INA Merged

INSURANCE ACCOUNTING
(UNIT – 1)
PRASAD AKOLKAR – 98194 65651
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“ ACCOUNTING ” - Meaning ..
PROCESS of ………
✓ Recording & reporting of financial transactions
✓ Origination of transactions
✓ Recognition
✓ Processing
✓ Summarization …
✓ ….. in the Financial Statement
✓ Communicating Interested parties
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“ ACCOUNTING ” – Interested groups ..
STAKEHOLDERS STAKEHOLDERS STAKEHOLDERS
Shareholders Investors Employees
Suppliers Creditors Customers
Lenders Regulators Govt. Authorities
Research Entities Industry Association Educational Institutions
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“ ACCOUNTING ” – Objectives, Functions ....
1. RECORDING OF FINANCIAL TRANSACTIONS
➢ Keeping books of account

➢ Record keeping – Systematic manner
➢ Documentary evidence
➢ Invoices, receipts, vouchers , bank statements
➢ Reliability of information
➢ Continuous basis viz, accessed at any point of time
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2. ACERTAINMENT OF RESULTS
➢ Profitability & Financial position

➢ Net results , operating surplus – commercial entity
➢ Income & expenditure – surplus or deficit – Non-profit entity
➢ Revenue account (Insurance companies) & Profit loss account
➢ Financial Position – Key ratio – Profitability vs liquidity
➢ Wealth creation for the period under review
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3. ASSESSMENT & ANALYSIS OF FINANCIAL HEALTH
➢ Growth , Sustainability & Solvency

➢ Exceptional & abnormal events & their implication
➢ Ratio analysis, Funds flow & Cash flow analysis
➢ Insurance companies – Solvency is critical factor
➢ Solvency – capacity to pay liabilities & borrowings – RSM vs ASM
➢ RSM – with reference to nature & volume of business
➢ ASM – Net worth in excess of Assets over Liabilities
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4. COMMUNICATION – STAKEHOLDERS – DECISION MAKING
➢ Ultimate communication through Financial Statements

➢ Enables Rational, Financial & Investment decisions
➢ Compliance thro’
➢ Annual report
➢ Directors’ report
➢ Management Discussion & Analysis
➢ Audit report
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FUNCTION DESCRIPTION
Performance Available tools such as Profit & Loss account ,

Measurement Balance Sheet, Cashflow , Funds flow , Receipts &
Payments
Forecasting, Trend analysis Past performance facilitates Forecasting &
meaningful Trends
Basis of Decision Making Financial results and information facilitates
decision making by Investors and other
stakeholders
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FUNCTION DESCRIPTION
Comparative Analysis Intra firm as well as inter firm comparison signifies

positioning of entity in industry, competitive
advantages over others
Control Administrative control, expenditure pattern viz,
Premium Register; Co-insurance Register, Advance
Register
Taxation Basis for tax collection
Govt Regulations Reporting, Filing statutory returns

Compliance , Disclosures 9
“ACCOUNTING PRINCIPLES” – Concepts & Conventions
➢ Entities with varied perspective could present Financial

Statements
➢ This will result in distorting picture
➢ Need for Uniform basis of communication
➢ Meaningless to compare ‘ Oranges with lemons ‘
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➢ “ Generally Accepted Accounting Principles – GAAP ”

➢ Outline general rules, conventions & practices
➢ Prescribed basic norms & assumptions
➢ Country to country GAAP may differ
➢ International Financial Reporting Standards
- IFRS eliminate ….
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1. Business Entity Concept
2. Money Measurement Concept
3. Going concern Concept
4. Accounting period Concept
5. Accounting Cost Concept
6. Duality Aspect Concept
7. Realization Concept
8. Accrual Concept
9. Matching Concept
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1. Business Entity Concept
✓ For the purpose of accounting , Business Entity and the Owner are
two distinct entities
✓ Investments by the owner in business is thus recorded as
“Liability – capital or Loan” of the business
Illustration:
Owner starting business with purchase of machinery (Rs.50,000) &
Furniture (Rs.10,000) are assets of Business and Rs. 60,000 is liability –
capital of business
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2. Money Measurement Concept
✓ Business transactions must be measurable in terms of money –

currency of the country
✓ Guides - “ What to record and what not to record ”
✓ Uniformity in recording
✓ Facilitates comparison
Illustration:
Merely Issuing of new Medical Insurance policy does not necessitate
recording as business transaction
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3. Going Concern Concept
✓ Entity to continue it business in perpetuity

✓ Provides basis of valuation of assets
Illustration:
Computers purchased worth Rs. 10 crores with expected operating life
of 5 years
Computers – Business Asset
20% charge – Business expenses - Depreciation
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4. Accounting period Concept
✓ Financial results relate to specified period

✓ Prepared periodically – quarterly, half yearly or Annual
✓ Quarterly results, half yearly audit – Regulations – General Insurance
✓ Objective – disclose financial position , Tax liability , comparative
performance …
✓ All transactions are recorded for the period
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5. Accounting cost Concept
✓ Recording all assets @historical cost – purchase price

✓ Cost of acquisition include transportation & installation
✓ NOT @ Market Price
Illustration:
Machinery purchased (10th September) – Rs. 50 Lakhs Installation cost
Rs. 3.50 Lakhs ; Market Value (31st March) – Rs. 72 lakhs
Recorded as asset – Rs. 53.50 lakhs in balance sheet
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6. Dual aspect Concept
✓ Foundation - Double Entry Book Keeping System

✓ Every transaction – TWO aspects
➢ Increase in one asset – Decrease in another asset
➢ Increase in one asset – Increase in Liability
➢ Decrease in one asset – Decrease in Liability
➢ Decrease in one Liability – Increase in another Liability
✓ Asset purchase, Raising of loan, Customers paying , Conversion of Bonds
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7. Realization / Revenue recognition Concept
✓ Revenue from business is recorded only when Realized

✓ Creation of legal right to receive money
✓ Receiving Court order is NOT a transaction to be recorded
Illustration:
Premium amount received on 18th August. Hence insurance cover to
be effective from the same date and transaction will be recorded in the
books (U/s 64VB of General Insurance Act)
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8. Accrual Concept
✓ Expenses to be recognized when become DUE & PAYABLE

✓ Payment of such expenses may be at later date
✓ Revenues are recognized when it is realizable or realized
✓ Accordingly, Expense and Revenue are recorded in the accounting
period to which it relates
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9 . Matching Concept
✓ Revenue and expenses incurred to earn revenue MUST belong to
same accounting period
✓ Revenue once realized to allocate to relevant accounting period
Illustration:
Transaction for 2019-2020
Sales – Rs. 10,000 ; Purchase – Rs. 5,000 ; Salaries – Rs. 2,000
Commission – Rs. 1,000 (including excess paid – 500)
Surplus = (10,000 – ( 5,000+2,000+1,000)) – Rs 2,000
Profit (Matching concept) = 2,000 – 500 (Excess paid) = 1,500
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GENERALLY ACCEPTED ACCOUNING PRINCIPLES - GAAP
✓ Derived from tradition, practice and Concepts

✓ Developed over the years ….
✓ … experience , research, usages, conventions & concepts
✓ IRDA prescribed – Part 1 – schedule B
➢ Consistency
➢ Prudence
➢ Materiality or Adequate Disclosure
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GENERALLY ACCEPTED ACCOUNING PRINCIPLES - GAAP
“ CONSISTENCY ”
Same manner period after period (Inventory valuation & Depreciation)
“ PRUDENCE or CONSERVATISM”
“ As is where is basis ”
No attempt to show better picture
No overstatement of Profit
All anticipated losses to be recognized
“ MATERIALITY OR DISCLOSURE ”
Time , effort & cost of accounting vs usefulness of data generated
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EXERCISE 1.1 – Match the Following …..
1. Business entity Health of the director is not recorded in the books

2. Money Measurement Owner’s personal expenses – recorded as drawings
3. Going Concern Order received for supply of goods is not recorded

4. Accounting Period Fixed assets are shown in the books at COST
5. Accounting Cost Transaction is to be recorded at two places
6. Dual Aspect Goodwill appears in the accounting if & only if purchased
7. Realization Purchase & Sale ; Rent & salaries for period only accounted - same period
8. Accrual Income = Excess of revenue over the expenses
9. Matching Revenue recognized as realized & Expenses considered when due, payable
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EXERCISE 1.1 (Key) – Match the Following …..
1. Business entity Owner’s personal expenses – recorded as drawings

2. Money Measurement Health of the director is not recorded in the books
3. Going Concern Goodwill appears in the accounting if & only if purchased
4. Accounting Period Purchase & Sale ; Rent & salaries for period only accounted - same period
5. Accounting Cost Fixed assets are shown in the books at COST
6. Dual Aspect Transaction is to be recorded at two places
7. Realization Order received for supply of goods is not recorded
8. Accrual Revenue recognized as realized & Expenses considered when due, payable
9. Matching Income = Excess of revenue over the expenses for the period
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“ CLASSIFICATION OF ACCOUNTS ” – Concepts
CLASSIFICATION TYPE GOLDEN RULES
PERSONAL Natural personal DEBIT – RECEIVER

Artificial personal CREDIT – GIVER
(Bank, Cos., Insurance Co…)
Representative personal
( Capital , Drawings A/c)
REAL Tangible DEBIT – WHAT COMES IN
(Cash, Machinery, Building…) CREDIT – WHAT GOES OUT
Intangible
(Patents, Copy right… )
NOMINAL Revenue Income or gains DEBIT - EXPENSES / LOSSES
Expense or losses CREDIT - INCOME REVENUE / GAINS
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3
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EXERCISE 1.2 – Journal Entries – Pioneer & Company …
Date PARTICULARS
June 1 Mr. Ramesh Commenced business with share capital contribution - ₹ 50,000
June 2 Purchases for cash ₹ 5,000
June 3 Paid rent of ₹ 2,000
June 4 Purchased equipment From XYZ Ltd. For cash - ₹ 7,500
June 5 Signed agreement with ABC Ltd. For designing Website for ₹ 10,000 on completion
June 9 Paid one year fire insurance policy ₹ 1,000 date of expiry 31 st May next year
June 10 Cash sales of ₹ 8,000
June 11 Received advance of ₹ 2,500 for services to be provided for next 2 months MNG Ltd
June 12 Purchase on credit ₹ 3,000 from DGP Ltd
June 14 Credit sales - ₹ 7,000 to MGP Ltd
June 15 50% part payment to DGP Ltd
June 16 Received 50 % payment from MGP Ltd
June 17 Appointed manager on salary of ₹ 3,000
June 18 Telephone bill paid ₹ 1,000 29
EXERCISE 1.3 – Ledger Accounts & Trial Balance ( 3 Months)
Date PARTICULARS
1 Started business with ₹10,00,000 capital brought in cash

2 Opened bank account & deposited cash - ₹ 9,90,000
3 Paid rent of ₹ 60,000 by cheque
4 Purchased Stationary for cash - ₹ 7,000
5 Invested ₹ 1,00,000 in Govt. Bonds through bank account
6 Cheque payment for purchase of machinery ₹ 2,50,000

