All About ACCOUNTING..!!

ACCOUNTING

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What is ACCOUNTING…?

All About ACCOUNTING..!!

What is accounting? • • • The language of business. A means to communicate financial information. A way to convey information about a business to users.

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What is Need of ACCOUNTING…?

All About ACCOUNTING..!!

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform? Where does the organization stand?
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.What is Need of ACCOUNTING…? All About ACCOUNTING.!! Accountants answer these questions with two major financial statements: Income Statement Balance Sheet 4 .

5 .!! Balance Sheet The balance sheet (also called statement of financial position or statement of financial condition) is a snapshot of the financial status of an organization at a point in time.What is Balance Sheet…? All About ACCOUNTING..

6 .. the assets of the organization.What is Balance Sheet…? All About ACCOUNTING.!! Balance Sheet Assets = Equities Assets are economic resources that are expected to benefit future activities of the organization. or interests in. Equities are the claims against.

7 .. which is usually called sales) and its efforts (cost of goods sold and other expenses).!! Income Statement The income statement measures the performance of an organization by matching its accomplishments (revenue from customers.What is Income Statement…? All About ACCOUNTING.

. Revenues must be earned. 8 .!! Revenues Revenues are increases in ownership claims arising from the delivery of goods or services.What is Revenue…? All About ACCOUNTING. Revenues must be realized.

!! Expenses Expenses are decreases in ownership claims arising from delivering goods or services or using up assets.. 9 .What is Expenses All About ACCOUNTING.

!! Profits Profits (or earnings or income) are the excess of revenues over expenses.What is Profit All About ACCOUNTING. 10 ..

Who are Users of Accounting…? All About ACCOUNTING..!! Who users accounting information? • • • • • • • • Owners Managers Investors (including potential) Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers 11 .

!! Accounting has two main divisions: • Financial accounting Primarily prepared for users external to the company.. earnings. 12 . assets. net present value. etc.Types of ACCOUNTING…? All About ACCOUNTING. etc. • Management accounting Primarily for internal purposes Costing. Revenues. budgeting.

13 .. control of execution and appreciation of effectiveness. Management accounting is a system that helps management in carrying out their functions more efficiently.What is MANAGEMENT ACCOUNTING…? All About ACCOUNTING.!! Management Accounting is comprised of two words “ Management” and “Accounting”. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formulation of policy. It is the study of managerial aspects of accounting.

.!! GAAP 14 .All About ACCOUNTING.

What is GAAP…? All About ACCOUNTING. standards and procedures that companies use while preparing their financial statement. 2. GAAP are common set of accounting principles. rules and procedures necessary to define accepted accounting practices at a particular time. Accounting Principle can be classified into two categories: 1.!! General Accepted Accounting Principle is a technical term that encompasses the conventions.. Accounting Concepts Accounting Conventions 15 .

.!! Accounting Concepts may be considered as traditions which guide the accountants while preparing the accounting statements Accounting Conventions:1.What is Accounting Conventions…? All About ACCOUNTING. 3. 4. Consistency Full Disclosure Conservation Materiality 16 . 2.

8.What is Accounting Concept…? All About ACCOUNTING. . 3. 4.Realisation Concept.. Separate Legal Entity Money Measurement Going Concern Cost Concept Accounting Period Dual Aspect Matching Concept Accrual concept 17 9. 6. 5.!! Accounting Concepts may be considered basic assumptions or conditions upon which the science of accounting is based. 2. 7. Accounting Concepts:1.

!! Inventory Valuation 18 ..All About ACCOUNTING.

19 be under-stocking of . Therefore a proper planning is required for purchase. About 90% of the working capital is invested in inventory. issue & vendor selection. consumables.What is Inventory …? All About ACCOUNTING. The investment in inventory is very high in a undertaking.!! Inventory is stock of goods. work in progress.. finished goods. The purpose of inventory management is that neither there should be over-stocking nor there should inventory. spares. its includes raw material. Overstocking=Reduction in liquidity Under stocking = Stoppage in production cycle.

Inventory All About ACCOUNTING..!! 20 .

