BALANCE SHEET   17

Students Manual for Chapter 2

BALANCE SHEET

Key Words
You are suggested to visit Glossary to appreciate and review the following key words
used in this chapter:
Balance Sheet
)) Account Receivable
))
Asset
)) Promissory Note
))
Liability
)) Prepaid Expenses
))
Current Assets
)) Accrued Liabilities
))
Current Liabilities
)) Provisions
))
Intangible Assets
)) Reserves and Surplus
))
Revenue
)) Contingent Liabilities
))
Expenses
)) Fixed Asset
))
Marketable Securities
)) Owner(s) Equity
))

ANNEXURES

Annexure 2.1  U
 nderstanding Balance Sheet: Sholay’s Ramgarh
Revisited
Let us consider one more example to understand balance sheet in a better way.

Once upon a time in Ramgarh, there lived a wealthy man named “Golumal”. He had two sons, Chotu and Motu.
They got married and the wives compelled their husbands to ask for a share of their father’s property.
The very next day, Chotu and Motu expressed their desire to Golumal and asked the property to be divided
among the two brothers. While, Golumal had no qualms in distributing the property among the two brothers, he
got confused as to how should he equally divide the property among the two sons. He took the obvious decision of
proceeding to a reputed consultant. He requested the consultant to give him a solution so that the tension built in
his house could be settled amicably.
18    FINANCIAL ACCOUNTING FOR MANAGEMENT

The consultant asked Golumaal two specific questions:

1.  What are the things of value you own?
2.   How much do you owe, and to whom?
Golumal replied -
Things I own are:
 ` 6,00,000 in cash.
  100 shares in Popat Technologies Limited worth ` 1,00,000.
 Land worth ` 8,00,000.
 Two buildings, each worth ` 7,05,000 i.e. ` 14,10,000.
 Two second hand cars, each worth ` 45,000; i.e. ` 90,000.
Things that I owe are:
 ` 14,00,000 to Bholumal.
 ` 5,00,000 to Rajumal.
The consultant reminded him that now Golumal also owed ` 1,00,000 to the consultant as his consultancy fee.
After noting down the information provided by Golumal, the consultant went to work. This is how he proceeded:
First, he segregated the components that Golumal owned and that he owed in two different groups.
Then, he prepared the following format, wherein he put the things Golumal owned on the left side and the things
that he owed on the right side.

Financial Position of Golumal as on March 1st, 2019

Things Owned ` Things Owed `

Cash 6,00,000 To pay (Bholumal) 1,4,00,000
100 Shares of Popat Tech. 1,00,000 To pay (Rajumal) 5,00,000
Land 8,00,000 To pay (Consultant) 1,00,000
Buildings 14,10,000
Cars 90,000 Balancing Amount
10,00,000
(Net worth)

Total 30,00,000 Total 30,00,000

Then the consultant divided the property of Golumal equally between Chotu and Motu. The task of division had
become very easy after preparing the above position statement.
Table below shows how their individual balance sheets appeared.

Equal Distribution of property between Chotu and Motu

Things Owned ` Things Owed `

Cash 3,00,000 To pay (Bholumal) 7,00,000
Shares of X Co. 50,000 To pay (Rajumal) 2,50,000
Land 4,00,000 To pay (Consultant) 50,000
Buildings 7,05,000 Balancing Amount
5,00,000
(Net worth)
Car 45,000
Total 15,00,000 Total 15,00,000
 BALANCE SHEET   19

These two tables you just saw are nothing but the balance sheets. Now, let us take you towards the concepts.
Therefore, we see that the balance sheet is prepared to give a synopsis of the present economic standing of the
organization to understand in an easy way. It can be done by simply listing down all the possessions and holdings
of an organization on one side and all the borrowings and the dues on the other side.
This is exactly what the consultant did in the example we took. When preparing Golumal’s balance sheet, the
consultant asked Golumal about the property that he had. Then he listed all of Golumal’s property on the left side.
After that, he summed up all the amounts. The total came to a figure of ` 30,00,000, commonly known as Assets.1
Then he listed all the borrowings and the payables of Golumal on the right hand side. The total, this time, came
to an amount of ` 20,00,000. This amount owed by an entity, which represents a claim by outsiders, is referred to
as Liabilities. Alternatively, a business entity may also have an obligation to compensate certain organizations or
individuals for rendering some service to the business entity (e.g., wages payable or electricity bill payable). Such
obligation will also be termed as the liability of the company. In the Golumal example, the amount owed by him to
Bholumal, Rajumal and the consultant are the liabilities of Golumal.
He observed a difference of ` 10,00,000 between the sides. This amount was put on the right hand side as the
balancing figure. This balancing figure is Golumal’s Net Worth.2 In our previous discussions also we had identified
two sources of funds for an organization, i.e., owners and through external sources. The funds contributed by the
owners of a business is part of what is also often known as Owners’ Equity or Total Shareholders’ Funds.
Having gone through the earlier example, we are now in a position to understand that the balance sheet is a
snapshot of the financial health of an entity at a particular point in time. In other words, information is true only at
that particular point in time at which the Balance Sheet is prepared. Since, there could be frequent transactions that
a business entity (herein, Golumal) gets into, the Balance Sheet position of a company could change quite rapidly.3

Annexure 2.2  Balance Sheet and Its need for Comparison

One can understand the liquidity and financial flexibility as necessary conditions for any profitable enterprise to
sustain. And only through careful analysis of things owned and owed (to outsiders) i.e., the balance sheets can this
judgment happen. For instance, Table A2.1 below displays the balance sheet equation for five Indian retail apparel
firms at the same time. Therefore, it gives a summary of things owned (assets), owed by outsiders (liabilities), and
owed to owners (owners’ equity) for these companies as on that date.

1 These are the possessions or the things of value owned by a firm or an individual. Accountants use the term “assets” to describe
things of value measurable in monetary terms. Hence, these are the economic possessions a business entity has. It can be the
buildings of your company, the land on which your company has been built or the raw material stock that you have on your shop
floor. In Golumal’s case, the cash, shares, land, buildings and cars were the assets owned.
2 Net Worth is the amount that an entity (herein, Golumal) owes to its owners. The Net Worth essentially comprises of two com-
ponents. First is the owners’ contribution to the entity and second is the profit earned by the entity through its operations. The
profits earned and retained quite obviously belong to the owners of the company. Various other terms are used to convey the same
meaning including Shareholders’ Equity and Owners’ Fund. Net Worth can be found out by subtracting Liabilities from the Assets.
In the Golumal example, the amount of ` 10,00,000 (being ` 30,00,000 minus ` 20,00,000) is the Net Worth of Golumal. This is
what the business owes to him.
3 Most business transactions have an impact on the Balance Sheet position. For example, if Golumal were to return the complete
amount due to Rajumal, i.e., ` 5,00,000 (of liability) using the cash in his assets. This would have resulted in a new balance sheet
with the assets owned by Golumal being reduced by ` 5,00,000 due to the decrease in cash in the asset side. This would have also
reduced the liabilities owed by Golumal to an equal extent as the liabilities would have gone down by ` 5,00,000 (given the amount
due to Rajumal would have been removed from the liability side).
  Normally, any increase/decrease in the asset side is offset by an equal increase/decrease of liability or owner’s equity or vice
versa. Alternatively, any increase/decrease in the asset or the liability side may be offset by a corresponding decrease/increase in
the same side.
20    FINANCIAL ACCOUNTING FOR MANAGEMENT

Table A2.1   Balance Sheet of Five Indian Retail Apparel Companies

  (all figures in ` Billion)

Company Name Assets =  Liabilities +  Shareholders’ Funds

Pantaloon (Retail) India Ltd. 70 = 41 + 29
Provogue (India) Limited 10 = 5 + 5
Koutons Retail India Limited 16 = 13 + 3
Raymond Limited 40 = 26 + 14
Arvind Limited 54 = 34 + 20
Arvind Limited 50 = 33 + 17
(immediate preceding year)

