Ans - 1:

INTRODUCTION:

An organization must have a proper accounting system for recording the effect of financial
events such as the purchase of raw materials, sale of goods, acquisition and disposal of assets,
direct and indirect expenses related to the business, etc. The final step in the accounting process
is the preparation of financial statements. A financial statement does not have to be created
after every transaction. A continuous sequence of steps is followed to record, classify and
summarize business transactions in accounting records. Accounting plays a vital role in any
business because it helps you to track income and expenditure, ensure statutory compliance,
and provide investors, management, and government with quantitative financial information
which can be used in making business decisions.

 Accounting Process

1) Analysis of 7) Prepare
6) Adjusted
Business Financial
Trial Balances
Transactions Statements

5) Make
2) Make 8) Close
Adjusting
Journal Entries Accounts
Entries

3) Post to
4) Prepare Trial 9) Post Closing
Ledger
Balance Trail Balance
Accounts

 What is an Account and How do analyze Different Accounts

The accounting system keeps a separate record for each item that appears in the financial
statement. This record is called “Account”. Accounts can be classified into the following
categories:
 1. Personal Accounts: These accounts relate to persons. It includes customers,
suppliers, lenders, and bankers. The capital account of the owners is also a personal
account. Accounts with a prefix or suffix, such as prepaid rent, salaries outstanding,
etc. are treated as personal accounts.

2. Real Accounts: These accounts relate to assets of the firm such as land, building,
investments, fixed deposits, cash balance, etc.

3. Nominal Accounts: These accounts are related to expenses, revenues, losses and
gains, salaries paid, interest paid, and commission received, these all are included
in Nominal Accounts. It is temporary only as their net results are reflected as profit
or loss, which is transferred to the capital account.

Based on all the details mentioned above, we should have a good understanding of what the
account is, which heading it includes, and which of these headings fall under which accounts,
and only after understanding all these things, we can make the journal entry. So, let us now
understand the rules for making a journal entry.

 Rules for debit and credit to make a journal entry

Accounting records are maintained using a double-entry accounting system. Under this system,
debit and credit entries of an equal amount are made to record every transaction. Entering a
transaction on the left-hand side of an account is known as debiting the account and entering a
transaction on the right-hand side is called crediting the account. The rules of debit and credit
differ with the account type, and are as follows:

Increase in assets are debits; decrease in assets are credit.

Increases in liabilites are credits; decreases in liabilites are

debits.

Increases in owners' capital are credits; decreases in

owners' capital are debits.

Expesnes and loses are debits; incomes and gains are

credits

For alternative classification of accounts, the following rules of debit and credit are followed:
______________________________________

For a personal accounts, debit the receiver

and credit the giver

______________________________________

For real accounts, debit what comes in and

credit what goes out.

______________________________________

For nominal accounts, debit all expenses and

losses and credit all incomes and gains.
 After understanding all the above-mentioned rules of Journal Entry, let us discuss the main
question and pass a journal entry, and before passing the journal entries, first of all, we need
no analyses of all the transactions:

CONCEPT:

ANALYSIS OF TRANSACTIONS
DATE ACCOUNTS TYPE OF DEBIT CREDIT
PARTICULARS EFFECT
(DECEMBER) INVOLVED ACCOUNT (RS.) (RS.)

CASH A/C REAL A/C INCREASED 5000

RS. 5000 CASH &
RS. 5,00,000 FROM
3 THE BANK
INVESTED IN
BANK A/C REAL A/C INCREASED 5,00,000

BUSINESS MRS. VEENA'S CAPITAL

PERSONAL A/C INCREASED 5,05,000
A/C

FURNITURE A/C REAL A/C INCREASED 60,000

PURCHASED
FURNITURE FOR
5 RS. 60,000 & 50%
PAYMENT MADE
BANK A/C REAL A/C DECREASED 30,000

THROUGH BANK ACCOUNTS PAYABLE A/C

OR PERSONAL A/C INCREASED 30,000
CREDITOR A/C
PURCHASED
GOODS OF RS. PURCHASE OF STOCK A/C NOMINAL A/C INCREASED 3,15,000

