From the following balances, prepare a comparative balance sheet showing an increase or
decrease in individual assets and liabilities, together with the percentage of such increase or
decrease, and write the interpretation.
31st March 2023 31st March 2024
(Rs.) (Rs.)
Liabilities:
Sharecapital 8,00,000 10,00,000
Reserves 1,00,000 1,20,000
Secured loans 30,000 40,000
Unsecured loan 20,000 10,000
s
Sundrycreditors 80,000 1,00,000
Assets:
Buildings 4,00,000 5,00,000
Machinery 3,00,000 4,00,000
Stock 2,00,000 1,80,000
Debtors 1,00,000 1,50,000
Cashat bank 30,000 40,000
Comparative Balance Sheet as of March 31, 2023, and March 31, 2024
Liabilities
1. Share Capital:
• 31st March 2023: Rs. 1,20,000
• 31st March 2024: Rs. 1,20,000
• Increase/Decrease: Rs. 0
• Percentage: 0 / 1,20,000 X 100= 0%
2. Reserves:
• 31st March 2023: Rs. 30,000
• 31st March 2024: Rs. 40,000
• Increase/Decrease: Rs. 10,000
• Percentage: 10,000/30,000X100= 33.33% increased
3. Secured Loan:
• 31st March 2023: Rs. 20,000
• 31st March 2024: Rs. 10,000
• Increase/Decrease: Rs. -10,000
• Percentage: 10,000/20,000X100 = 50% Decreased
4. Sundry Creditors:
• 31st March 2023: Rs. 80,000
• 31st March 2024: Rs. 80,000
• Increase/Decrease: Rs. 0
• Percentage: 0/80,000X100= 0%
Assets
1. Buildings:
• 31st March 2023: Rs. 4,00,000
• 31st March 2024: Rs. 5,00,000
• Increase/Decrease: Rs. 1,00,000
• Percentage: 1,00,000/4,00,000X100=25% Increased
2. Machinery:
• 31st March 2023: Rs. 3,00,000
• 31st March 2024: Rs. 4,00,000
• Increase/Decrease: Rs. 1,00,000
• Percentage: 1,00,000/3,00,000X100=33.33% Increased
3. Stock:
• 31st March 2023: Rs. 1,80,000
• 31st March 2024: Rs. 1,80,000
• Increase/Decrease: Rs. 0
• Percentage: 0%
4. Debtors:
• 31st March 2023: Rs. 1,50,000
• 31st March 2024: Rs. 1,30,000
• Increase/Decrease: Rs. -20,000
• Percentage: 20,000/1,50,000X100=13.33% Decreased
5. Cash at Bank:
• 31st March 2023: Rs. 40,000
• 31st March 2024: Rs. 30,000
• Increase/Decrease: Rs. -10,000
• Percentage: 10,000/40,000X100=25% Decrea
Describe the various types of Accounting Ratios with their formula in details.
Accounting ratios are categorized into four main types: Liquidity, Solvency,
Activity, and Profitability. Each type assesses different aspects of a
company's financial health, using specific formulas to analyze financial
statement data.
1. Liquidity Ratios:
Purpose:Measure a company's ability to meet its short-term obligations (debts
due within a year).
Key Ratios:
Current Ratio: (Current Assets / Current Liabilities) Indicates how many times a
company can pay off its current liabilities with its current assets.
Quick Ratio (Acid-Test Ratio): ((Current Assets - Inventory) / Current
Liabilities) A more conservative measure than the current ratio, excluding
inventory (which may not be easily converted to cash).
Cash Ratio: (Cash and Cash Equivalents / Current Liabilities) The most
stringent liquidity measure, focusing on readily available cash.
2. Solvency Ratios (Leverage Ratios):
Purpose: Evaluate a company's ability to meet its long-term debt obligations.
Key Ratios:
o Debt-to-Equity Ratio: (Total Liabilities / Shareholders' Equity) Shows
the proportion of debt financing compared to equity financing.
o Debt Ratio: (Total Liabilities / Total Assets) Indicates the extent to
which a company's assets are financed by debt.
o Interest Coverage Ratio: (Earnings Before Interest and Taxes
(EBIT) / Interest Expense) Measures a company's ability to cover its
interest expenses with its earnings.
3. Activity Ratios (Turnover Ratios):
Purpose: Assess how efficiently a company utilizes its assets.
Key Ratios:
o Inventory Turnover Ratio: (Cost of Goods Sold / Average Inventory)
Measures how quickly inventory is sold and replaced.
o Receivables Turnover Ratio: (Net Sales / Average Accounts
Receivable) Indicates how efficiently a company collects its
receivables.
o Payables Turnover Ratio: (Cost of Goods Sold / Average Accounts
Payable) Measures how quickly a company pays its suppliers.
o Working Capital Turnover Ratio: (Net Sales / Net Working Capital)
Shows how effectively a company uses its working capital to generate
sales.
