OBJECTIVE

To enable participants to :-

 Know about accounting

 Understand Profit & Loss Account
 Understand Balance Sheet
 Analyse accounting data
 Make logical conclusions
 BASIC UNDERSTANDING

Fund Inflow (Credit):-

 Revenue (Income)
 Capital or Loan Borrowings (Liability)

Fund Outflow (Debit) :-

 Expense
 Addition of Asset
 ACCOUNTING

 Language of Business
 Art of Recording, Classifying, summarizing &

Analyzing transactions of Financial nature

&
 Interpretation of results
 OBJECTIVES OF MAINTAINING ACCOUNTS
 TO KEEP A TRUE AND CORRECT RECORD OF ALL
BUSINESS TRANSACTIONS AS AND WHEN THEY
OCCUR.

 TO ASCERTAIN THE FINANCIAL POSITION OF A

BUSINESS ENTERPRISE AS ON A PARTICULAR DATE

 TO ASCERTAIN THE PROFIT / LOSS OF THE BUSINESS

ENTERPRISE FOR A PARTICULAR PERIOD.
 FORMS OF BUSINESS ORGANISATION

 Sole Proprietorship
 Partnership

 Private Limited Company

 Public Limited Company

 Government Enterprise

 Joint Ventures
 INTERESTED PARTIES

 Owners
 Management
 Potential Investors
 Financial Institutions, Credit Rating agency
 Employees
 Statutory Authorities
 Customers & Creditors
 Competitors
 CONCEPTS IN ACCOUNTING

 Business Entity Concept

 Money measurement Concept

 Accrual Concept
 Going concern Concept

 Cost concept
 Conservatism Concept
 Fair Value Concept
BUSINESS ENTITY

 Meaning
 The business and its owner(s) are two separate
entities.
 Any private and personal incomes and expenses of the
owner(s) should not be treated as the incomes and
expenses of the business.

10
MONEY MEASUREMENT
 Meaning
Transactions and events that are capable of being
measured in monetary terms are recognized in the
financial statements. It is also known as Measurability
Concept
 Examples
Market conditions, technological changes and the
efficiency of management would not be disclosed in the
accounts since they cannot be measured in monetary
terms.

11
ACCRUALS/MATCHING

 Meaning

 Revenues are recognized when they are earned,

but not when cash is received.

 Expenses are recognized as they are incurred, but

not when cash is paid.

 The net income for the period is determined by

subtracting expenses incurred from revenues
earned 12
GOING CONCERN
 Meaning
 The business will continue in operational existence
for the foreseeable future.

 Financial statements should be prepared on a going

concern basis unless management either intends to
liquidate the enterprise or to cease trading, or has no
realistic alternative but to do so.

13
HISTORICAL COST
 Meaning
 Assets should be shown on the balance sheet at
the cost of purchase instead of current value
 Example
 The cost of fixed assets is recorded at the date
of acquisition cost. The acquisition cost
includes all expenditure made to prepare the
asset for its intended use. It includes the
invoice price of the assets, freight charges,
insurance or installation costs.

14
PRUDENCE/CONSERVATISM

 Meaning

 Revenues and profits are not anticipated. Only

realized profits with reasonable certainty are
recognized in the profit and loss account.

 However, provision is made for all known expenses

and losses whether the amount is known for certain
or just an estimation.

 This treatment minimizes the reported profits.

15
FAIR VALUE
Fair Value is the amount for which an asset could be
exchanged between knowledgeable, willing parties
in an arm’s length transaction.

Arm’s length transaction - A transaction in which the buyers and sellers of a

product act independently and have no relationship to each other. The concept
of an arm's length transaction is to ensure that both parties in the deal are
acting in their own self interest and are not subject to any pressure or duress
from the other party.

For example, if two strangers are involved in the sale and purchase of a
house, it is likely that the final agreed-upon price will be close to market
value (assuming that both parties have equal bargaining power and equal
information about the situation). This is because the seller would want a price
that is as high as possible and the buyer would want a price that is as low as
possible.
16
 POINTS TO BE REMEMBERED
 Transactions to be recorded from the view point of
the person for whom the accounts are maintained.

 Assume that the establishment is going to exist for

ever.

 Provide for all prospective losses but do not

account for prospective profits.

 Sum of Debits should be equal to sum of credits.

 BOOK-KEEPING

IT IS THE SCIENCE AND ART

OF RECORDING
THE BUSINESS TRANSACTIONS
REGULARLY AND
SYSTEMATICALLY
IN PROPER BOOKS OF ACCOUNTS
TO EXHIBIT THE FINANCIAL
POSITION OF BUSINESS
AT A GIVEN DATE
 ACCOUNTING – COMPONENTS

 Transaction
 Identification of Debits and Credits

 Posting of transaction in to books of accounts

 Generation of ledgers

 Creation of Trial Balance

 Preparation of Profit & Loss Account and
Balance Sheet
 ACCOUNTING CYCLE

Profit & Loss A/c Transaction

Trial Balance Balance Sheet Debit & Credit

Ledger Posting into books

 BASIC BOOKS OF ACCOUNTS
Cash & Bank Book
Purchase & Sales Journal

Subcontractor Journal

Journal Entries Balance Sheet

LEDGERS TRIAL BALANCE

 REVENUE EXPENDITURE & CAPITAL EXPENDITURE

What is
Revenue Expenditure:
Any expenditure directly or indirectly involved in producing
or
selling a good or service during a given time period, the
benefit of which cease to exist in the same period.