7 Bought furniture worth ₹ 1,50,000 from M/s Furniture Mart
8 Bought goods worth ₹ 4,00,000 paid by cheque
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EXERCISE 1.3 – Ledger Accounts & Trial Balance – XYZ Ltd.
Date PARTICULARS
9 Credit purchase from X Ltd. ₹ 2,00,000

10 Cash sales - ₹ 5,50,000
11 Made part payment to X in cash ₹ 1,50,000
12 Credit sales to Y ₹ 2,50,000
13 Part payment by Y amounting to ₹ 1,75,000 ; discount allowed ₹ 5,000
14 Interest received - ₹ 1,000
15 Paid salary - ₹ 1,10,000
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EXERCISE 1.3 (Key)
HEAD OF ACCOUNT DEBIT CREDIT
Purchase A/c 6,00,000
Sales A/c 8,00,000
Rent A/c 60,000
Salaries A/c 1,10,000
Stationary A/c 7,000
Discount A/c 5,000
Cash A/c 3,000
Bank A/c 6,46,000
Capital A/c 10,00,000
Y A/c 70,000
X A/c 50,000
Furniture A/c 1,50,000
Machinery A/c 2,50,000
Investment A/c 1,00,000
Interest Earned A/c 1,000
Furniture Mart A/c 1,50,000
TOTAL 20,01,000 20,01,000
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EXERCISE 1.4 – Adjustment entries ….
PARTICULARS
1 Salary for one month - ₹ 55,000 is yet to be paid
2 Interest on investment accrued - ₹ 1,500 yet to be received
3 50% of rent paid is advance payment
4 Goods worth ₹ 80,000 are unsold at the end of the period
5 Depreciation to be provided 3 Months – furniture – 10% pa ; machinery – 7.5% pa
Notes : (a) above information is over and above Trial Balance at illustration 1.4
(b) Present revised Trial Balance & Balance sheet
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EXERCISE 1.4 (Key)
Salary A/c 55,000

To Outstanding Salary A/c 55,000
Interest Receivable A/c 1,500
To Interest earned A/c 1,500
Prepaid Rent A/c 30,000
To Rent A/c 30,000
Closing Stock A/c 80,000
To Purchases A/c 80,000
Depreciation A/c (Machinery –₹ 4687 ; Furniture - ₹ 3,750) 8,437
To provision for depreciation A/c 8,437
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EXERCISE 1.4 (Key) Purchase A/c
Sales A/c
5,20,000
8,00,000
Rent A/c 30,000
Discount A/c 5,000
Cash A/c 3,000
Bank A/c 6,46,000

Capital A/c 10,00,000
Y A/c 70,000
X A/c 50,000
Furniture A/c 1,50,000
Machinery A/c 2,50,000
Investment A/c 1,00,000
Interest Earned A/c 2,500
Furniture Mart A/c 1,50,000
Prepaid Rent A/c 30,000
Outstanding Salaries 55,000

Depreciation 8,437
Interest receivable 1,500
Closing Stock 80,000
Provision for depreciation 8437

TOTAL 20,65, 937 20,65, 937
EXERCISE 1.4 (Key) – Transfer Entry
Sales A/c 8,00,000

Interest earned A/c 2,500
To Profit & Loss A/c 8,02,500
Profit & Loss A/c 7,35,437

To Purchase A/c 5,20,000
To Rent A/c 30,000
To Salaries A/c 1,65,000
To Stationery A/c 7,000
To Discount A/c 5,000
To Depreciation A/c 8,437
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EXERCISE 1.4 (Key) Profit & Loss Account
PARTICULARS DEBIT PARTICULARS CREDIT
Purchase A/c 5,20,000 Sales A/c 8,00,000

Rent A/c 30,000 Interest Earned 2,500
Discount A/c 5,000
Depreciation A/c 8,437
Profit & loss A/c 67,063
TOTAL 8,02,500 TOTAL 8,02,500
EXERCISE 1.4 (Key) Balance Sheet as at ……
LIABILITY ASSETS
Capital Account 10,00,000 Cash 3,000
Add: Profit 67,063 Y Account 70,000
10,67,063 Furniture 1,50,000
Less: Depreciation 3,750 1,46,250
X Account 50,000 Machinery 2,50,000
Less: Depreciation 4, 687 2,45,313
Furniture Mart 1,50,000 Investments 1,00,000
Outstanding Salary 55,000 Bank Account 6,46,000
Closing Stock 80,000
Interest Receivable 1,500
Prepaid Rent 30,000
TOTAL 13,22,063 TOTAL 13,22,063
“ PRINCIPAL BOOKS & SUBSIDIARY BOOKS ”
PRINCIPAL BOOKS
JOURNALS (Books of Prime entry) & LEDGERS (Individual accounts) are maintained
SUBSIDIARY BOOKS
SALES DAY BOOK – record of credit Sales on daily Basis
PURCHASE DAY BOOK - record of credit Purchases on daily Basis
CASH BOOK - record of receipts and disbursements of cash and Bank transactions on
daily Basis
SALES RETURN BOOK – record of Return of goods sold – return inward book
PURCHASE RETURN BOOK - record of Return of goods purchased - return outward book
“ PRINCIPAL BOOKS & SUBSIDIARY BOOKS ”
INSURANCE BUSINESS
PRIMARY BOOKS
➢ General Ledger – premium account
➢ Claims paid
➢ Commission account
➢ Bank account
SUBSIDIARY BOOKS
➢ Premium register
➢ Claims paid
➢ Commission account
➢ Bank account
EXERCISE 1.5 – Cash Book
2021
1st August Cash & Bank Balance -₹ 22,000 & ₹ 25,000
5th August Received cheque – Mr. Rohit - ₹ 30,000
9th August Sold goods for Cash - ₹ 30,000
10th August Deposited cash into Bank - ₹ 20,000
12th August Cash Purchase - ₹ 20,000
14th August Credit sales to Mr. Virat - ₹ 50,000
17th August Purchase of Furniture - ₹ 10,000 by cash and by cheque - ₹ 20,000
18th August Sold Goods for cash - ₹ 12,000
21st August Paid rent by cheque - ₹ 10,000
24th August Cash withdrawn from Bank - ₹ 20,000
29th August Salary paid in cash - ₹ 10,000
31st August Cash withdrawn for personal use ₹ 2,000
EXERCISE 1.5 (Key) – Cash Book
Date Particulars Cash Bank Date Particulars Cash Bank
01.08.21 To Balance B/F 22,000 25,000 10.08.21 By Bank – contra 20,000
05.08.21 To Rohit 30,000 12.08.21 By Purchase 20,000
09.08.21 To Sales 30,000 17.08.21 By Furniture 10,000 20,000
10.08.21 To cash – contra 20,000 21.08.21 By Rent 10,000
18.08.21 To Sales 12,000 24.08.21 By Cash – contra 20,000
24.08.21 To Bank – contra 20,000 29.08.21 By Salary 10,000
31.08.21 By Drawings 2,000
31.08.21 By Balance C/F 22,000 25,000
TOTAL 84,000 75,000 TOTAL 84,000 75.000

“ BANK RECONCILIATION STATEMENT – BRS ”
✓ Reconciles the difference between Bank passbook and cash book maintained by
the entity
✓ Tool of Internal control both for administration & accounting
✓ Detection of discrepancies & irregularities – Financial Transactions
✓ Most of the scams remained undetected for long time ( Satyam & Enron …)
✓ Mistakes – unintentional or intentional
✓ Periodical reconciliation is the first & foremost tool for internal control
✓ Difference due to TIME DIFFERENCE
✓ Difference due to ERRORS OF RECORDING
TIMING DIFFERENCE ERRORS IN RECORDING
➢ Uncredited cheques ➢ Errors by the bank
➢ Unpresented cheques ➢ Errors by the entity
➢ Direct Debits
➢ Direct Credits
➢ Dishonoured cheques
➢ Interest charges / Bank charges
➢ Standing instruction
➢ Dividend / Interest received
Moving from Cash book – Pass book Moving from Pass book – Cash book
Balance as per Cash book Balance as per Pass book
Add: Add:
(a) Cheques issued not presented (a) Standing instruction – direct debit
(b) Bank Interest credited (b) Cheques deposited but not credited
(c) Direct credit – customer (c) Dishonoured cheques
Less: (d) Bank charges
(a) Standing instruction – direct debit Less:
(b) Cheques deposited but not credited (a) Cheques issued not presented
(c) Dishonoured cheques.no entry – Cash Book (b) Bank Interest credited
(d) Bank charges (c) Direct credit – customer
Balance as per Pass book Balance as per Cash book
Cash Book shows bank balance as ₹ 46,100 on 30th June 2021 but not matching with
Bank Pass Book
Following discrepancies were found on 5th July 2021
1 Three cheques issued but not presented - ₹ 40,000; ₹ 20,000 and ₹ 3000
2 Two cheques aggregating ₹ 25,000 deposited but credited on 3rd July 2021
3 Dividend directly credited ₹ 3,800 on 28th June by bank, intimated on 3rd July 2021
4 Two cheques totalling ₹ 7,300 ; intimation by bank – 5th July 2021
5 Bank charges - ₹ 4,200 ; direct payment of annual subscription ₹ 1,000 not given effect
6 Bank wrongly debited cheque of ₹ 2,700 not issued by company
Bank Reconciliation Statement as on 30th June 2021
PARTICULARS AMOUNT AMOUNT
Bank Balance as per Cash book 46,100