7 3,15,000 AND
MADE PAYMENT BANK A/C REAL A/C DECREASED 3,15,000
THROUGH BANK

SHE SOLD OFF THE BANK A/C REAL A/C DECREASED 5,00,000

8 ENTIRE GOODS AT
5,00,000 SALES A/C NOMINAL A/C INCREASED 5,00,000

SHE PAID RENT, RENT/ELECTRICITY/SALARY

ELECTRICITY, AND NOMINAL A/C INCREASED 10,000
TO EMPLOYEES
SALARY TO

10 EMPLOYEES RS.
10,000 FOR EACH
BANK A/C REAL A/C DECREASED 10,000
TYPE OF EXPENSE
THROUGH THE
BANK

TOTAL 13,90,000 13,90,000

Journal entry becomes very easy if we analyze every financial transaction in the accounting
process. After every transaction given above is analyzed, now we know which transactions
have been done with whom, which accounts are included in it, what type of accounts are there
or which accounts have to be debited and credited with what amount, all this we have come to
know by analyzing the transactions, so let us now make the journal entry.
 JOURNAL OF VEENA'S BUSINESS
DATE
PARTICULARS L.F. DR CR
(DECEMBER)

CASH A/C Dr. 5000

3 BANK A/C Dr. 5,00,000

TO VEENA’S CAPITAL A/C 5,05,000

(Being the amount invested by Mrs. Veena to start a business)

FURNITURE A/C Dr. 60,000

5 TO BANK A/C 30,000

TO ACCOUNTS PAYABLE (CREDITOR) 30,000

(Bought furniture and paid half of the amount from the bank)
PURCHASE OF STOCK A/C Dr. 3,15,000
7 TO BANK A/C 3,15,000

(Purchased the goods and paid the amount from the bank)
BANK A/C Dr. 5,00,000
8 TO SALES OF STOCK A/C 5,00,000

(Sold off the entire goods)

REVENUE EXPENDITURE A/C Dr. 10,000
10 TO BANK A/C 10,000

(Paid rent, electricity, and salary to employees from the bank)

TOTAL 13,90,000 13,90,000

CONCLUSION:

In the first entry of 3rd December, Cash and Bank account debit and capital account
credit, Cash and bank account is a real account and the real accounts rules say that
“Debit what comes into the business” so, we debit it because cash comes in business
from Veena. And Veena’s capital account is Veena’s personal account and the personal
accounts rules say that “Credit the giver” so we credit Veena’s Capital Account because
she invested money into the business.
In the second entry of 5th December, the Furniture account is debited, Furniture
account is a real account and the real accounts rules say that “Debit what comes in
business” and furniture comes into business so, we debit it. And Bank and Creditors
account is credit, Bank is a real account and a Creditor is a personal account, and for
the real accounts, the rules say that “Credit what goes out” For the purchase of
furniture we have to pay the money and we paid half money from the bank, so, the
bank account is credit and for personal account “Credit the giver” here, half payment is
pending so, also credit the creditor’s account.

In the third entry of 7th December, the Purchase of Stock account is debit, Purchase of
stock account is a Nominal Account. And for the nominal accounts rules says that
“Debit all expenses” and stocks come into the business, so we debit it And Bank
account is credit, Bank account is a real account, and for the real account rules say that
“Credit what goes out” for the purchase of stocks we have to pay the money and we
paid through bank, so we debit the bank account.

In the fourth entry of 8th December, the Bank account is debited, and the Bank account
is a real account, and for the real account rules say that “Debit what comes in” in this
transaction we sell the stock and because of selling the stock we earned money. and
here money comes in the bank, so we debit bank account and Sales of Stock Account is
credit. And Sales and stock account is a Nominal account, and the nominal accounts
rules say that “Credit all incomes”. Here we sell the stock and make income so we
credit the Sales of the stock account.