Capital Expenditure:
Any expenditure which accrues benefit not only for the time
period in which it is incurred, but contributes for future time
period.
 SYSTEM OF ACCOUNTING

Compulsorily to
DOUBLE be followed by
ENTRY business
enterprise
 WHAT IS DOUBLE ENTRY?

Golden Rule of Double Entry System-

For Every Debit

there is an equal and
corresponding Credit
 DOUBLE ENTRY RULES

Personal Real Accounts

Accounts Dr - Comes In
Dr - Receiver Cr - Goes Out
Cr - Giver
Nominal Accounts
Dr - Exp.
Cr - Incomes
 ACCOUNTING EQUATION

LIABILITIES + INCOME = ASSETS + EXPENSES

or say

(L) + (I) = (A) + (E)

 PROFIT AND LOSS ACCOUNT

 Prepared at the end of relevant period

 To ascertain the profitability of the

enterprise
 PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 31st MARCH 200X

PARTICULARS (Rs. in Crores)

SALES (INCOME)

EXPENDITURE
MATERIALS
LABOUR & S/C
STAFF EXPENSES
ADMINISTRATION EXPENSES
DEPRECIATION
INTEREST
0
PROFIT BEFORE TAX 0

LESS: PROVISION FOR TAX 0

PROFIT AFTER TAX

LESS: PROPOSED DIVIDEND

TRANSFER TO GENERAL RESERVE 0

OWN GENERATION or INTERNAL 0

GENERATION (PAT + DEPN - DIV)
 BALANCE SHEET

Balance Sheet is a Statement

prepared to know the exact
financial position of the business
on the date of preparation
 BALANCE SHEET

 Status on a particular date

 Status of what the co., owns

 Status of what the co., owes

 ASSETS
Broadly Classified as :-
Fixed Assets :- Examples :-
Land & Buildings, P&M & Furniture

Current Assets :- Examples :-

Cash & Bank Balances, Sundry Debtors,
Stock Etc.
 LIABILITIES

It Represents
The Money available
to the Enterprise
contributed by the
Owners And
Outsiders
 LIABILITIES

•Owners Funds
•Borrowed Funds
•Sundry Creditors
•Customer Advances
 CONTENTS OF BALANCE SHEET

Balance Sheet
Liabilities Assets
Share Holders Funds Fixed Assets
Share Capital Land & Buildings
Reserves & Surplus Plant & Machinery
Loans Furniture & Fixtures
Secured & Unsecured Loans Investments:
Current Liabilities Current Assets
Sundry Creditors Sundry Debtors
Bank Overdraft Stock
Bills Payables Cash & Bank Balance
Total Total
 PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 31st MARCH 200X

PARTICULARS (Rs. in Crores)

SALES 7500

EXPENDITURE
MATERIALS 4000
LABOUR & S/C
STAFF EXPENSES
ADMINISTRATION EXPENSES
DEPRECIATION
INTEREST
4000
PROFIT BEFORE TAX 3500

LESS: PROVISION FOR TAX 1000

PROFIT AFTER TAX 2500

LESS: PROPOSED DIVIDEND

TRANSFER TO GENERAL RESERVE 2500

OWN GENERATION or INTERNAL 2500

GENERATION (PAT + DEPN - DIV)
 CONTINGENT LIABILITY

 Liability which is difficult to quantify, or

which may or may not occur, such as an
outstanding law suit.
 Represent the amount which the company is
contingently liable.
 Off the Balance sheet item.
 Important for assessing the risk.

37
 ANNEXURES TO THE BALANCE SHEET

 Auditors report.
 Directors Report.

 Notes forming part of accounts.

 Significant accounting policies.

 Related Parties Disclosure.

 Segmental Reporting.

38
WHAT ARE ACCOUNTING POLICIES ?

 Refers to the specific accounting principles

and methods adopted by the enterprise in
the preparation and presentation of financial
statements
EXAMPLES OF VARIOUS ACCOUNTING POLICIES ?

 Method of Depreciation
 Treatment of Expenditure
 Valuation of Inventories
 Treatment of Goodwill
 Valuation of Investment
 Valuation of Fixed Assets
 CASH FLOW STATEMENT

 What is cash flow statement?

 Why cash flow statement?
 AS3: Cash Flow Statements
 How to prepare cash flow statement?
 Cash from operating activities
 Cash from financing activities
 Cash from investing activities
 Change in cash and cash equivalents
 HOW TO READ A FINANCIAL STATEMENTS

 Net worth(Share capital + Reserves)

 Loan funds Vs. owner’s funds (Ideal is 2:1)
 Current assets Vs. cur. Liabilities (2:1)
 Net Profit as a % of sales
 Fixed Assets Turnover ratio(Sales/FA)
 Working capital Turnover ratio(WC/Sales)
 Ratios differ from business to business