The barrel was restocked three times with 100 pounds of nails being added at each restocking.Example of Inventory Valuating • All About ACCOUNTING.!! Mueller Hardware has a storage barrel full of nails. and the third batch cost Mueller 120/-. Mueller weighs the barrel and decides that 140 pounds of nails are on hand 21 . the second batch cost Mueller 110/-. • The barrel was never allowed to empty completely and customers have picked all around in the barrel as they bought nails from Mueller • At the end of the accounting period. • • The first batch cost Mueller 100/-..

first-out (LIFO) Weighted-average 22 . first-out (FIFO) Last-in.Example of Inventory Valuating All About ACCOUNTING.!! The methods from which to choose are varied.. generally consisting of one of the following: • • • First-in.

the most recent purchases are assigned to units in ending inventory..FIFO All About ACCOUNTING. first-out. Conversely. For Mueller's nails the FIFO calculations would look like this: 23 . the oldest cost is matched against revenue and assigned to cost of goods sold.!! CALCULATIONS: With first-in.

recent costs are assigned to goods sold while the oldest costs remain in inventory: 24 .. first-out is just the reverse of FIFO.!! Last-in.LIFO CALCULATIONS: All About ACCOUNTING.

Average Cost All About ACCOUNTING.!! CALCULATIONS: The weighted-average method relies on average unit cost to calculate cost of units sold and ending inventory 25 ..

!! Valuation of inventory bears direct relation on the determination of income of the company. AVERAGE COST 26 .. the most important being. If all the material are purchased at same rate there will be no problem in valuation of inventory. There are many methods of valuing inventory. LIFO 3.What is Inventory Valuation All About ACCOUNTING. But because of different market condition the valuation of inventory can be done in different ways. 1. FIFO 2.

. • Ie. Unit cost are apportioned to cost of production according to their chronological order.What is FIFO…? First In First Out • All About ACCOUNTING.!! This method assumes that oldest material is issued first and at its original rate at which it is received. • This method is beneficial in case of falling price 27 .

!! 5.. Simple to understand All About ACCOUNTING. Useful when price are falling 4.Advantages of FIFO…? First In First Out. Material cost correctly ascertained 3. Closing stock value in balance sheet is more realistic 28 .Advantages 1. Rational 2.

.!! 2.Disadvantages of FIFO…? First In First Out. Possibility of more clerical error All About ACCOUNTING. In case of frequent price fluctuation the pricing becomes different 29 .Disadvantages 1. Sometimes more than one price has to be use to value one issue 3.

!! In this method issue is done in the reverse order of purchase..What is LIFO…? Last In First Out • • • • All About ACCOUNTING. Material received last in the stores is issued first More appropriate in rising price Also known as replacement cost method 30 .

What is LIFO…? Last In First Out (Advantage) • • • All About ACCOUNTING.!! No profit No loss as material are issued at cost price Production Cost represents recent cost Suitable in rising price 31 ..

32 .What is LIFO…? Last In First Out (Disadvantage) • All About ACCOUNTING.!! May result in clerical error as every time issue is made price may be revised • • Comparison between different jobs is difficult The stock in hand is valued at price which is not current market price • More than one price can be used for valuing issue of material of single requisitions..

.Example All About ACCOUNTING.!! Discuss the effect of adopting LIFO and FIFO on profit with the help of following figures Jan-1 Opening Balance-10 units @ 30/Jan 10 Purchased 10 unit @ 33/Jan 12 Issued 10 Jan 31 Closing Balance-10 unit Feb-3 Purchase-10 unit @36/Feb-12 Issued-10 units Feb-28 Purchased-10 units @ 40/33 .

Weighted average method 34 .!! The principle on which average method is based is that all of the material in the stores is mixed up and cannot be issued from any particular lot Types of Average Stock Method 1.Average Method All About ACCOUNTING. Simple Average method 2..

Simple Average Method Simple Average method All About ACCOUNTING.!! Price is calculated by dividing total of the prices of material in the stock with the number of prices used in the total Eg 1000units purchased @ 10/2000units purchased @ 11/3000units purchased @ 12/Then the issue price of next issue will be 10+11+12/3 = 11 35 ..

33/36 ..Weighted Average Method Weighted Average method All About ACCOUNTING.!! Price is calculated by dividing total cost of material in the stock with the total quantity of material Eg 1000units purchased @ 10/2000units purchased @ 11/3000units purchased @ 12/Then the issue price of next issue will be (1000*10)+(2000*11)+(3000*12)/(1000+2000+3000) = 11.