In the fifth entry of 10th December, the Revenue expenditure account is debit, Revenue
expenditure account is a Nominal Account. And for the nominal accounts rules says
that “Debit all expenses”, Rent, electricity, and the salary of staff that all are our
expenses and so we debit the revenue expenditure account. And Bank account is a
credit, a Bank account is a real account, and the real accounts rules say that “Credit
what goes out” for that all expenses we paid money from the bank so we credit the
bank account.
Ans - 2:

INTRODUCTION:
Before discussing the essential components of a Profit and loss account, we have to discuss the
below-mentioned 4 steps:
1. Meaning and features of profit and loss account:
2. Purpose of profit and loss account:
3. Contents of items shown in the profit and loss account:
4. Balancing of profit and loss account:

1. Meaning and features of profit and loss account:

• Profit and Loss account is prepared after Trading Account. And from the Trading
account, we have to get Gross Profit or Gross Loss and put it in the Profit and Loss
account.
• Thus, it is the second stage of making the financial statement, and the first stage of
making a financial statement is to prepare a Trading account.
• Profit and Loss account starts with Gross Profit on the credit side or Gross Loss on
the debit side. Let’s understand this point in detail by making a ledger:

Trading Account
Dr. (For the year Ended…) Cr.
Particulars Amount Particulars Amount
To Opening Stock Xxx By Net Sales xxx
To Net Purchase Xxx By Closing Stock xxx

If Gross If Gross Loss

Xxxx xxxx
Profit

Total Xxxxx Total xxxxx

Dr. Profit and Loss Account Cr.

Particulars Amount Particulars Amount

To Gross By Gross
Loss
Xxx xxx
Profit

To Net profit Xxxx By Net Loss xxxx

Total Xxxxx Total xxxxx

 • It is prepared according to the Accrual Basis of accounting. Accrual Basis
accounting means recognizing business revenue and matching expenses when they
generated-not when money changes hands.
• While preparing the Profit and Loss account, the Matching concept is used to record
Expenses and Incomes. The matching concept is an accounting practice whereby
firms recognize revenues and their related expenses in the same accounting period.

2. Meaning and features of profit and loss account:

• To ascertain Net Profit or Net Loss.

• Profit and Loss account is prepared to calculate net profit earned or net loss
incurred.
• It helps to take steps for effective control over the expenses

3. Contents of items shown in the profit and loss account:

• Now, let us see how the structure of the Profit and Loss account should be:

Profit and Loss Account

(For the year ended….)
DR CR
PARTICULARS AMOUNT PARTICULARS AMOUNT
To gross Loss xxx By Gross Profit xxx
To Salaries xxx By Discount Received xxx
To Office Rent xxx By Commission Received xxx
To Printing & Stationery xxx By Bank Interest xxx
To Telephone Expenses xxx By Rent Received xxx
To Postage & Telegram xxx By Dividend on Shares xxx
To Discount Allowed xxx By Interest Earned on Debentures xxx
To Insurance xxx By Profit on Sale of Asset xxx
To Audit Fees xxx
To Electricity Charges xxx
To Repairs and Renewals xxx
To Depreciation xxx
To Advertisement xxx
To Carriage Outwards xxx
To Bed Debts xxx
To Selling Commission xxx
To Bank Charges xxx
To Interest on Loans xxx
To Loss on Sale of Asset xxx
To Net Profit xxxxxx By Net Loss xxxxxx
xxxxxxx xxxxxxx
 4. Balancing of Profit and Loss Account:

• Credit side > Debit side (i.e., Net Profit), If the total of the credit side is more than
the total of the debit side, it is Net Profit.
• Net profit is added to Capital Account in the Balance Sheet.
• Debit side > Credit side (i.e., Net Loss), If the total of the debit side is more than
the total of the credit side, it is Net Loss.
• Net Loss is subtracted from Capital Account in the Balance Sheet.

CONCEPT:
Let us discuss essential components which contribute
to preparing the profit and loss account.