4. Profitability Ratios:
Purpose: Evaluate a company's ability to generate profits from its operations.
Key Ratios:
o Gross Profit Margin: (Gross Profit / Net Sales) Shows the percentage
of revenue remaining after deducting the cost of goods sold.
o Operating Profit Margin: (Operating Income / Net Sales) Indicates the
profitability of core business operations.
o Net Profit Margin: (Net Income / Net Sales) Represents the overall
profitability of the company, after all expenses.
o Return on Assets (ROA): (Net Income / Total Assets) Measures how
effectively a company uses its assets to generate profits.
o Return on Equity (ROE): (Net Income / Shareholders' Equity) Shows
how well a company is generating returns for its shareholders.
o Earnings Per Share (EPS): (Net Income - Preferred Dividends) /
Weighted Average Outstanding Shares) Measures the profitability per
Explain the various Accounting Concepts and Accounting Conventions in details.
Accounting concepts and conventions are fundamental principles that
guide how financial transactions are recorded and reported. Accounting
concepts are the basic assumptions and rules that underpin the
accounting process, while accounting conventions are the practical
applications of these concepts, offering guidance on how to handle
specific situations.
Detailed Summary of accounting as under
I. Accounting Concepts:
1. 1. Business Entity Concept: This concept treats the business and its
owner as separate entities, meaning the business's financial
transactions are recorded separately from the owner's personal
finances.
2. 2. Going Concern Concept: This assumes the business will continue its
operations for the foreseeable future, allowing for the valuation of
assets and liabilities based on their continued use rather than
immediate sale.
3. 3. Money Measurement Concept: Only transactions that can be
expressed in monetary terms are recorded in the accounting books,
excluding qualitative factors.
4. 4. Accounting Period Concept: The life of a business is divided into
specific accounting periods (e.g., a year, a quarter) for reporting
purposes, allowing for regular performance evaluation.
5. 5. Cost Concept: Assets are recorded at their original purchase price
(historical cost) and remain at that value until they are used or
disposed of.
6. 6. Dual Aspect Concept: Every transaction has two aspects – a debit
and an equal and opposite credit – which are recorded to maintain the
accounting equation (Assets = Liabilities + Equity).
7. 7. Accrual Concept: Revenues and expenses are recognized when they
are earned or incurred, regardless of when cash is exchanged.
8. 8. Matching Concept: Expenses are matched with the revenues they
generate in the same accounting period to accurately determine profit
or loss.
9. 9. Realization Concept: Revenue is recognized when it is earned,
meaning when the goods or services have been delivered or rendered,
not just when payment is received.
From the given information from the books of Titan Co. on 31 st March 2024. You are
required to prepare Trading A/C and Profit and loss A/C and a Balance Sheet as on that
date.
Opening stock Rs. 5000 Commission received Rs. 2000
B/R Rs. 22500 Return outwards Rs. 2500
Purchases Rs. 195000 Trade expenses Rs. 1000
Wages Rs. 14000 Office furniture Rs. 5000
Insurance Rs. 5500 Cash in hand Rs. 2500
Sundry debtors Rs. 150000 Cash at bank Rs. 23750
Carriage inwards Rs. 4000 Rent and taxes Rs.5500
Commission paid Rs. 4000 Carriage outwards Rs. 7250
Interest on capital Rs. 3500 Sales Rs.250000
Stationery Rs. 2250 Bills payable Rs. 15000
Return inwards Rs. 6500 Creditors Rs. 98250
Capital Rs. 89500
Closing stock Rs. 125000
Prepare the Trading Account
The Trading Account shows the gross profit or loss from the trading activities.
Sales: Rs. 250,000
Less: Returns Inwards: Rs. 6,500
Net Sales: Rs. 250,000 - Rs. 6,500 = Rs. 243,500
Opening Stock: Rs. 5,000
Add: Purchases: Rs. 195,000
Less: Return Outwards: Rs. 2,500
Add: Carriage Inwards: Rs. 4,000
Cost of Goods Sold (COGS): Opening Stock + Purchases - Return Outwards
+ Carriage Inwards
COGS: Rs. 5,000 + Rs. 195,000 - Rs. 2,500 + Rs. 4,000 = Rs. 201,500
Less: Closing Stock: Rs. 125,000
Gross Profit: Net Sales - COGS = Rs. 243,500 - Rs. 201,500 = Rs. 42,000
Prepare the Profit and Loss Account
The Profit and Loss Account shows the net profit or loss after accounting for all
expenses.
