This action might not be possible to undo. Are you sure you want to continue?
Treatment in profit and loss account Nil Nil Nil Nil Nil
Treatment in the balance sheet Shown in the asset side Shown in the liability side Shown as assets Shown as assets Shown as liability
side of profit and loss Bad debts Shown on the expenses side Nil of profit and loss Shown on the liability side of the balance sheet The new provision which is given in the adjustments will be shown on the expenses side of profit and loss after deducting from debtors
Provision for bad debts( if Nil no adjustment is given outside the trial balance ) Provision for bad debts (if The amount which is given adjustments is given in the trial balance will be outside the trial balance) shown on the income side of profit and loss
Provision for discount on debtors (if no adjustment is given out side the trial balance) Provision for discount on debtors (if adjustment is given in the outside trial balance)
Shown on the expenses side Nil of profit and loss
Nil Will be shown on the liability side
The amount which is given in the trial balance will be shown on the income side of profit and loss
The new provision which is given in the adjustments will be reduced from debtors and will be shown on the debit side of profit
Discount received Reserve for discount on creditors (if no adjustment is given outside the trial balance) Reserve for discount on creditors ( if adjustment is given outside the trial balance)
Shown on the income side of profit and loss Nil
Nil Will be shown on the liability side of the balance sheet after deducting from creditors The new provision which is given on the adjustments will be deducted from the creditors and will be shown on the income side of the profit and loss
The amount which is given on the trial balance will be shown on the debit side as cancellation item
Interest on capital
Shown on the expenses side Nil of profit and loss as separate item
Interest on drawings
Shown on the income side of profit and loss account
Adjustments Outstanding expenses Prepaid expenses
profit and loss account Added to the respective account Deducted from the respective expenses
Treatment in the balance sheet On the liability side On the asset side
Added to the respective income on the income side
Deducted from the respective account On the expenses side of profit and loss
On the assets side
Unearned income Depreciation
On the liability side Asset side after deducting from the related assets
Interest on capital On the expenses side of profit and loss On the liability side after adding to the capital Interest on drawings Interest on loan ( if taken) On the income side of profit Deducted from the capital and loss On the expenses side of profit and loss Liability side after adding to the loan amount Interest on loan ( if given) Interest on investments On the income side of profit Asset side after adding to and loss the loan amount On the income side of the profit and loss On the asset side after adding to the investments Closing stock Bad debts On the income side of profit On the asset side of the or loss balance sheet On the debit side of the profit and loss On the asset side after deducting from dedbtors .
On the liability side of the balance sheet Nil Loss by accident On the debit side of profit and loss Sales tax Goods distributed as free sample and donation On the expenses side of profit and loss Deducted from the purchases and shown in the expenses side of profit and loss debit side .Provision for bad debts On the debit side of the profit and loss On asset side after deducting from the debtors Provision for discount on debtors On the debit side of the profit and loss On the debit side after deducting from debtors Provision for discount on creditors On the credit side of the profit and loss account On the liability side of balance sheet after deducting from the creditors On the asset side after deducting from the related assets.
.Drawing of goods Provision for repairs and donations Sale or return basis sales Deducted from purchases Deducted from capital as drawings Shown on the expenses side Shown on the liability side of the profit and loss of the balance sheet Sales price is reduced from the sales and cost price is added to the closing stock and shown on profit and loss account credit side Sales price is reduced from the debtors and cost price of stock is added to the closing stock Deferred expenditure Part of deferred expenses will be written of shown on the expenses side Nil Remaining amount will be shown on the assets side Contingent liability Such liability is shown out side the trial balance as note. Bills or cheques dishonored Bank account will be reduced and debtors account will be increased.
Omission of entry of credit sales and purchases: Incase of credit purchases Incase of credit sales Purchases will be increased in profit or loss account Will be added to sales Will be added to creditors account Will be added to debtors Goods in transit On the income side of profit Will be shown on the asset & Loss account side of balance sheet Deducted from debtors and creditors Shown on income side of profit and loss Deducted from creditors Common debt Reserve for discount on creditors Manager’s commission on profit Abnormal loss of stock Shown on the expenses side Shown on the liability side of profit and loss Total value will be reduced from the purchases if any recovery amount the adjustment will be made If amount due from the insurance company will be shown on the asset side of balance sheet. .
Wages include on installation of PM Sales includes sales tax Direct deposit by the customer in to bank Will be deducted from wages Deducted from sales Added to plant and machinery Shown on the liability side Debtors will reduce and bank will increase Bank charges debited by the bank Debtors includes drawings from proprietor Purchases includes furniture purchased Shown on the expenses side of profit and loss Reduced from bank Reduced from debtors and reduced from capital Reduce from purchase and increase the furniture .
Items in trial balance 9% loan from A Treatment in profit and loss Interest will be shown on the expenses side of profit and loss Interest on deposit will be shown on the income side of profit and loss Treatment in the balance sheet Added to the loan account and shown on the liability side The interest amount will be added to deposit and shown on the asset side 10% Deposit with the B 10% investments Interest on investment Interest amount added will be shown on income to investment and side of profit and loss shown on asset side .
For business profit is like engine of a car. . similarly identity of business comes to an end when the word profit is removed from it. Profit is very important in any business. As the car ends when its engine is separated from it.
. In this statement revenue of a particular period are marched with the expenses of that period. It is a dynamic document which shows the results of operation of an enterprise for a particular period of time. The excess of revenue over expenses is known as net income and excess of expenses over revenue is known as net loss.
. As the name suggests. this statement is prepared to find out whether an organisation has made a profit or a loss. The answer to this question is simple and obvious .
. This question is equally simple to answer. you might want to re-consider whether you wish to continue running it. The primary objective of starting business is to earn profit. Unless the business is making a profit.
So the only way to conclude the profitability position is if profit and loss account is prepared and studied. motivated employees and an outstanding brand may well be bleeding dray. At the same time. An organisation with a grand façade. a business operating from a rundown shack could just as well be high profitable. . highprofile clients.
Profit on sale of assets Commission received Rent received etc.SALES OTHER INCOME Income from sale of goods. . Dividend received on investments. Income from Services Interest earned on deposits.
.Opening stock + Purchases – Closing stock Note: Under the new approach direct expenses are shown under the head expenses.
handling. carriage on sales. packing charges etc. are shown in this head. printing &stationary. management or administration are shown under this head Advertisement. salary and commission to agents. rent and tax. Those expenses with which words selling or distribution are associated are shown under this head. . postage & telegram.Those expenses which begin with the word office. are shown .OFFICE OR ADMINISTRATIVE EXPENSES SELLING & DISTRIBUTION EXPENSES In this head salaries of employees. legal expenses auditing fees etc.