.All About ACCOUNTING.!! Inventory Management 37 .

About 90% of working capital is invested in inventory management..33%.75% and in steel industry also it count to about 65. the raw material cost is as high as 68. In industries like sugar. retail trade is very high. Inventory Management will determine • What to purchase How much to purchase From where to purchase When to purchase 38 • • • .What is Inventory Management…? Inventory Management:The investment in inventory in most All About ACCOUNTING. wholesale.!! of the manufacturing.

spares & finished goods so that production should not suffer at any time & customer demand should also be met. To minimize losses due to wastage & damage. so that cost of production is minimum. All About ACCOUNTING. 3. To eliminate duplication in ordering or replenishing stock.!! To ensure continuous supply of materials. 7.Objective of Inventory Management…? Objectives of Inventory Management:1. 5. 2. 6. To maintain investment in inventory at optimum level To maintain material cost at minimum. To ensure perpetual inventory control To facilitate furnishing of data for short-term & long-term planning & 39 . 4. To avoid over-stocking & under-stocking of inventory.. 8.

4.B. Determination of stock level.!! 40 . 5. A.Tools of Inventory Management…? Tools of Inventory Management:1. Preparation of inventory report 6. 2.. Determination of safety stock. Perpetual Inventory system 7. Determination of EOQ.C Analysis. JIT Control System All About ACCOUNTING. 3.

.This represent the quantity which must be maintained in hand at all times. Minimum level depends on:• • • Lead time Rate of consumption] Nature of material STOCK LEVEL=REORDER LEVEL-(NORMAL MINIMUM CONSUMPTION *NORMAL REORDER LEVEL) 41 . (a) Minimum Level :. at the same time there should be no stock out. Various stock level are fixed for this.Determination of Inventory level…? Determination of Inventory level:- All About ACCOUNTING.!! An efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory cost is minimum.

It depends on following factors :• • • • Rate of consumption Lead time Maximum quantity of material required in a day. The order is sent before the material reaches the minimum level. Reorder level is fixed between minimum & maximum level.!! Re-order level -When the quantity of the material reaches a certain figure then fresh order is sent to get the material again..Determination of Inventory level…? All About ACCOUNTING. Nature of material RE-ORDER LEVEL= (MAXIMUM CONSUMPTION * MAXIMUM REORDER PERIOD) 42 .

If stock reaches beyond this level it is over stocking.Determination of Inventory level…? All About ACCOUNTING.. Availability of space for storing the material Cost of maintaining the stores. 43 .!! Maximum level –It is that quantity of the material beyond which a firm should not exceed its stock. Maximum level depends on following factors :• • • • • • • Rate of consumption Lead time Maximum quantity of material required in a day. Nature of material Availability of capital for purchase of material.

Determination of Inventory level…? • • • Availability of material at any point of time. Restrictions imposed by the government. All About ACCOUNTING. MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + RE-ORDER QUANTITY – (MINIMUM CONSUPTION * MINIMUM RE- ORDERING PERIOD) Average stock level.The average stock level is average of minimum stock & maximum stock.!! This possibility of change in fashions will also affect the maximum level.. Danger level-It is that level beyond which the material should not fall in any case. DANGER LEVEL= (AVERAGE CONSUMPTION * MAXIMUM RE-ORDER PERIOD FOR EMERGENCY PURCHASE) 44 .

The usage of inventory cannot be perfectly forecasted.!! Safety Stock– Safety stock is a buffer to meet some unanticipated increase in usage.Determination of Safety Stock…? All About ACCOUNTING. The stock out can prove costly by effecting in smooth working of concern. The demand for material may fluctuate & delivery of inventory may also be delayed & in such a situation the firm can face a problem of stock-out. 45 . It fluctuates over a period of time. In order to protect against this situation firm usually maintains some stock this stock is known as safety stock..

Inventory Order Cycle
Order quantity, Q

All About ACCOUNTING..!!

Reorder point, R

Inventory Level

Demand rate

0

Lead time Order Order placed receipt

Lead time Order Order placed receipt

Time

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Determination levels…?

All About ACCOUNTING..!!

From the following information, calculate minimum stock level, maximum stock level and reorder level :• Max Consumption-200 units per day • Min Consumption-150 units per day • Normal Consumption-160 units per day • Re-order period-10-15 days • Re-order quantity-1600 units • Normal re-order period-12 days
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Determination of EOQ…?

