1. 1-1-2003 Madhu commenced business with cash 15,000/-
2. 2-1-2003 Paid into bank Rs.10,000/-
3. 3-1-2003 Purchases from B Rs.2000/-
4. 4-1-2003 Returned goods to B Rs.200/-
5. 5-1-2003 paid to B in full settlement of his A/C 1700/-
6. 6-1-2003 received interest from bank Rs.750/-
9-1-2003 sold goods for cash 7000/-
12-1-2003 sold goods to ram 4000/-
15-1-2003 Returned goods from ram 100/-
16-1-2003 paid salaries 400/-
17-1-2003 entertainment expenses Rs.50/-
18.1.2003 cheque Received from ram Rs 1000/-
25-1-2003 received cheque Rs.500/- towards rent to landlord.

Journal entries in the books of Madhu:

Date Particulars Lf Debit Amt. In Credit amt in
No Rs Rs
1-1-2003 Cash A/C Dr 15000
To Capital 15000
(Being business started with cash)
2-1-2003 Bank A/C Dr 10000
To cash A/C 10000
(Being cash paid into matrix)
3-1-2003 Purchase A/C Dr 2000
To B A/C 2000
(Being goods purchased)
4-1-2003 B A/C Dr 200
To Purchase ReturnsA/C 200
(Being goods returned to B)
5-1-2003 B A/C Dr 1800
To Cash A/C 1700
To Discount Received 100
(Being cash paid to B with
discount)
6-1-2003 Cash A/C Dr 750
To interest received 750
 (Being interest Received from
Bank)
9-1-2003 Cash A/C Dr 7000
To sales A/C 7000
(Being goods sold)
12-1-2003 Ram A/C Dr 4000
To sales A/C 4000
(Being goods sold to Ram)
15-1-2003 Sales return A/C Dr 100
To Ram A/C 100
(Being Goods return from ram)
16-1-2003 Salaries A/C Dr 400
To cash A/C 400
(Being salaries paid in cash)
17-1-2003 Entertainment Expences A/C Dr 50
To Cash A/C 50
(Being entertainment expenses
paid)
18-1-2003 Cash A/C Dr 1000
To Ram A/C 1000
(Being cheque received from
ram)
25-1-2003 Rent A/C Dr 500
To bank A/C 500
(Being rent paid to land lord)

Ledger: in the books of madhu

Cash a/c
Particulars If Amt Date Particulars If Amt in
Date no in Rs no Rs
1-1-03 To capital 15000 2-1-03 By bank A/C 10,000
6-1-03 A/C 750 5-1-03 By B A/C 1700
To interest By salaries 400
9-1-03 received 7000 16-1- By
18-1- To sales A/C 1000 03 entertainment 50
03 To Ram 17-1- expenses
03 By balance c/d 11600
23,750 23750
31.1.03
11600
1-2-03 To balance
b/d

Capital A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
1-1-03 By cash 15000
 Bank A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
2-1-03 To cash A/C 10000 25-1- By rent 500
03 By balance c/d 9500
10000 10,000

To balance b/d 9500

Purchase A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
3-1-03 To B A/C 2000

B A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
4-1-03 To purchase 200 3-1-03 By purchase 2000
Return A/C
5-1-03 A/C 1700
5-1-03 To cash A/C 100
To discount
received 2000 2000

Purchase returns A/C

Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
4-1-03 By B A/C 200

Discount ReceivedA/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
5-1-03 By B A/C 100

Interest received A/C

Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
7-1-03 By cash A/C 750
 Sales A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
To balance c/d 9-1-03 By cash A/C 7000
11000 12-1- By Ram’s A/C 4000
11000 03 11,000

To balance b/d
11,000

Ram A/C
Date Particulars If Amt Date Particulars If Amt in
no in Rs no Rs
2-1-03 To sales A/C 4000 15-1- By sales returns 100
03 By cash A/C 1000
By Balance c/d 2900
4000 40000

To balance 2900

Sales Returns A/C

Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
15-1-03 To Ram’s 100

Salaries A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
6-1-03 To cash A/C 400

Entertainment Expenses A/C

Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
17-1-03 To cash A/C 50

Rent A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
25-1-03 To bank A/C 50
 2) Journalise the following transactions & post them into ledger
1-1-04 Raja commenced business with Rs.40000
2-1-04 Deposited into bank Rs.30000
3-1-04 Brought goods worth Rs.48000
4-1-04 Sold goods worth Rs60000
5-1-04 Paid rent 4000/-
6-1-04 Paid advertisement Rs3000/-
7-1-04 Sold goods Rs.50000 to suresh
8-1-04 Suresh paid Rs48600 in full settlement
10-1-04 paid Rs40000 to Rani on A/C