Expenses incurred for procurement of money are known as financial expenses. repairs. trade exp etc .are shown under this head . For example – interest on loan. bank charges etc Depreciation.FINANCIAL EXPENSES OTHER MISCELLANEOUS EXPENSES. donation loss of assets.
It is also known as Earnings Before Interest and Tax ( EBIT). Generally it is used to measure managerial Performance. This is a measure of gross performance of a company with reference to its total capital employed. Interest is a reward of borrowed capital and tax is a compulsory deduction imposed by law. As the term suggests. interest and tax are not deducted while computing PBIT. .
net profit is first presented before charging tax. This is a measure of net profit before charging tax. Since tax is a compulsory and non – discretionary charge on the company. By this the users can understand profit earning ability of the company and the tax impact separately. This also otherwise known as Earnings Before Tax (EBT). .
It is otherwise known as Earnings After Tax (EAT). This is a measure of net profit. This is used to understand the profit earned after tax charge. .
. A small amount is left which can be used in the subsequent year for maintaining uniform rate of dividend. This is given by PAT plus balance of Profit and Loss Account standing from previous years.
Profit and Loss Account includes elements of non-operating items. income from investments in is non-operating income which arises out of investment outside the business. For example. Related expenses are non-operating expenses. Similarly. profit or loss on sale of fixed assets or investments is also categorized non-operating income/ expenses. .
. Book Profit: It is the profit as per books of accounts. This includes accrued income also. Profit available to Equity Shareholders: This is distributable profit minus dividend paid to preference shareholders. Actual Profit: The profit which is actually realized.
Item s schedule 2010 2009 Income : Sales Less Excise duty Net sales Finished goods internally capitalized Other income Total Expenditure : Decrease ( increase) in stock of finished goods Raw materials Power &Fuel Repairs and maintenance Other manufacturing expenses Employees remuneration Administrative expenses Other expenses Selling and distribution expenses Interest and financing charges Provisions Depreciation Total .
Profit Before Interest and Tax (PBIT) Less Interest Profit Before Tax (PBT) Less Provision for taxation Current Fringe benefit Deferred Earlier years Profit After Tax (PAT) Balance brought forward from previous year Transfer from capital reserve Transfer from general reserve Provision for differential actuarial liability Amount available for appropriation .
Appropriations: Interim Dividend Proposed Final dividend Tax on dividend Transfer to General reserve Balance Carried forward to Balance Sheet Earnings Per Share: (EPS) Profit after tax Average number of equity shares Basic & Diluted earnings per share Significant Accounting Policies .
Purchases Carriage Carriage inward Freight Freight inward Wages Factory expenses Stores consumed Royalty Motive Power Coal. coke Water Oil Octroi Dock charges Custom Duty .
salary rent. rate & taxes stationary postage and telegram audit fees legal charges telephone charges insurance premium entertainment expenses repairs depreciation interest trade expenses conveyance charity bank charges .
office expenses establishment exp stable expenses license fees brokerage commission office lighting advertisement export duty discount packing charges traveling exp bad debts provision for bad debts .
Sales Income from services Rent received discount received commission received interest received bad debts recovered apprentice premium income from investment .
Cash in hand Cash at bank Bills receivable Sundry debtors Closing stock Finished goods Raw materials Work in progress Stationary Goods sent on consignment Long term investments Trade mark Patents Vehicle Furniture Investments Machinery and plant Tools Land and building Goodwill .
Bank overdraft Bills payable Sundry creditors Short term loans Bank loans Long-term loans Incomes received in advance Capital .
One group consists of employees. printing stationer etc. vendors. This group represents operating expenses. which expects to collect tax Yet another group are the lenders also need to be rewarded. . Another group are the share holders who also expect reward Another group is government.
Operating Expenses Interest Tax Share holders .
liabilities and equity at a point in time. The Balance Sheet presents an enterprise’s assets. and the claim to those resources by owners and creditors of the enterprise on a certain date. It summarizes the resources. .
. This is money that it owes because it was borrowed by the organization. In other words. where the organization has received its funds. Liabilities represent money that organization owes. liabilities shows the sources of money.
Contribution from outsiders Creditor for goods/ services. it amounts to a loan.when goods are purchased on credit. Capital.Direct contribution from owners/ share holders Reserves – Indirect contribution by the owners Loan. not in cash but in kind. .
assets tells us where the money was spent. and which has been obtained by spending the money raised. . Assets represent something that the organisation possess. something that it owns.the use of money. In other words.
Creation of infrastructure ( purchase of fixed assets) Creation of current assets components like inventory. cash and bank balance .
Assets Office equipments Stock Bank Cash Building Total of assets Schedule Amount Liabilities Creditors Outstanding expenses Overdraft Equity Share capital Retained earnings Total equity Total of liabilities and equity .
Items Sources of Funds: Share holder’s funds Capital Reserve and surplus Loan fund Secured loan Unsecured loan Total Application of funds: Fixed assets Current assets and loans and advances Less current liabilities and provisions Total Schedule No Amount .
400 1.400 (5.800 (5.000) 460 0 70.000) (14.000) (11.800 0 0 24.000) 460 (1.800) 8.000 0 20.000) (14.000) (11.700 24.000) (12.00.000) Advance rent Customer Supplies Liability Equity 70.100 1.Assets Bank 1.000) .000 0 0 0 0 62.000 (70.00.000 0 0 (12.000 20.
000 5.000 ______________ 29.000 9.000 _____________ 42.Particular INCOME Revenue from services Bank interest Total of Income EXPENSES Office Rent Computer rent Subscription for data base Secretary salary Assistant salary Total of Expenses Net Profit Amount 70.800 460 _____________ 71.260 ______________ 5.000 11.000 12.260 .
800 ______________ 1.100 1.29.000 24.660 _______________ .400 1.660 _______________ 20.Particulars ASSETS Bank balance Advance Rent Customer Stock of supplies Total of Assets LIABILITIES Loan from friend Advance service charges EQUITY (Opening Capital + Net Profit) (1.260) Total of liabilities and Equity Amount 39.260 ______________ 1.73.000 +29..000 62.760 70.00.73.
800) Cash flow from Investing Activities Interest from bank Advance rent Details Amount 33.000 +1.100 +9.100 (43.Particulars Cash flow from operating Activities Receipt from services (24.800) __________ (10.000 20.00.000+5.000 _________ Cash from Financing Activity Opening capital Loan from friend Net increase in cash 1.700) 460 (70.000+9.000 ___________ 39.760 .540) __________ (80.20.000 +11.000 +12.240) 1.000) Operating expenses (5.000) __________ (69.