All About ACCOUNTING..!!

Economic order quantity– is the level of inventory that minimizes the total inventory holding costs and ordering costs. The framework used to determine this order quantity is also known as Wilson EOQ Model. The model was developed by F. W. Harris in 1913. But still R. H. Wilson is given credit for his early in-depth analysis of the model. Ordering cost are the cost which is associated with the purchasing or ordering of material. E.g. Cost of staff posted for ordering of goods, transportation expenses, inspection cost. This cost is also called buying cost. The planning commission of India has estimated these cost between 10% to 20%. Carrying cost are the cost of holding the inventory. E.g. Cost
48 of capital invested, storage cost, insurance cost, loss if

!! (d) The purchase price of the item is constant i.e. (b) The rate of demand is constant (c) The lead time is fixed All About ACCOUNTING. 49 . no discount is available EOQ is the level of the inventory where ordering cost and carrying cost remains equal.Determination of EOQ…? Underlying assumptions (a) The ordering cost is constant..

!! Annual cost ($) Slope = 0 Minimum total cost Total Cost Carrying Cost = CcQ 2 Ordering Cost = Optimal order Qopt 50 CoD Q Order Quantity..EOQ Cost Model All About ACCOUNTING. Q .

Ordering cost=C × D/Q Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2.) Purchase cost =(P×D) Ordering cost: This is the cost of placing orders: each order has a fixed cost C. Holding cost = H × Q/2 51 . Total Cost = purchase cost + ordering cost + holding cost Purchase cost=(purchase unit price × annual demand quantity.!! cost function: EOQ is the level of the inventory where ordering cost and carrying cost remains equal..Determination of Total Cost…? All About ACCOUNTING. and we need to order D/Q times per year.

Determine EOQ All About ACCOUNTING.!! Find out EOQ from following information Annual usage-6000units Cost of material per unit-20/Cost of receiving and placing order-60/Annual carrying cost of one unit.10% of inventory value 52 ..

The unit cost is 6/-. and the carrying cost is 25% of unit cost. EOQ 2. Time period between two consecutive order.determine 1..EOQ Analysis… All About ACCOUNTING. If the cost of procurement is 75/.!! A manufacturing company uses 6400unit of material per year. Number of order per annum 3. 53 .

what is extra cost.!! X ltd produces a product which has a monthly demand of 4000 units.For every finished product.EOQ Analysis… All About ACCOUNTING..per order and the holding cost is 10%p. EOQ 2. The product requires a component X which is purchased at 20/-. The ordering cost is 120/. the company has to incur 54 . one unit of the component is required. If the minimum lot size to be supplied is 4000unit.a You are required to calculate 1.

What is EOQ 2.Ordering cost id 6/. The cost per unit is 3/-.EOQ Analysis (Decision making)… All About ACCOUNTING.. What should the firm do if the supplier offers discount as below At 4500 units – Discount offered is 2% At 6000 units – Discount offered is 3 % 55 .!! An Enterprise requires 90000 units of a component in a year.per unit 1.

The firm should. It is not desirable to keep the same degree of control on all the items.ABC Analysis… All About ACCOUNTING. 56 .. This analytical approach is called the ABC analysis and tends to measure the significance of each item of inventories in terms of its value. therefore. The firm should pay maximum attention to those items whose value is the highest.!! Usually a firm has to maintain several types of inventories. The firm should be selective in its approach to control investment in various types of inventories. classify inventories to identify which items should receive the most effort in controlling.

Like ABC control VED analysis is also used in few industries for controlling inventory V – Vital – without which production will stop. E – Essential – Which is essential for production. . The control on C category items are kept under minimum control.ABC Analysis… All About ACCOUNTING..!! ABC analysis helps to concentrate more effort on category A since greatest monetary advantage will come by controlling these items. D – Desirable – Without which there will be no effect on 57 production but is desirable for production. The control on B category items are moderate.

58 . The stores are selected in rotation for checking the items physically. 3.Perpetual Inventory System… All About ACCOUNTING.. 2. which reflects the physical movement of stock & their current balance.!! Perpetual Inventory System may be defined as a system of records maintained by the controlling department. 4. Procedure of Perpetual Inventory System 1. The up to date position in stores ledger and bin cards should be made to know the current balances of the stores. Physical stock checking is done & tallied with the records. The stores which are not checked are marked. 5. Final report is signed by cost accountant.