From the Table A2.1, shown above, a few quick things can be easily observed:
●● Among these five apparel companies, Pantaloon (Retail) is the largest player and Provogue (India) is the
smallest.
●● Among these five firms, Koutons Retail is funding itself more with outsiders’ money (compared to the own-
ers’ funds). As a result, new lenders would be averse in giving money to them easily.
●● The owners of Provogue (India) are using equal proportion of outsiders’ funds and shareholders’ funds. Is
this a conscious management decision!
Year-on-year changes in the financial position can give additional information about the liquidity and financial
flexibility of the firms. We have the year-on-year figures for Arvind Limited. From those figures, we observe that:
●● During this financial year, the size of Arvind Limited has grown from ` 50 billion to ` 54 billion i.e., 8%.
●● Further, during this year, Arvind Limited has increasingly relied more on using owners’ funds compared to
the outsiders funds
Consequently, analyzing the balance sheet of a company for one particular period of time may not give you a
clear picture of the financial health of the company. Ideally, one would prefer to have data for more than one
period of time to get a reasonably clear picture of the company. This is the reason why you generally see bal-
ance sheets of two consecutive years being presented simultaneously. It provides us with a picture of financial
position of the company over the years. The figures of a particular balance sheet item may be compared over
the consecutive years to get an idea of the better or worse performance of the company with relation to that
component. For example, if you see that the company has increased its debt heavily then a lender may be wor-
ried of further extending a loan to the company as he will be doubtful of company’s ability to meet its bulging
future obligations.
Simultaneously, the lender might also compare the proportion of debt in a particular company’s balance sheet
with that of its peers from the same sector to see if it is an industry-wide trend or a company-specific trend. A good
decision maker would typically look forward to probing into the key reasons behind a particular observation and also
consider the potential implications of the same. This is similar to our looking at the annual report (also known as,
annual progress sheet) of a child’s school performance and then comparing this with the child’s past performance
and performance of his/her school classmates to draw conclusions.
 BALANCE SHEET   21

Hence, the balance sheet allows comparison:

●● Of the financial status of the company over different years.
●● Between multiple companies, especially with respect to financial health.
Since balance sheets present the health of a company as of one point in time so valuable information will be lost
if managers do not compare the progress and trends of a business by regularly evaluating and comparing balance
sheets of past year.
Source: Ramachandran N. and Ram K. Kakani, How to Read a Balance Sheet 2nd Edition (Mcgraw Hill Education, 2013), print.

Annexure 2.3  What are ‘Bad and Doubtful Debts’?

Bholuram: Finnova, what are ‘bad and doubtful debts’ and how does it affect a Balance sheet?
Finnova: Bhola, ‘bad and doubtful debts’ come due to ‘bad or doubtful sales’ i.e., few credit sales turning bad
or doubtful. It is the amount which is not received from the debtors by the end of the accounting period.
So, in case of bad sales, there is a decrease in the assets (due to reduction of debtors) as these sales are written
off (i.e., debtors are adjusted with owners equity). And, in case of credit sales turning doubtful, a liability is
created in the balance sheet (known as, provision for doubtful credit sales). It implies that the owners’ equity
will be adjusted (reduced) with the increased liabilities of the organization.
Bholuram: Finnova, Can you tell why bad and doubtful debts might occur?
Finnova: Bhola, There may be several reason, for example bankruptcies of customers, disputes over the goods
or services performed, cash flow problems for debtors. Most businesses constantly monitor those debtors to
ensure that bad debts are kept to a minimum.
Source: Ramachandran N. and Ram K. Kakani, How to Read a Balance Sheet 2nd Edition (Mcgraw Hill Education, 2013), print.

Annexure 2.4  Fixed Asset Schedules of two FMCG Giants

While the summarized balance sheets only present the net asset value of the fixed assets (both, tangible and intan-
gible) as per the format suggested by the schedule III of the Indian Companies Act 2013 – yet a lot more can be
learnt when we see the illustration 2.3 delving on Ramsons Limited gross fixed assets, accumulated depreciation
and net fixed assets. For example, how old are the fixed assets of the organization can be understood from the ac-
cumulated depreciation to gross fixed assets ratio. A good understanding of the balance sheet of most companies
happens only when we can get more details on the nature of fixed assets (both, tangible and intangible) along with
their proportion wise additions and deletions during the year.
To give you an idea of the same, we present here the relevant schedule of fixed assets of:
●● Colgate Palmolive India Limited, the Indian subsidiary of the American multinational consumer company
focused largely on oral hygiene products, from its recent annual report. We present the schedule of fixed
assets of Colgate Palmolive India below:
22    FINANCIAL ACCOUNTING FOR MANAGEMENT
BALANCE SHEET   23
24    FINANCIAL ACCOUNTING FOR MANAGEMENT

●● ITC Limited, Indian cigarette giant and a conglomerate with its diversified businesses in FMCG, Hotels,
Paperboards & Packaging, Agri Business & Information Technology. We present the schedule of fixed assets
of ITC below:
BALANCE SHEET   25
26    FINANCIAL ACCOUNTING FOR MANAGEMENT

Annexure 2.5  Illustration on Sources of Funds

Table A2.2 below displays the summarized details of ‘sources of funds’ for five Indian retail apparel firms at the
same time. Therefore, it gives a break up of their current liabilities, non-current liabilities, and total shareholders’
funds for these companies as on that date.
Table A2.2   Shareholders Funds’ of Five Indian Retail Apparel Companies
  (all figures in ` Billion)

Company Name  Koutons Pantaloon Provogue Raymond Arvind Arvind

Retail India (Retail) (India) Limited Limited Limited
 “Source of Funds” Items Limited India Ltd. Limited
Financial Year End  Current Current Current Current Current Previous
Year Year Year Year Year Year
Total current liabilities [a] 10.16 12.10 4.28 16.24 25.13 23.61
Total long-term liabilities [b] 3.09 29.16 0.47 10.22 8.64 9.48
Shareholders’ Funds
● Capital 0.31 0.45 0.11 0.61 2.58 2.54
● Reserves & Surplus 2.42 28.52 5.43 13.01 17.74 14.40
Total shareholders’ funds [c] 2.73 28.97 5.54 13.62 20.32 16.94
Total i.e., [a] + [b] + [c] 15.98 70.23 10.29 40.08 54.09 50.03

One can observe many interesting things from the above figures:
●● Among the above five firms, Provogue (India) has the minimum equity share capital paid-up, whereas,
Arvind has largest equity capital.
●● Koutons Retail India has minimal retained earnings. It possibly conveys that the firm has not had the best of
the times in the recent past.
●● Among the five firms, Pantaloon (India) has very large reserves in proportion to its paid-up capital. This is
an indication of a firm sitting on large amount of reserves – either capital reserve or revenue reserve.
●● Comparing the year-on-year figures of Arvind suggests that the firm had increased its equity share capital
during the year. It indicates that the firm had raised equity during the Current Year from either new investors
and/or existing owners (say, by issuing ESOPs).
Source: Ramachandran N. and Ram K. Kakani, How to Read a Balance Sheet 2nd Edition (Mcgraw Hill Education, 2013), print.