Add: (a) Cheques issued but not presented ( 40,000+20,000+3,000) 63,000
(b) Dividend directly collected by bank 3,800 66,800
Less: (a) Cheques deposited but not credited – Pass Book 25,000
(b) Dishonoured cheques 7,300
(c) Bank charges debited not recorded – Cash Book 4,200
(d) Annual Subscription paid by Bank directly 1,000
(e) Cheque wrongly debited by the bank 2,700 40,200
Bank Balance as per Pass book 72,700
(UNIT – 2)
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“ PREPARATION - FINANCIAL STATEMENTS ” – IRDA Regulations
✓ IRDA (Preparation of Financial Statements & Auditor’s report of Insurance Companies)
Regulation, 2000
✓ Schedule-A (Life Insurance) ; Schedule-B (General Insurance) ;
✓ Schedule-C (Audit Report)
✓ Balance Sheet
✓ Revenue Account – Policy holders’ account
✓ Receipt & Payments – Cash Flow Statement
✓ Profit & Loss Account – Shareholders’ account
✓ Conformity with Accounting Standards (AS issued by ICAI)
✓ AS 3 – Cash Flow Statement – Direct method
✓ AS 17 - Segment Reporting
2
ACCOUNTING BASIS - Fund Basis V/S Annual Basis
FUND BASIS ANNUAL BASIS
✓ U/W results are determined only ✓ U/W results determined annually
when there is certainty ✓ Profit & losses – at the year end
✓ Premium, related claims posted ✓ Provisioning – claims , risk ….
to Fund
✓ Better indicator – profitability
✓ Fund for each year – open till
Information on u/w available ✓ Suitable – certainty of information
✓ Not better indicator ✓ Outcome – end of reporting period
✓ Suitable – marine, Aviation, ✓ Indian GAAP – applicable
liability Business – Delays occur
“ FORM B – RA ” – IRDA Regulations
PARTICULARS SCHD. CURRENT PREVIOUS
YEAR YEAR
1 Premium Earned (Net) 1
2 Profit / loss on sale or redemption of investment
3 Others ( to specify)
4 Interest, Dividend & Rent (gross)
TOTAL (A)
1 Claims Incurred ( Net) 2
2 Commission 3
3 Operating expenses relating Insurance Business 4
TOTAL (B)
Operating Profit / Loss – Fire / Marine / Miscellaneous Business (A) – (B)
APPROPRIATIONS ;
Transfer to Shareholders‘ Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves
TOTAL (C) 4
“ FORM B – PL ” – IRDA Regulations
YEAR YEAR
1 OPEARTING PROFIT / (LOSS)
(a) Fire Insurance
(b) Marine Insurance
(c) Miscellaneous Insurance
2 INCOME FROM INVESTMENT
(a) Interest , Dividend & Rent
(b) Profit on Sale of investments
Less: Loss on Sale of investments
3 OTHER INCOME
TOATAL (A)
4 PROVISIONS (Other than taxation)
(a) Diminution in value of investments
(b) Doubtful debts
(c) Others
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“ FORM B – BS ” – IRDA Regulations
YEAR YEAR
SOURCES OF FUNDS
Share Capital 5
Reserves and surplus 6
Fair Value change account
Borrowings 7
TOTAL SOURCES XXXX
APPLICATION OF FUNDS
Investments
Loans 8
Fixed Assets 9
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“ FORM B – BS ” – IRDA Regulations ( Continued …..)
YEAR YEAR
Current Assets 10
Cash & Bank Balances 11
Advance & Other Assets 12
Sub – Total (A)
Current Liabilities 13
Provisions 14
Sub – Total (B)
NET CURRENE ASSETS ( C ) = (A) – (B)
Miscellaneous Expenditure ( to the extent not written off) 15

Debit Balance in Profit & Loss account
TOTAL APPLICATION XXXX
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“ REINSURANCE ” – Concept
✓ Insurance for Insurance companies
✓ Tool for protection form risk
✓ Company requesting for cover - Cedant
✓ Reinsurer accepting cover from other insurance cover - Ceded
✓ When risk is shared – Premium is also shared
✓ Premium sharing based on proportionate Risk sharing
✓ Similar to premium ; Claim is also share in same proportion
✓ Ceding company receives commission from the Reinsurer
✓ “Commission on re-insurance” ceded
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“ PREMIUM INCOME ” – Computation
Premium Received on risks undertaken (Direct & Reinsurance accepted) XXX

Add: receivable at the end of the year XXX
Less: receivable at the beginning of the year (XX)
Less: Premium on reinsurance Ceded
Paid during the year XX
Add: Payable at the end of the year XX
Less: Payable at the beginning of the year (XX) (XX)
Premium Income Earned ( Net) (XXX)
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“ CLAIMS EXPENSES ” – Computation
Claims settled during the year (Direct & Reinsurance accepted) XXX
Add: Payment to co-insurers XXX
Less: Received from co-insurers & re-insurers (XX)
Net Payment XXX
Add: Estimated liability at the end of the year XX
(After deducting recoverable – co insurers & re insurers)
Less: Estimated liability at the beginning of the year (XX)
(After deducting recoverable – co insurers & re insurers)
Claims Expenses XXX
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“ COMMISSION EXPENSES ” – Computation
Commission paid (Direct & Reinsurance accepted) XXX

Add: Commission payable at the end of the year XX
(Direct & Reinsurance accepted)
Less: Commission payable at the beginning of the year (XX)
(Direct & Reinsurance accepted)
Commission Expenses XXX
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Illustration 1 …
Calculate “Net Premium earned” for 2019 -2020 – (Fire Insurance)from the following :
Gross Direct Premium – Rs 981 crores; Premium Reinsurance accepted – Rs. 343 crores
Premium Reinsurance ceded – Rs. 437 crores; Net Premium(2018-19) - Rs 913 crores
(Rs. Crores)
Gross Direct Premium (a) 981

Add: Premium Reinsurance accepted (b) 343
Less: Premium Reinsurance ceded (c) (437)
Net Premium (a)+(b) – (c) 887
Add: Change – Reserve for unexpired risk ## 13
Add: 50% Reserve for unexpired risk viz, 50% (913 – 887) ##
Net Premium earned (2019 -2020) 900
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Illustration 2 …
Reserve for unexpired risk (31.12.2021) - Marine – Rs. 22.50 crores ; Fire – Rs. 30.00
crores ; Miscellaneous – Rs. 7.50 crores
During 2022 following business was conducted. Calculate accounting treatment (2022)
MARINE FIRE MISCELLANEOUS
Direct Premium (Rs. Crores) – (a) 27.00 64.50 18.00
Premium Reinsurance accepted – (b) 10.50 7.50 6.00
Premium Reinsurance ceded – (c) 10.00 6.40 10.50
Net Premium 27.50 65.60 13.50
Reserve for unexpired risk – Closing 27.50 32.80 6.75
(100%) (50%) (50%)
Reserve for unexpired risk – Opening 22.50 30.00 7.50

Revenue Account Dr 5.00 2.80
To Reserve for Unexpired Risk Cr 0.75
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Illustration 3 …
From the following, Calculate “Total Claims Incurred” for the year ending 31st March 2011
Claims for reinsurance ceded – Rs. 50,000
Claims Intimated Claims Admitted Claims Paid Amount
(Year) (Year) (Year) (Rs)
2010 2010 2011 30,000
2011 2011 2012 20,000
2009 2010 2010 10,000
2009 2010 2011 24,000
2011 2012 2012 16,000
2011 2011 2011 2,04,000
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Illustration 3 (Key) …
(Rs)
Claims paid in the year 2011 2,58,000
(Direct 2,04,000 + 24,000 +30,000)
Add: Claims paid – reinsurance accepted -
Less: Claims paid – reinsurance ceded (50,000)
Net claims paid 2,08,000
Add: Claims outstanding at the end of the year viz, intimated in 2011, whether 36,000
accepted in 2011 or 2012 [20,000 (2011) + 16,000 (2012)]
Less: Claims outstanding at beginning of the year viz, intimated in 2010 or (54,000)
earlier whether accepted in 2010 or 2011 [30,000 (2011) + 24,000(2010)]
Total Claims incurred 1,90,000
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Illustration 4 ….. Co - Insurance
1. Fire Insurance policy issued by New India to ABC Limited on 01/04/2010

2. Sum insured – Rs. 400 crores , premium @ Re 0.50 / Rs.1000;
3. New India – lead insurer (40%)
4. Co insurers – Oriental, National & United – 20% share each
5. Claim – Rs. 1.20 crores on 10/07/2010;
6. Surveyor assessed – Rs. 99 lakhs (31/08/2010)
7. New India paid entire claim on 17/09/2010 & Surveyor fees – Rs. 1 lakh
8. Co- insurance balance settled on 18/09/2010
Record all the relevant transactions in the books of New India
16
Illustration 4 (Key) ….. Co - Insurance
DATE PARTICULARS DEBIT CREDIT
01/04/2010 Bank A/c 20,00,000
To Premium Control A/c 20,00,00
01/04/2010 Premium Control A/c 20,00,000
To Fire Premium 8,00,000
To National 4,00,000
To Oriental 4,00,000
To United 4,00,000
31/08/2010 Fire Claim A/c 40,00,000

National 20,00,000
Oriental 20,00,000
United 20,00,000
To Claims payable A/c - ABC 99,00,000
To Fees payable A/c – surveyor 1,00,000
17
Illustration 4 (Key) ….. Co - Insurance
DATE PARTICULARS DEBIT CREDIT
17/09/2010 Claims payable A/c - ABC 99,00,000

Fees payable A/c – Surveyor 1,00,000
To Bank 1,00,00,000
18/10/2010 Bank A/c 48,00,000

To National 16,00,000
To Oriental 16,00,000
To United 16,00,000
18
“ REVENUE ACCCOUNT ” – Exercise 2.1 …
Prepare Fire Insurance Revenue account for the year 31st March 2019 as per IRDAI Regulation
Claims Admitted but not paid – 31st March 2019 3.30,000

Commission paid 3,15,000
Commission on reinsurance received 78,000
Bad debts 16,500
Claims Paid 1,35,000
Premium received (less reinsurance) 18.67,500
Reserve for unexpired risk – 1st April 2018 7,05,000
Additional Reserve - 1st April 2018 1,42,500
Claims outstanding - 1st April 2018 1,53,000
Premium Outstanding – 1st April 2018 2,10,000

Premium Outstanding – 31st March 2019 2,25,000
Note: Company maintains 50% Net Premium for Reserve for unexpired risk & 10% of Net premium – additional
Reserve 19
SCHEDULE 1 – NET PREMIUM EARNED - Exercise 2.1(Key..)
₹ Amount ₹ Amount
Premium received (less reinsurance) 18,67, 500
Add: Outstanding premium (closing) 2,25,000
Less: Outstanding premium (opening) (2,10,000)
Net premium received(before adjusting unexpired risk reserve)(A) 18,82,500
Now, 50% unexpired risk reserve on 18,82,500 9,41,250
Less: Reserve for unexpired risk – 1st April 2018 (B) (7,05,000) (2,36,250)
Now, 10% additional reserve on 18,82,500 1,88,250

Less: Balance of additional reserve – 1st April 2018 (C) (1,42,500) (45,750)
TOTAL PREMIUM EARNED (NET) - (A) – ((B)+(C)) 16,00,500
20
SCHEDULE 2 – CLAIMS INCURRED (NET) - Exercise 2.1(Key..)
₹ Amount ₹ Amount
Claims paid 1,35,000

Add : Claims outstanding – 31st March 2019 – closing balance 3,30,000
Less : Claims outstanding – 1st April 2018 – opening balance (1,53,000) 1,77,000
TOTAL CLAIMS INCURRED 3,12,000
₹ Amount
SCHEDULE 2 - COMMISSION EXPENSES78
Commission Paid 3,15,000
Less : commission earned on re-insurance ceded (78,000)
NET COMMISSION 2,37,000
21
REVENUE ACCOUNT (FIRE INSURANCE) for the year ended 31st March 2019
Schedule ₹ Amount
Premium Earned (Net) 1 16,00,500

Profit/loss on sale or redemption of investment -
Others -
Interest, dividend & rent – gross -
TOTAL – A 16,00,500
Claims incurred (Net) 2 3,12,000
Commission 3 2,37,000
Operating expenses relating to Fire insurance -
TOTAL – B 5,49,000
Operating Profit from fire insurance = (A) – (B) 10,51,500
22
2
23
“ CASH FLOW STATEMENT ” – Concept & Objective
✓ Cash generated from various activities of business