Journal entries in the Books of Raja

Date Particulars If Amt in Rs Credit
no Amt (Rs)
1-1-04 Cash A/C Dr 40000
To Capital A/C 40000
(Being business commenced)
Bank A/C Dr
30000
To Cash A/C
2-1-04 30000
(Being cash deposited in bank)
Purchase A/C Dr 48000
3-1-04 To Rani’s A/C 48000
(Being goods purchased from Rani)
Cash A/C Dr 60000
4-1-04 To Sales A/C 60000
(Being goods sold for cash)
Rent A/C Dr
4000
To Cash A/C
5-1-04 4000
(Being rent paid by cash)
Advertisement A/C Dr 3000
6-1-04 To Cash A/C 3000
(Being advert paid by cash)
Suresh’s A/C Dr 50000
7-1-04 To sales A/C 50000
(Being goods sold to suresh)
Cash A/C Dr 48600
8-1-04 Discount A/C 1400
To Suresh’s Account 50000
(Being cash received from suresh with
discount)
10-1-04 Rani’s A/C Dr 40000
To Cash A/C 40000
(Being Cash Paid To Rani)
 Ladger in the books of Raja.
Cash A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
1-1-04 To Capital A/C 40000 2-1-04 By Bank A/C 3000
4-1-04 To Sales A/C 60000 5-1-04 By Rent A/C 4000
8-1-04 To Suresh’s A/C 48600 6-1-04 By Advt A/C 3000
10-1-04 By Rani’s A/C 40000
By Balance c/d 71600
148600 148600
To Balance b/d 71600

Capital A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
1-1-04 By cash A/C 40000

Bank A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
2-1-04 To Cash A/C 30000

Purchase A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
3-1-04 To Rani’s A/C 48000

Rani’s A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
10-1-04 To Cash A/C 40000 3-1-04 By purchase A/C 48000
To Balance A/C 8000

48000 48000

By balance b/d 8000

Sales A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
To balance c/d 110000 4-1-04 By cash A/C 60000
7-1-04 By Suresh’s A/C 50000
110000 110000
By balance A/C 110000
Rent A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
5-1-04 To Cash A/C 4000

Advertisement A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
6-1-04 To cash A/C 3000

Suresh’s A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
7-1-04 To sales A/C 50000 8-1-04 By cash A/C 48600
8-1-04 By discount A/C 1400
50000 50000
Discount A/C
Date Particulars If Amt in Date Particulars If Amt in
no Rs no Rs
8-1-04 To Suresh’s A/C 1400

TRAIL BALANCE
The first step in the preparation of final accounts is the preparation of trail balance. In the double
entry system of book keeping, there will be credit for every debit and there will not be any debit
without credit. When this principle is followed in writing journal entries, the total amount of all
debits is equal to the total amount all credits.

A trail balance is a statement of debit and credit balances. It is prepared on a particular date with the
object of checking the accuracy of the books of accounts. It indicates that all the transactions for a
particular period have been duly entered in the book, properly posted and balanced. The trail
balance doesn’t include stock in hand at the end of the period. All adjustments required to be done at
the end of the period including closing stock are generally given under the trailbalance.

DEFINITIONS:

:A trail balance is a list of all the balances standing on the ledger accounts
and cash book of a concern at any givendate.- SPICER AND POGLAR

A trail balance is a statement of debit and credit balances extracted from the ledger with a view to test the
arithmetical accuracy of the books.- J.R.BATLIBOI:

Thus a trail balance is a list of balances of the ledger accounts’ and cash book of a business
concern at any given date.
PROFORMA FOR TRAIL BALANCE:

Trail balance for MR…………………………………… as on …………

NO NAME OF ACCOUNT DEBIT CREDIT
(PARTICULARS) AMOUNT(RS.) AMOUNT(RS.)

Trail Balance
Specimen of trial balance
S no DEBIT S no CREDIT
1 Opening stock Asset 1 Sales Gain
2 Provision for discount on creditors Asset 2 Dab debts reserve Gain
3 Debtors Asset 3 Creditors Liability
4 Goodwill Asset 4 Cash in hand Liability
5 Plant, machinery Asset 5 General reserve Liability
6 Land, buildings Asset 6 Provisionfor depreciation Liability
7 Furniture, fittings Asset 7 Bills payable Liability
8 Investments Asset 8 Bank overdraft Liability
9 Loan advances Asset 9 Outstanding salaries Liability
10 Horse, carts Asset 10 Capital Loan
11 Bills receivable Asset 11 Loan Taken Loan
12 Prepaid insurance Asset 12 Discount received Revenue
13 Patents & Trademarks Asset 13 Commission received Revenue
14 Motor vehicle Asset 14 Interest received Revenue
15 Income tax Drawings 15 Petty receipts Revenue
16 Purchases Expense 16 Bad debt reserve Revenue
17 Wages Expense 17 Outstanding rent Revenue
18 Freight Expense 18 Gain Returns
19 Transport expenses Expense 19 Liability outwards
Provision
20 Royalities on production Expense for
21 Gas, fuel Expense discount
22 Repairs Expense on
23 Rent Expense debtors
24 Salaries Expense
25 Interest paid Expense
26 Insurance Expense
27 Carriage outwards Expense
28 Advertisements Expense
29 Petty expenses Expense
30 Trade expenses Expense
31 Office expenses Expense
32 Customs duty Expense
33 Sales tax Expense
34 Excise duty Expense
35 Returns inwards Loss
36 Discount allowed Loss
 37 Bad debts Loss
38 Depreciation Loss
FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has
resulted in profit or loss and what the financial position of the business is at a given time. In brief,
he wants to know (i)The profitability of the business and (ii) The soundness of the business.
The trader can ascertain this by preparing the final accounts. The final accounts are prepared
from the trial balance. Hence the trial balance is said to be the link between the ledger accounts and
the final accounts. The final accounts of a firm can be divided into two stages. The first stage is
preparing the trading and profit and loss account and the second stage is preparing the balance sheet.
TRADING ACCOUNT
The first step in the preparation of final account is the preparation of trading account. The
main purpose of preparing the trading account is to ascertain gross profit or gross loss as a result of
buying and selling the goods.
Trading account of MR……………………. for the year ended ……………………
Particulars Amount Particulars Amount
To opening stock xxxx By sales xxxx
TopurchasesLess:returns xx Less: returns xxx
To carriage inwards To wages By closingstock
To freight
To customs duty, octroi
To gas, fuel, coal, Water
To factory expenses
To other man. Expenses To
productive expenses To gross profit
c/d