Annexure 2.6  Illustration on Various Formats of Balance Sheet

Two presentation formats of balance sheet using Ramsons were shown in the text book, namely, horizontal format
(illustration 2.3) and vertical format (illustration 2.4). We display below Ramsons balance sheet in the other two
formats i.e., illustration A2.3 using the report format; and illustration A2.4 using the earlier Vertical format as pre-
scribed by the erstwhile Indian Companies Act 1956.
 BALANCE SHEET   27

Illustration A2.3

Ramsons Limited
Report Format Balance Sheet as at December 31, 2019

  (All figures in ` ’000)

Current Assets
Cash 500
Marketable Securities 200
Notes/Bills receivable 300
Accounts receivable 1,000
Less: estimated loss on collection 100 900
Prepaid expenses 500
Merchandise inventory 1,100
Current Assets 3,500
Property, Plant & Equipment
Land 2,000
Buildings, plant and machinery: 3,000
Less: Accumulated depreciation 1,000 2,000
Property, Plant and Equipment 4,000
Intangible Assets
Goodwill 1,500
Deferred Expenditure 1,000
Intangible Assets 2,500
Total Assets 10,000
Liabilities And Shareholders’ Equity
Current Liabilities
Notes payable 600
Accounts payable 1,000
Accrued Liabilities 800
Income Tax payable 400
Bank overdraft 200
Current Liabilities 3,000
Long term Liabilities
Debentures 1,000
Long term loans 2,000
Long term Liabilities 3,000
Shareholder’s Equity
Equity share capital 2,000
Capital Reserves 500
Revenue Reserves 1,500
Share holders equity 4,000
Total Liabilities And Shareholders’ Equity 10,000
28    FINANCIAL ACCOUNTING FOR MANAGEMENT

Illustration A2.4

Ramsons Limited
Earlier Vertical Format Balance Sheet as at December 31, 2019

(All figures in ` ’000)

I. Equity and Liabilities
Shareholder’s Fund
Equity share capital 2,500
Reserves & Surplus
Revenue reserve 1000
Capital reserve 500 1500
Share holders equity 4,000
Non-current Liabilities
Long term borrowing
Debentures 1000
Long term loans 2000
Long term borrowing 3,000
Total Sources of Funds 7,000
II. Assets
Non current assets
Tangible assets
Land 2000
Buildings, plant and machinery: 3,000
Less: Accumulated depreciation (1,000) 2,000
Total tangible assets 4,000
Intangible Assets
Goodwill 1,500
Other non current assets
Deferred Expenditure 1,000
Current Assets
Cash 500
Other current assets 200
Trade receivables 1300
Less: Estimated loss on collection 100 1200
Other current assets 500
Inventory 1,100
Total Current Assets 3,500
Less: Current Liabilities
Current Liabilities
Trade payable 1,600
Other current Liabilities 1200
Short term borrowings 200
Current Liabilities 3,000
Net Current Assets 500
Total Application of Funds 7,000
 BALANCE SHEET   29

Annexure 2.7  What to See in a Balance Sheet?

Let us now come to the application process. Suppose you are an astute investor analyzing a company before putting
your money into it or a manager trying to get the company back on track. What are the specifics that you should look
for in a balance sheet? As you are comfortable now with different components of balance sheet, you must know the
important things that should be analyzed in the balance sheet of a company.
A balance Sheet provides a basis for evaluating the capital structure4 of the enterprise and in that sense it gives us
an idea of the financial flexibility and liquidity of the organization compared to other peer entities. It also provides
a basis for computing rates of return – given that it gives us a hint of the total assets, total operating assets, and the
total shareholders’ funds that are involved in the business. In order to make certain judgments about a business
entity’s viability, its riskiness, and assessments of its future cash flows, one must analyze the balance sheet and
determine such aspects.
As we have already discussed, in order to get a clearer picture of the company, one would prefer (if possible) to
have with them data for more than a period. This would enable us to compare the data of the company over the years
and give us a sense of where the company is actually heading towards.
The following are a few yet very important parts of a balance sheet that need to be analyzed:
●● Components of Capital Employed: The relative proportions of debt funds versus equity funds are an impor-
tant item to be looked into (often, known as capital structure issues). If a company is increasing its long-term
liabilities considerably without increasing its shareholders’ funds, then it can indicate that the company is
taking more risks and that it is increasingly run by external funds which make its operations more prone
to bankruptcy. Moreover, increase in debt implies higher interest costs for the company, which can lead to
unprofitable operations.
●● Consistent increase in trade receivables (debtors) amount and their relative proportions in the balance sheet
is also not a good sign. It can possibly indicate that the company might have a few major customers who are
not paying or are dictating terms to the company. It can even indicate the firm’s changing credit policy or
customer group. It might signal that the company is making its credit policy more lenient in order to sustain
in a competitive market by allowing debtors more time to pay back the money they owe to the fi rm. It might,
however, be harmful for a company as it may block a company’s funds with the debtors. Similarly a piling
up inventory, i.e., consistent increase in the amount of inventory when compared to last year is a cause of
concern and needs to be probed further.
●● If fixed assets are decreasing considerably for any business, it indicates that the company is possibly down-
sizing. Often this is a result of suffering from cash crunch and thus selling its non-current assets to meet its
day to day requirements of funds.
●● If accounts payable of any company increases considerably over a period of time, it indicates that the com-
pany is perhaps able to negotiate better with the suppliers with regard to repayment of its dues. In a company
with other bad signs, this can indicate an inability to fulfill its short-term commitments, hence inviting a
more serious problem.
●● Importance is also to be given to notes to accounts i.e., other supplemental information – specially focus-
ing on the ones that are providing explanation or qualification of items in the balance sheet. For example,

4 “Capital Structure” refers to the way a business entity finances its assets i.e., the proportions of equity, long-term debt, or short-term
liabilities. In other words, a business entity’s Capital Structure is then the composition or ‘structure’ of its liabilities. Another way
to explain Capital Structure would be – What are the funding sources (and their relative blend!) for the things a business entity
owns?
30    FINANCIAL ACCOUNTING FOR MANAGEMENT

Contingencies5 & contingent liabilities such as corporate guarantees, bank guarantees, and disputes of ad-
ditional income taxes of prior years.
●● Also, look at the details of essential supporting schedules on aspect such as valuation methods used – es-
pecially for asset items such as inventory, investments in subsidiaries, other non-current assets and their
depreciation methods.
●● Explanations of certain ‘contractual obligations’ or ‘ensuring restrictions’ attached either to specific assets
or, more likely, to liabilities. Covenants on debt taken are a good example of the same.
●● Disclosures of certain events that have occurred after the balance sheet date but before the financial state-
ments have been issued i.e., post-balance sheet disclosures also need to be assessed.

Annexure 2.8  Solved Illustration

JFK Apparels Limited was formed on 04-01-20X9, with an equity issue of ten-lakh shares of ` 10 each, at a pre-
mium of ` 1.50 per share. The whole issue was subscribed and the company received the amount, including the
share premium.
To fund its operations, the company got a cash-credit limit from the Bank of Baroda, of ` 10 Lakhs and avails
the same immediately. The directors of the company gave a loan of ` 20 Lakhs and an inter-corporate loan was
sanctioned by the board of directors to the extent of ` 15 Lakhs duly taken by the company. These amount were still
outstanding as at March 31, 20X0.
The company purchased the following during the year:
Boiler ` 10 Lakhs Electrical Installation ` 43 Lakhs
Factory Building ` 28 Lakhs Plant & Machinery ` 9 Lakhs
All these items are to be depreciated at 10%, except the Boiler, which is to be depreciated at 20 % per annum.
The closing stock as on March 31st, 20X0 was as follows:
Raw Materials 10,00,000 (Market Value 12,50,000)
Work in Progress 20,00,000 (Market value 15,00,000)
Finished Goods 25,00,000 (Market value 25,00,000)
The sundry debtors as at the end of the accounting period, were of ` 45,00,000, of which parties to the tune of
` 5,00,000, were considered doubtful. The management decided to create a provision for bad and doubtful debts
of ` 5,00,000.
Amount payable for the various supplies of raw material to the company was ` 20,00,000 as on the last day of
the accounting year. The company had a cash balance of ` 300,000. Fixed deposits with bank were of ` 15,00,000
and the amount in the current account with the Bank of Baroda was ` 12,00,000.
You are required to prepare a balance sheet as at March 31, 20X0, as per new Schedule VI of the Companies
Act, 2013.