!! Analysis of Financial Statement 59 ..All About ACCOUNTING.

!! FINANCIAL ANALYSIS is the process of critically examining in detail accounting information given in the financial statement. FINANCIAL INTERPRETATION is closely related to financial analysis.What is Analysis of Financial Statement…? All About ACCOUNTING. 60 . The analysis & interpretation of financial statement is to determine the significance & meaning of the financial statement data. FINANCIAL ANALYSIS is largely a study of relationship among the various financial factor in a business as disclosed by a single set of statement and a study of trend of these factors.. Interpretation is thus drawing of inference & stating what the figures in the financial statement really mean.

61 .! All About ACCOUNTING.Objective of Financial Analysis…. (6)To assess the stability of the firm (7) For decision making. (3)To assess the short term & long term solvency of the concern. (5) For forecasting & preparation of budget.. (4) To have a comparative study in regard to one firm with another or one department with another.!! (1)To assess the present & future earning capacity or profitability of the concern (2)To assess the operating efficiency of the concern as a whole & various departments.

!! RATIO is the arithmetical expression of the relationship of one number to another.. FINANCIAL RATIO ANALYSIS is a technique of analysis & interpretation of the financial figures in the financial statement. It is the process of establishing & interpretation various ratios for decision making. 62 . It may be defined as the indicated quotient of two mathematical expression.What is Ratio Analysis …? All About ACCOUNTING. FINANCIAL RATIO is the relationship between two accounting figures expressed mathematically.

. The interpretation of ratio can be made in following ways: • • • • Single absolute ratio Group ratio Historical Comparison Inter-firm Comparison 63 . To make ratio useful it has to be further interpreted.What is Ratio Analysis …? All About ACCOUNTING.!! A single ratio in itself does not convey much of sense.

.!! Ratios Traditional Functional Significance Balance sheet P&L A/c Mixed Liquidity Solvency Turnover Profitability Primary Secondary 64 . Classification of Ratios…!! All About ACCOUNTING.3.

Current ratio.What is Traditional Classification…? All About ACCOUNTING. Operating Ratio. 65 . Debt-equity ratio. Creditor Turnover ratio.!! Balance sheet Ratio deals with the relationship between two balance sheet figures. E. Net Profit Ratio. Liquidity ratio.g.g. e.g. Capital Gearing ratio. Gross Profit Ratio. Stock turnover ratio. Debtors Turnover ratio. e.. Mixed Ratio exhibit the relationship between the figures of profit & loss account and balance sheet. Profit & Loss Account Ratio deals with the relationship between two profit & loss figures.

g. Absolute liquid ratio.g. Capital Gearing ratio. Gross profit ratio. Current ratio. Coverage Ratio. Solvency or Leverage Ratio Long-term solvency ratio conveys a firms ability to meet the interest cost & repayment schedules of its long-term obligations . 66 .g.g. Activity or Turnover Ratio are calculated to measure the efficiency with which the resources of a firm are employed. Debt-Equity Ratio.!! Liquidity Ratio deals with the ratios which measures the short-term solvency or financial position of a firm. They indicate the speed with which assets are being converted into sales. E.What is Functional Classification…? All About ACCOUNTING. Liquid ratio.e. Stock turnover ratio. Debtors turnover ratio. This ratio are calculated upon the short-term paying capacity of a concern.. Creditor turnover ratio. Proprietary Ratio. Profitability Ratio measures the result of the business operations or overall performance & effectiveness of the firm. E. E.

are ratio which support the primary ratio. Return on capital. E.. the relationship of operating profit to sales or the relationship of sales to total 67 .g.!! Primary Ratio deals with the ratios which are of prime importance to a concern. Secondary Ratio assets of the firm.g.What is Significance Classification…? All About ACCOUNTING. E.

.All About ACCOUNTING.!! Liquidity Ratio 68 .

floating or circulating assets..!! Liquidity Ratio deals with the ratios which test the ability of a concern to meet its current obligation as & when due. To measure liquidity following ratios should be calculated:1. Current Ratio 2. The short term obligation are met by realizing amounts from current.What is Liquidity ratio…? All About ACCOUNTING. Absolute Liquid Ratio 69 . Liquid Ratio 3.