xxxx xxxx

Finally, a ledger may be defined as a summary statement of all the transactions relating to a person ,
asset, expense or income which have taken place during a given period of time. The up-to-date state
of any account can be easily known by referring to the ledger.

PROFIT AND LOSS ACCOUNT

The business man is always interested in knowing his net income or net profit.Net profit represents
the excess of gross profit plus the other revenue incomes over administrative, sales, Financial and
other expenses. The debit side of profit and loss account shows the expenses and the credit side the
incomes. If the total of the credit side is more, it will be the net profit. And if the debit side is more,
it will be netloss.
PROFIT AND LOSS A/C OF MR……………….FOR THE YEAR ENDED………

…PARTICULARS AMOUNT PARTICULARS AMOUNT

TO office salaries Xxxxx By gross profit b/d Interest Xxxx
TO rent,rates,taxes x received Discount received Xxxx
TO Printing and stationery Xxxxx Commission received xXxx
TO Legal charges,Audit fee Xxxxx Income from investments xXxx
TO Insurance Xxxx Dividend on shares xxXx
TO General expenses Xxxx Miscellaneous investments xx
TO Advertisements Xxxx Rent received Xxxx
TO Bad debts Xxxxx
TO Carriage outwards Xxxx xxxx
TO Repairs Xxxx
TO Depreciation Xxxx
TO interest paid Xxxxx
TO Interest on capital Xxxxx
TO Interest on loans Xxxxx
TO Discount allowed Xxxx
TO Commission Xxxxx
TO Net profit------- Xxxxx
(transferred to capital a/c) Xxxxx
Xxxxxx Xxxxxx

BALANCE SHEET
The second point of final accounts is the preparation of balance sheet. It is prepared often in the
trading and profit, loss accounts have been compiled and closed. A balance sheet may be considered
as a statement of the financial position of the concern at a given date.
DEFINITION: A balance sheet is an item wise list of assets, liabilities and proprietorship of a
business at a certain state.
botliboi: A balance sheet is a statement with a view to measure exact financial position of a
business at a particular date.
Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a business
firm and which serves to as certain the financial position of the same on any particular date. On the
left-hand side of this statement, the liabilities and the capital are shown. On the right-hand side all
the assets are shown. Therefore, the two sides of the balance sheet should be equal. Otherwise, there
is an error somewhere.
 BALANCE SHEET OF ………………………… AS ON …………………………………….
Liabilities and capital Amount Assets Amount

Creditors Bills payable Cash in hand Cash

Bank overdraft at bank Bills
Loans receivable Debtors
Mortgage Closing stock
Reserve fund Investments
Capital xxxx Furniture and fittings
Add: Net Profit xx Plats & machinery
------- Land & buildings
xxxxx Patents,tm,copyrights
Less: Drawings xxxx Goodwill
Prepaid expenses
Outstanding incomes
XXXX XXXX

Advantages: The following are the advantages of final balance.

1. It helps in checking the arithmetical accuracy of books of accounts.
2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.
FINAL ACCOUNTS -- ADJUSTMENTS
We know that business is a going concern. It has to be carried on indefinitely. At the end of every
accounting year. The trader prepares the trading and profit and loss account and balance sheet.
While preparing these financial statements, sometimes the trader may come across certain problems
.The expenses of the current year may be still payable or the expenses of the next year have been
prepaid during the current year. In the same way, the income of the current year still receivable and
the income of the next year have been received during the current year. Without these adjustments,
the profit figures arrived at or the financial position of the concern may not be correct. As such these
adjustments are to be made while preparing the final accounts.