000) (2.500) (9.500) 0 90 48.600 0 0 0 (340) (1.500) (9.000 + 25.810) 21.000 3.800 (14.000) 0 0 (2.000 + 0+ 0+ 3.000) 25.000 (7.900 + (3.900 48.000) (340) Computer Customers = Supplies Liabilities + Capital 60.000 (15.000) + 0+ 0+ 450 + .500) (3.600 (21.800 + (14.500) (450) 40.500) 25.000 (7.900) + 0+ 0+ 9.200 9.200) (1.Assets Bank 60.
Particulars Amount 48.500 340 1.690 7.500 9.600 90 48.000 2.290 27.500 450 21.400 Income Service charges bill raised Discount received Total of Income Expenses Salary of manager Rent Salary of assistants Interest Consumption of supplies Outstanding electricity bill Total of expenses Net profit .
400 2.000 450 25.800 87.400 1.000) Outstanding electricity bill Creditors for computers Income received in advance Equity Opening Capital + Profit during the year (60.650 Assets Bank Computer Customer or debtors Stock of supplies Total of assets Liabilities Bank loan (126.96.36.1990 1.000-14.000 9.650 11.Items Amount 63.000 27.850 40.000 +27400) Total of liabilities and equity .
385 Expenses Rent (3.005 450 500 20..920 +970 -1.500-500) Salary (9.205 .590 3.Received for next year ( 22.590 22.100 1.710 3.Particulars Amount Income Receipt from customers from services +amount receivable .540) Depreciation on Camera Insurance ( 2.300) Electricity bill (910 +95) Telephone charges Hire charges of video camera Total expenses Net profit 2.620 1.300+950 -1.000 9.300) Total of income 22.240 +380) Supplies (2.000 1.400-1.
310 Assets Camera (30.300 31.540 970 1.Items Amount 27.300 380 950 5.000 95 500 880 Equity .000) Prepaid rent Stock of supplies Customers Prepaid insurance premium Total of assets Liabilities Advance service charges Outstanding salary Creditors for supplies Creditor for video camera Outstanding electricity Outstanding hire charges Bank overdraft 1.3.000.000 500 1.
800 17.050 9.050 20.400 1.160 970 2.000 .Particulars Income Revenue from services Total income Expense Salaries Supplies Telephone charges Rent Depreciation Total expenses Net profit Amount 20.050 3.720 2.
800 1.160 3.160 3.360 .Particulars Opening retained earnings Add profit during the year Less Dividend paid during the year Closing retained earnings Amount 2.000 _____________ 5.
360 .170 5.Particulars Assets Equipments less accumulated depreciation Supplies Debtors Cash Prepaid rent Unbilled revenue Total of assets Liabilities Creditors Unearned revenue Salary payable Equity Share capital Retained earnings at the end Amount 14.310 25.000 1.900 4.400 1.800 2.100 3.160 970 1.210 2.020 30.
100 Credit 800 4.290 .200 290 1.200 2.400 1.190 4.400 8.600 2.110 940 100 1.090 1.000 17040 1.200) Cash Insurance Prepaid insurance Creditors Unearned revenue Share capital Dividends Revenue from services Salaries expenses Outstanding salary Telephone expenses Debit 9.800 15.Heads of account Swimming pool Depreciation on swimming pool Tennis court Depreciation on tennis court Supplies Supplies at the end Debtors (2.290 1.910+1.
000 12.190 2.600) Debit 18.560 650 6.060 1.000 2.900-1.000 6.960 +3.000 2.000 .100) Cash Prepaid insurance Insurance Creditors Bills payable Interest Outstanding interest Unearned revenue (1.760 2.400 2.200 2.600) Share capital Dividends Revenue from services(24.000 28.100 +1.060 +3.Heads of account Building Depreciation on building Computers Depreciation on computers Supplies consumed Stock of supplies at the end Debtors (2.400 52 Credit 4.600 52 300 30.
600 2.640 490 .000 Credit 2.580 930 5.Heads of Account Office equipments Accumulated depreciation Depreciation on equipments Consumption of office supplies(2510-930) Stock of office supplies Cash Creditors Unearned revenue(2.430 4.000 1.340 14.810+460+370) Revenue receivable Salary (5.640 10.600 1.000 1.800 240 1.000 370 6.940 +490) Outstanding salary Rent Cleaning expenses Debit 10.100-460) Share capital Retained earnings Dividend Revenue from services(13.000 2.
490 880 1.750 250 970 1.540 630 600 3.170 2.200 Credit 18.100+3.100) Outstanding salary Debit 14.000 6.100 .875 125 11.Heads of account Building Depreciation on building Office equipments Depreciation on equipments Stock of supplies Supplies consumed (2140-970) Debtors (1640+900) Revenue from services (16870+900+720) Unearned revenue (1600-720) Cash Rent Prepaid rent Creditors Share capital Dividend Salary (3.020 20.000 3.000 1.
620 700 170 3.730 1.240 7.100 20.910 940 3.100) Unearned revenue (2.000 5.200 ) Revenue (33.000 1.000 8.400 170 11.2.100 900 2.Heads of account Computer Depreciation on computer Office equipments Depreciation on office equipments Supplies used (3970-1240) Stock of supplies Debtors (1710+6.200 +2.400 @15% X4/12) Accrued interest Rent Prepaid rent Creditors Share capital Debit 10.000 Credit 41.800.100) Cash Bills receivable Interest (3.320 +6.000 .
Particulars Amount Retained earnings at the beginning Add Net profit during the year Profit available for distribution Less dividend paid Retained earnings at the end .
Other moneys for which the company is contingently liable . Claims against the company not acknowledged as debt Uncalled liability on shares held as investments Arrears of fixed cumulative dividends on preference shares Estimated amounts of contracts remaining to be executed on capital account and not provided for.
. The company which purchases shares is called holding company and that other company is called subsidiary company whose shares are purchased. one company purchases more than 50% shares in other company on the other and thus acquires control on that company. whereas two or more companies are amalgamated on the one hand.
A Balance Sheet which is prepared by combining holding company’s balance sheet and subsidiary company’s balance sheet is called consolidated balance sheet. By seeing the consolidated balance sheet the share holders of holding company can know the true value of their shares. Hence holding companies prepare consolidated balance sheet also. In preparing consolidated balance sheet, the assets and liabilities of both companies are added together but some adjustments are made.