✓ Conversion of financial transactions recorded on accrual basis to cash basis
✓ Information as to generation of cash
✓ Classification of activities – operating , investing and financial activities
✓ Measurement of cash – operating , investing and financial activities
✓ Timing and certainty of cash generation enabling financing decisions
✓ Evaluating future cashflows & implications
✓ Assessment – liquidity & solvency position
✓ Information to users – ability to pay obligation, future course of action
24
“ CASH FLOW STATEMENT ” – Constituents
CASH FLOW FROM
OPERATING ACTIVITIES ✓ Sources and Uses of cash from core activities of business
✓ Transactions flowing in regular course
✓ Two methods – Direct vs Indirect method
INVESTING ACTIVITIES ✓ Sources & Uses of cash for acquiring or disposing of long
term assets & investments
✓ Transaction based
✓ Rewards generated from the assets – interest , dividend
FINANCING ACTIVITIES ✓ Sources and Uses of cash relating to means of financing
✓ Transaction based
✓ Cash flows towards serving / costs
25
“ CASH FLOW STATEMENT ” Direct Method (Operating activities)
INFLOWS :
Cash sales
Collection from customers
Other operating receipts
TOTAL INFLOWS (A)
OUTFLOWS :
Cash Purchase
Payment to suppliers
Other operating expenses
Income tax Paid
TOTAL OUTFLOWS (B)
CASH FLOW FORM OPEARTING ACTIVITIES (A) – (B)
26
“ CASH FLOW STATEMENT ” – Exercise 2.1
Trading & Profit & Loss Account for the year ended 31st March 2019
Opening Stock 48,000 Sales 4,80,000
Purchases 3,00,000 Closing Stock 68,000
Gross Profit C/F 2,00,000
5,48,000 5,48,000
Salaries 40,000 Gross Profit B/F 2,00,000

Rent 20,000
Depreciation 60,000
Net Profit 80,000
2,00,000 2,00,000
27
Additional Information 01.04.2018 31.03.2019
Debtors 40,000 56,000
Creditors 28,000 20,000
Salaries – Outstanding 4,000 6,000
Rent – Prepaid 4,000 4,000
28
“ CASH FLOW STATEMENT ” – Exercise 2.1 (Key….)
CASH FLOW – OPERATING ACTIVITIES Ref Note Amount
Cash received - Customers 1 4,64,000
Cash paid - Suppliers 2 (3,08,000)
Payment - Salaries 3 (38,000)
Payment - Rent 4 (20,000)
Net Cash Flow from Operating activities 98,000
29
“ CASH FLOW STATEMENT ” – Exercise 2.2 (Key)
DEBTORS ACCOUNT CREDITORS ACCOUNT
Opening Balance 40,000 Cash received 4,64,000 Cash paid 3,08,000 Opening Balance 28,000
(Balancing Figure) (Balancing Figure)
Credit Sale 4,80,000 Closing Balance 56,000 Closing Balance 20,000 Credit Purchases 3,00,000
5,20,000 5,20,000 3,28,000 3,28,000
SALARIES (O/s) ACCOUNT RENT (Prepaid) ACCOUNT

Cash paid 38,000 Opening Balance 4,000 Opening Balance 4,000 Rent A/c 20,000
(Balancing Figure)
Closing Balance 6,000 Salaries A/c 40,000 Cash paid 20,000 Closing Balance 4,000
(Balancing Figure)
44,000 44,000 24,000 24,000
30
BALANCE SHEET AS AT 31ST MARCH NOTES 2019 2018 CHANGE
Fixed assets 1 4,21,000 3,13,000 1,08,000

Inventories 1,76,000 1,18,000 58,000
Investments, Cash equivalent 1,37,000 1,93,000 (-)56,000
Trade Receivables 2 1,25,000 93,000 32,000
Prepaid Expenses 3 3,000 5,000 (-)2,000
TOTAL ASSETS 8,62,000 7,22,000 1,40,000
Equity capital 3,50,000 2,00,000 1,50,000
Reserves & Surplus 4 71,000 53,000 18,000
Borrowings 1,71,000 1,99,000 (-)28,000
Current Liabilities 56,000 57,000 (-)1,000
Trade Payables 1,79,000 1,93,000 (-) 14,000
Provision for Tax 35,000 20,000 15,000
TOTAL LIABILITIES 8,62,000 7,22,000 1,40,000

31
PROFIT LOSS A/C FOR THE YEAR ENDED 2019 NOTES 2019
Sales 9,25,000
Other income 5 13,000
Expenses:
Cost of goods sold 6,69,000
(materials consumed, labour cost, purchases, change in inventories, Mfg. expenses)
Interest 22,000
Depreciation 98,000
Other expenses & Losses 6 79,000
TOTAL EXPENSES 8,68,000
Profit Before Tax 70,000
Tax provision (27,000)
Profit After Tax 43,000
32
NOTES TO FINANCIAL STATEMENTS 2019 2018
1. Fixed Assets – Gross Block 9,73,000 8,18,000
Less: Accumulated depreciation (5,52,000) (5,05,000)
Net Block 4,21,000 3,13,000
2. Trade Receivables – Gross 1.34,000 1,00,000
Less: Provision for Bad debts (9,000) (7,000)
Net 1,25,000 93,000
3. Other Current assets - Prepaid expenses 3,000 5,000
4. Reserves & Surplus - General reserve 71,000 53,000
5. Other income - Interest income 7,000
Profit on sale of equipment 6,000
6. Other expenses & losses - Selling & Admin expenses 58,000
Bad debts 12,000
Loss on sale - investment 9,000
33
ADDITIONAL TRANSACTIONS AMOUNT
( ₹)
1 Cash purchase – equipment 1,73,000
2 Sold equipment for cash ( cost - ₹ 67,000; accumulated depreciation - ₹ 51,000) 22,000
3 Credit purchase of equipment 49,000
4 Purchased investments for cash 26,000
5 Sold investment for cash ( cost - ₹ 51,000) 42,000
6 Issue of shares @par 1,00,000
7 Converted debentures into equity @par 50,000
8 Paid Dividend 25,000
9 Redeemed debentures 27,000
10 Repaid borrowings 1,000
11 Bad Written off 10,000
34
CASH FLOW FROM OPERATING ACTIVITIES
CASH RECEIVED FROM CUSTOMERS 2019
Sales 9,25,000
Add: Closing Balance of Trade receivables (gross) 1,00,000
Less: Opening Balance of Trade receivables (gross) (1,34,000) (34,000)
Less: Write offs – Bad debts, if any (10,000)
Cash Received from customers 8,81,000
35
CASH FLOW FROM OPERATING ACTIVITIES
CASH PAID TO SUPPLIERS 2019
Cost of goods sold 6,69,000

Add: Selling & Administrative Expenses 58,000
Add : Increase (- Decrease) in Inventory 58,000
Increase (- Decrease) in Prepaid Exp. (2,000)
Decrease (- Increase) in Trade payables 14,000 70,000
Cash Paid to Suppliers 7,97,000
INCOME TAX PAID 2019

Income tax Expenses 27,000
Add: Decrease ( - Increase) Tax Payable (15,000)
Income tax Paid 12,000
36
A. CASH FLOW FROM OPERATING ACTIVITIES
2019
Cash received from customers – inflow 8,81,000

Less: Cash paid to suppliers – outflow (7,97,000)
Cash generated from operations 84,000
Less: Income tax paid (12,000)
Net cash Inflow from operating activities 72,000
37
B. CASH FLOW FROM INVESTING ACTIVITIES
FIXED ASSETS INVESTMENT
Opening Balance 8,18,000 Sale 67,000 Opening Balance 1,42,000 Sale 51,000
Credit Purchase 49,000 Closing Balance 9,73,000 Closing Balance 1,17,000
Cash Purchase 1,73,000 Purchase 26,000
(balancing Fig.) (balancing Fig.)
10,40,000 10,40,000 1,68,000 1,68,000
ACCUMULATED DEPRECIATION
Sale 51,000 Opening Balance 5,05,000
Closing Balance 5,52,000 Depreciation 98,000
6,03,000 6,03,000
38
2019
Purchase of Equipment - Outflow (1,73,000)

Sale of property, equipment - Inflow 22,000
Purchase of assets - Outflow (26,000)
Sale of Investment - Inflow 42,000
Interest received - Inflow 7,000
Net cash outflow from investing activities (1,28,000)
39
C. CASH FLOW FROM FINANCING ACTIVITIES
SHARE CAPITAL
Closing Balance 3,50,000 Opening Balance 2,00,000

Conversion of debentures 50,000
Issue of shares 1,00,000
3,50,000 3,50,000
40
2019
Issue of shares – Inflow 1,00,000

Dividend paid – Outflow (25,000)
Redemption of debentures - Outflow (27,000)
Repayment of short term loan - Outflow (1,000)
Interest paid - Outflow (22,000)
Net cash outflow from financing activities 25,000
41
AMOUNT (₹) AMOUNT (₹)
A. CASH FLOW FROM OPERATING ACTIVITIES
Cash received – customers 8,81,000
Cash paid – suppliers (7,97,000)
Cash generated from operations 84,000
Income tax paid (12,000) 72,000
Purchase of property, plant & equipment (1,73,000)
Sale of Property, plant & equipment 22,000
Purchase – investments (26,000)
Sale – investments 42,000
Interest received 7,000 (1,28,000)
Proceeds – Issue of shares 1,00,000
Dividend Paid (25,000)
Redemption – Debentures (27,000)
Repayment – short term loan (1,000)
Interest paid (22,000) 25,000
Net Decrease in cash & cash equivalent (A) + (B) + (C) (31,000)
Cash & cash equivalent (Beginning) 51,000
Cash & cash equivalent (End ) 20,000
42
3
43
“ FINANCIAL ANALYSIS ” – Objective
FINANCIAL ANALYSIS HIGHLIGHTS ……
✓ Financial health
✓ Stability factor
✓ Measurement of Solvency
✓ Liquidity aspect
✓ Operational efficiency
✓ Internal vs Industry standards
✓ Profitability
✓ Comparison
✓ Predicting future
45
FINANCIAL STATEMENTS REPORTING - Contents …
✓ Income Statement or Revenue Statement
✓ Balance Sheet
✓ Cash Flow Statement
46
REVENUE STATEMENT – Presentation ….
Total Sales
Less: Cost of Sales
Gross Profit
Operating expenses ( Cash Expenses – Administration , Selling & Distribution costs)
Less: Depreciation (Non Cash expense)

Profit Before Intertest & Tax (PBIT)
Less: Interest
Profit Before Tax (PBT)
Less : Tax Provision
Profit After Tax ( PAT)
47
BALANCE SHEET – Presentation…
SOURCES OF FUNDS APPLICATION OF FUNDS