The adjustments to be made to final accounts will be given under the Trial Balance. While making
the adjustment in the final accounts, the student should remember that “every adjustment is to be
made in the final accounts twice i.e. once in trading, profit and loss account and later in balance
sheet generally”. The following are some of the important adjustments to be made at the time of
preparing of final accounts:-
1.CLOSING STOCK:-

(i) If closing stock is given in Trail Balance: It should be shown only in the balance sheet “AssetsSide”.
(ii) If closing stock is given as adjustment:

1. First, it should be posted at the credit side of “TradingAccount”.

2. Next, shown at the asset side of the “BalanceSheet”.
 2.OUTSTANDING EXPENSES:-
If outstanding expenses given in Trail Balance: It should be only on the liability side of Balance Sheet.
If outstanding expenses given as adjustment:
1. First, it should be added to the concerned expense at the debit side of profit and loss account or Trading Account.
2. Next, it should be added at the liabilities side of the Balance Sheet.
3. PREAPID EXPENSES:-
(i) If prepaid expenses given in Trial Balance: It should be shown only in assets side of
the Balance Sheet. (ii)If prepaid expense given as adjustment :
1. First, it should be deducted from the concerned expenses at the debit side of profit and loss
account or Trading Account.
2. Next, it should be shown at the assets side of the Balance Sheet.
4.INCOME EARNED BUT NOT RECEIVED [OR] OUTSTANDING INCOME [OR] ACCURED INCOME:-
(i) If incomes given in Trial Balance: It should be shown only on the assets side of the Balance Sheet.
(ii) If incomes outstanding given as adjustment:
1. First, it should be added to the concerned income at the credit side of profit and loss account.
2. Next, it should be shown at the assets side of the Balance sheet.
5. INCOME RECEIVED IN ADVANCE: UNEARNED INCOME:-
(i) If unearned incomes given in Trail Balance: It should be shown only on the liabilities side of the
BalanceSheet.
(ii) If unearned income given as adjustment :
1. First, it should be deducted from the concerned income in the credit side of the profit and lossaccount.
2. Secondly, it should be shown in the
liabilities side of the Balance Sheet.
6.DEPRECIATION:-

(i) If Depreciation given in Trail Balance: It should be shown only on the debit side of the profit and loss
account.
(ii) If Depreciation given as adjustment
1. First, it should be shown on the debit side of the profit and lossaccount.
2. Secondly, it should be deduced from the concerned asset in the Balance sheet assetsside.
7.INTEREST ON LOAN [OR] CAPITAL:-

(i) If interest on loan (or) capital given in Trail balance:It should be shown only on debit side of the
profit and loss account.

(ii) If interest on loan (or)capital given as adjustment:

1. First, it should be shown on debit side of the profit and lossaccount.

2. Secondly, it should added to the
loan or capital in the liabilities
side of the BalanceSheet.

8.BAD DEBTS:- If bad debts given in Trail balance:It should be shown on the debit side of the profit and
lossaccount.
 (i) If bad debts given asadjustment:
1. First, it should be shown on the debit side of the profit and lossaccount.
2. Secondly, it should be deducted from debtors in the assets side of the BalanceSheet.

9.INTEREST ON DRAWINGS:-

(i) If interest on drawings given in Trail balance: It should be shown on the credit side of the profit and
lossaccount.
(ii) If interest on drawings given as adjustments:
1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be deducted from capital on liabilities side of the Balance
Sheet.
10.INTEREST ON INVESTMENTS:-

(i) If interest on the investments given in Trail balance:It should be shown on the credit side of the
profit and loss account.

(ii) If interest on investments givenasadjustments :

1. First, it should be shown on the credit side of the profit and lossaccount.
2. Secondly, it should be added to the investments on assets side of the BalanceSheet.
Note: Problems to be solved on final accounts

Preparation of balance sheet for the question in trail balance. Trading & profit & loss A/C for year ended 31-12----
-

To opening stock 20,000 By sales 800000

To purchase 30,000 By closing stock 30000

Less Returns - 300,000

To wges 50,000

To power & water 65,000

To gross profit 395000 ______

______ 830000

830000

To Salaries 90000 By gross profit 395000

To electricity 14000 By commission

To interest 16000 received 15000

To rent 24000 By discount received 7000

To office ex 30000 ________

To N/P 243000 417000

417000

Balance sheet

Capital 300000 Land 140000

Add N/P 243000 Building 400000

543000 Debitors 60000

Creditor 70000 Closing stock 30000

B/P 17000

630000 630000

From the following info of Mr.Ramana trades you can prepage final A/C

Trial Balance as on 31-12-1986

Plant & machinary 520000 Capital 280000

Purchase tax 670000 Creditor 450000

Furniture & fixtures 170000 Returns 20000

Opening stock 230000 Rent received 280000

Return inwards 50000 Fees & commission 420000

Debitors 380000 Other income 70000

Carriage & fraight 90000 Total 31 20 000

Rent, rates & taxes 46000

Printing and stationary 54000

Trade expenses 110000

Postage & Telegram 80000

Salaries & wages 420000

Cash in r and 75000

Cash at bank 225000

31,20 000
Adjustments:-

Stock on 31-12-1998 580000/-

Dep: 20% on furniture

10% on plant & machinary.