If the holding company has purchased shares in subsidiary company at above par value or below par value and the balance sheet of the subsidiary company has pre-acquisition profits and reserves and all the shares in subsidiary company are held by the holding company, the cost of investment in shares will be adjusted to share capital + pre-acquisition profits and reserves
Note- Here only Pre-acquisition profit and reserves will be considered
. If the cost of investment is more, the difference will be shown as goodwill on asset side in the balance sheet and if the cost of investment is less the difference will be shown on the liability side of consolidated balance sheet
The profit before the acquisition of business. Suppose the accounting period is 1st January 2010 to 31st December 2010. The business acquired on 1st may 2010. Here the pre-acquisition period is 1st January 2010 to 30th April 2010 and post –acquisition period is 1st May 2010 to 31st December 2010.
Suppose the total profit for the period is Rs10.000 x 3/12 =2.000.500 Post –acquisition profit is 10. In this case the Pre-acquisition profit is 10. The pre-acquisition period is 3 months and post-acquisition is 9 months.000 x 9/12= 7.500 .
. Minority interest includes nominal value of share held by minority share holders and proportionate reserves and profits. In the reserves and profits of the holding company. only holding company’s share in post acquisition profits and reserves are added. On the liability side of consolidated balance sheet minority interest is shown as a separate item.
Step –I: Share of holding company and minority interest Step-II: Computation of goodwill or capital reserve Step-III: Minority Interest Step-IV: Consolidated General reserve Step-V: Consolidated Profit & Loss Step-VI: Consolidated Balance Sheet .
It is important fundamentals of accounting to make proper distinction about capital and revenue as regard to expenditure. receipts and losses. additions may be may be made to premises but charged to repairs account. similarly some of the fixed assets might have been sold and this might have been included in sales account. For example furniture purchased may be included in the purchases account. payments profits. The failure of this will not present the accounting data accurate. If this is the situation. then trading and profit/ loss account and balance sheet will be misleading and inaccurate . This will falsify the entire accounting data.
These expenses are recorded in Balance Sheet. purchase of plant. For example purchase of land and building. brokerage or commission paid for acquiring the long term loan etc. It is the amount spent to acquire the assets not for resale them. it is for generating the income of the business unit. it is for the longer period. The benefit of this is not for one year. .
Purchase of land. Amount spent for erecting of plant . vehicle and any other fixed asset. Cost of replacing petrol driven engine to a diesel driven engine. building. plant and machinery. Expenditure incurred for increasing the sitting accommodation in a auditorium or restaurant. furniture.
Expenditure incurred on major repairs and replacement of plant and machinery or any other fixed assets which results in increased efficiency.g copy right . trade mark. patent right etc Expenditure incurred for reconditioning an old fixed assets. .goodwill. Expenditure incurred for acquiring some right to carry on business e.
These all expenses are taken into account in trading and profit loss account. renewals. . meeting the day to day expenses of carrying business. insurance etc. depreciation of fixed assets. the full benefit of which is derived in that period only. wages and salaries. It consists of expenditure incurred in one period of account. raw materials and replacements. carriage. repairs. taxes. cost of goods. It includes purchasing assets required for resale at a profit or being made into saleable goods. rent rates. maintaining fixed assets in good working conditions.
They are usually are revenue expenses.then such repairs becomes capital expenditure. Repairs . but the legal expenses incurred in connection with purchase of fixed asset must be treated as a part of the cost of the asset . Legal expenses – They are revenue charges. but if we purchase second hand plant and pay for immediate repairs necessary to make it efficient for our purpose .
but the wages paid to workman to erect and fit some new machinery. Transport expenses – They are usually a revenue charges but payment made for transporting any plant and machinery is added on as part of the cost of the plant and machinery. the firm bought. Wages – They are the revenue items. must be considered an addition to machinery .
All such expenditure incurred during the period of development is called development expenditure and must be treated as capital expenditure.require very long period development before they can begin to earn any income. collieries etc . horticulture. Development expenditure .Some concerns such as tea and rubber plantation. Interest on capital – Such amount of interest which is paid during the construction of work or buildings or plant may be capitalized. .
Carriage and freight – Such expenses in connection with acquisition of fixed assets are capital assets . Interest on capital – Such amount of interest which is paid during the construction of work or buildings or plant may be capitalized.
Advertising .The cost of special advertising undertaken for the purpose of introducing new line of goods may be treated as capital expenditure as the benefit of such advertising will be available in future also . Raw material and stores –They are usually revenue charges but of consumed in making of a fixed asset. must be treated as capital expenditure.
Preliminary expenses .All expenses incurred before incorporation of accompany are called preliminary or formation expenses . as the benefit of this will be available in future also. .This must be treated as capital expenditure.
The nature of this is non-recurring and special nature. It is the expenditure which would be normally treated as revenue expenditure but it not written off in one year as its benefit is not exhausted in one year but over a period of year. a proportionate amount is charged to profit &loss account every year and the balance amount is treated as an asset and shown on the balance sheet asset side . It may be spread over a number of years.
in current year profit loss account 20. 000 will be treated as an asset and will be shown as asset . In this case.000 will be charged and the balance amount i.eRs80. 00. till the amount exhausted.In the next year again Rs 20. Advertisement expenses amount of Rs1. 000 will be shown in the balance sheet so on. .000 will be charged and balance of Rs60.000 spent and the benefit of this suppose over a period of 5 years.
will be taken into profits/loss account . commission earned .interest received or rent received etc. . Revenue profit on the other hand.g profit on sale of goods. income from investments. discount received. is profit made by trading e.
transfer fees received etc. loans and the proceeds of sale of assets etc. revenue receipts in a business are cash from sales. Capital Receipts in a business comprise capital invested in the business. interest on investment. On the other hand. discount received. Revenue receipts are recorded in profit /loss account and capital receipt are recorded on the liability side of Balance sheet . commission.
Capital losses are those losses which occur on selling fixed assets or raising share capital. 000. are being sold for Rs25. For example. 000. 000. if investments having original cost Rs30. there will be a capital loss . there will be loss of Rs5.Similarly when shares or debentures face value of Rs100 issued at discount of Rs10.
a proportionate amount being charged to profit /loss account and balance being carried forward as an asset to be written off in future years. But if the amount of such loss is negligible they are debited to the profit and loss account of the year in which they occur. this capital loss will be adjusted. the amount is large in that case the amount can be spread over a few years. . If however. As and when there will be capital profit. These capital losses should not be debited to profit/loss account but may be shown on the asset side of Balance Sheet.
Revenue losses are those losses which arise during the normal course of business.e. . i. in trading operations of such as losses on the sale of goods. Such losses are debited to profit and loss account.
which is likely or certain to be incurred. as reasonably necessary for the purpose of providing for any liability or loss.before ascertaining the net profits.provisions are the amounts set aside . Provisions : A provision is a charge against profit for all anticipated losses. . but the amount or the date on which they will arise may or may not be ascertained with reasonable accuracy . Therefore .