Gross Profit: Rs. 42,000
Less: Trade Expenses: Rs. 1,000
Less: Wages: Rs. 14,000
Less: Rent and Taxes: Rs. 5,500
Less: Insurance: Rs. 5,500
Less: Commission Paid: Rs. 4,000
Less: Carriage Outwards: Rs. 7,250
Less: Stationery: Rs. 2,250
Less: Interest on Capital: Rs. 3,500
Net Profit: Gross Profit - Total Expenses = Rs. 42,000 - (Rs. 1,000 + Rs. 14,000
+ Rs. 5,500 + Rs. 5,500 + Rs. 4,000 + Rs. 7,250 + Rs. 2,250 + Rs. 3,500) = Rs.
42,000 - Rs. 43,000 = Rs. -1,000 (Net Loss)
Prepare the Balance Sheet
The Balance Sheet shows the financial position of the company as of 31st March
2024.
Assets:
Cash in Hand: Rs. 2,500
Cash at Bank: Rs. 23,750
Sundry Debtors: Rs. 150,000
Bills Receivable: Rs. 22,500
Office Furniture: Rs. 5,000
Closing Stock: Rs. 125,000
Total Assets: Rs. 2,500 + Rs. 23,750 + Rs. 150,000 + Rs. 22,500 + Rs. 5,000 + Rs.
125,000 = Rs. 328,750
Liabilities:
Creditors: Rs. 98,250
Bills Payable: Rs. 15,000
Capital: Rs. 89,500 - Net Loss Rs. 1,000 = Rs. 88,500
Total Liabilities: Rs. 98,250 + Rs. 15,000 + Rs. 88,500 = Rs. 201,750
Explain the various Accounting Concepts and Accounting Conventions in details.
Accounting concepts and conventions are fundamental principles that
guide how financial transactions are recorded and reported. Accounting
concepts are the basic assumptions and rules that underpin the
accounting process, while accounting conventions are the practical
applications of these concepts, offering guidance on how to handle
specific situations.
Detailed Summary of accounting as under
I. Accounting Concepts:
1. 1. Business Entity Concept: This concept treats the business and its
owner as separate entities, meaning the business's financial
transactions are recorded separately from the owner's personal
finances.
2. 2. Going Concern Concept: This assumes the business will continue its
operations for the foreseeable future, allowing for the valuation of
assets and liabilities based on their continued use rather than
immediate sale.
3. 3. Money Measurement Concept: Only transactions that can be
expressed in monetary terms are recorded in the accounting books,
excluding qualitative factors.
4. 4. Accounting Period Concept: The life of a business is divided into
specific accounting periods (e.g., a year, a quarter) for reporting
purposes, allowing for regular performance evaluation.
5. 5. Cost Concept: Assets are recorded at their original purchase price
(historical cost) and remain at that value until they are used or
disposed of.
6. 6. Dual Aspect Concept: Every transaction has two aspects – a debit
and an equal and opposite credit – which are recorded to maintain the
accounting equation (Assets = Liabilities + Equity).
7. 7. Accrual Concept: Revenues and expenses are recognized when they
are earned or incurred, regardless of when cash is exchanged.
8. 8. Matching Concept: Expenses are matched with the revenues they
generate in the same accounting period to accurately determine profit
or loss.
9. 9. Realization Concept: Revenue is recognized when it is earned,
meaning when the goods or services have been delivered or rendered,
not just when payment is received.
II. Accounting Conventions:
1. 1. Consistency: This convention requires the consistent application of
accounting policies and procedures from one period to the next,
ensuring comparability of financial information.
2. 2. Conservatism (Prudence): This convention suggests that when faced
with uncertainty, accountants should choose the method that results
in a lower net income and net asset value, erring on the side of
caution.
3. 3. Materiality: Only information that is significant enough to influence
the decisions of financial statement users should be disclosed.
4. 4. Full Disclosure: All material and relevant information that could
affect the understanding of the financial statements must be
disclosed, often in the notes accompanying the statements
5. From the given information from the books of Titan Co. on 31 st March 2024. You are
required to prepare Trading A/C and Profit and loss A/C and a Balance Sheet as on
that date.
Opening stock Rs. 5000 Commission received Rs. 2000
B/R Rs. 22500 Return outwards Rs. 2500
Purchases Rs. 195000 Trade expenses Rs. 1000
Wages Rs. 14000 Office furniture Rs. 5000
Insurance Rs. 5500 Cash in hand Rs. 2500
Sundry debtors Rs. 150000 Cash at bank Rs. 23750
Carriage inwards Rs. 4000 Rent and taxes Rs.5500
Commission paid Rs. 4000 Carriage outwards Rs. 7250
Interest on capital Rs. 3500 Sales Rs.250000
Stationery Rs. 2250 Bills payable Rs. 15000
Return inwards Rs. 6500 Creditors Rs. 98250
Capital Rs. 89500
Closing stock Rs. 125000