Out standing salaries and ways 90,000/-

Fees & commission were prepaid the extent of 50,000/-

Trading A/C for the year ending of 31/12/1998

Particulars Rs Particulars Rs

To opening stock 230000 By sales 1800000 less

returns 50000
To purchases 670000 1750000
By close stock
less returns 20000 650000 580000

To carriage 90000

To gross profit 1360000

233000 2330000

Profit & Loss A/C

Particulars Rs Particulars Rs

To salary wages 420000 add By gross profit 1360000/-

out standing 90000 salaries
510000 By rent received 280000/-
To R.R.T
46000 By fee & commission 220000/-
To printing & stationary 220000 less return
54000 50000 inwards
To trade ex.
110000 By other income 170000
To postage & telegrams
80000
To Dep.170000x 20/100
34000 70000
To Dep on plant
520000x10/100

To net profit 52000

994000

1880000 1880000/-
 Balance sheet

Liability Rs Assets Rs

Capital 280000 Add N/P P/ in 520000

994000 creditors
1274000 Less D&P 52000 468000
Creditors
450000 &/& 170000
Outstanding sales
90000 less Dep 34000 136000
Income received in advance
50000 Debitors 380000

Cash in hand 75000

Cash at bank 225000

1864000 Closing stock 580000

1864000

FINANCIAL ANALYSIS
Ratio Analysis
Absolute figures are valuable but they standing alone convey no meaning unless compared with
another. Accounting ratio show inter-relationships which exist among various accounting data.
When relationships among various accounting data supplied by financial statements are worked out,
they are known as accounting ratios.
Accounting ratios can be expressed in various ways such as:
1. a pure ratio says ratio of current assets to current liabilities is 2:1or
2. a rate say current assets are two times of current liabilitiesor
3. a percentage say current assets are 200% of currentliabilities.

Each method of expression has a distinct advantage over the other the analyst will selected that
mode which will best suit his convenience and purpose.

Uses or Advantages or Importance of Ratio Analysis

Ratio Analysis stands for the process of determining and presenting the relationship of items and
groups of items in the financial statements. It is an important technique of financial analysis. It is a
way by which financial stability and health of a concern can be judged. The following are the main
uses of Ratioanalysis:

(i) Useful in financial position analysis: Accounting reveals the financial position of the
concern. This helps banks, insurance companies and other financial institution in lending
and making investmentdecisions.
(ii) Useful in simplifying accounting figures: Accounting ratios simplify, summaries and
systematic the accounting figures in order to make them more understandable and in lucidform.

(iii) Useful in assessing the operational efficiency: Accounting ratios helps to have an idea of
the working of a concern. The efficiency of the firm becomes evident when analysis is based on
accounting ratio. This helps the management to assess financial requirements and the
capabilities of various businessunits.

(iv) Useful in forecasting purposes: If accounting ratios are calculated for number of years, then
a trend is established. This trend helps in setting up future plans andforecasting.

(v) Useful in locating the weak spots of the business: Accounting ratios are of great assistance in
locating the weak spots in the business even through the overall performance may beefficient.

(vi) Useful in comparison of performance: Managers are usually interested to know which
department performance is good and for that he compare one department with the another
department of the same firm. Ratios also help him to make any change in the
organisationstructure.

Limitations of Ratio Analysis:

These limitations should be kept in mind while making use of ratio analyses for interpreting the
financial statements. The following are the main limitations of ratio analysis.

1. False results if based on incorrect accounting data: Accounting ratios can be correct only if
the data (on which they are based) is correct. Sometimes, the information given in the
financial statements is affected by window dressing, i. e. showing position better than what
actuallyis.
2. No idea of probable happenings in future: Ratios are an attempt to make an analysis of the
past financial statements; so they are historical documents. Now-a-days keeping in view the
complexities of the business, it is important to have an idea of the probable happenings
infuture.
3. Variation in accounting methods: The two firms’ results are comparable with the help of
accounting ratios only if they follow the some accounting methods or bases. Comparison
will become difficult if the two concerns follow the different methods of providing
depreciation or valuingstock.
4. Price level change: Change in price levels make comparison for various yearsdifficult.
5. Only one method of analysis: Ratio analysis is only a beginning and gives just a fraction of
information needed for decision-making so, to have a comprehensive analysis of financial
statements, ratios should be used along with other methods ofanalysis.
6. No common standards: It is very difficult to by down a common standard for comparison
because circumstances differ from concern to concern and the nature of each industry
isdifferent.
7. Different meanings assigned to the some term: Different firms, in order to calculate ratio
may assign different meanings. This may affect the calculation of ratio in different firms
and such ratio when used for comparison may lead to wrongconclusions.
8. Ignores qualitative factors: Accounting ratios are tools of quantitative analysis only. But
sometimes qualitative factors may surmount the quantitative aspects. The calculations
derived from the ratio analysis under such circumstances may getdistorted.
9. No use if ratios are worked out for insignificant and unrelated figure: Accounting ratios
should be calculated on the basis of cause and effect relationship. One should be clear as to
what cause is and what effect is before calculating a ratio between twofigures.
 Ratio Analysis: Ratio is an expression of one number is relation to another. It is one of the methods
of analyzing financial statement. Ratio analysis facilities the presentation of the information of the
financial statements in simplified and summarized from. Ratio is a measuring of two numerical
positions. It expresses the relation between two numeric figures. It can be found by dividing one
figure by another ratios are expressed in three ways.
1. Jines method
2. Ratio Method
3. Percentage Method
Classification of ratios: All the ratios broadly classified into four types due to the interest of
different parties for different purposes. They are:
1. Profitability ratios
2. Turn over ratios
3. Financial ratios
4. Leverage ratios