Liabilities and charges (provision for taxation and provision for sales tax) Valuation adjustment for fixed assets (provision for depreciation) Current assets (provision for doubtful debts)
A reserve is an amount of money that is set aside until that is set aside until it is needed for some purpose. Reserves are the items of owners' equity which arise from retention of profits (an appropriation of profits, sum of money set aside from distributable profits), capital receipts( profit on sale of fixed assets or issue of shares at a premium) upward revaluation of assets( bringing the assets to current value from historical cost) .All reserves are credit balance and shown on the liability side of Balance Sheet.
Capital Reserve Revenue Reserve (a) General Reserve (b) Specific Reserve
These reserves are undisclosed understatement of financial position of a business unit resulting from the following: Excessive writing down of assets Overstatement of provisions and liabilities Writing off additions to fixed assets as expenses
Funds also refer to assets for specific purposes.fund sets aside cash or other assets to achieve specific objectives . which are not generally available for normal operations. Fund is used to include securities which have a ready market and can be quickly liquidated. Funds are cash or its equivalent. In fact . that is converted in to cash.
. An amount equivalent to reserve created as sinking fund is invested outside the business in gilt-edged or other securities and are allowed to accumulate at compound rate of interest so as to produce the required amount to repay the liability or replace the assets after specific period. A sinking fund is a fund created by the regular investment of fixed amount to accumulate the amount of money required to pay off a debt or for the replacement of an asset at a set date in future.
Particulars To transfer to General reserve Dividend equalization reserve Capital redemption reserve Debenture redemption fund To dividend Interim divided Final divided or proposed divided (On equity and preference share) To bonus to share holders To balance C/d Amount Particulars By balance b/d By net profit for the current year By transfer from reserves By adjustment of last year managerial remuneration if any. Amount .
Dividend from profits only Setting off previous losses and provision for depreciation is compulsory Compulsory transfer to reserves Dividend to be paid cash only Distribution of dividend out of reserves .
the dividend can be paid in the ratio of amount paid on each share (Sec. Dividend will be paid in cash only but bonus shares may be issued by capitalizing profits (Sec.207) .93). If Articles of Association permit.(Sec.205) The cheques for dividend or dividend warrant must be sent to the registered address of the share holder. it must be paid within 42 days of declaration (Sec.206) After declaration of dividend.
If there are no provisions in the Articles and Table A of the Companies Act applies. No dividend will be paid on calls in advance. Dividend may be paid as per Articles of Association on nominal value or called up value or paid up values of shares. . dividend will be paid on paid up amount of shares from the date of payment.
If there is no provision in articles and Table A is applicable. . the dividend will be paid on the nominal value of shares. The articles of company may prohibit payment of dividend on the shares on which call are in arrears.
If there is no restriction by articles of the company for doing so. If capital profits remain after adjusting profit or loss on revaluation of other assets and liabilities. If profits have been actually realized either in cash or in any other way. Note: Dividend cannot be paid out of securities premium. capital redemption reserve and profit on revaluation of assets .
e. dividend equalization reserve or reserve fund. Out of general reserve or out of any other reserve created out of profit i. Out of debenture redemption fund after the redemption of debentures (generally it is transferred to general reserve . Out of the balance of profit and loss account.
Out of security premium . Out of capital profits actually received ( e.g profit prior to incorporation or profit on sale of fixed assets) Out of capital redemption reserve created on the redemption of redeemable preference shares.
. According to these guidelines the issue of bonus shares after the public/right issue of shares will be made subject to the condition that the bonus issue will not reduce the value of rights of the debenture holders (fully or partly convertible debentures) Bonus issue will be made out of reserves created out of profits (free reserves). The reserve created on the basis of revaluation of fixed assets will not be utilized for issue of bonus shares.
the interest is regularly is paid by the company and the redemption is regularly made on due dates. If there are partly shares issued by the company. . The issue of bonus shares will not be made in place of dividend. If the company has accepted fixed deposits from the public. bonus shares will not be issued unless the partly shares are made fully paid. In the same way there is no mistake made by the company in the payment of debentures interest and redemption of debentures.
After the declaration of bonus shares by the company on the recommendation of Board of Directors. If it is not so. it is necessary that the declaration is fulfilled within six months of its approval. There must be provisions in the articles of the company about capitalization of reserves. a provision will be made in the articles of the company by making necessary change for the capitalization of reserves by passing a resolution in the general meeting .
the company will pass a resolution in the general meeting to increase the authorized capital . As a result of bonus issue if the subscribed and paid up capital exceeds its authorized capital.
. the assets and liabilities of both companies are added together but some adjustments are made. In preparing consolidated balance sheet. A Balance Sheet which is prepared by combining holding company’s balance sheet and subsidiary company’s balance sheet is called consolidated balance sheet.
Step-I: Share of holding and subsidiary company Step-II: Capital reserve or goodwill Step-III: Minority Interest Step-IV: Consolidate profit Step-V: Consolidated reserve Step-VI: Consolidated Balance Sheet .
If the holding company has purchased the entire share capital of the subsidiary company. The investment in shares of subsidiary is shown in the balance sheet of holding company on the assets side and share capital of subsidiary company is shown in its balance sheet on the liability side. the investment appearing in the balance sheet of holding company is adjusted with share capital appearing in the balance sheet of subsidiary company. .
. the cost of investment in shares will be adjusted to share capital + pre-acquisition profits and reserves.. If the holding company has purchased shares in subsidiary company at above par value or below par value and the balance sheet of the subsidiary company has pre-acquisition profits and reserves and all the shares in subsidiary company are held by the holding company.
the difference will be shown as goodwill on asset side in the balance sheet and if the cost of investment is less the difference will be shown on the liability side of consolidated balance sheet as capital reserve. If the cost of investment is more. .
only. Minority interest includes nominal value of share held by minority share holders and proportionate reserves and profits. On the liability side of consolidated balance sheet minority interest is shown as a separate item. . In the reserves and profits of the holding company.
Debtors and creditors Bills receivable and bills payable Bills discounted with the bank Mutual loans .
000 purchased from A Ltd. charged profit of 20% on sales. Then unrealized profit will be 10. .000.If percentage of profit on sales is known. the unrealized profit will be stock X % /100 For example. if stock of B Ltd. includes goods worth Rs10.000 X20% = Rs2.Percentage profit on sales :.
thus profit of Rs25 on goods sold of Rs125 . then unrealized profit will be Stock X %/ 100 +% For example. on which A Ltd earned a profit of 25% on cost. Percentage of profit on cost :. Then unrealized Profit will be 8.If profit charged by vendor company is a certain percent on cost. as goods cost Rs100 was sold at Rs125.600. stock of B Ltd includes goods worth Rs8.000 purchased from A Ltd.000 X25/125 = Rs1.