(EQUITY & LIABILITIES) (FIXED ASSETS & WORKING CAPITAL)
OWN FUNDS XXX FIXED ASSETS XXX

Shareholders funds
BORROWED FUNDS XXX WORKING CAPITAL XXX

(Long Term vs Short term) (Current Assets – Current Liabilities)
TOTAL: SOURCES XXXX TOTAL: APPLICATIONS XXXX
48
FINANCIAL STATEMENTS – Different Dimentions …
✓ LIQUIDITY signifies how quickly current assets could be disposed off or

liquidated to pay off the current liabilities
✓ PROFITABILITY MARGIN : What (%) Mark–Up company maintains
✓ ACTIVITY OR VELOCITY : Time period within which current asset is realized in
cash. Generally expressed in “No. of Days”
✓ LEVERAGE : Relationship between borrowed funds to own funds (viz, Net
worth, Shareholders Funds)
✓ VALUATION or WAELTH CREATION : Investors deriving value from investments
✓ ROI, ROA, RONW or ROSE …..
49
FINANCIAL STATEMENTS – Different Dimensions …
A. LIQUIDITY
Current Ratio ✓ Current Assets / Current Liabilities

✓ Current Assets - Cash, Trade Receivables, Inventory, Marketable Securities
✓ Current Liabilities – Trade Payables, Outstanding Exp. , Provisions, Bank
Overdraft
Quick Ratio (Current Assets – Inventory) / Current Liabilities
Cash Ratio Cash Balance / Current Liabilities

Working Capital Current Assets - Current Liabilities
50
B. PROFITABILITY
Gross Profit Margin (Gross Profit * 100) / Sales

(GPM) Gross Profit is excess of revenue over cost of production
Operating Profit Margin (Operating Profit OR PBIT *100) / Sales

(OPM) What company earns before interest and taxes
Operating Ratio (Operating Costs *100) / Sales
Net Profit Margin (Net Profit OR PAT *100) / Sales
(NPM)
Interest Coverage Ratio PBIT / Interest OR PBIDT / Interest
Adequacy of Profits to cover interest payment
Debt Service Coverage (PAT + Depreciation) / (Interest + Repayment due)
Ratio Adequacy of Cash flows to service Debt
51
C. ACTIVITY OR VELOCITY
Debtors’ Turnover (Days) (Average Debtors * 360) / Sales
How effective is recovery of outstanding dues from customers,
Also called average collection period
Creditors’ Turnover (Days) (Avg. Debtors *360) / Sales
How effective is payment cycle for outstanding dues from
suppliers, Also called average payout period
Inventory Turnover (Days) (Avg. Inventory *360) / Cost of Production
(Avg. Inventory *360) / Sales
Period for which funds are blocked–inventory
Working Capital Turnover (Days) (Working Capital *360) / Sales
Signifies how effective is liquidity management
Fixed Assets Turnover Fixed Assets / Sales
Quantum of assets / Investment to generate revenue
52
D. LEVERAGE
LT Debt / Equity Ratio Long Term Debt / Equity or Net worth
Proportion of LT borrowed funds to Own funds
ST Debt / Equity Ratio Short Term Debt / Equity or Net worth

Proportion of LT borrowed funds to Own funds
Total Debt / Equity Ratio (Long Term + Short Term Debt) / Net worth
Proportion of Total debt to Own funds
53
E. VALUATION / WAELTH
CREATION
Earning per share (EPS) PAT / No. of Equity Shares
Price Earnings Ratio (PE ratio) Market Price / Earning per share
Investor perception about the company
Dividend Yield (%) Dividend per share *100 / Market Price
Returns linked to market value as base
Market Capitalization Market Price * No. of outstanding shares
Enterprise Value (Market Value of Equity + Debt) – Cash
Book Value per share Net Worth / No. of Equity Shares
54
F. ROI
Return on Investment (ROI) (PBIT*100) / Capital Employed (Debt +Equity)

Holistic approach to evaluate return vis a vis capital
investment
Return on Net worth (RONW) (PAT*100) / Net worth or Equity or Shareholders funds
or Own funds
PAT is available for distribution to shareholders
Return on Assets (ROA) (PBIDT *100) / Capital Employed (i.e. Debt + Equity)
55
RATIO ANALYSIS –Illustration 2.1 …
2019 (₹ crores) 2020 (₹ crores)
Sales 2780 3345
Profit After Tax 360 402
Equity capital 50 50
(Face Value - ₹ 10)
Reserves & Surplus 835 895
Compute : Net Margin Ratio ; EPS and RONW

Comment on the performance
56
RATIO ANALYSIS –Illustration 2.1 (Key) …
2019 (₹ crores) 2020 (₹ crores)
Net Margin Profit After Tax / Sales ₹360 / ₹2780 = 12.9% ₹402 / ₹3345 = 12%
Earning per Profit After Tax / no. of ₹360 / 5= ₹ 72.00 ₹402 / 5 = ₹80.40
share - EPS equity shares
Return on Net Profit After Tax / ₹360 / (₹50+ ₹835) ₹402/(₹50+₹895)
worth Shareholders funds ₹360/ ₹885 ₹402/ ₹945
=40.7% = 42.5%
Comment : 1. Marginal decline in net margin
2. Other two parameters improved
3. Overall improved performance
57
XYZ limited reported PAT - ₹3.80 crores in the year 2021 ; company’s share capital
represents ₹2.50 crores comprising 25 lakh shares of ₹ 10 each. Co declared
dividend of 50% and the market price is ₹ 210
Calculate :
1. EPS
2. Dividend per share
3. P/ E Ratio
4. Dividend payout ratio
5. Retention ratio
6. Dividend Yield
7. Market capitalization
58
RATIO FORMULA RESULT
Earnings per share PAT / No. of shares ₹ 3.80 / 0.25= ₹ 15.20

– EPS
Dividend per share Face Value * Dividend % ₹10 * 50% = ₹ 5 per share
P / E Ratio Current Market Price / EPS ₹210 / ₹ 15.20 = 13.8 times
Dividend Pay-out Dividend per share / Earning per Share ₹ 5 / ₹ 15.20 = 32.89%
ratio
Retention ratio 1 - Dividend Pay-out ratio 1- 32.89% = 67.11%
Dividend Yield Dividend per share / Current Market Price ₹ 5 / ₹ 210 = 2.38%
Market capitalization Market Price * No. of outstanding shares ₹ 210*25 lakhs = ₹ 52.50 crores
59
Company A Company B
Sales (₹ crore) 834 680

Cost of goods Sold (₹ crore) 670 550
Trade Receivables (₹ crore) 132 120
Inventory (₹ crore) 89 64
Trade Payables (₹ crore) 62 55
Purchases 570 465
Indicate which company is manging working capital better?
60
RATIO FORMULA Company A Company B
Debtor’s Turnover Sales / Debtors ₹ 834/ ₹ 132 ₹ 680 / ₹ 120
Ratio (X) = 6.32 times = 5.67 times
Days Debtors *360 / Sales 57 days 63 days
Stock Turnover Cost of Goods Sold / ₹ 670 / ₹ 89 ₹ 550/ ₹ 64

Ratio (X) Inventory = 7.53 times = 8.59 times
Days Inventory *360 / Sales 48 days 42 days
Creditor’s Turnover Purchases / Creditors ₹ 570 / ₹ 62 ₹ 465 / ₹ 55

Ratio (X) = 9 times = 8 times
Days Creditors *360 / Purchases 40 days 45 days
Operating Cycle (Debtors + Inventory - Creditors) 65 days 60 days

Days
Comment: Lower Operating cycle of 60 days is significantly lower than that of Co. A,
signifies better working capital management for Company B 61
4
62
RATIO ANALYSIS – Non - life Insurance Cos…..
Mandatory disclosure of analytical ratios – FORM NL 30 ( 15 nos.)
Gross Direct Premium Growth rate Underwriting Balance ratio

Gross premium to Shareholders’ Funds Operating profit ratio
Growth rate to Shareholders’ Funds Liquid assets to liabilities ratio
Net Retention Ratio Net earnings ratio
Net Commission Ratio Return on Net Worth ratio
Expenses of management to Gross direct premium Available to required solvency Margin Ratio
Combined Claims & Mgmt. Exp) Ratio

Technical (Unexpired) Reserves to Net Premium Ratio Non Performing Advances (NPA ratio)
63
RATIO FORMULA
Gross Direct Premium (GDP) (Closing GDP – Opening GDP) / Opening Gross Direct Premium
Growth rate
Gross premium to Shareholders’ GDP *100 / Shareholders’ funds
Funds
Growth rate to Shareholders’ Shareholders’ funds(Closing – Opening )*100 /Opening Shareholders’ funds
Funds
Net Retention Ratio (Net Premium *100) / Gross Direct Premium
Net Commission Ratio (Commission net of reinsurance) / Net Premium
Management Exp. to GDP Management Exp. / Gross Direct Premium
Combined Claims & Mgmt. Exp) (Incurred claims + Management Exp) / GDP
Ratio
Technical (Unexpired) Reserves Reserve for( Unexpired risk+ Premium Deficiency + O/s Claims) / Net
to Net Premium Ratio Premium 64
RATIO FORMULA
Underwriting Balance ratio Underwriting Profit or loss / Net Premium

Operating profit ratio Underwriting Profit or loss + Investment income / Net Premium
Liquid assets to liabilities ratio Liquid assets / (Unexpired risk+ Premium Deficiency + O/s Claims)
Net earnings ratio Profit after tax / Net premium
Return on Net Worth ratio Profit after tax / Net worth
Available to required solvency Margin Actual solvency Margin for quarter as against required (150%)
Non Performing Advances (NPA ratio) As provided separately for policy holders funds & shareholders funds
Reinsurance ratio Risk reinsured / Gross Direct Premium
65
RATIOS – Non- life Insurance Cos - Illustration 2.3
PARTICULARS 2016 2015
Gross Direct Premium 6151 5937
Shareholders’ Funds 6973 5973
Net Premium 4914 4752
Unexpired Risk Reserve 2573 2470
Outstanding Claims 6140 5759
Risk Reinsured 2099 1654
Incurred Claims 4177 3644
Expenses of Management 1019 1153
Commission 459 390
Investment Income 2365 2267
Tax Provision 120 154
Net worth 6973 5972
Difference – Unexpired risk Provision 103
Gross Profit (PBT) – ( -844 + 2365) 1521
Profit after Tax (PAT) 1401 66
RATIOS – Non- life Insurance Cos - Illustration 2.3
Compute the following accounting ratios :
1. Gross Premium to Shareholders’ Funds
2. Growth Rate – Shareholders’ Funds
3. Mgmt. Expenses to Gross Direct Premium
4. Net Commission Ratio
5. Technical Reserve to Net premium
6. Combined Ratio
7. Operating Profit Ratio
8. Net earning ratio
9. Return on Net worth
10.Reinsurance Ratio
67
RATIOS – Non- life Insurance Cos - Illustration 2.3 (Key)
PARTICULARS FORMULA & RATIO 2016
Gross Direct Premium to (Gross Direct Premium *100) / Opening Balance of Shareholders’ funds 102.98 %
Shareholders’ funds = 6151 * 100 / 5973
Shareholders’ Funds Shareholders’ Funds (closing – opening) *100 / Opening Shareholders’ funds 16.74%
(growth rate) = (6973 – 5973) * 100 / 5973
Management expenses (Management expenses *100) / Gross Direct Premium 16.57%