1. Profitability ratios: These ratios are calculated to understand the profit positions of the
business. These ratios measure the profit earning capacity of an enterprise. These ratios can
be related its save or capital to a certain margin on sales or profitability of capital employ.
These ratios are of interest to management. Who are responsible for success and growth of
enterprise? Owners as well as financiers are interested in profitability ratios as these reflect
ability of enterprises to generate return on capital employ important profitability ratiosare:

Profitability ratios in relation to sales: Profitability ratios are almost importance of concern.
These ratios are calculated is focus the end results of the business activities which are the
sole eritesiour of overall efficiency of organisation.

i) LIQUIDITY RATIO:-
Liquidity ratio are divided into 2 types.
a. Current ratio
b. Quick ratio

a) Current Ratio:-
Current ratio is the ratio between current asserts and current liabilities. It is a measure of general liquidity
and is most widely used to make the analysis of a short- term financial position of a firm.
Current ratio = Current assets
Current liabilies
The standard current ratio is 2:1
This current ratio measures only the quality of current assets and not quality of current assets.
CA CL
Cash in hand Outstanding expenses
Cash at bank Bills payable
Marketable securities Sunory creditors
(short- term). Short term advance
Short term investments Divided payable
Bills receivable Bank over Draft
Sundry Debitors
Stock/closy stock/ inventories
Prepaid Ex.
 b) QUICK RATIO:-
Quick ratio is also called as acid test ratio. It measures the firms ability to convert its current assets quickly into
cash to pay the current liabilities.
Quick ratio = Quick asset
Quick liabilities
The standard quick ratio is 1:1
Quick assets = current assets – [ stock + prepaid expenses ]
ii) ACTIVITY RATIOS:-
Activity ratio express now the firms are active interms of selling stock, collecting its receivables and payables.
These are of three types.
a) Stock turn over ratio
b) Debitors turn over ratio
c) Creditors turn over ratio
a) STOCK TURN OVER RATIO:-
This ratio is also called inventory turn over ratio. It indicates the number of times the average stock is
begin sold during a given period.
The favourable ratio is 8 times. The higher the stock is turn over ratio the better the performance of the
firm in sales.
Stock turn over ratio = Cost of goods sold
Avg. stock at cost
Cost of goods sold = sales – Gross profit.

Avg. stock = Opening stock + closing stock

2
(or)
Avg. stock = Net sales
Closing stock
b) Debitors turn over ratio:-
Debitors turn over ratio shows the no. of times the average debitors are collected during a given
accounting period. It shows quickly the firm is in position to collect its debitors.
The favourable ratio between 10 to 12 times.
The standard days are in between 3 to 36 days.

Debitors turnover ratio = Credit sales

Avg. debitors

Debitors collection period = No. of days in a year

Debitors turn over ratio

Avg. debitors = [opening debitors + bills receivable] + [ Closing debitors + bills receivable] /2
The standard creditor’s turnover ratio is 12 times or below 12 times.
The standard payment period is about 50 days.

iii) PROFITABILITY RATIOS:-

Profitability ratio indicates profitability position of the form. They are
a) Gross profit ratio
b) Net profit ratio
c) Opening profit ratio
d) Operating ratio.

Gross profit ratio = G/P x 100

Sales

Net profit ratio = N/P x 100

Sales

Operating profit ratio = Operating profit x 100

Sales
Operating ratio = 1-operating profit ratio.
Operating profit = [ profit + non operating expenses – non operating income]

P) Sales = 10,00,000, Gross profit = 40,00,000, N/P = 3,00,000,

Non-operating expenses = 1,50,000, non-operating income = 1,00,000.
Estimate profitability

Gross profit ratio = Gross profit x 100-40%

Sales
Net profit ratio = N/P x 100 = 30%
Sales

Operating profit ratio = o/p x 100

Sales
O/P = [N/P + No Exp – No incomes] = 300000 + 150000 – 100000 = 350000
O/P ratio = 35%
Operating ratio =1- operating profit ratio
= 65%

EARNING PER SHARE RATIO:- [EPS]

This helps in determine the market price of equity shares of the company and estimating the company
capacity to pay divided to its equity shares holders. It is calculated as follows

EPS = Net profit after tax

No. of equity shares

Ex:- The following figures are available of XYZ company for the year ending 31 st March 2000.
No. Of shares = 10000/-
Net profit after tax = 450000/-
Eps = 45/-
PRICE EARNING RATIO (PE ratio):-
This is share price divided by earning per share
Market price per share
PE ratio = Earning per share
p) If marketing price per share is Rs 340 and Eps is 10/-, then calculate PE ratio.
Sol:- PE ratio = 34 times
 CAPITAL STRUCTURE RATIO:-
Capital structure or leverage ratio is defined as the financial ratio which focuses on the long solvency
of the firm. The long term solvency of the firm is always reflected in its ability to meet its long term comments such as
payment of interest periodically with out fail. These are two types.
1. Debt – Equily ratios
2. Internet coverage ratio.