A management reporting system can be defined as an organized method of providing each manager with all the data and only those data which he needs for his decisions. when he needs them and in a form which aids his understanding and stimulates his action .
Appraising the management with actual performance To enable the management to make scientific and sound decisions .
Proper selection of financial and operating data and other relevant facts and figures which are to be communicated. Organization of data to put the information in a proper form that can be rapidly understood and appreciated by the management and Selecting the appropriate method of reporting .
Evaluation of each manager’s area of responsibility Proper flow of information Proper form Proper time Cost benefit analysis Flexibility .
The term Report. The subordinate communicates the results. may be defined as a formal communication which moves upward. . The superior communicates the orders to the subordinate. It differs from the word communication. while results and reports are reported. orders are communicated. The word Report is generally used for factual communication by a lower level to a higher level of authority. Thus.
Written Report Graphic Reports Oral Reports .
Reports must contain up-to-date information. The draft of the report should be simple. Reports should be presented in time. The report should be précised. specific and accurate. They should be economical . It should bear a suitable title. They should be specific and definite. It must follow the organizational lines.
It must distinguish between controllable and uncontrollable cost. It must suit to the end-user’s requirements. It must be attractable. It must provide for exceptional circumstances . The report should highlight the trouble spot. They must comparable They must be consistent and correct as to information.
Good form and content Promptness Comparability Consistency Simplicity Appropriateness Controllability Accuracy Consideration of cost Effective communication .
FORM WISE PURPOSE WISE Descriptive Tabular Graphical Internal report External report .
CONTENT WISE FREQUENCY WISE Production report Sales report Cost report Financial report Operating report Routine report Special report .
OPERATING REPORT FINANCIAL REPORT Information report Control report Static report Dynamic report .
Sales report Production cost report Operating report Schedule of debtors Research and development report Different short-term budgets as cash budget etc . Production report.
Make or buy decisions. Exploring new market Cost reduction schemes Whether to purchase or hire a fixed cost Research and development expenditure problems The effect of labour disputes on production and cost of production and so on. Effect of idle capacity on cost of production of different products. .
Evolving proper plans keeping the basic objective in view. Formulating the basic goal of enterprise. Promoting appropriate development schemes. . Proper delegation of responsibility to subordinate executives with the objectives of getting efficient and effective utilization of the resources.
Quarterly balance sheet and profit and loss account. Quarterly machine and labour utilization statement . Quarterly funds flow statement Quarterly production cost statement.
Monthly production cost statement. Material scrap statement. Monthly labour utilization statementdepartment wise. quantity produced and orders outstanding.department wise Monthly production statement showing quantity budgeted. . Overhead cost statement.department wise. Monthly machine utilization statementdepartment-wise.
Monthly report of finished goods stock position. orders executed. orders kept pendingdivision wise.SALES DIRECTOR FINANCE DIRECTOR Monthly report of orders received. arrears and bad debts-division-wise Monthly Funds Flow Statement Monthly abstract of receipts and payments . Monthly report of credit collection. Monthly report of selling and distribution costdivision –wise.
orders executed and orders outstanding. Fortnightly report of credit collections. Fortnightly report of orders booked. Weekly report of production statement showing quantity budgeted. orders outstanding Fortnightly report of budgeted and actual salesarea wise and product wise. Weekly report of scrap – department wise. outstanding and bad debts. quantity produced. Fortnightly report of stock position .WORKS MANAGER SALES DIVISION MANAGER Weekly report of the idle time and idle capacitydepartment wise.
Daily scrap report Daily report of production. Weekly report of credit collections.salesman-wise Weekly report of orders booked. . executed and outstanding.budgeted and actual Sales area supervisors Weekly report of sales. Daily report of idle time and machine utilization. outstanding and bad debts.
Cost of sales Efforts to be made to cover lower actual . Sales force progress of work Sales promotion work Exports Publicity and advertisement.
Other workers employment.approved and proposed Approximate cost of present and proposed staff .PRODUCTION PERSONAL Inventory Work-in-progress Capital expenditure Progress of capital works Direct workers employment estimatesapproved and proposed.
OVERHEAD FINANCE Estimates based on past trends. Accounts payable position and estimates . New items Accounts receivable position and estimates.
It is systematic and rational method of allocating costs to the period in which benefits are derived. Fixed assets are used by a business firm for the purpose of producing or providing goods or services. The expense which results from the use of fixed assets is called depreciation. . In other words it is gradual deterioration in the value of assets due to wear and tear passing of time and new developments in technology.
Depreciation is gradual diminution in the value of assets It decreases the book value of an asset. Depreciation is a continuous process of diminution in value of fixed asset due to its use or lapse of time.
Depreciation is not a method of valuation of assets but it is a process of spread over of cost of assets over its useful life. Change in market value of an asset is not termed as depreciation. The term depreciation is used only for diminution in value of tangible fixed assets due to its use.
Wear and tear due to constant use Lapse of time Depletion Obsolescence Accident Exhaustion of assets
Depreciation Depletion Amortization Obsolescence
To ascertain the profit or loss properly To show a true and fair view of the financial position To find out correct cost of production To comply with legal requirements .
To accumulate funds for replacement of assets To avoid payment of dividend from capital To get deduction from Income Tax Other miscellaneous reasons .
Total cost of the asset Estimated useful life of the asset Estimated residual value of the asset Provisions for repairs and renewals Possibility of new inventions Expansion of assets Legal laws Interest on capital invested Working conditions .
Depreciation fund method. Straight line or original or fixed cost method. Diminishing balance method or reducing instalment method. Insurance policy method Annuity method .
Machine hour method Depletion method Revaluation method Sum of year’s method .
Cost – estimated scrap value / estimated life in years. Suitability: This method is suitable for those assets that do not require large investment and the amount of repairs and renewals required is also not large such assets have comparatively shorter life, such as Furniture, Patent; Copy right, Trade mark and Leaseholds etc.
Suitability: This method is suitable for those assets in relation to which the amount of repairs and renewals goes on increasing as the asset grows older and the possibilities of obsolescence are more. This method is suitable for Plant & Machinery and Building.