= 1019 *100 / 6151
Net Commission ratio (Net Commission *100) / Net premium 9.34%

= 459 *100 / 4914
Technical Reserve ratio (Technical Reserve * 100) / Net Premium i.e. 8713*100 / 4914 177.31%
(Technical Reserve = Unexpired Risk Reserve + O/s claims *100) / 4914
(2573+6140 = 8713)
68
RATIOS – Non- life Insurance Cos - Illustration 2.3 (Key)
PARTICULARS FORMULA & RATIO 2016
Combined ratio (Incurred claims + Management expenses* 100) / Gross Direct Premium 84.47%
= (4177 + 1019) = 5196 *100 / 6151
Operating Profit ratio (operating profit *100) / Net premium 30.95 %
= 1521 * 100 / 4914
Net earning ratio (Net profit *100) / Net premium 28.51%
= 1401 * 100 / 4914
Return on Net Worth (Net profit *100) / Shareholders’ funds – closing 20.09%
= 1401 *100 / 6973
Reinsurance ratio (Risk reinsured *100) / Gross Direct premium 34.12%
= 2099 *100 / 6151
69
Illustration 2.4 -- Revenue & Profit Loss Account Preparation
PARTICULARS - ABC General Insurance Company FY 2010 FY 2010 FY 2010
(Fire - ₹ lakhs) ( Marine ₹ lakhs) ( Misc. ₹ lakhs)
Premium – Direct Business 98,139 49,483 4,67,524

Premium – Reinsurance Accepted 34, 363 1,536 50, 278
Premium – Reinsurance Ceded 43, 732 27,842 1,38,322
Net Premium – Beginning 1,05,292 18,857 3,51,027
Interest , Dividend & Rent – gross 10,619 3,053 54,493
Claims Paid – Direct 70,511 15,380 3,70,421
Claims – Reinsurance ceded 14,435 1,095 61,648
Claims – Reinsurance accepted 29,228 3,751 2,467
Outstanding Claims – Closing 80,000 21,099 5,12,889
Outstanding Claims – Beginning 75,558 17,999 4,82,365
Commission Paid – Direct 10,721 4,982 46,819
Commission – Reinsurance Accepted 6,292 318 6,346
Commission – Reinsurance Ceded 6,990 2,631 19,934
Foreign Taxes & provision , write-off , amortization 10 3 106
Profit on sale / redemption – investment 10,490 3.016 53.827
Apportioned – Management / operating Expenses 19,611 5,663 76,637
70
Illustration 2.4 (Key) -- Revenue & Profit Loss Account Preparation
SCHEDULE .1 PREMIUM EARNED FY 2010 FY 2010 FY 2010
Premium – Direct Business 98,139 49,483 4,67524

Add: Premium – reinsurance accepted 34,363 1,536 50,278
Less: Premium – reinsurance ceded (43,732) (27,842) (1,38,322)
Net Premium 88,770 23,177 3,79,480
Less: Reserve - unexpired risk of net premium – closing (44,385) (23,177) (1,89,740)
50% 100% 50%
Add: Reserve - unexpired risk of net premium – opening 52,646 18,857 1,75,514
50% 100% 50%
Net Premium Earned 97,031 18,857 3,65,254
SCHEDULE.3 COMMISION PAID (Net)

Commission paid – direct 10, 721 4,982 46,819
Add: Commission – reinsurance accepted 6,292 318 6,346
Less: Commission – reinsurance ceded (6,990) (2,631) (19,934)
Net Commission 10,023 2,669 33,231
71
Illustration 2.4 (Key) -- Revenue & Profit Loss Account Preparation
SCHEDULE .2 INCURRED CLAIM – NET FY 2010 FY 2010 FY 2010

Claims paid – Direct 70,511 15,380 3,70,421

Add: Claims – reinsurance accepted 14,435 1,095 2,467
Less: Claims – reinsurance ceded (29,228) (3,751) (61.648)
Net Premium 55,718 12,724 3,11,240
Add: Outstanding Claims – closing 80,000 21,099 5,12,889
Less: Outstanding Claims – opening (75,558) (17,999) (4,82,365)

Incurred claims - Net 60,160 15,824 3,41,764
72
Illustration 2.4 (Key) Revenue & Profit Loss Account Preparation
PARTICULARS SCH. FIRE MARINE MISC.
Premium Earned 1 97,031 18,857 3,65,254
Profit on sale / redemption – investment 10,490 3.016 53.827
Others 0 0 0
Interest Dividend & Rent 10,619 3,053 54,493
TOTAL (A) 1,18,140 24,926 4,73,574
Claims Incurred (Net) 2 60,160 15,824 3,41,765
Commission 3 10,023 2,670 33,231

Operating / Management expenses 19,611 5,663 76,637
Others – Taxes & Write off / amortization 10 3 106
TOTAL (B) 89,804 24160 4,51,739
Surplus – Transfer to Shareholders’ fund (Profit / Loss Account) 28,336 766 21,835
73
SOLVENCY ANALYSIS - Non- life Insurance Cos
✓ Financial capacity to meet its obligations

✓ High ratio means the company is financially sound
✓ Enough capital to pay all valid claims
✓Assessment - company’s ability to meet its long-term financial obligations
✓Company’s after-tax profit with depreciation added back / All liabilities (short-term and
long-term)
✓High solvency ratio shows company can remain financially stable in the long term
✓Limitation of the measure is It does not factor in a company’s ability to acquire new
funding sources in the long term
✓ Few more ratios – Debt Equity ; Interest cover ; Proprietary Ratio and so on
✓ IRDA prescribed ratio of 150%
74
5
75
VALUATION ASSETS & LIABILITIES – Approaches
✓ Determining fair value of an asset

✓ Involve subjective & objective measurements
✓ Net Assets Value=Book value of ((Tangible assets) – (Intangible assets + Liabilities))
✓ Assessing the effectiveness of strategic decision-making
✓ Tracking performance in terms of estimated change in value, not just in revenue
✓ Two main axes - asset based business valuation
✓ Asset valuation methodology
✓ Type of asset to be valued
76
APPROACH FEATURES
Future Profitability ✓ What buyer expects in terms of future earnings
✓ Past performance is not vital
Cash Flow ✓ Appropriate – Insurance & Financial services
✓ Tangible assets are negligible
✓ Real value – cash inflows over costs of running
Potential Risk ✓ Less value offered for high risk
✓ Valuation of liabilities critical
✓ Sustainability of cash flows
Objectivity vs ✓ Objective review – revenue and expenses
Subjectivity ✓ Subjective aspect facilitate comparative valuation – similar
business
✓ Terms of payment, Guarantee, seller’s involvement in transition
Motivation & ✓ “Willing Buyer & Willing Seller”
Determination ✓ Attitude goes beyond Valuation
77
78
FIXED ASSET VALUATION
(Tangible assets - Quality to diminish over time - account for depreciation)
✓ Cost method is the simplest form of asset-based valuation.

✓ Assets are valued with their purchase cost
✓ Market value method uses the market price
✓ projected price as if available on the open market
✓ Value-based Method is valued with consideration to its ability to generate a
cash flow
79
INTANGIBLE ASSET VALUATION
(Intangible assets include patents, client relationships, and brand recognition)
✓Market value approach value intangible assets based on what other

companies have paid for a similar asset
✓Income Method is based on the cash flow it is likely to bring into the
business over time
✓Cost method is to intangible asset valuation is when companies use the cost
of rebuilding or replacing the asset under consideration
80
STOCK VALUATION
(stocks & shares of companies listed on stock exchanges)
✓Discounted Dividend Model discounts the future dividends of a stock to its present value
in order to calculate the stock price
✓Discounted Cash Flow Model is similar to the income method. Model projects the stock’s
future cash flow (projections usually go out around five years) and then discounts that
projection using the weighted average cost of capital (WACC). In this way, a company can
use the present value of projected future cash flows to determine the stock price
✓Comparable Valuation - most straightforward of the stock valuation methods — although
it does call for some equations.
✓Easiest way to know what peer companies have done
✓Rreferencing the valuation ratios of several of your peers (most commonly the price-to-
earnings ratio, the price-to-book ratio, or the price-to-cash-flow ratio)
81
VALUATION ASSETS & LIABILITIES – Auditor’s Role
✓ Ensuring appropriateness of valuation
✓ Share price be aligned with its true and fair value on the basis of financial statement
Auditor to address following aspects :
✓ Nature of the asset - Different types of assets call for different valuation methods, so it is
important to categorize them appropriately
✓ Usage of the asset - Sometimes an asset’s function within the company changes and may
pose Challenge for valuation
✓ Life of the asset- Certain degree of speculation into the future, which always brings an
element of the unknown into the process of valuation
✓ Future contingencies - Value of an asset changes after the audit is complete e.g. Damage to
property due to fire may call for relook at whole issue so as to put the balance sheet in
order
✓ Inadequate facts - Inherent risk that something might get overlooked or user error may play
hamper the valuation
82
BUDGETING – Conceptual Framework ..
BUDGET – BUDGETING – BUDGETARY CONTROL
✓ Formal statement of financial resources
✓ Focus on specific activities
✓ Specified period
✓ Co-ordination across functions
✓ Assigning responsibilities
✓ Policy to be pursued
✓ Continuous comparison of actual vs budgeted results
✓ Individual action - objective / policy
✓ Basis for its revision
83
BUDGETING – Characteristics….
✓ Participative
✓ Comprehensive
✓ Standard
✓ Flexible
✓ Feedback
✓ Analytical
84
BUDGETING – Advantages ..
✓ Developing target based approach
✓ Promoting effective communication & Co-ordination
✓ Defining roles & responsibilities
✓ Basis for performance appraisal
✓ Inbuilt Control function
✓ Remedial action
✓ Motivation – staff & team building efforts
✓ Optimization of resources at disposal
✓ Effective time management
✓ Management by exception
85
BUDGETING – Limitations ..
✓ Stressful workplace
✓ Manipulative & misguiding tactics
✓ Departmental conflicts
✓ Dispute over resource allocation
✓ “Blame game”
✓ Synchronizing individual vs organizational goal – Challenge
✓ Tendency of overestimation
✓ Safeguard against overspending
86
BUDGETS – Classification ..
FUNCTION BEHAVIOUR
Sales Budget Fixed Budget
Production Budget Flexible Budget
Purchase Budget
Labour Budget
Utility Budget
Cash Budget
Master Budget
Others (R & D; Capital Exp.; Selling & Distribution; Admin.)
87
CASH BUDGET – Illustration 2.5
PARTICULARS January 2019 February 2019 March 2019 April 2019

