FINANCIAL ACCOUNTING AND ANALYSING

1.
In the books of …….
For the year ending …….

Date Particulars Debit(Dr.) Credit(Cr.)

03-Dec Bank A/C - Dr. 5,00,000

Cash A/C - Dr. 5,000
To Capital A/C 5,05,000
(Being capital introduced in business)

05-Dec Furniture A/C -Dr. 60,000

To Bank A/C 30,000
To Sundry Creditors 30,000
(Being 50% paid and 50% account payable)

07-Dec Purchase A/C -Dr. 3,15,000

To Bank A/C 3,15,000
(Being goods purchased for sale)

08-Dec Bank A/C - Dr. 5,00,000

To Sales A/C 5,00,000
(Being goods sold)

10-Dec Rent A/C - Dr. 10,000

Electricity A/C - Dr. 10,000
Salary A/C - Dr. 10,000
To Bank A/C 30,000
(Being expenses paid)
2.
A profit and loss statement is a report in finance which shows how much of an business have been spent and
earned over a specified period of time. It also indicates if a business has made a profit or a loss over that time
which is exactly what the name suggests. A profit and loss statement can also be referred as a P&L or an
income statement.

There are various important components of profit and loss statement out of which we will trace 5 of them
with the help of below mentioned pointers : -

1. Revenue from operations : -

Generally, the terms revenue and sales are used inter changeably but sales is just used for the goods
but revenue is used as a term for services as well as goods. Any revenue which is generated due to
normal course and functioning of business is called as revenue from operations

2. Other income : -

An income which is incurred by the business which is not due to the normal course of business is
called as other income.
For example, when a business deposits a significant amount of money in the bank it receives an
interest in the end of term of the period irrespective of the time period for which the amount is
deposited. So this income is not generated due to the day to day functions of a business instead it is
generated apart from the normal course of business which is why it is called as other income.
Also, another example for other income could be sales of fixed assets

3. Expenses

Any amount spent by business is called as an expense. There are few sub points under this header
which are as follows : -

i) cost of material consumed

It is basically the purchase amount which is given or spend by an organisation or business for the raw
material, components or spare parts
ii) Purchase of stock in trade
Some businesses do to not make finished goods out of raw material rather, they use the finish goods
as their product and sell them as it is. This is called as purchase of stock in trade changes in
inventories of finished goods, work in progress and stock in trade. Out of the total purchase of raw
material sometimes we sold and remains with the entity which is known as opening stock.
So opening stock - closing stock = change in stock in trade
Whatever change finished goods, work in progress the entity has to show it under this header of
changes in inventories of its goods. When the change in inventory is low it is shows the positive side
 of the consumed inventory and when the change is high in inventory it is a negative side which is
shown on the expenses side
iii) Employee benefit expenses
Employee benefit expenses are the expenses which are spent for employees like bonus purpose its
cost of facilities cost of recruitment of employees etc
iv) Finance cost
A cost which is paid by the company or an organisation in order to bring in finance is called as
finance cost.
For example, the payment of interest to the bank for the loan which is taken by the firm or
Organisation in order to bring in some capital

v) Depreciation and amortization

Fall in value of fixed assets after the use is called as depreciation. This depreciation is considered as
an expense. It is a non-cash expense. There are various methods of valuation of depreciation. For
tangible assets, it is depreciation while for intangible assets, it is known as amortization.
For example, licence is purchased which will expire in 3 years so every year the one third or 33.33%
value of licence falls.

4. Profit before exceptional and extraordinary items and tax

Profit before exceptional and extraordinary items and tax is derived when we add revenue from
operations and other income this is adding and we get a total of it. When the expenses are subtracted
from the total, it gives us profit before exceptional and extraordinary items and Taxes.

5. Exceptional items
If certain item is not going to recur every year and it is not occurred due to the normal course of the business
it is required to be shown as exceptional items.
Exceptional item can be a profit or loss so let's take an example of exceptional profit when a business
purchases a land worth rupees 5 lakh in the year 1950 after 70 years its value today will be 5 crores so the
profit of business is 4.95 crore so it is a exceptional profit which will not recur
For example of exceptional loss, we can consider the loss occur due to and significant famine or a natural
disaster which causes repair of machinery loss of stock repair of infrastructure.
3. a.
Liabilities ₹ Assets ₹

Retained Earnings 8,60,000 Current Assets

common stock 10,00,000 Accounts receivable 2,50,000
Supply 1,50,000
Current Liabilities Cash 5,50,000
Salary payable 1,50,000 Prepaid Insurance 3,00,000
unearned revenue 2,00,000
Property(Plant
Accounts payable 5,40,000 Equipment) 15,00,000

27,50,000 27,50,000

3. b.
A ratio is a mathematical number calculated to denote the relationship between two accounting figures. It
can also be called as financial ratio.
Current ratio is a subtype of Balance sheet ratio. It is the ratio which is established between current assets
and current liabilities. The main objective of ratio is to measure the ability of a firm or organisation or
business to meet its short term obligation and loans. Current ratio can also be referred as working capital
ratio. It indicates the safety margin between current assets and current liabilities.

Formula : - Current Assets

Current liabilities

Solution : -

Current assets = Accounts receivable + Supply + Cash + Prepaid insurance

= 2,50,000 + 1,50,000 + 5,50,000 + 3,00,000
= 12,50,000

Current Liabilities = 1,50,000 + 2,00,000 + 5,40,000

= 8,90,000

Current Ratio = 12,50,000/ 8,90,000

= 1.4044 i.e. 1.40
Hence the Current Ratio is 1 : 1.40