To replace a wasting asset, for example: A mine or an oil well. To replace a depreciable asset To renew a Lease
Date 1st Year at the beginning At the end of the 1st year
Particulars When assets purchased Asset A/c Dr To Bank A/c __________________________________ For setting aside the amount of depreciation: Profit & Loss a/c Dr To Depreciation Fund a/c For investing amount outside the business Depreciation Fund Investment A/c Dr To Bank a/c
Date Particulars Dr Cr For interest received: 2nd and subsequen Bank A/c Dr t year To Depreciation Fund a/c For appropriation of profit Profit & Loss a/c Dr To Depreciation Fund a/c When amount invested: Depreciation Fund Investment a/c Dr To Bank a/c .
Date At the end of last year Particulars For interest received: Bank A/c Dr To Depreciation Fund a/c For appropriation of profit Profit & Loss a/c Dr To Depreciation Fund a/c For sale of investment: Bank a/c Dr Depreciation Fund a/c Dr ( if loss) To Depreciation Fund Investment a/c To Depreciation Fund a/c ( if profit) For transfer of balance of depreciation fund to asset: Depreciation fund a/c Dr To Asset a/c For purchase of new asset if any New asset a/c Dr Dr Cr .
Profit & Loss A/c Dr To Provision for depreciation A/c .Date Particulars Dr Cr First and In the beginning when asset purchased: subseque Asset A/c Dr nt year To bank A/c When the insurance premium paid: Depreciation Insurance Policy A/c Dr To bank a/c At the end of the year for providing depreciation to the extent of premium.
Date At the end of the last year Particulars In addition to above two entries: On realization of money from the insurance company: Bank A/c Dr To Depreciation Insurance Policy A/c For transferring the profit on insurance policy: Depreciation Insurance Policy A/c Dr To Provision for depreciation a/c For transfer of accumulated depreciation to the asset: Provision for depreciation A/c Dr To Asset A/c On purchase of new asset: New Asset A/c Dr To Bank A/c Dr Cr .
Suitability: The annuity method is suitable to those assets that require considerable investment and where frequent additions are not made.e Additions or extensions are frequently made in plant and machinery so this method is not suitable for them. It is suitable for lease properties i. .
. Depreciation per MH= Cost of Machine – Scrap Value / Life of machine (in hours) Annual depreciation = Actual working hours during the year X MHR Suitability: Machine hour rate method is an ideal method for calculating depreciation where costly and different machines are use in production.
quarries etc. This method is suitable for wasting assets like mines. When the whole quantity is extracted the mine losses it value. . The value of mine depends upon the quantity of minerals that can be extracted. The rate of depreciation is calculated by simply dividing the cost of mine by the total quantity of minerals expected to be available. Hence the mine depreciates according to quantity mined. from which certain quantity of output is expected to be executed.
Loose Tools. live stock. For example. trade mark. it is not possible to depreciate each item. patents etc. When assets represented by large number of small and diverse items having small unit cost. . Suitability: This method is suitable for charging depreciation on loose tools. This method is also referred to as the appraisal system or inventory system.
Step. The difference is charged as depreciation . calculated above is compared with the opening balance and purchase /production made during the year.II The cost. Step.I At the end of each accounting period. all items of good condition are valued at cost.
The numerator does not change but the denominator changes every year. This is the method of calculating depreciation under which the rate of depreciation is determined by the fraction where the denominator is the sum of the digits representing the useful life of the asset and the numerators are individual digits used in the life of the asset taken in reverse order. The amount of depreciation goes on decreasing in the coming years. .
a ratio is an expression of relationship of one figure with another.In general words. A ratio may be expressed in percentage in which the base. It may be defined as the relationship. Meaning: . or proportion that one amount bears to another. is taken as equal to 100 and the quotient is expressed as per hundred of the base . It is found by dividing a figure with another.
Balance sheet ratios: Current ratio Liquidity ratio Proprietary ratio Fixed assets ratio Capital gearing ratio Book value per share .
Operating ratio Expenses ratio Net profit ratio Gross profit ratio Stock turnover ratio .
Return on capital employed Return on share holders fund Current asset turnover ratio Ratio of net sales to fixed assets .
Operating ratio Return on capital employed Stock turnover ratio Debtors turnover ratio Solvency ratio .
Current ratio Solvency ratio Creditors turnover ratio Fixed assets ratio Assets cover ratio Debt service ratio .
Return on share holders fund Capital gearing ratio Dividend cover ratio Yield rate Proprietary ratio Dividend rate Assets cover on shares .
Current ratio Liquidity ratio Absolute liquid ratio Cash ratio .
Debt equity ratio Proprietary ratio Solvency ratio or debt to total assets ratio Fixed assets ratio Capital gearing ratio Debt-service ratio or interest coverage ratio .
Gross profit ratio Operating ratio Expenses ratio Operating profit ratio Net profit ratio .
Return on share holders fund Return on capital employed Return on equity .
Total assets turnover ratio Fixed assets turnover ratio Working capital turnover ratio Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio .
Current ratio Quick or acid test ratio or liquidity ratio Cash position ratio or absolute liquid ratio Basic Defensive Interval Cash ratio .
it is also called the working capital ratio. Current ratio = Current assets/ Current liability . Current ratio is the most common and widely used ratio for measuring liquidity. Being related to working capital analysis. This ratio indicates the relationship between total current asset and total current liabilities of a firm. This is calculated by dividing current assets by current liabilities.
stock . provision for taxation. work in progress stock of raw materials and sundry supplies Bills payable. debtors. money at call and short notice. Outstanding expenses. short term deposits. . income tax payable. prepaid expenses. creditors.CURRENT ASSETS CURRENT LIABILITIES Cash in hand. interest due on fixed liabilities. reserve for unbilled expenses. bills receivable.finished goods. bank overdraft. cash at bank. installment payable on long-term loans.
Liquid ratio = Liquid assets / Current liabilities Or Liquid ratio = Liquid assets / Liquid liability Liquid assets = Current assets – Stock – prepaid expenses Liquid liability = Current liability – Bank over draft Standard norm: 1 : 1 .
5 :1 . cash at bank and short term marketable securities. Standard norm: . Absolute liquid ratio = Absolute liquid assets / liquid liabilities Absolute liquid assets = Cash in hand.
Cost of goods sold/ average inventory Stock velocity ( in months)= Average stock/cost of goods sold X12 .
DTR= Net credit sales/ average trade receivables Or net credit sales/ total trade receivables .
Average collection period or average age of receivables= Trade receivables/ sales per day Or Trade receivables / net credit sales X 365 days Or 365/ DTR .
CTR = Net credit purchases / Average payables (creditor +BP) Net credit purchase = Total purchase – cash purchase – purchase return Average payable = opening payable + closing payable / 2 .