What is Current ratio…? Current Ratio ratio. 70 . This ratio is also known as working capital A relatively high current ratio indicate that the firm is liquid & has ability to pay its current liability. A ratio of 2:1 is referred as s banker’s rule of thumb or a standard for the current ratio.!! may be defined as the relationship between current assets & current liability.. Where as a relatively low current ratio indicate that the firm is not liquid. Current ratio is current assets to current liability Interpretation of current ratio: All About ACCOUNTING.

Calculate Current ratio…? Stock-60000/Cash-20000/Prepaid Expenses-10000/Goodwill-50000/Bills Payable-15000/Outstanding Expenses.7000/Debenture-75000/Debtors-70000/- All About ACCOUNTING.000/Creditors-20000/Tax Payable-18000/Bank Overdraft-25000/- 71 ..!! Bills Receivables-30000/Land & Building-100.

Current assets include inventory & prepaid expenses which are not easily convertible into cash within a short period.!! Liquidity Ratio is a more rigorous test of liquidity than the current ratio. 72 . Where as a relatively low liquid ratio indicate that the firm is not liquid.What is Liquidity ratio…? All About ACCOUNTING.. A ratio of 1:1 is referred a standard for the liquid ratio. Quick ratio is Liquid assets to Current liability Interpretation of Quick ratio: A relatively high liquid ratio indicate that the firm is liquid & has ability to pay its current liability.

A ratio of . Where as a relatively low ratio indicate that the firm is not liquid..What is Absolute Liquidity ratio…? All About ACCOUNTING. Quick ratio is Absolute liquid assets to Current liability Interpretation of Quick ratio: A relatively high ratio indicate that the firm is liquid & has ability to pay its current liability. 73 .!! Absolute Liquidity Ratio is the most rigorous test of liquidity.50:1 is referred a standard for the absolute liquid ratio.

All About ACCOUNTING..!! Solvency Ratio 74 .

Debt-Equity 2. Fixed Asset to Net worth 3. Capital Gearing Ratio 75 . The following ratio serve the purpose of determining the solvency of the concern: 1.What is Solvency Ratio…? All About ACCOUNTING..!! Solvency Ratio may be defined as the ratio which test the ability of concern to meet long-term obligation.

THE RATIO IS NAMED AS LONG-TERM DEBT TO SHAREHOLDER’S FUND.. Preference share capital. Revenue reserve and reserves representing accumulated profit & surplus like reserves for contingencies.!! Debt-Equity Ratio . 76 .g. Bank loan. whether long term or short term. also known as External-Internal Ratio is calculated to measure the relative claims of the outsider Debt-Equity Ratio is Outsiders Fund to Shareholder Fund Outsiders Fund is external equity & includes all debt & liability to the outsiders. Shareholder’s Fund consist of equity share capital . Mortgages or other current liability. sinking fund etc. Capital reserve. E.What is Debt-Equity Ratio…? All About ACCOUNTING. IF CURRENT LIABILITY IS NOT INCLUDED IN DEBT-EQUITY. Debenture.

What is Debt-Equity Ratio…? Interpretation of Debt-Equity Ratio All About ACCOUNTING. A ratio of 1:1 is considered as a satisfactory ratio although there cannot be any rule of thumb A low ratio is considered as favorable from the long-term creditors point of view because a high proportion of owner’s fund provide more margin. 77 . The ratio indicate the proportionate claims of owner & the outsider against the firm’s assets. A high ratio provide a less margin of safety for them at the time of liquidation..!! The debt-Equity ratio is calculated to measure the extent to which debt financing has been used in the business.

each. 9% Preference Shares of 10/.What is Debt-Equity Ratio…? All About ACCOUNTING. fully paid-200000/General Reserve-50000/Share Premium-25000/Profit & Loss A/c-125000/7% Debenture-140000/Montage Loan-60000/Creditor-129000/Bills Payable-74500/Find Debt-Equity & Comment on this ratio 78 . fully paid-500000/20000..!! The following figure relate to the liability side of a company: 50000. Equity share of 10/-each.