5 Readers would remember that ‘Contingencies’ are Events that have an uncertain outcome to a firm; and that may have a material
effect on financial position in future.
 BALANCE SHEET   31

Solution:

JFK Apparels Limited

Balance Sheet as at March 31st 20X0

Notes Amount

SOURCES OF FUNDS

SHAREHOLDERS FUNDS
Share Capital 1 1,00,00,000
Reserves and Surplus 2 35,00,000

LOAN FUNDS
Secured Loan 3 10,00,000
Unsecured loan 4 35,00,000
          
1,80,00,000

APPLICATION OF FUNDS

FIXED ASSETS 5 80,00,000

Current Assets, Loans and Advances 6 1,20,00,000
Less: Current Liabilities 7 20,00,000

NET CURRENT ASSETS 1,00,00,000

          
1,80,00,000

Working Notes:
1) SHARE CAPITAL
Authorised:
__________ Ordinary Shares of ` 10/- each
Issued and Subscribed:
1,00,000 Ordinary Shares of ` 10 /- each 1,00,00,000

2) RESERVES AND SURPLUS

Securities premium Account (1,00,000 shares at 1.50 per share) 15,00,000
Profit from Operations6 20,00,000
35,00,000

6 The difference of ` 2,00,000 in the balance sheet represents the surplus for the year. When, we have all the figures of the balance
sheet except the reserves and surplus whatever the difference is in the balance sheet will be either profit for the period (or the loss
for the period) due to the firm’s operations during the period.
  In the above problem, we do not give the details of the sales and its cost details to not complicate the problem at this stage
(Chapter 2). If you look at the nature of all the items given, you will find that all are balance sheet related items. And hence what-
ever remains must be due to its operations during the period i.e., profit or loss for the period, which is again a balance sheet item.
32    FINANCIAL ACCOUNTING FOR MANAGEMENT

3) LOAN FUNDS (Secured Loan):

Cash Credit Limit from Indian Bank 10,00,000

4) LOAN FUNDS (Un-Secured Loan):

Loan From Directors 20,00,000
Inter Corporate Loans 15,00,000
35,00,000

5) FIXED ASSETS
Item Opening Amount Depreciation Balance
Boilers 10,00,000 2,00,000 8,00,000
Electrical Installation 43,00,000 4,30,000 38,70,000
Factory Building 28,00,000 2,80,000 25,20,000
Plant and Machinery 9,00,000 90,000 8,10,000
80,00,000
6) CURRENT ASSETS, LOANS AND ADVANCES
●● Inventories are valued at the lower of cost or market value. As a result, the following balances are to be taken
to the Balance Sheet as the closing stock
Raw Material 10,00,000
Work In Progress 15,00,000
Finished Goods 25,00,000 50,00,000

●● Sundry debtors 45,00,000

Less: Provision for Doubtful Debts 500,000 40,00,000
●● Cash In Hand and Cash At Bank
Fixed Deposits with the bank 15,00,000
Balance in the Current Account 12,00,000
Cash In Hand 300,000 30,00,000
1,20,00,000
7) CURRENT LIABILITIES
Amount payable for the various supplies of raw material 20,00,000

Annexure 2.9  Additional Reading Material

Sample Promissory Note
In business, channel partners (especially, large regular customers) issue formal documentary debts on purchase from
organizations. These are represented by promissory notes receivable or bills receivable; and are essentially accounts
receivable. Unlike a bill of exchange, a promissory note is not a transferable (and thus, easily exchangeable) docu-
ment. Figure A2.5 gives an illustration of the same.
 BALANCE SHEET   33

Figure A2.5: Another Sample Promissory Note

SAMPLE Promissory Note

I, RAGHUBAR DAS, of M/s Neelanchal Towers, Hatikhulia, Baleswar, Odisha, India PIN 756001, do hereby
promise to provide PB Trading Company, Kala Sadan, Rewari, Haryana, India, PIN 123401 with the following:
1. Regular counseling advice on matters of proprietary.
2. Suitable recompense for his assistance which should be expected to be at least 0.7% of the transaction
amount and to be paid in Indian Rupees.

All of the above, I do promise.

Signed under seal this (Date) ______________________

_________________________________  _________________________________

_________________________________  _________________________________

(Raghubar Das)  (Public Notary)

Figure A2.5   Sample Promissory Note

More on Manufacturing Inventory & their Valuation

The inventory purchased from outside is usually classified into raw materials and components. Raw material refers
to all the material which has to be transformed to make the finished product. The steel purchased by an automobile
manufacturer or the iron ore and coke purchased by a steel maker are examples of raw materials. Components on
the other hand, are finished products in themselves but in the hands of the particular firm, they are to be incorpo-
rated as a part of, the finished product being produced by it. The tires, light assemblies, storage battery and so on,
purchased by an automobile manufacturer, are not raw materials, but components.
Similarly, in a large steel manufacturing company, the raw materials inventory would be consisting of items such
as iron ore and coke, the work-in-progress inventory would consist of items such as metal slabs and hot metal, the
finished goods inventory would consist of finished goods such as hot rolled steel in warehouses, and stores & spares
inventory would consist of items such as grease, motor bearings and small office supplies.
Inventories cost represents the purchase price in case of goods traded. For manufacturing concerns, cost includes
the raw materials costs and the additional expenditures incurred for value addition, such as electricity costs, labor
charges, and intermediaries. In valuing inventory at lower of cost or market price, care should be taken to see that
the valuation does not exceed the realizable value or selling price in the ordinary course of business.
The accounting standard on inventory specifically excludes interest on working capital, being purely of financial
nature. However an interpretation of borrowing cost is that it does not exclude stock or current assets, so long as they
conform to the definition of “qualifying asset” (wherein, ‘qualifying assets’ herein mean those assets that necessarily
take a substantial period of time to get ready for its intended use or sale. For example, it is possible in the case that
some stock a long time to come to a saleable condition, such as alcohol, housing colony, heavy engineering construc-
tion, and wine, to include the interest element in the cost of goods. Thus it includes the interest element in such cases).
34    FINANCIAL ACCOUNTING FOR MANAGEMENT

Working Capital and its link with Operating Cycle

Another concept worth noting is working capital. The working capital (also known as Net Working Capital or Net
Current Assets) is given by Current Assets less the Current Liabilities of the firm. The working capital of the firm is
the capital employed by a firm in conducting its day to day operating activities (see, Figure A2.6). The firm tries to
keep its working capital at an optimum level. Too high a working capital normally results in unnecessary blockage of
funds in current asset items (say, receivables and inventories), which could have resulted in extra returns if invested
somewhere else. Low working capital (say, low cash and inventories) may result in shortage of funds in times of
need and even loss of business opportunities (say, due to no stocks). Box 2.1 in the book gives us a general idea of
operating cycle and its practical connect with working capital becomes visible by connecting it with Figure A2.6
wherein the working capital cycle of a pen manufacturing entity is presented.

Cash Accounts
Receivable

Cash converted to Receive Order Collect Accounts

prepaid expense of Pens from suppliers
and work-in-
progress

Deliver pens
Produce Pens
to suppliers

Pens converted to
Accounts
Receivable

Figure A2.6   Working Capital Cycle of a pen manufacturing company

Source: Ramachandran N. and Ram K. Kakani, How to Read a Balance Sheet 2nd Edition (Mcgraw Hill Education, 2013), print.