There are eight essential components:

  Gross Profit: - Gross Profit = Revenue – Cost of Goods Sold (COGS)
Where Revenue is the amount of money a company receives in exchange for its goods or
services. The revenue received by a company is usually listed on the first line of the income
statement as revenue, sales, net sales, or net revenue.
Revenue = Price of Goods/Services × Number of units sold/Number of Customer
Where the Cost of goods sold is the sum of all direct costs associated with making a product
or services. Depending on the business, that may include raw materials, packing direct labour,
etc. Gross profit is a measure of how efficiently a business uses labor and supplies for
manufacturing goods or offering services to clients. The gross profit helps us to understand the
costs needed to generate revenue, When the value of the cost of COGS increases, the gross
profit value decreases. So, we have to spend less money to deal with our operating expenses.
And when COGS value decreases, there will be an increase in profit, which means our company
will have more money to spend on our business operations.

 Net profit: - Net Profit = Gross Profit – Operating expenses and

Taxes.
Net Profit is the most important parameter that determines the financial condition of any
business. It shows whether the business can make more than what it spends. We can use the
net profit to help the business decide when and how to work towards expanding the business
and when to reduce expenses. Net Profit tells us about the profitability of our business. Based
on the net profit, The financial institutions decide whether to issue a loan or not. Furthermore,
Landers and Investors look at our company’s net profit to check the capability to pay our future
debts.
 So, let us now understand the difference between gross profit and net profit through the income
statement shown below:

XYZ PRIVATE LTD.

INCOME STATEMENT 2015-16 2016-17 2017-18 2018-19 2019-20

VALUES IN CR.
₹ ₹ ₹ ₹ ₹
REVENUE
1,000.00 1,100.00 1,250.00 1,300.00 1,550.00
₹ ₹ ₹ ₹ ₹
COST OF GOODS SOLD (COGS)
400.00 435.00 455.00 500.00 575.00
₹ ₹ ₹ ₹ ₹
GROSS PROFIT 600.00 665.00 795.00 800.00 975.00
GORSS PROFIT MARGIN 60.00% 60.45% 63.60% 61.54% 62.90%

MARKETING, ADVERTISING, & ₹ ₹ ₹ ₹ ₹

PROMOTION EXPENSES 150.00 165.00 180.00 225.00 300.00
GENERAL & ADMINISTRATIVE ₹ ₹ ₹ ₹ ₹
EXPENSES 80.00 80.00 80.00 80.00 80.00

EARNING BEFORE
INTEREST, TAXES, ₹ ₹ ₹ ₹ ₹
DEPRECIATION, 370.00 420.00 535.00 495.00 595.00
AMORTIZATION

DEPRECIATION & ₹ ₹ ₹ ₹ ₹
AMORTIZATION 95.00 100.00 105.00 110.00 120.00
EARNINGS BEFORE ₹ ₹ ₹ ₹ ₹
INTEREST & TAXES 275.00 320.00 430.00 385.00 475.00

₹ ₹ ₹ ₹ ₹
INTEREST
125.00 140.00 135.00 175.00 225.00
₹ ₹ ₹ ₹ ₹
TAXES
100.00 85.00 110.00 140.00 155.00

₹ ₹ ₹ ₹ ₹
NET PROFIT 50.00 95.00 185.00 70.00 95.00

NET PROFIT MARGIN 5.00% 8.64% 14.80% 5.38% 6.13%

So, from the above sheet, we can understand the difference between gross profit and net profit.
Note: - for any business 50-60 % gross margin is good. And also 10-20% net profit margin is
good for any business.
  Operating Profit: - Operating Profit = Gross Profit – Operating
Expenses
For a simple understanding, Operating profit is the difference between Sales Revenues, Cost
of Goods Sold, and other Operating Costs.

For example,

Particulars Amount
₹
Sales Revenue
10,00,000.00
₹
Cost of Sales
2,00,000.00

Gross Profit ₹ 8,00,000.00

₹
Other Operating Costs
6,00,000.00

Operating
₹ 2,00,000.00
Profit

To find operating profit first we need to understand that in the business there are different types
of income and also different types of expenses. Different types of incomes like income from
sales, interest on savings, etc. similarly expenses are also of different types like the cost of
manufacturing or services, interest on a bank loan, office rent, staff salary, etc. and to find out
the operating profit, we have to focus on sales revenue only, vice-versa in expenses focus on
production or service-related cost only.