Fixed Asset to Net Worth Ratio is Fixed Assets (After Depreciation) to Shareholder’s Fund. INTERPRETATION OF THE RATIO: This ratio indicates the extent to which shareholder’s fund are sunk into Fixed asset. Shareholder's fund is same as net worth. Generally the fund for fixed assets should be financed from shareholder’s fund.What is Fixed Asset to Net Worth Ratio…? All About ACCOUNTING. If the ratio is less than 100% that implies that the owner has put part of his fund in working capital & if the ratio is more than 100% it implies that owner has not got sufficient fund to finance fixed asset. 79 .!! Fixed Asset to Net Worth Ratio.. is calculated to measure the relationship between Fixed assets of the company & shareholder’s Fund.

. 80 . it is said to be low geared.What is Capital Gearing Ratio…? All About ACCOUNTING.!! Capital Gearing Ratio. If this ratio is less than 1. Capital Gearing Ratio is Fixed Interest Bearing Security to Shareholder’s Fund. it is said to be evenly geared. INTERPRETATION OF THE RATIO: A Company is said to be highly geared if the major shares of the total capital is in the form of fixed interest bearing securities or if this ratio is more than 1. establishes the relationship between fixed interest bearing security & Shareholder’s fund. If it is exactly 1.

.!! Profitability Ratio 81 .All About ACCOUNTING.

What is Profitability Ratio…? Profitability Ratio the company The following ratio serve the purpose of All About ACCOUNTING..!! may be defined as the ratio which test the profit making capacity of the company and indicates overall performance of determining the profitability of the concern • • • • • • Net Profit Ratio Gross Profit Ratio Return on Capital Employed Return on Fixed Assets Earning Per Share Price Earning Ratio 82 .

It reflects the efficiency with which a firm produces its products. 83 .P Ratio…? Gross-Profit Ratio All About ACCOUNTING. Interpretation of G.P ratio This ratio indicates the extent to which selling price of goods per unit may decline without resulting in losses on operations of a firm. Higher the ratio better the profitability..low demand etc.P & N.What is G. The ratio should be expressed in percentage. Net-Profit Ratio measures the relationship of net profit to net sales. The ratio should be expressed in percentage.!! measures the relationship of gross profit to net sales. Interpretation of N.P ratio This ratio indicates the firm’s capacity to face adverse economic conditions such as price competition .

it measures the cost of operations per rupee of sales.What is Operating Ratio…? All About ACCOUNTING. 2.!! Operating Ratio measures the relationship between cost of goods sold and other operating expenses on the one hand and sales on the other. Administrative & office expenses.. Operating expense consist of:1. 84 . The ratio should be expressed in percentage. OPERATING RATIO IS OPERATING COST DIVIDED BY NET SALES OPERATING COST IS COST OF GOODS SOLD PLUS OPERATING EXPENSES. In other words. Selling & Distribution expense Operating ratio indicate the percentage of net sales that is consumed by operating cost. Higher the ratio less favorable it is for the company.

!! Return on Capital also known ROI is the relationship between net profit before tax and the proprietors fund. This ratio indicates how well the resources of a firm are used.. higher the ratio better it is for the firm. This ratio should be used for trend analysis & inter-firm comparison. should be INTERPRETATION OF THE RATIO: This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. 85 .What is Return on capital…? All About ACCOUNTING. The ratio expressed in percentage.

This ratio is more meaningful to the equity shareholders who are interested to know the profit earned by the company Higher the ratio better it is for the company.!! Return on equity Capital :Equity shareholders are the real owner of the company.What is Return on Equity capital…? All About ACCOUNTING.. 86 . The rate of dividend varies with the availability of profit. Therefore return on capital employed is the relationship between profit of the company available to equity shareholders and equity share capital.

!! Turnover Ratio 87 ..All About ACCOUNTING.

Creditor Turnover ratio 4.. The following ratio serve the purpose of determining the activity level of the concern 1.!! may be defined as the ratio which measures the efficiency or effectiveness with which a firm manager its resources & assets. Fixed Asset Turnover ratio 88 . Inventory Turnover ratio 2. This ratio is also known as activity ratio.What is Turnover Ratio…? Turnover Ratio All About ACCOUNTING. Debtor Turnover ratio 3.