Limitations of the Balance Sheet

We have only discussed the positive aspects of a Balance Sheet. Two limitations of a Balance Sheet should also be
noted:
 A Balance Sheet may not show the complete picture of the business because the valuation is based on going
concern basis and thus dependent upon the historical cost – whereas, a reader (of balance sheet) might be
interested in other ways of valuation to generate a useful information. This is more so the case in times of
inflation.
 A few non-financial assets like intellectual capital, organizational culture, loyalty and dedication of the
employee, synergies among groups within organizations, human capital, trust, value of a brand, and such
aspects are not captured.
There are few other minor limitations – but those are not very important.
 BALANCE SHEET  35

QR CODES
“Why Uber’s Balance Sheet will differ from Amazon.com, Inc.?”
Uber Technologies, Inc. is an American ridesharing company offering mobile app services that
include ride service hailing plus peer-to-peer ride services. It has lately moved towards food
delivery and mobility system with electric two-wheelers. On the other hand, Amazon.com, Inc.
is an American multinational technology company focused on e-commerce, hybrid-commerce,
cloud computing, and digital streaming. Their respective summarized latest balance sheets can
easily be accessed from the Wall Street Journal website. We present a recent summary of their
balance sheet equation below:
(all figures in USD Billions)

Assets = Liabilities + Owner(s) Equity

Amazon.com, Inc. 162.6 = 119.1 + 43.5
Uber Technologies Inc. 24.0 = 17.2 + 6.8

Software companies like Amazon can get more investor capital early on due to potential software monopolies
(unlike transportation firms). In their infancy, they tend to favor user growth over financial sustainability. Thus,
Amazon is a favorite example of a company that lost money to make money. On the other side, the marginal
cost of adding just one customer is nearly zero. Their main cost is in writing and maintaining the software. This
cost does not increase linearly with adding customers. Growing early can even entail ‘locking in’ customers and
warding off new entrants.
While many of us argue that Uber is a software company like Amazon and Flipkart. Yet, an Uber can’t dodge
onerous transport regulations. It is a late entrant and expects its operational expenses to ‘increase significantly in
the foreseeable future.’ Further, many of the above factors do not apply for Uber due to higher level of competi-
tion and increased regulatory oversight. In other words, unlike software companies, additional revenue comes
at a cost.
The result is – such ambiguous comparisons are fraught with chaos – similar to the risk of comparing apples
with oranges.
Source: Information collated from The Wall Street Journal website, company-specific financials, Nov. 28, 2019, web.

“Is there a Template for ‘Balance Sheet’ by Ministry of Company Affairs,

Government of India?”
The financial statements prepared for all financial periods beginning on or after April 01, 2011
by the Indian Companies incorporated under the Companies Act, 2013 are required to file their
details of Balance Sheet with the Registrar of Companies (RoC) in the following format:
36    FINANCIAL ACCOUNTING FOR MANAGEMENT

Balance Sheet as at March 31st, 20.....

Particulars Notes Figure as at the end Figure as at the end

No. of Current reporting of Previous reporting
period period
I. EQUITY AND LIABILITIES      
1)   Shareholder’s Funds      
 (a)  Share Capital      
 (b)  Reserves and Surplus      
 (c) Money received against share warrants      
2)   Share Application money pending allotment      
3)   Non-current Liabilities      
 (a)  Long term borrowings      
 (b)  Deferred tax liabilities (net)      
 (c)  Other long term liabilities      
 (d)  Long term provisions      
4)   Current Liabilities      
 (a)  Short-term borrowings      
 (b) Trade payables      
 (c)  Other current liabilities      
 (d)  Short-term provisions      
Total      
II.  ASSETS      
1)   Non-Current Assets      
 (a)  Fixed assets      
   (i)   Tangible assets      
   (ii)  Intangible assets      
   (iii) Capital work-in-progress      
   (iv) Intangible assets under development      
 (b)  Non-current investments      
 (c)  Deferred tax assets (net)      
 (d)  Long-term loans and advances      
 (e)  Other non-current assets      
2)   Current Assets      
 (a)  Current investments      
 (b)  Inventories      
 (c)  Trade receivables      
 (d)  Cash and cash equivalents      
 (e)  Short term loans and advances      
 (f)   Other current assets      
Total      
Source: Government of India, Ministry of Company Affairs website, annual filing guidelines, Web, Nov. 09, 2019.
 BALANCE SHEET  37

“Animals in a Zoo: Assets or Liabilities?”

A financial reader can find all the animals under the term “Livestock”. It is always found on the
asset side.
Zoos are not in the business of selling their animals. If they were, such as poultry farm or
cattle farm, it would be considered ‘inventory’ and ordered as such on the balance sheet.
A Zoo usually buys their animals. So, there is a historical cost to every animal. Animals can
be depreciated depending on its intended usage to the owner. They are included as part of plant,
property and equipment and are often depreciated using the straight-line method. The age can range from one year
to as long as seventy years.
In case, the animals are born at the zoo, then – they can be valued upon the net realizable value.
However, considering that the Zoo owners don’t use these animals for any produce or service. In practice, their
valuation is not so common. Hence, rarely do we see them being depreciated.
All costs to maintain Zoo animals are expensed as incurred as they are insignificant to their large financial statements.

“Wow! Land Identified for Sale”

Bholuram: You say that the assets that are held for a period for less than a year are Current As-
sets and those held for more than that are Non-Current Assets. Suppose I bought a piece of land
with the intention to keep it for more than a year, and hence classified it as Fixed Asset. But due
to some unforeseen circumstances, I was forced to sell it within six months itself. So, was my
previous classification faulty?
Finnova: What an insightful question, Bhola! Here is your answer. The golden test in these cir-
cumstances is: what was the intention while acquiring the asset? If at that time you wanted to keep it for more than
a year, then you can go ahead and record it as a Fixed Tangible Asset, as part of Non-Current Assets. Since assets
are only included in the current assets classification if there is an expectation that they will be liquidated within
one year, land should not be classified as a current asset. Instead, land is classified as a non-current asset, and so
is categorized within the fixed assets classification on the financial position statement. It would not matter even if
you were to sell it later after holding it for a shorter duration. Here let me give you an interesting example. Suppose
an automobile dealership has acquired two cars—one with the purpose of selling (which obviously it hopes to sell
within a year) and the other to be used by its Managing Director. The dealership, in this case, will record the first
car as a Current Asset, while the second one would be classified as a Fixed Tangible Asset.
Furthermore, land is considered to be the longest-lived non-current asset and thus it cannot be depreciated. It implies
that it has fundamentally everlasting useful life. The sole exception is when natural resources (minerals and rare
earths) are being extracted from land (say, for mining purposes), in which case the expected depletion rate for the
resource extraction could be considered the life of the land asset.

“Balance Sheet of a Bank: A Kingfisher Brew”

Unlike, the balance sheet of a manufacturing entity, which is divided into two parts — ‘Sources
of funds’ and ‘Application of funds’, for a typical bank these are termed as ‘Capital and liabili-
ties’ and ‘Assets’ respectively. We highlight and focus on the other significant differences from a
manufacturing entity below:
● In a bank, the liabilities are in the form of ‘deposits and borrowings’. They can either be
deposits or borrowings. Deposits are again broadly of three kinds — demand deposits
(current accounts), savings bank deposits (savings accounts) and term deposits (fixed deposits).
38    FINANCIAL ACCOUNTING FOR MANAGEMENT

●● While the net worth of banks is quite similar to that of a non-financial institution, there are some balances
that a bank needs to maintain for regulatory purposes. One such reserve is the ‘statutory reserve’. Unlike this
there are free reserves that banks maintain, such as ‘Investment Reserve Account’ and ‘Foreign Currency
Translation Account’.
●● As it is a bank’s business to raise funds and lend the same, the debt to equity ratio is typically 10 to 20 times,
much higher than that of non-financial firms.
●● On the Assets side, apart from advances, a bank needs to put aside a portion of its assets in various forms.
These can be in the form of investments, deposits with the RBI, cash balances, among others. The proportion
of deposits that a bank needs to keep with the RBI is determined by the prevailing ‘cash reserve ratio’ (CRR).
●● A bank is required to invest in G-Secs. The amount that needs to be invested is dependent on the prevailing
statutory liquidity ratio (SLR).
●● The biggest item in a Bank’s balance sheet, Advances, are of three types - Bills purchased & discounted, cash
credits, overdrafts & loans repayable on demand and term loans.
●● Fixed assets for a bank would mainly include premises, land, assets on lease and furniture & fixtures. The
‘other assets’ portion includes various items such as the non-banking assets acquired in satisfaction of claims
and security deposits for commercial and residential property.
●● Contingent liabilities in a bank would often include liability on account of outstanding forward exchange
and derivative contracts.
Source: “Making sense of a bank’s balance sheet,” The Hindu Business Line Aug. 07, 2015 and Sep. 1, 2015, print.