 Goods and Service Tax:

Goods and Services Tax (GST) is shown as a deduction from gross sales. It is an indirect
tax that the seller recovers from the customer and deposits to the government. If our
company is registered under GST, then we must charge 15% GST on our all sales.
When preparing profit and loss statements GST is not included in sales. Because it is
not revenue of our business.
  Income Tax:

Income tax is treated as a separate business expense for the company’s account. But in
the case of a sole proprietorship, it is treated as a personal expense and is adjusted in
the owners’ capital account. Tax expenses are calculated on the profit before tax and
recorded in the profit and loss statement as the provision for tax.

CONCLUSION
So, the profit and loss account are a very critical and confidential statement for any company.
It helps to understand the business’ profitability and operational efficiency. Profit and loss
account plays an important part in preparing the balance-sheet. Profit and loss statement is one
of the cornerstones of corporate financial analysis and reporting. It is designed to easily
summarize business costs, revenues and expenses, with the aim of giving owners insight into
their firm's ability to generate profits.

Importance of
Profot & Loss
Account

Ability to make
Proof of
informed Help with Taxes
succsess
decisions
 Ans: 3(A)

WHAT IS “T” FROM BALANCE SHEET?

The “T” form balance sheet is known as Horizontal Form. The T-form balance sheet has 2
sides, in which the liabilities of the firm are shown on the left side and the assets on the right
side. A balance sheet reports a company's assets, liabilities, and shareholder equity. Liabilities
mainly include capital, reserve and surplus, loan from banks, bank overdraft, creditors, notes
payable, outstanding expenses, etc., and assets side include land and building, leasehold
premises, machinery, furniture, goodwill, patents, capital, investments, a fixed deposit with a
bank, sundry debtors, prepaid expenses, accrued income, cash in the bank, cash in hand, etc.
The balance sheet is not only used for internal decisions of the company, but it is also very
important for other investors because through that they get an estimate of the company’s capital
structure, and also used for lenders to understand the capacity of the firm to repay the borrowed.
The balance sheet can be used with other important financial statements to conduct a
fundamental analysis or calculate financial ratios.

PROCEDURE
Let us prepare the T form balance sheet of Z and X, LLP

BALANCE SHEET OF Z AND X LLP

AMOUNT AMOUNT AMOUNT AMOUNT
LIABILITIES (Rs. In (Rs. In ASSETS (Rs. In (Rs. In
'000) '000) '000) '000)
Shareholder's Non-current
equity: assets:
Retained earnings 860 Fixed asset -
Common Stock 1000 1860 Equipment 1500 1500

Current liabilities: Current assets:

Salary payable 150 Account receivable 250
Accounts Payable 540 Supplies 150
Unearned revenue 200 890 Cash 550
Prepaid insurance 300 1250

TOTAL 2750 TOTAL 2750

INTERPRETATION
❖ Retained Earnings:

Retained earnings are not an asset, but are considered a liability because it is set aside
to pay shareholders in the event of a sale or purchase of the business.

❖ Common Stock:

Common stock is one type of equity and is included under the liability side. This also
means the shareholders' funds do not belong to the company as it rightfully belongs to
its shareholders. Hence from the company's perspective, the shareholders' funds are an
obligation payable to shareholders. Hence this is shown on the liabilities side of the
balance sheet.

❖ Salary Payable:

Salary payable is kept on the liability side, as it is a kind of expenditure of the company,
which has to be paid in the next 1 year to the employee who has worked for the
company.

❖ Accounts Payable:

When a company purchases any goods or services on credit, the company has to pay
that vendor within 90 days, and it has to pay the vendor in the short term, so Accounts
Payable is put on the liability side kept under current liability.

❖ Unearned Revenue:

Unearned revenue is treated as a liability because the revenue has still not been earned
and represents products or services owed to a customer.