1. DEBT – EQUITY RATIO:- Debt equity ratio is the ratio between oursiders funds (debt) and insiders funds
(equity)
Debt – equity ratio = long term Debts
Shareholders fund

Long-term debt = Debentures + long term liabilities + Martage loan + Bank loan-----

Shareholders fund = share capital + Reserves & surplus + capital reserves + general reserves + p/l A/C Balance.

Eg:- Calculate debt – equity ratio under the following info

Equity – share capital 5,00,000.
Reserves & Surplus 2,00,000
Profits & Loss A/C 1,00,000
Debentures 2,00,000
Long-term liabilities 1,00,000
Bank loan 1,00,000
Sol:- Long-term debt = Debentures + long–term liabilities + Bank loan.
= 2,00,000 + 1,00,000 + 1,00,000
= 4,00,000

Shareholders fund = Share Capital + reverses & Surplus + Profit & loss A/C balance.
= 8,00,000
Debit – equity ratio = 1: 2

INTERPRETATION :- 1: 2 ratio means for every 100 is debit, There is an equity fund of Rs.200. So the ratio 1 : 2 is
satisfactory.
2. INTERNET COVERAGE RATIO:-
Internet coverage ratio is calculated to judge the firms capacity to pay the interest on debt it borrows. It
gives an idea of the extent the firm earnings may contract before it is unable to pay interest payment out of current
earnings, It is very important ratio for the financial institution to judge the ability of the borrower to service the loan
from the current year profits.

Interest coverage ratio = Net profit before interest & tax

Fixed interest charges
Ex:- The earnings before interest & taxes (EBIT) of the company is as Rs. 5,60,000. Its fixed commitment include
payment of 10% of 7000 debentures of 100/- each is subjected to tax of 30% per annum.
Sol:- Net profit before interest and taxes = 5,60,000/-
Fixed interest charges on the debentures
= (7000 x 100) x 10%
= 70,000/-
Interest coverage ratio = 8 times.
P) The following are the extracts from the financial statements of blue & red Ltd. As an 31st march 2001 & 2002
respectively.
Particulars 31-3-2001 31-3-2002
Stock 10,000 25,000
Debitors 20,000 20,000
B/R 10,000 5000
C/h 18,000 15000
B/P 15,000 20,000
Creditors 30,000 40,000
Bank OD ____ 2000
9% Debentures 5,00,000 5,00,000
Sales 3,50,000 3,00,000
Cash at bank 40,000 50,000
Purchases 2,00,000 1,50,000
Compute the following for both the years
a) Current ratio (C/R) b) liquidty ratio (L/R) c) Stock turn over ratio
Sol:-
a) 2001 2002
Current ratio = C.A
C.L
CA = Stock + Debitors + B/R + C/N + C/B C.A= 1,05,000
= 98,000.
C.L = Criditors + B.OD + B/P C.L= 62,000
= 45,000
C/R = 2.17 C/R = 1.69
b) Quick ratio = Q.A/C.L Q/R= Q.A/C.L
= 88000 =80,000
45000 62,000
= 1.956 = 1.29
2001
c) Stock turn over ratio = Cost of goods sold
Avg. stock
Cost of goods sold = Sales – Gross profit
= 2,80,000
avg. stock = opening stock + closing stock
2
= Closing stock (opening stock is not given)
= 10,000
Stock turn over ratio = 2,80,000 =28 times
10,000
2002 avg. stock= 10000 + 250000/2 = 17,500
Cost of goods sold = 25,0000
Stock turn over ratio = 250000 = 14.28 times
17500
2 Marks Questions and Answers
1. Define accounting?

A). Accounting also refers to the process of summarizing, analyzing and reporting the business transactions

According to American Accounting Association, “accounting is the process of identifying, measuring, and
communicating economic information to permit informed judgments and decisions by the users of the information”.

2. What are the branches of accounting?

A). there are various branches of accounting system these are,

1. Financial accounting 2. Cost accounting 3. Management accounting

3 .Define accounting cycle?

A). accounting cycle covers all the important stages in accounting. It includes the process journal, ledger, trial balance and
final accounts.

TRANSACTIONS

FINAL
JOURNAL
ACCOUNTS

TRIAL BALANCE LEDGER

4. what is journal?

A). journal is a French word come from “jour” it means ‘a day’. Journal is a primary entity books of accounting in which
transactions are record in chronological order, the moment they take place in business. Recording entries in journal is
called journalizing.

5. What is ledger?

A). Ledger is a book that contains several accounts. The process of preparations of accounts from the journal in to ledger
is called posting in the ledger. The example of ledger accounts are sales a/c, cash a/c etc.

Format of ledger

Dr ACCOUNT Cr

date particulars L.F no amount Date particulars L.F.NO amount

1/02/2012 To cash a/c xxxxx 21/2/2012 By bank a/c Xxxxx

6. What is meant by trial balance?

A). trial balance is a statement containing debit and credit balances of various accounts taken out from ledger books as on
a particular date. A trial balance must agree on that date.