“One Transaction, Two Balance Sheets”

Bholuram: Can the balance sheets of two different entities change simultaneously due to a transaction?
Finnova: In real life – All most all transactions result in balance sheets of both the entities changing. Let me show
the same using an example,
If you were to purchase a Railway Ticket in advance for a travel to be done next month from Delhi to Mumbai
through the Indian Railways website then:
  What happens to your balance sheet on the day of purchasing these cancellable-reservation tickets? and
  
What happens to the balance sheet of the Indian railways at the time of sale of these cancellable reservation
tickets?
Bholuram: Let me try this out:
●● I shall always ask the question … what are the changes in the items owned by Indian Railways? What are
the changes in the items owed by Indian Railways to outsiders? And how is the new balance sheet of Indian
Railways going to balance itself. Thus, changes in the balance sheet of Indian Railways after the ticket is
sold: The Cash balance of Indian Railways, an asset item, goes up. However, simultaneously, its liability side
item also goes up, we can call this as “Advance from Customer” goes up. Hence, the Railways balance sheet
equation balances i.e., Cash ↑ and Advance from Customer ↑
●● I shall always ask the question … what are the changes in the items owned by Bholuram? What are the
changes in the items owed by Bholuram to outsiders? And how is the new balance sheet of Bholuram go-
ing to balance itself. Thus, Changes in the balance sheet of Bholuram after the ticket is purchased: One of
his asset items goes up, we can call this as “Prepaid Expenses” ↓ and another of his asset item goes down.
Hence, my balance sheet will balance due to two asset item changes i.e., Cash ↓ and Prepaid Expenses ↑
(due to reservation ticket purchase)
 BALANCE SHEET   39

Finnova: Bhola, CORRECT!! That is wonderful answer from you. Now, can you suggest the changes in their bal-
ance sheet after the travel is completed on this account only?
Bholuram: I will give it a try:
●● A change in the balance sheet of Indian Railways as the travel is done: The liability side item “Advance from
Customer” goes down (as the service has been provided). Simultaneously, the Railways balance sheet equa-
tion balances due to increase in its owners equity (being residual in nature) i.e., Advance from Customer ↓
and Owners Equity ↑
●● Changes in the balance sheet of Bholuram: His asset item, Prepaid Expenses does not exist, so it goes down;
and simultaneously, his Owners Equity being residual in nature goes down i.e., Prepaid Expenses ↓ and
Owners Equity ↓
Finnova: Bhola, Too much!! You cracked it. I owe you a treat for this one.
Please note that Indian Railways would have also had some expenses in providing the above service – which is not
reflected in the discussion above.
Now, can you try to guess the changes in the balance sheet equation – if the above tickets were cancelled a day
before the journey (say, with no cancellation-cum-transaction charges and balance money refunded to the customer).
Bholuram: Uhhhhh!!! Will try this at a later point!
Finnova: I shall give you a hint and you can try it later. This transaction seems largely a reversal of the first transac-
tion (i.e., buying of reservation ticket by Bholuram from the Indian Railways)
Source: Ramachandran N. and Ram K. Kakani, How to Read a Balance Sheet 2nd Edition (Mcgraw Hill Education, 2013), print.

ADDITIONAL READING MATERIAL

2.3  Balance Sheet Equation
Let us Check Concepts 1!
State whether the following statements are True or False:
(a) Assets = Owners Equity is also a possible scenario.
(b) Outsiders claim against the business is a residual claim.

2.4  Balance Sheet Changes

Let us Check Concepts 2!
State whether the following statements are True or False:
(a) An increase in an asset always results in an increase in the owner(s) equity.
(b) An increase in the assets could be equated by an increase in the liabilities.
40    FINANCIAL ACCOUNTING FOR MANAGEMENT

2.6  Current Assets

Let us Check Concepts 3!
State whether the following statements are True or False:
(a) Losses result in an increase in the owner(s) equity.
(b) Inventories would include packaging material.

2.8 Investments
Let us Check Concepts 4!
State whether the following statements are True or False:
(a) All assets in the balance sheet are valued at their realizable value.
(b) “Loans and advances”, a part of Current Assets will not include advance to suppliers and vendors.

2.10  Current Liabilities

Let us Check Concepts 5!
State whether the following statements are True or False:
(a) If Ms. Malini Parmar was going to buy the assets of a company, the price that he would pay for the assets
is their net book value, as shown on the balance sheet.
(b) Some companies, instead of having cash on their balance sheet, have a line of credit or bank indebtedness
(i.e., negative balance in their bank current accounts).

2.11  Non-Current Liabilities

Let us Check Concepts 6!
State whether the following statements are True or False:
(a) We cannot have long-term borrowings above the ‘historical price’ of the entities fixed assets.
(b) The material effect of amortization and depreciation is almost the same.
 BALANCE SHEET   41

AUXILIARY TEST MATERIAL

Exercises

1.  Multiple Choice Questions

1. The ease with which an asset can be converted to cash is referred to as:
(a) Spread
(b) Liquidity
(c) Timeliness
(d) None of the above
2. T
 he decrease in the economic utility of a tangible fixed asset (say, due to wearing out or using up) is best
known as:
(a) Devaluation
(b) Utilisation
(c) Depreciation
(d) None of the above
3. W
 hich of the following costs are generally allowed to be included in the computation of the cost of a plant
and machinery?
(a) Cost of installation
(b) Taxes and Import Duties Paid
(c) Transportation Costs
(d) All of the above
(e) None of the above
4. A
 niket Pizza Limited has current assets worth ` 5,275,000, current liabilities worth ` 1,000,000, zero long-
term liabilities, and shareholders’ equity totaling ` 5,000,000. The total assets of the company would be:
(a) Equal to ` 6,000,000
(b) Less than ` 6,000,000
(c) More than ` 6,000,000
(d) Insufficient information
5. A
 company’s total liabilities and shareholders’ equity amount to ` 850,000, long term assets to ` 500,000,
accounts receivable to ` 50,000 and inventory to ` 100,000. The only other current asset account shown on
the balance sheet is cash. The value of the cash would be:
(a) ` 100,000
(b) ` 150,000
(c) ` 200,000
(d) ` 250,000
6. Purchase of Government of India Bonds for cash would:
(a) Reduce assets
(b) Increase assets
(c) Increase liabilities
(d) None of the above
42    FINANCIAL ACCOUNTING FOR MANAGEMENT

7. On sale of an old building, owners’ equity would:

(a) Increase.
(b) Decrease.
(c) Remain unchanged.
(d) All of the above
8. What is the significance of a preference share being described as cumulative?
(a) Irrespective of a company’s financial position, preference dividends will be paid on such shares every period.
(b) Each year, the dividend per share will not be paid but go on compulsorily accumulated.
(c) If the company is unable to pay a dividend one year, the missed dividend can be paid out of future years’
surplus.
(d) None of the above.
9. Payment of ` 85,000 towards rent results in:
(a) Increase in owners’ equity by ` 85,000
(b) Decrease in owners’ equity by ` 85,000, if it does not include any advance payment of rent
(c) It shall not affect the balance sheet at all
(d) None of the above
10. Of the following which is not included on a balance sheet?
(a) Prepaid Insurance Premium
(b) Accounts payable
(c) Sales
(d) Cash