Opening Balance ₹ 8,000
Cash Sales ₹ 60,000 ₹ 40,000 ₹ 45,000 ₹ 40,000
Cash Purchase ₹ 48,000 ₹ 80,000 ₹ 81,000 ₹ 90,000
Salaries ₹ 5,000 every month
Notes: (a) If the deficit is up to ₹ 10,000 arrangements with banker exists
(b) If the deficit is up to ₹ 42,000 arrangements – issue of debentures
(c) If the deficit is beyond ₹ 42,000 arrangements – issue of equity shares
Prepare Cash Budget for the period January to April 2019
88
CASH BUDGET – Illustration 2.5 (Key)
PARTICULARS January 2019 February 2019 March 2019 April 2019
Opening Balance ₹ 8,000 ₹ 15,000 - -
CASH INFLOW:
Cash Sales ₹ 60,000 ₹ 40,000 ₹ 45,000 ₹ 40,000
Issue – Debentures ₹ 30,000 ₹ 41,000
Issue - Equity shares ₹ 55,000
Total cash inflow ₹ 68,000 ₹ 85,000 ₹ 86,000 ₹ 95,000
CASH OUTFLOW:
Cash Purchase ₹ 48,000 ₹ 80,000 ₹ 81,000 ₹ 90,000
Salaries ₹ 5,000 ₹ 5,000 ₹ 5,000 ₹ 5,000
Total cash outflow ₹ 53,000 ₹ 85,000 ₹ 86,000 ₹ 95,000
Closing Balance ₹ 15,000 - - -
89
PARTICULARS Jan 21 Feb 21 March 21 April 21 May 21 June 21
Opening Balance
Sales 80,000 80,000 75,000 90,000 85,000 80,000
Purchase 45,000 40,000 42,000 50,000 45,000 35,000
Salaries 20,000 18,000 22,000 24,000 20,000 18,000
Expenses 5,000 6,000 6,000 6,000 6,000 5,000
Notes: (a) 10 % of purchases & 20% of sales are on cash basis
(b) Average collection period is 15 days
(c) Suppliers are paid in the next month
(d) Salaries are paid half monthly
(e) Rent of ₹ 500 per month is excluded from expenses
(f) Opening Balance – April 21 is ₹ 15,000
(g) Company decided to maintain minimum balance of ₹11,000 and excess if any
invested in FDR with bank @ rounded to thousand
Prepare Budget for the months – April , May and June 2021
90
PARTICULARS Jan 21 Feb 21 March 21 April 21 May 21 June 21
Sales 80,000 80,000 75,000 90,000 85,000 80,000
Cash Sales (20%) 16,000 16,000 15,000 18,000 17,000 16,000
Credit Sales (80%) 64,000 64,000 60,000 72,000 68,000 64,000
50% Collection - CM 32,000 30,000 36,000 34,000 32,000
50% Collection - PM 32,000 32,000 30,000 36,000 34,000
Total Collection – 15days lag 64,000 62,000 66,000 70,000 66,000
Purchases 45,000 40,000 42,000 50,000 45,000 35,000
Cash Purchase (10%) 4,500 4,000 4,200 5,000 4,500 3,500
Credit Purchase (90%) 40,500 36,000 37,800 45,000 40,500 31,500
Collection – 1 Month lag 40,500 36,000 37,800 45,000 40,500
Salaries 20,000 18,000 22,000 24,000 20,000 18,000
50% Payment – CM 9,000 11,000 12,000 10,000 9,000
50% Payment – PM 10,000 9,000 11,000 12,000 10,000
Total Payment 23,000 22,000 19,000
91
CASH BUDGET – Illustration 2.6 (Key)
PARTICULARS April 21 May 21 June 21
Opening Balance 15,000 11,700 11,700
Cash Sales (20% ) 18,000 17,000 16,000
Collection – Credit Sales 66,000 70,000 66,000
Total cash Inflow 99,000 98700 93,700
Cash Purchases (10% ) 5,000 4,500 3,500

Payment – Credit Purchases 37,800 45,000 40,500
Salaries 23,000 22,000 19,000
Expenses 6,000 6,000 5,000
Rent 500 500 500
Investment – FDR 15,000 9,000 14,000
Total cash Outflow 87300 87,000 82,500
Closing Balance 11,700 11,700 11,200
92
FIXED & FLEXIBLE BUDGETS
FIXED BUDGET
✓ Financial plan – static irrespective of changes
✓ No modification for variations in actual activity
✓ Most common form of budget
✓ Simple to construct
✓ Preferable for short period – quarterly
FLEXIBLE BUDGET
✓ Dynamic scenario
✓ Activity Levels
✓ Seasonality of business
✓ Adjustable – necessity of business
✓ Complexity in making budgets
✓ Estimation is more realistic
93
FLEXIBLE BUDGETS - Illustration 2.7
Company is going through sluggish market conditions and operating at 50% capacity.
However, revival in demand is visible with substantial increase in level of activity.
Prepare Flexible Budget for likely level of 80% and 100% activity
No of units 5,000 units

Raw Material cost ₹ 80
Labour cost ₹ 50
Direct expenses ₹ 15
Factory Overheads ₹ 50,000 ( 50% fixed)
Admin. Overheads ₹ 40,000 (40% fixed)
94
FLEXIBLE BUDGETS - Illustration 2.7 (Key)
Flexible Budget for likely level of 80% and 100% activity
PRESENT -50% ESTIMATE -80% ESTIMATE - 100%
Units 5,000 8,000 10,000

Raw Materials cost @ ₹ 80 4,00,000 6,40,000 8,00,000
Labour cost @ ₹ 50 2,50,000 4,00,000 5,00,000
Direct expenses @ ₹ 15 75,000 1,20,000 1,50,000
PRIME COST : 7,25,000 11,60,000 14,50,000
Factory Overheads - ₹ 50,000 (50% Fixed) 25,000 25,000 25,000
Factory Over heads - (50% variable) 25,000 40,000 50,000
FACTORY COST : 7,75,000 12,25,000 15,25,000
Administrative Overheads ₹ 40,000 (40% Fixed) 16,000 16,000 16,000
Administrative Over heads - (60% variable) 24,000 32,000 40,000
TOTAL COST : 8,15,000 12,73,000 15,81,000
95
FLEXIBLE BUDGETS - Illustration 2.8
Factory is currently working at 50% capacity & produces 10,000 units. Estimate profits of
the company when the factory works at 60% and 80% capacity with following changes.
Offer your critical comments
50% capacity 60% capacity 80% capacity
No of units 10,000
Selling Price ₹ 200 /unit - 2% - 5%
Raw Material cost ₹ 100 /unit + 2% + 5%
Labour cost ₹ 30 /unit
Factory Overheads ₹ 30 /unit

(40% fixed)
Admin. Overheads ₹ 20 /unit
(50% fixed)
96
FLEXIBLE BUDGETS - Illustration 2.8 (Key)
PRESENT -50% ESTIMATE -60% ESTIMATE - 80%
Number of Units 10,000 12,000 16,000

Per Unit Amount Per Unit Amount Per Unit Amount
SALES (₹ ) 200 20,00,000 196 23,52,000 190 30,40,000
Raw Materials cost 100 10,00,000 102 12,24,000 105 16,80,000
Labour cost 30 3,00,000 30 3,60,000 30 4,80,000
Factory Overheads - 40% Fixed 12 1,20,000 10 1,20,000 7.50 1,20,000
Factory Overheads - 60% Variable 18 1,80,000 18 2,16,000 18 2,88,000
Admin. Overheads - 50% Fixed 10 1,00,000 8.33 1,00,000 6.25 1,00,000
Admin. Overheads - 50% Variable 10 1,00,000 10 1,20,000 10 1,60,000
TOTAL COST : 180 18,00,000 178.33 21,40,000 176.75 28,28,000

PROFIT 20 2,00,000 17.67 2,12,000 13.25 2,12,000
97
(UNIT – 3)
1
“ CAPITAL v/s REVENUE EXPENDITURE ” - Meaning ..
CAPITAL EXPENDITURE (CAPEX)
✓ Funds to acquire, upgrade and maintain physical assets …..

✓ …… property, buildings, or equipment
✓ One-time spending
✓ Large amount involved
✓ Benefit - revenue generation - longer period
✓ Irreversible type of expenditure
✓ Decision to spend – critical
2
REVENUE EXPENDITURE (OPEX)
✓ Referred to as ongoing expenses

✓ short-term expenses
✓ Running the daily business operations
✓ Operating expenses in nature
✓ Regular repair and maintenance costs…
✓ …. keep an asset working
✓ …. without substantially improving useful life of asset
✓ Benefit derived in the same year
3
CAPEX OPEX
Facility or factory - an upgrade or Salaries & wages
expansion
Vehicles – Trucks , cars & others Overheads – Administrative, Selling & Distribution
Computers Utilities & Rent
Furniture & Fixture Travel Expenses
Manufacturing equipment Research & Development (R & D)
Property Taxes
4
“ CAPITAL v/s REVENUE EXPENDITURE ” - Comparison
CAPEX OPEX
Definition Asset acquisition Running expenses
Tenure Long Term Short term
Value Added Enhance asset value No such enhancement
Physical Presence Tangible (except- IPR, Patents) No physical presence
Occurrence One Time Recurring
Capitalization YES NO
Impact on revenue No Reduction - business revenue Reduces business revenue
Potential Benefit Long term benefit Short term benefit
Appearance Presented – Balance sheet Always – Revenue Statement
5
“ DEFERREED REVENUE EXPENDITURE ” - Meaning ..
✓ Money spent, that will create future revenue

✓ Revenue earned - more than one accounting year
✓ One-time expense creating ongoing benefits
✓ Disclosure - Deferred revenue expenditure – MUST
✓ Examples – Advertising , Market Research
✓ Accounting Treatment as per GAAP – Matching Principle ….
✓ Part of expenses - in case revenue generated in same year
✓ profits aren’t being distorted by large expense
6
“ CAPITAL RECEIPTS ” - Meaning ..
✓ Create liability or reduce assets

