ACCOUNTING FOR MANAGERS (MBA-MU)

Unit
4

PREPARATION OF
FINAL ACCOUNTS

Semester 1

PREPARED & COMPILED BY:

JEET KAKKAD
Unit - 4 Preparation of Final Accounts

Financial Statement

Financial Statement is Trading and Profit and loss A/c, Balance Sheet & Cash Flow
Statement.

Trading Account

Trading Account is the account prepared for knowing the gross profit or loss of the
business. It is related to trading activities of the business ie purchasing and selling.

Profit and loss Account

An account which is prepared to find the net profit of the business

Balance Sheet

Balance Sheet is statement of affairs of business showing the assets and liabilities
on a particular date

Gross Profit

Profit arising due to the trading activities of business, i.e., sales and purchase

Net Profit

Profit which is achieved by deducting all expenditure (operating and non-operating)

from revenue (operating and non-operating).Tax is also deducted to get net profit.

Prepaid Expenses

A prepaid expense is a type of asset on the balance sheet that results from a
business making advanced payments for goods or services to be received in the
future. Prepaid expenses are initially recorded as assets, but their value is expensed
over time onto the income statement.

Outstanding Expenses:

Outstanding expenses are those expenses which have been incurred during the
current accounting period and are due to be paid, however, the payment is not
made. Such an item is to be treated as a payable for the business. Examples
– Outstanding salary, outstanding rent, outstanding subscription, outstanding wa
ges, etc.

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Unit - 4 Preparation of Final Accounts

Cash Flow Statement

Cash flow statement is a statement showing the changes in financial position of a

business concern during different intervals of time in terms of cash and cash
equivalents.
The Revised Accounting Standard-3 has made it mandatory for all listed companies
to prepare and present a cash flow statement along with other financial statements
on annual basis.

Objectives of Cash Flow Statement

(i) Useful in short-term financial planning.

(ii)Useful in efficient cash management.
(iii)Helpful in formulation of business policies.
(iv)Assists in preparation of cash budget.
(v)Used for assessment of cash flow from various activities, viz operating, investing
and financing activities

Cash and Cash equivalent

As per AS-3, 'Cash' comprises cash in hand and demand deposits with banks, and
'Cash equivalents' means short-term highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant
risk of changes in value.

Cash from Operating Activity

Inflow and out flow due to operations of business.

Operating Activities are the activities that constitute the primary or main activities
of an enterprise.

Cash from Investing Activity

Cash flow due to non-current investments or non-current assets.

Investing Activities are the acquisition and disposal of long-term assets and long-
term investments.

Cash Flow from Investing Activities is the section of a company's cash flow
statement. It contains 3 sections: cash from operations, cash from investing and
cash from financing. that displays how much money has been used in (or generated
from) making investments during a specific time period.

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Unit - 4 Preparation of Final Accounts

Cash from Financing activity

Cash flow due to financing activity of the transaction related to Debt, Equity,
Dividend, Interest, etc.

Financing Activities relate to long-term funds or capital of an enterprise, e.g., cash

proceeds from issue of equity shares, debentures, raising long-term bank loans,
repayment of bank loan, etc.

Cash flow from financing activities (CFF) is a section of a company's cash flow
statement, which shows the net flows of cash that are used to fund the company.
Financing activities include transactions involving debt, equity, and dividends.

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Unit - 4 Preparation of Final Accounts

Depreciation

It is the permanent, continuous and gradual reduction / decrease in the value of an

asset.

Straight line method of Depreciation

(Also known as Fixed Instalment Method & Original Cost Method)

Depreciation is calculated by considering the original value of assets to be equally

divided over the life of asset

Written-down Value Method of Depreciation

(Also known as Reducing Balance Method, Diminishing Balance Method, Reducing
Instalment Method, Reducing-value Method)

Depreciation is calculated by considering the written-down value of assets as a fixed

percentage of the same every year.

Under this method, depreciation is calculated at a certain percentage each year on

the balance of the asset which is brought forward from the previous year. The
amount of depreciation charged for each period is not fixed but it goes on decreasing
gradually as the opening balance of the asset in each year will reduce. Thus, amount
of depreciation becomes higher at in the earlier periods and becomes gradually lower
in subsequent periods

SLM Vs. WDV

Sr.
Basis Straight Line Method Written Down Value Method
No.
Depreciation is calculated as
Basis of A fixed percentage of the fixed percentage of Written-
1 Charging original cost is charged as down Value / Book Value /
Depreciation depreciation. (i.e. original cost less
depreciation charged till date)
Annual
Declines / Reduces year after
2 Depreciation Fixed (Constant) every year
year
Amount
Successive years face higher
Depreciation amount
charges on account of more
Total decreases every year which
3 maintenance expenses.
Charge balances higher maintenance
Depreciation amount
charges.
remains the same.
This method does not reduce
Book Value This method reduces the
4 the book value of the asset to
/ Zero-Level book value of the asset to
zero.

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Unit - 4 Preparation of Final Accounts

zero or equal to its scrap

value.
Depreciation is easy to Calculation of depreciation is
5 Calculation
calculate. difficult.
Under this method, there is a
fall in the depreciation and
Effect on Impact on financial
rise in the repairs and
Profit and statements is lower in initial
6 maintenance charges. Thus,
Loss years as maintenance
charges remain the same
Account charges are less.
during the life time of the
asset.
This method is appropriate
This method is appropriate for assets where the amount
for assets with less chances of repairs and renewals goes
7 Suitability
of obsolescence and less on increasing with the age of
repair charges. the asset and the possibilities
of obsolescence are higher.
Recognition
Not recognised, except a few
8 by Income Recognised
cases
Tax Law

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