2.  True and False

Mark whether the following statements are “True” or “False” by marking T or F opposite each statement.
(a) An increase in an asset always results in an increase in the owner(s) equity.
(b) Assets = Liabilities + Owners Equity is always true.
(c) Outsiders claim against the business is a residual claim.
(d) An increase in the assets could be equated by an increase in the liabilities.
(e) Losses result in an increase in the owner(s) equity.
(f) Inventories would include packaging material.
(g) All assets in the balance sheet are valued at their realizable value.
(h) If Mr. X was going to buy the assets of a company, the price that he would pay for the assets is their net book
value, as shown on the balance sheet.
(i) Some companies, instead of having cash on their balance sheet, have a line of credit or bank indebtedness
(i.e., negative balance in their bank current accounts).
(j) “Loans and advances”, a part of Current Assets will not include advance to suppliers and vendors.
 BALANCE SHEET   43

3.  Answer the following by completing the Blank

(i) An increase in an asset in a position statement is possible by:
(a) ____________________________
(b) ____________________________
(c) ____________________________
(ii) An increase in a liability could result in:
(a) ____________________________
(b) ____________________________
(c) ____________________________
(iii) Outsiders claim against the assets of an entity is called:
____________________________
(iv) Things of value to the entity are referred to in accounting, as:
____________________________
(v) Owners Equity = Contributed Capital + ____________________________.
(vi) Revenues _________the owner’s equity and the expenses ______________the owner’s equity.
(vii) A increase in unearned Revenues (also known as advances from customers) would typically _________the
liabilities and ______________the assets.
(viii) A liability which materializes only on the happening of a future event is known as _______________.
(ix) There cannot be a compensation of a loss due to a bad credit deal, although a _____________ can be made
for an anticipated loss.

4.  Answer the following questions by filling in the boxes with figures or words.
(i) The fundamental accounting equation could be written as:

= +
(ii) If the owner(s) equity is ` 10,000 and the liabilities is ` 15,000, what is the value of total assets?

= 15,000 + 10,000
(iii) If the total assets of a business are ` 100,000 and the total liabilities, ` 75,000, what is the amount of owner(s)
equity?

– =
(iv) If the total assets of a business are worth ` 1,00,000 and the owners equity is ` 30,000, what is the amount
of the liabilities?

– =
44    FINANCIAL ACCOUNTING FOR MANAGEMENT

5.  Fill in the Blanks

1. A balance sheet can be presented either in
(a) ____________________ form, or as a
(b) ____________________.
2. Temporary investments are valued in the balance sheet by applying the principle of ____________________.
3. Accounts receivable are also referred to as ____________________.
4. Sundry creditors are also referred to as ____________________.
5. We classify an item as current assets if they are to be converted into cash during a ____________________.
6. Inventory is usually valued on the basis of “____________________”.
7. Liquidity refers to the nearness of an item to ____________________.
8. Items classified as current assets are usually listed in the order of their relative ____________________.
9. The basis of valuation as applied to temporary investments is ____________________.
10. Formally written/documented debts refers to ____________________ or ____________________.

6. For each item listed below, please indicate the category (Assets/ Liability/
Capital) of the item in the accounting equation:
Term Loan; Preference Shares Issued; Loose Tools; Salary Advance; Bill Receivable; Accounts Receivable;
Accounts Payable; Electricity Bill Payable; Dividend Payable; Wages Payable; Debentures Issued; Building;
Advance from Customers.

7.  For each of the following transactions balance accounting equation:

(a) Amit commenced business with cash ` 800,000
(b) Paid rent in advance ` 20,000
(c) Purchased a mobile ` 70,000
(d) Bought furniture from Andrews furniture ` 30,000 on credit
(e) Bought goods from Sohan for cash ` 350,000
(f) Sold goods to Shyam for cash ` 400,000 (costing ` 300,000)
(g) Bought goods from Ramesh ` 300,000
(h) Sold goods to Shyam costing ` 300,000 for ` 500,000
(i) Purchased furniture and furnishings for ` 150,000. A sum of ` 50,000 was paid in cash & balance through loan
(j) Goods destroyed by fire ` 5,000 (cost) ` 6,000(Sale price)
(k) Paid half the amount Owed to Andrews Furnitures
(l) Paid cash ` 5,000 for loan and ` 3,000 for interest
(m) Withdrew goods for personal use (cost ` 5,000, sale price ` 6,000)
(n) Received ` 495,000 from Shyam in full settlement
(o) Paid ` 297,000 to Ramesh in full settlement
(p) Paid salary ` 5,000 and ` 1,000 is outstanding
(q) Charged depreciation of ` 3,000 on furniture and ` 1,000 on mobile.
 BALANCE SHEET   45

8. Show the accounting equation on the basis of the following transactions and
present a balance sheet on the basis of the ending equation. Please note
that all figures below are in Rupees.
(a) Mohan commenced business with cash 70,000
(b) Purchased goods on credit 14,000
(c) Withdrew for private use 3,000
(d) Goods purchased for cash 10,000
(e) Paid wages 2,000
(f) Paid to creditors (for full bill settlement) 13,000
(g) Sold goods, on credit (Cost price- ` 10,000) 15,000
(h) Sold goods, for cash (Cost price- ` 3,000) 6,000
(i) Purchased furniture for cash 2,000

9. Chachhi & Chacha Limited was a company headed by Aashish Chachhi.

Aashish had two accountants in his firm, namely, Navroz Singh Dhillon and
Aadith Raman. On the last working day of the current accounting period,
Aashish started totaling the cash account of the firm to ensure that it was
tallying with the accounts prepared by the two accountants.
The cash kept in the cash chest totaled to ` 184.00/-. The deposits on call amounted to ` 2,840.00/-. The firm’s
balance in the current account of the local SBI bank amounted to ` 8,90,008.00/-. Of this bank balance, an amount
of ` 2,28,000.00/- was categorized specifically for the purchase of a second hand Tractor from Nayan Goswami, a
seconds automobile dealer. Bank of Baroda, was another banker of Chachhi & Chacha Limited. In that account,
the firm had balance of only ` 1,800.00/-. The firm’s cash chest also had two notes of Singapore totaling SG
$ 20,000.00/-. The price of 1 Singapore dollar = 33.40 Indian Rupees.
(i) Cash balance in the firm will be equal to
(a) ` 8,94,832.00/-
(b) ` 6,66,832.00/-
(c) ` 13,34,832.00/-
(d) ` 13,31,992.00/-
(e) None of the above
(ii) Chachi & Chacha Limited would surely have the following item in its balance sheet:
(a) Marketable Securites
(b) Accounts Receivable
(c) Other Assets
(d) Inventory
(e) Prepaid Expenses & Advances
(iii) The fixed assets of Chachi and Chacha Limited would be:
(a) More than ` 2,00,000.00/-
(b) More than ` 1,00,000/- but less than ` 2,00,000.00/-
(c) More than ` 10,000/- but less than ` 1,00,000.00/-
(d) Less than ` 10,000/-
(e) Cannot be determined
46    FINANCIAL ACCOUNTING FOR MANAGEMENT

10.  Match the Following

(a) Fixed Assets 1)  The profit earned during the year
(b)  Inventories 2)  Amount borrowed from third parties and repayable after a year
(c) Debtors 3)   Amounts borrowed from third parties and repayable within a year
(d) Prepayment 4)  Physical cash, money deposited on short-term basis with a bank
(e) Cash & Bank 5)  Assets used to run the business long-term
(f) Trade Creditors 6)  Goods purchased and awaiting use or produced awaiting sale
(g)  Accruals 7)  Amount owed to company
(h)  Loans 8)  Money taken out of the business by the owner. A reduction of owner’s capital
(i)  Long-term Creditors 9)  Amount paid in advance
(j)  Profit 10) Money owed to suppliers
(k)  Drawings 11) Amounts owed to the suppliers of services