More precisely. the greater the debt-equity ratio. bills or debentures Shareholder’s fund Preference share capital. whether in the form of mortgage. capital reserves. retained earnings and any other reserves representing the accumulated profit. Standard norm: 2 : 1. however lending institutions prefer 1:1 A low ratio signifies a smaller claim of creditors. equity share capital. Debt equity ratio = outsider’s fund / share holders fund Outsider’s fund Debt. long-term or short term. greater the risk to the creditor .
however lending institutions prefer 1:1 Higher the ratio lesser the dependence for working capital on outside sources. better the long-term solvency and stability and greater the protection to the creditors of the firm . = Share holders fund / Total assets or Total equities Standard norm: 2 : 1.
the greater is the dependence of the firm on outsiders for its financing. Solvency Ratio = Total Liabilities / Total Assets The higher this ratio. .
. a ratio of 0. Usually. On the contrary. better the position because in such a case proprietor’s funds will be available for working capital needs also. Fixed asset to net worth ratio = Fixed assets (after depreciation) /Total long term funds This ratio should not exceed 1:1.e fixed assets are about two-third of the proprietor’s funds) is considered satisfactory. lesser the ratio.67:1 ( i.
The general rule is that fixed assets should not exceed 2/3rd of total longterm funds so that rest of the long-term funds could be utilized for meeting working capital requirement. If it exceeds 1:1. . Fixed assets ratio= Fixed assets (after depreciation) / Total long-term funds This ratio should not exceed 1:1. It implies that short-term funds of the firm have also been applied for acquiring fixed assets which in no way be considered appropriate.
This ratio indicates financial capability of the firm. . There is no rule of thumb for this ratio. Current assets/ Proprietor’s funds This ratio indicates the extents to which proprietor’s fund are invested in current assets.
. Current assets / Total liabilities This ratio is a measure of financial stability of the firm.
This ratio indicates the relationship between two main sources of financing –proprietor’s fund and outsides loans ( or liabilities). It is calculated as follows: Proprietor’s funds / Total liabilities Higher the ratio better is the security of creditors. .
Tangible assets / Total debt This ratio measures the ability of the firm to pay its debts. Higher the ratio. greater is the security of the creditors . This ratio indicates the relationship of tangible assets to total debts. as it shows the extent to which total liabilities of the firm can be repaid by its tangible assets.
DSR = Net income (before charging interest and income tax) / Fixed charges . It is calculated by dividing the net profit before interest and taxes by fixed interest charges. This ratio is calculated to evaluate the debtservicing capacity of the firm.
Preference Dividend Coverage Ratio (or No. of times Preference dividend earned)= Net income after interest and tax/ Preference Dividend This ratio is an index of the risk accruing to the preference share holders. Coverage of at least 2 is considered standard .
Gross profit / Net sales X100This ratio establishes relationship between gross profit and net sales. This indicates gross profit margin to net sales and usually expressed in percentage .
100 minus operating ratio is operating profit ratio . selling and distribution expenses. Cost of goods sold + operating expenses/ Net sales X100 Operating expenses means the sum of administrative. This ratio is calculated by dividing the operating cost ( i.e cost of goods sold plus all operating expenses) by net sales.
The following formula is used Particular expenses / Net sales X100 . These ratios help in analyzing the causes of variation of operating ratio. It is calculated to show the relationship of each item of manufacturing cost and operating expenses to net sales.
This ratio measures the rate of net profit on sales. This is calculated as follows: Net profit after tax / Net sales X100 .
It is usually expressed in percentage as below: Return on equity capital = Net profit (after tax and preference dividend)/ equity capital X100 . This ratio is calculated by dividing the net profits available to equity share holders ( i.e net profit after tax and preference dividend) by capital invested by these shareholders.
EPS = Net profit after tax and preference dividend / Number of equity shares . Earnings per share are calculated by dividing net profits after tax and preference dividend by the total number of equity shares. : It is small variation of return on equity capital. earnings are expressed per share instead of in percentage. Here.
This ratio measures the profitability of the concern in relation to total investments made by the share holders (or proprietors) in the business. Return on Investments (ROI)= Net profit (after interest and tax) / Share holder’s fund X100 . It is calculated by dividing net profit after interest and taxes by share holder’s fund.
greater is the profitability of the company. This is measure of managerial efficiency of utilizing funds invested in the firm. Higher the ratio. This is calculated as follows: Net Profit before interest and tax/ Total Investment X100 Total investment implies shareholder’s funds plus long-term liabilities. .
Gross capital employed = Equity share capital + preference share capital +reserve and surplus + all long and short term external loans Or All net fixed assets + current assets + including goodwill of the firm but fictitious assets are not included .
Net capital employed = Equity share capital + preference share capital + reserve and surplus + long term loans .
if any . Proprietor’s net capital = Equity share capital + preference share capital + reserves and surplus – accumulated losses.
Net sales ( or cost of sales)/ working capital A high working capital turnover ratio shows the efficient utilization of working capital .
It is calculated as follows: Net sales/ Share capital or net worth . This ratio is measure of efficiency of utilization of shareholders capital. Efficient use of capital is an indicator of profitability of business and managerial efficiency.
CGR= Fixed cost bearing capital/ variable cost bearing capital Or CGR= variable cost bearing capital / Fixed cost bearing capital .
It expresses relationship of total long-term funds to long-term liabilities. As a general rule the proportion of long-term liabilities should be very high. Long term fund (share holder’s fund + Longterm liabilities)/ Long-term liabilities. .
The debentures of a company are usually issued by mortgaging the fixed assets. Hence. This ratio is calculated as follows: Fixed assets / Funded debt . such as debentures. the greater will be the security of debenture holders. This ratio determines the margin of safety o funded debt. higher the ratio of fixed assets to debentures.
It implies the amount payable per share on liquidation of the company. Share holders fund / Number of shares Investors compare this value of the share with market price. Now this ratio has lost importance because assets shown in the balance sheet are usually different from their current values. .
Market price per share / earnings per Share Market price per share = PE Ratio X EPS . This ratio expresses the relationship of market price of the share with its rate of earnings.
This is calculates as follows: DYR = Dividend per share / Market price per share . This ratio is calculated to know the effective return of the owners. This ratio compares the rate of dividend with the market price of the share.
DPR = Dividend per share / Earnings per share X100 . This is a ratio of dividend per share to earnings per share. It indicates the extent to which earnings per share have been used for paying dividend and what portion of earnings has been retained in the business for growth and future uncertainties.
This may be calculates as follows Cover for preference Dividend =Earnings after tax / Preference dividend Cover for equity Dividend = Earnings after preference dividend / Equity dividend Higher the cover better it is. .