❖ Equipment:

Equipment is a part of a fixed asset, and since its consumption is to be more than one
year, so it is kept under non-current assets on the asset side of the balance sheet.
❖ Account Receivable:

Just as if we have purchased goods or services on credit from a vendor, it is kept on the
liability side, Likewise, if any party or customer has borrowed goods or services on
credit from our company, so we have to get compensation or remuneration for the goods
or services provided to them, so it is placed on the asset side.

❖ Supplies:

As long as our company does not use the supply, some of its value is extracted and kept
on the assets side.

❖ Cash:

Cash plays a major role in business, as cash is something that a company can easily pay
its debts at any time, and is also used on a day-to-day basis for operational expenses of
the business. So, it is kept as an assets side.

❖ Prepaid Insurance:

Prepaid insurance is a type of prepaid expense that we have not yet benefited from. And
paying it in advance reduces the cost in the future and gets benefits in the future, but if
for some reason we don't take that benefit then we can get that paid amount later. So, it
is kept as an assets side.
Ans: 3(B)

UNDERSTANDING
The current ratio is one type of liquidity ratio. The liquidity ratio tells us about the short-term
financial position of the company. In short, current ratios show us whether the company has
the ability or money to pay its current liabilities. Generally, the current ratio is used by creditors
to evaluate a company’s credit status before offering short-term debts. If the current assets fall
short of the current liabilities, the company may be in trouble or it may prove to be already in
trouble. And current ratios also prove whether the company is systematically utilizing its assets
or not.

Formula:

CURRENT ASSETS
CURRENT LIABILITIES

Here, the current assets are the resources that we consume within 1 year or convert into cash.
Current liabilities are also short-term liabilities that we have to pay within 1 year. What can
occur in current assets and current liabilities is shown below:

CURRENT ASSETS CURRENT LIABILITIES

CASH ACCOUNTS PAYABLE

BANK DEPOSITS SHORT-TERM LOANS

MARKETABLE SECURITIES CASH CREDIT & OVERDRAFT

ACCOUNTS RECEIVABLES ADVANCE FROM CUSTOMERS

INVENTORY OUTSTANDING EXPENSES

PRE-PAID EXPENSES TERM LOAN INSTALLMENTS

SHORT-TERM LOANS & ADVANCES

PROCEDURE
Let us calculate the current ratio of Z and X LLP.

CURRENT ASSETS AMOUNT CURRENT LIABILITY AMOUNT

Account Receivable 2,50,000 Salary Payable 1,50,000

Supplies (As Inventory) 1,50,000 Account Payable 5,40,000

Cash 5,50,000 Unearned Revenue 2,00,000

Prepaid Insurance 3,00,000

TOTAL 12,50,000 TOTAL 8,90,000

CURRENT ASSETS

CURRENT LIABILITIES

12,50,000

8,90,000

1.40:1

INTERPRETATION
A low current ratio (Less than 1) may indicate that a company would have difficulty in paying
bills as they become due without selling some long-term assets. A high current ratio may not
always be good as it may indicate too much money being tied up in inventory, receivables, and
unproductive cash balances. It is difficult to specify a normal level of current ratio as this level
differs from one industry to another.

But in the general case current ratio is approximated as follows:

 CURRENT RATIO

-3 -2 -1 0 1 1.33 3 4 5

If CL > CA (CURRENT RATIO < 1) CR is CR > 1.33 to CR > 3 means

It means short-term trouble for from 1 to 3 is called the company
1.33 is healthy CR. can
the company, may have to raise
Good and And Comfortably
additional financing, High
liquidity risk, and May tap into company company meet Short-
can meet can easily term liabilities,
long-term funds.
its Short- meet its but it shows
term Short-term that current
Liabilities Liabilities assets are not
utilized
efficiently as
funds are either
idle or are
locked up in
inventories or
in receivables.

So here current ratio of Z and X LLP company is 1.40 which is healthy. And Z and X LLP
Company can easily pay its short-term liabilities.