Accumulated . Low ratio indicates high investment in inventory.!! Stock Turnover Ratio also known as stock velocity.What is Stock Turnover Ratio…? All About ACCOUNTING. as it indicates stock is converted into sales in less time & hence less capital is blocked in inventory. Higher ratio indicates efficient management. It would indicate whether inventory has been efficiently used or not. obsolete 89 . Inventory turnover ratio indicates the number of times the stock has turned over during a period of time & evaluate the efficiency with which the firm is able to manage the inventory. INVENTORY TURNOVER RATIO IS COST OF GOODS SOLD TO AVERAGE INVENTORY Inventory turnover ratio measures the velocity of conversion of stock into sales..

!! Debtor Turnover Ratio indicates the velocity of debt collection by a firm. Debtor velocity indicates the number of times the debtors are turned over during a year. Debtor turnover ratio is Credit Sales to Average Debtor. Also it indicates the number of times debtors are turned over during a year. 90 . But a very high ratio ratio indicates inability of firm to sell.What is Debtor Turnover Ratio…? All About ACCOUNTING. Higher the value of debtor turnover the more efficient is the management of debtors. Average collection period represent the number of days for which a firm has to wait before receivables are converted into cash.. Trade Debtor is Sundry Debtors & Bills Receivable.

Creditor velocity indicates the number of times the creditor are turned over during a year.What is Creditor Turnover Ratio…? All About ACCOUNTING.. Also it indicates the number of times Creditors are turned over during a year. Trade Creditor is Sundry Creditors & Bills Payable. Creditor turnover ratio is Credit Purchase to Average Creditor. 91 .!! Creditor Turnover Ratio indicates the velocity of debt payment by a firm.

Reverse Journey to balance sheet All About ACCOUNTING..!! From the following information.000/Stock turnover ratio (Cost of sales/closing stock) =6 times Gross profit ratio=20% Fixed asset ratio=2 times Average debt collection period=2 month Fixed assets : Shareholders Net worth=1:1 Reserve: Share Capital= 0.5 Liquid ratio=1.5 : 1 92 .5 Net working capital=300. Draw up the balance sheet Current Ratio=2.

All About ACCOUNTING.!! Accounting for Transportation undertaking 93 ..

All About ACCOUNTING..!!

Transportation companies may be divided into (a) Railway (b) Roadways (c) Shipping (d) Airways Transportation companies carry goods & passengers for one place to another against some fare which they collect either at the point of boarding or on the way or at the point of unloading or destination

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Railway Transportation ?

All About ACCOUNTING..!!

The station master or the booking clerk of each station prepares a statement showing the total number of tickets sold to different station which must agree with the opening & closing balances of tickets. A summary is made at the end of each week with the total amount of sales so realized which will be forwarded to the cashier of the respective division. Total collection are added up to find out total of each division & zone. The divisional cashier deposits the total collection into bank For Income from other sources like advertisement a separate account is prepared

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Railway Transportation ?

All About ACCOUNTING..!!

For purchase & issue of coal, petrol, diesel etc separate account is prepared. At the same time account for wages & salary, lubricants, engineering goods, tyres etc separate account is prepared. At the end of the year, after making distinction between revenue & capital expenditure, Final account is prepared. Capital and Revenue Accounts.- The accounts of a railway presented in such a form as to facilitate a review of the finances of the railway as a commercial undertaking are known as "Capital and Revenue Accounts". The Capital and Revenue Accounts of a railway are compiled every year and included in the Annual Report of the railway. The various processes of accounting followed in Railway Accounts Offices lead up to these accounts.
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(e) The Debt Head Report.Railway Transportation ? All About ACCOUNTING. (d) Statement of Voted and Charged Expenditure. the following accounts and returns should be compiled (a) The Capital and Revenue Accounts (Section II of the Annual ReportFinancial Statements).!! After the books for a financial year have been closed and after the final accounts current have been submitted. (e) Appropriation Accounts and connected Returns 97 .. (b) The Finance Accounts.

(e) The Debt Head Report. (b) The Finance Accounts.!! After the books for a financial year have been closed and after the final accounts current have been submitted. the following accounts and returns should be compiled (a) The Capital and Revenue Accounts (Section II of the Annual ReportFinancial Statements).. (e) Appropriation Accounts and connected Returns 98 .Airways Transportation ? All About ACCOUNTING. (d) Statement of Voted and Charged Expenditure.

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