7. what is capital expenditure?

A). capital expenditure refers to that expenditure incurred to acquire a fixed asset used continuously in the business for the
purpose of earning revenue. any amount spent to increase the earning capacity of the asset is also called capital
expenditure .

For example: cost of plant and machinery, buildings etc.

8. what is deferred revenue expenditure ?

A).it refers to that portin of expenditure that remains euchanged to profit and loss account of a given period.

9. what is contra entry?

A). contra entry means opposite, it implies that for an entry in cash column of debit side, there is an entry in the opposite
side in the bank column.

Example:: cash is deposited into bank , cash is drawn from bank for office use.

10. what is journal proper?

A). such transactions which can’t be recorded in any of the above subsidiary books are recorded in journal proper

For example:: opening entries , closing entries, adjustment entries, purchase / sale of assets on credit basis etc.

11. What is ratio analysis?

A). Ratio analysis is the process of determining and interpreting numerical relation ship based on financial statements . by
computing ratios, it is easy to understand the financial position of the firm . it is used to focus on financial issues such as
liquidity, profitability and solvency of a given firm.

12. what is EPS?

A). EPS refers earnings for share is relationship between net profits and the number of shares outstanding at the end of the
given period.

EPS= NETPROFIT AFTER TAXES/NO OF SHARES OUT STANDING

13. What is the formula for current ratio?

A). Current ratio is relation ship between the current assets and current liabilities it is standard ratio is 2:1. The following
formula is used for computing current ratio.. Current ratio= current assets/current liabilities

14)define ratio analysis ?

a) Ratio Analysis stands for the process of determining and presenting the relationship of items and groups of items in the
financial statements. It is an important technique of financial analysis. It is a way by which financial stability and health of
a concern can be judged
15)define profitability ratios

a) Profitability ratios: These ratios are calculated to understand the profit positions of the business. These ratios measure
the profit earning capacity of an enterprise.

16)write formula of inventory turn over ratio ?

a)
cost of goods sold
1. Stock turnover ratio = average stock

Here,
opening stock  closing stock
Average stock= 2
17) define liquidity ratio ?

a) Liquidity refers to ability of organisation to meet its current obligation. These ratios are used to measure the financial
status of an organisation. These ratios help to the management to make the decisions about the maintained level of current
assets & current libraries of the business.

18)define solvency or leverage ratios

a) Solvency refers to the ability of a business to honour long item obligations like interest and installments associated with
long term debts. Solvency ratios indicate long term stability of an enterprise. These ratios are used to understand the yield
rate if the organisation.

19) formula of debt equity ratio ?

a)
outsiders funds Debt
1. Debt – equity ratio= = share holders funds Equity

20)write formula of current ratio

a)
current assets
Current ratio = current liabilitie s
Note: The ideal ratio is 2:1
 MODULE-V

S.No Question CO BL Ma
rks
1 A. Define financial accounting. Explain various types of accounts. 5 2 6
B. Explain about Double entry Book keeping system. 6
Journalize the following transactions in the books of Hari. 5 2
2 2020 March 01 Started business with cash- Rs.6,000 12
02 Sold Goods- Rs.3,500
04 Bought Goods- Rs.1,500
07 Sold Goods to Rajesh on credit- Rs.3,800
08 Bought Furniture for cash from Krishna Murthy- Rs.1440
10 Bought Plant& Machinery- Rs.15,000
3 Journalize the following transactions in the books of Gopal. 5 2 12
2022 June 03 Received cash from Ram- Rs.5,000
04 Purchased Goods for cash- Rs.500
11 Sold Goods to Hari- Rs.200
13 Paid Ramakrishna- Rs.400
17 Received from Hari- Rs.200
20 Bought Furniture from Raju- Rs.200
27 Paid Room Rent- Rs.80
30 Paid Stationery- Rs.100
4 Write short notes on a) Journal b) Ledger c) Trial Balance 5 2 12
5 Explain various steps involved in preparing final accounts. 5 2 12
6 A) Smrita Ltd. has current ratio of 3|1. If its stock is Rs.40, 000 and Total 5 2 6
current liabilities are Rs.75, 000, Find its Liquid Ratio.
B) A company has current ratio of 3|1 and liquid ratio of 1|2. If the working 6
capital is Rs.1, 80,000, Find current liabilities and stock.
7 A) Compute Debtors Turnover Ratio, if total sales are Rs.2, 50,000 and Cash 5 2 6
Sales is Rs.70,000. Debtors in the beginning are Rs.16,000 and at the end is
Rs.8,000 more. 6
B) Stock turnover ratio is 2.5 and Average stock is Rs.20,000. If profit is 25% of
cost, compute cost of goods sold, Net sales and Stock velocity.
8 Define the term ratio. Explain different types of ratios. 5 2 12
9 Discuss advantages and limitations of ratios. 5 3 12
10 Write short notes on following. 5 3 12
A. Stock Velocity
B. Debt Collection Period
C. EPS