Basic Concepts in Accounting

Case prepared by: Prof.K.S.Ranjani

Ms.Usha Vidyarthi decided to retire from active politics (once again). Only this time she
decided to start a business instead of taking ‘sanyas’. As she was wondering what
business she could do, she decided to take advice from some of her friends. Her friends
told her that next to politics, fashion was the most growth oriented industry. Her decision
was made. She decided to take the plunge. She decided to launch her “Saffron range” of
designer wear under the brand name “Ravan”. She consulted with her astrologer and set
the date of commencement of business for 15th August 2005.She decided to bring in an
initial investment of Rs.14,00,000/- consisting of Rs.10,00,000/- which was her own
money and Rs.4,00,000 of loan taken from her brother @5% per annum.Part of the
money was brought in as cash and the rest were brought in as follows: Motor car-
Rs.2,00,000/- ; Building and land- Rs.5,00,000/-; Furniture-Rs.50,000/- With the
available cash she decided to buy equipment and machinery. She also decided to make
some purchases.

By now her confidence level had grown and she also realized that one never always does
business with one’s own money. So she decided to negotiate for credit terms both with
her equipment supplier as well as her stock suppliers. She bought equipment worth
Rs.6,00,000/- from Ms.Shilpa Enterprises on the 20th of August and paid 25% in cash.
She agreed to pay up the remainder in 3 equal installments on 31st August, 30th September
and 31st October. She also purchased raw material from Ms. Shah Enterprises worth
Rs.1,25,000/-. She purchased ink, dyes and other consumables worth Rs.50,000/-from
Shilpa Enterprises and since she did not get satisfactory credit terms, had to settle for a
cash purchase.

She recruited a few designers with effect from 1st September. Work commenced in
earnest and she managed a few orders in the month of September. The details of the
completed orders are as follows:
10-09-2005 Neelam Textiles 50,000/-
14-09-2005 Amrut Garments 28,000/-
20-09-2005 Maruti & co. 37,000/-
25-09-2005 Rahman Enterprises 40,000/-
30-09-2005 Saleem Fabrics 48,000/-

Cash collections were made on all the completed orders with the exception of Saleem
Fabrics.
She had convinced her designers that she had still not made any cash collections and
would therefore pay their salaries only in October end. Actually, she wanted to try them
out and be sure that they performed well before she paid them. However, she had been
generous with the salaries and promised all her three designers Rs.10,000/- per month
each. The other cash expenses of September end were as follows:

Electricity Rs.4,000/-
Utilities Rs.2,000/-
Telephone Rs.3,500/-
Her brother insisted that he wanted the interest payments on time so she paid the interest
due to him on the 30th September.

She now realized that she could manage with business quite well and in fact, much better
than what she had expected. But she could not understand what to make out from all of
those transactions and how to account for them. You happen to meet her and she has the
following questions:

1. Can these individual transactions be recorded and summarized?

2. Can the cash balance be verified?
3. What is the position on 30th of September?
4. Can the revenue items be identified?

You assure her that you have the answers to all her questions, so what are you waiting
for? Go ahead and give her the trial balance.