✓ Non-recurring in nature
✓ Types of capital receipts….
✓ …. Borrowing - raising bank loan, issue of bonds (Liability increase)
✓ …. Recovery of loans, receivables (Assets reduction)
✓ …. Other viz, disinvestment of savings
✓ Examples – IPO, Bond issue, Sale of equipment, Insurance claim
received on damaged plant & machinery
7
“ REVENUE RECEIPTS ” - Meaning ..
✓ Neither reduce the company’s assets nor create any liability
✓ Always recurring in nature
✓ Means of survival
✓ Short term in nature
✓ Recurring
✓ Impacts Profit & Loss – either enhances revenue or reduces losses
✓ Normally small in magnitude
✓ Examples – Selling of scrap, Discount earned, Services provided
Interest or Dividend received, Rent received
8
“ CAPITAL v/s REVENUE RECEIPTS ” - Comparison
CAPITAL RECEIPTS REVENUE RECEIPTS
Nature Non Recurring Recurring & regular
Sustainability Not essential – Business survival Must for Busisness survival
Utilization Not for distribution profits Available after deducting expenses
Disclosure Balance sheet Revenue Statement
Impact Reduce assets ; create liability No effect on assets / liabilities
Classification Non operational resources Operational resources
Example …. Sale of assets Sale of Products & services
9
“ DEPRECIATION ” – Concept …
✓ Concept based on “matching principle”
✓ Fixed asset is expected to benefit more than one year
✓ Cost of asset to be spread
✓ Over its useful life in systematic manner…
✓ Charging depreciation ……
✓ …. Capitalized cost converted operating cost
✓ Basis of charging depreciation ….
✓ …. Cost od asset; expected useful life; residual value; method viz,
✓ Depreciation = (Cost – residual life) / Useful life
10
“ DEPRECIATION ” – Straight line Method …
Machine Cost - ₹ 1,00,00,000 ; residual value - ₹ 10,00,000 ; Useful life – 10 years
YEAR DEPRECIATION
1 9,00,000
2 9,00,000
3 9,00,000
4 9,00,000
5 9,00,000
6 9,00,000
7 9,00,000
8 9,00,000
9 9,00,000
10 9,00,000
11
“ DEPRECIATION ” – Written Down Value- WDV Method …
Machine Cost - ₹ 1,00,00,000 ; residual value - ₹ 20,00,000 ; Useful life – 7 years
YEAR WDV (beginning) Depreciation@20% WDV (End)
1 1,00,00,000 20,00,000 80,00,000

2 80,00,000 16,00,000 64,00,000
3 64,00,000 12,80,000 51,20,000
4 51,20,000 10,24,000 40,96,000
5 40,96,000 8,19,200 32,76,800
6 32,76,800 6,55,360 26,21,440
7 26,21,440 5,24,288 20,97,152
12
“ DEPRECIATION ” – Useful Life of asset – Sch.II
TYPE OF ASSET USEFUL LIFE
Building – Factory 30 Years

Building – Fence, Wells & Tube Wells 5 Years
Building – Others (temporary structure) 3 Years
Plant & machinery – other than continuous process plant 15 Years
Plant & machinery – continuous process plant 25 Years
Special Plant & machinery – other than continuous process plant 8 – 40 Years
Electrical Installations 10 Years
Vehicles (Motor cars , motor cycle , scooters) 10 years
Buses & Lorries (other than used for hire) 8 Years
Buses & Lorries (Used for hire) 6 Years
Furniture & Fittings (General) 10 Years
Computers – Servers & Network 6 Years
End user Device – desktops , laptops 3 Years 13
“ DEPRECIATION RATES -WDV ” – As per I T Act
TYPE OF ASSET DEPRECIATION
RATE
Building – Residential – other than hotels & Boarding 5%

Building – Office, Factory ,Godowns – other than residential 10%
Building –Temporary erections 100%
Plant & machinery – General rate 25%
Plant & machinery – Motor cars 20%
Plant & machinery – Computers , books owned by professionals 60%
Plant & machinery – Energy saving devices , used in field operations by 80%
mineral oil Cos.
Plant & machinery – Pollution control equipment 100%
Patents , copyrights , trade marks , licenses , other rights 25%
14
“ INVENTORY VALUATION ” – Methods …
METHOD FEATURES
FIRST – IN – FIRST – OUT ✓ Inventory items purchased first are consumed or sold first
✓ Ending Inventory will represent latest purchases
✓ Old purchases appropriated to consumption or sale
LAST – IN – FIRST – OUT ✓ Most recent purchase are consumed or sold first
✓ Cost of goods sold represent recent acquisitions
✓ Ending inventory represent prices of old purchases
WEIGHTED AVERAGE ✓ Ending inventory & materials consumed or sold valued at

average cost
15
“ INVENTORY VALUATION ” – Methods …3.1
Following records were extracted from ABC limited. Using FIFO; LIFO & Weighted Avg.
Method calculate; where 1500 units sold at ₹1800 per unit on 30 th October 2021
(a) Value of Closing inventory (b) Cost of goods sold and (c) Gross Profit
DATE QUANTITY UNIT PRICE / VALUE (₹)
(UNITS)
1st Oct 2021 700 1200
PURCHASES:
10th Oct 2021 800 1240
15th Oct 2021 500 1250
29th Oct 2021 700 1290
ISSUES / SALES:
8th Oct 2021 400
17th Oct 2021 800
26th Oct 2021 300
16
“ INVENTORY VALUATION ” – Methods …3.1 (Key)
FIFO METHOD
Date Quantity Unit Amount Quantity Unit Amount Quantity Unit Amount
(RECEIPT) Price (₹) (ISSUE) Price (₹) (BALANCE) Price (₹)
1.10.2021 700 1,200 8,40,000 700 1,200 8,40,000

8.10.2021 400 1,200 4,80,000 300 1,200 3,60,000
10.10.2021 800 1,240 9,92,000 300) 1,200 3,60,000
800) 1,240 9,92,000
15.10.2021 500 1,250 6,25,000 300) 1,200 3,60,000
800) 1,240 9,92,000
500) 1.250 6,25.000
17.10.2021 300 1,200 3,60,000 300) 1,240 3,72,000
500 1,240 6,20,000 500) 1,250 6,25,000
17.10.2021 300 1,240 3,72,000 500 1,250 6,25,000
29.10.2021 700 1,290 9,03,000 500) 1,250 6,25,000
700) 1,290 9,03,000
31.10.2012 2,700 33,60,000 1,500 18,32,000 1,200 15,28,000
17
LIFO METHOD
1.10.2021 700 1,200 8,40,000 700 1,200 8,40,000

8.10.2021 400 1,200 4,80,000 300 1,200 3,60,000
10.10.2021 800 1,240 9,92,000 300) 1,200 3,60,000
800) 1,240 9,92,000
15.10.2021 500 1,250 6,25,000 300) 1,200 3,60,000
800) 1,240 9,92,000
500) 1,250 6,25.000
17.10.2021 500 1,250 6,25,000 300) 1,200 3,60,000
300 1,240 3,72,000 500) 1,240 6,20,000
17.10.2021 300 1,240 3,72,000 300) 1,200 3,60,000
200) 1,240 2,48,000
29.10.2021 700 1,290 9,03,000 300) 1,200 3,60,000
200) 1,240 2,48,000
700) 1,290 9,03,000
18
31.10.2012 2,700 33,60,000 1,500 18,49,000 1,200 15,11,000
WEIGHTED AVERAGE METHOD
1.10.2021 700 1,200 8,40,000 700 1,200 8,40,000

8.10.2021 400 1,200 4,80,000 300 1,200 3,60,000
10.10.2021 800 1,240 9,92,000 1,100 1,229.09 13,52,000
15.10.2021 500 1,250 6,25,000 1,600 1,235.63 19,77,000
17.10.2021 800 1235.63 9,88,500 800 1,235.63 9,88,500
17.10.2021 300 1235.63 3,70,688 500 1,235.63 6,17,813
29.10.2021 700 1,290 9,03,000 1,200 1267.34 15,20,813
31.10.2012 2,700 33,60,000 1,500 18,39,188 1,200 15,20,813
19
Summarized Financials – FIFO ; LIFO & WEIGHTED AVERAGE Method
PARTICULARS FIFO LIFO WEIGHTED

AVEARGAE
(a) Value – Closing Inventory – 1,200 units (₹) 15,28,000 15,11,000 15,20,813
(b) Cost of goods sold – 1,500 units (₹) 18,32,000 18,49,000 18,39,188
Sales – 1,500 units @ ₹ 1,800 / unit 27,00,000 27,00,000 27,00,000
Less : Cost of goods sold – 1,500 units (₹) (18,32,000) (18,49,000) (18,39,188)
(c) Gross Profit – 1,500 units (₹) 8,68,000 8,51,000 8,60,812
20

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INSURANCE ACCOUNTING

PRASAD AKOLKAR – 98194 65651

STAKEHOLDERS STAKEHOLDERS STAKEHOLDERS

Shareholders Investors Employees

Suppliers Creditors Customers

Lenders Regulators Govt. Authorities

Research Entities Industry Association Educational Institutions

➢ Keeping books of account

➢ Profitability & Financial position

➢ Growth , Sustainability & Solvency

➢ Ultimate communication through Financial Statements

Performance Available tools such as Profit & Loss account ,

Comparative Analysis Intra firm as well as inter firm comparison signifies

Govt Regulations Reporting, Filing statutory returns

➢ Entities with varied perspective could present Financial

➢ “ Generally Accepted Accounting Principles – GAAP ”

✓ Business transactions must be measurable in terms of money –

✓ Entity to continue it business in perpetuity

✓ Financial results relate to specified period

✓ Recording all assets @historical cost – purchase price

✓ Foundation - Double Entry Book Keeping System

✓ Revenue from business is recorded only when Realized

✓ Expenses to be recognized when become DUE & PAYABLE

✓ Derived from tradition, practice and Concepts

1. Business entity Health of the director is not recorded in the books

3. Going Concern Order received for supply of goods is not recorded

1. Business entity Owner’s personal expenses – recorded as drawings

PERSONAL Natural personal DEBIT – RECEIVER

1 Started business with ₹10,00,000 capital brought in cash

6 Cheque payment for purchase of machinery ₹ 2,50,000

9 Credit purchase from X Ltd. ₹ 2,00,000

1 Salary for one month - ₹ 55,000 is yet to be paid

2 Interest on investment accrued - ₹ 1,500 yet to be received

3 50% of rent paid is advance payment

4 Goods worth ₹ 80,000 are unsold at the end of the period

5 Depreciation to be provided 3 Months – furniture – 10% pa ; machinery – 7.5% pa

Salary A/c 55,000

Salaries A/c 1,65,000

Stationary A/c 7,000

Discount A/c 5,000

Cash A/c 3,000

Bank A/c 6,46,000

Machinery A/c 2,50,000

Investment A/c 1,00,000

Interest Earned A/c 2,500

Furniture Mart A/c 1,50,000

Prepaid Rent A/c 30,000

Outstanding Salaries 55,000

Interest receivable 1,500

Closing Stock 80,000

Provision for depreciation 8437

Sales A/c 8,00,000

Profit & Loss A/c 7,35,437

Purchase A/c 5,20,000 Sales A/c 8,00,000

01.08.21 To Balance B/F 22,000 25,000 10.08.21 By Bank – contra 20,000

05.08.21 To Rohit 30,000 12.08.21 By Purchase 20,000

09.08.21 To Sales 30,000 17.08.21 By Furniture 10,000 20,000

10.08.21 To cash – contra 20,000 21.08.21 By Rent 10,000

18.08.21 To Sales 12,000 24.08.21 By Cash – contra 20,000

24.08.21 To Bank – contra 20,000 29.08.21 By Salary 10,000

31.08.21 By Drawings 2,000

31.08.21 By Balance C/F 22,000 25,000

TOTAL 84,000 75,000 TOTAL 84,000 75.000