Discussion Questions

1. Describe a vertical format of company balance sheet.

2. Distinguish between:
(a) Tangible and intangible assets.
(b) Fixed assets and current assets.
(c) Short-term and Long-term liabilities
3. Capital expenditure versus revenue expenditure – Discuss.
4. Classify the following either as – i) Current assets; ii) Fixed Tangible assets; iii) Current liabilities; iv) Non-
Current liabilities; v) Owners equity items; or vi) Fixed Intangible assets:
(a) Building
(b) Equity investors investment
(c) Machines
(d) Patent rights
(e) Trade mark
(f) Office furniture
(g) Accrued interest
(h) Mortgage Loan
(i) Bills Payable
(j) Supplier
(k) Bills receivable
(l) Leasehold Land
(m) Computer Software
(n) Preliminary Expenses
(o) Land
(p) Bank Balance
(q) Stock-in-trade
(r) Accrued wages and Salaries payable
(s) Office supplies
(t) Prepaid advertising
 BALANCE SHEET   47

 lease identify some of these items from a latest annual report of your choice, downloaded from the National
P
Stock Exchange.

Review Questions

1.  Dr. Bansi Yadav

Dr. Bansi Yadav never maintains any books of accounts as required by the law, but follows the traditional method
of keeping records for his daily transactions. He wants to know the amount owned by him vis-à-vis the amount
owed by him as on March 31, 20X0. For this, he provides you with the following information (with all figures in `):
Capital introduced since beginning 7,00,000
Loan from Friends & Relatives 1,50,000
Excess of Income over expenditure for the year 1,00,000
Cash in hand 40,000
Cash at Bank 35,000
Land 2,50,000
Building 5,00,000
Amount receivable from patients 25,000
Closing stock as at 03-31-20X0 1,50,000
Insurance Paid 10,000
Sundry Creditors 1,00,000
Salary paid 70,000
Drawings during the year 50,000
You are further informed that the insurance paid was for the period starting on April 1, 20X9 and ending on
March 31, 20X1. The salary to Mr. Radha Mohan was yet to be paid for the year, which was amounting to ` 5,000.

2.  Ani Initiatives

Madam Ani, located in Nagpur, started a new business entity and a new office in Bangalore under the name of Ani
Initiatives (with separate accounts). The company employed Bhola Reddy as a Manager and was intended to take
up small projects related to data tabulation and portfolio consultation.

No Date Events/ Transactions (with details)

1. Dec-11-19 Ani gives Bhola ` 66,000 to start the Bangalore office of Ani Initiatives (part of ` 1,00,000
capital)
2. Dec-11-19 Ani purchases Railway tickets for Bhola to Bangalore worth ` 1000
3. Dec-12-19 Compaq Presario Laptop purchased for Bangalore office worth ` 55110 from D-Mart Comput-
ers (Receipt No 333). Bhola goes hi-tech
4. Dec-12-19 Computer Accessories (Mouse) purchased for office worth ` 416 from D-Mart Computers
(Receipt No 335)
5. Dec-13-19 Ani gives Bhola ` 8000 to start the Bangalore office of Ani Initiatives (part of capital; Paid
thru wire transfer via ICICI)
6. Dec-13-19 Purchased HP Printer for office worth ` 7999 from D-Mart Computers (Receipt No 395)
7. Dec-13-19 Computer Accessories (Pendrive and cable wire) purchased for office worth ` 3107 from D-
Mart Computers (Receipt No 395)
8. Dec-13-19 Bhola Monthly Salary ` 1000 paid
48    FINANCIAL ACCOUNTING FOR MANAGEMENT

9. Dec-16-19 Internet Connection Installation fees worth ` 1000 from Tata Indicom Broadband
10. Dec-16-19 Internet Connection Deposit to Tata Indicom Broadband ` 2000
11. Dec-22-19 Ani gives Bhola ` 27,000 as part of Ani Initiatives (part of capital; Paid via ICICI wire
transfer)
12. Dec-25-19 Bhola is paid extra Salary for Completion of Data Entry of YFA project ` 1500
13. Dec-31-19 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/14638)
14. Dec-31-19 Bhola Monthly Salary ` 1000 paid
15. Jan-2-20 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/15739)
16. Jan-30-20 Ani gives Bhola ` 15000 to increase capital to ` 115000 of Ani Initiatives (Paid via SBI
transfer to Bhola)
17. Jan-31-20 Bhola Monthly Salary ` 2000 paid
18. Feb-2-20 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/18291)
19. Feb-4-20 Income earned from portfolio consultancy ` 9500
20. Feb-5-20 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/19893) for extra use
21. Feb-7-20 Commodities Market Training Fees of ` 15000 to Bhola (Wellingkar Management Institute
Receipt No 1637)
22. Feb-15-20 Travel Expenses of ` 1500 to Bhola (Reimbursement for Training related traveling)
23. Feb-21-20 Bhola Monthly Salary ` 1000 paid
24. Feb-22-20 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/21542)
25. Feb-23-20 Commodities Market Training Fees of ` 500 to Bhola (Wellingkar Management Institute
Receipt No 1183)
26. Feb-26-20 Ani Initiatives accepts business from Avinash, takes an advance of ` 9000 for research data
tabulation (parliament project)
27. Feb-28-20 Bhola Monthly Salary ` 2000 paid
28. Mar-1-20 Ani gives a loan of ` 15000 to Ani Initiatives (Paid via SBI transfer to Bhola)
29. Mar-2-20 Internet Bill paid to Tata Indicom Broadband ` 850 (Bill No DSL/20430)
30. Mar-5-20 Income earned from portfolio consultancy ` 11400 (payment received from Gopal, SBI Ch
No 598738)
31. Mar-5-20 Bhola portfolio incentive ` 5700 (cash paid)
32. Mar-10-20 Income earned from portfolio consultancy ` 4000 (payment received from Siddharth, SBI Ch
No 598248)
33. Mar-10-20 Bhola portfolio incentive ` 2000 (cash paid)
34. Mar-10-20 Income billed from portfolio consultancy ` 10600 to Gopal
35. Mar-24-20 Payment received from Gopal worth ` 10600 (through ICICI Bank cheque)
36. Mar-24-20 Ani Initiatives settles this amount with the loan balance of Ani ` 10600 (as agreed)
37. Mar-31-20 Bhola Monthly Salary ` 2000
Depreciation is applicable as per the local Tax Act. It is known to be 60% on Computer and
accessories.
Required:
(a) Ani would like to know the financial position of Ani Initiatives after each transaction. Prepare a position
statement after each transaction.
(b) Did Ani Initiatives make a profit or loss as at the end of the accounting period? Do you suggest Ani to re-
consider the new business initiative?
Describe the main the accounting principle(s) applied in recording each transaction.
 BALANCE SHEET   49

3.  Dimple Parathas

The following balances were extracted from the books of M/s Dimple Parathas Limited on 06-31-20X0 (all figures
are in `):

Item Amount `  Item Amount `

Share Capital 10,00,000 Machinery 5,00,000
Land 8,00,000 Bills Receivable 2,00,000
Building 2,00,000 Cash In Hand 50,000
Debentures Capital 2,00, 000 Sundry Debtors 1,50,000
Bank Loan 1,50,000 Sundry Creditors 1,00,000
Profit (Current Year) 1,50,000
Profit (Previous Year) 2,50,000
Provision for Taxation 50,000

Prepare Balance Sheet as at June 31st 20X0 as per the Companies Act 2013.

4.  Sneha Event Consultants

Given the following limited information, you are required to prepare the balance sheet of M/s Sneha Event Consul-
tants Ltd. as at March 31, 20X0 in the Vertical Form.
The following balances are taken from its books (all figures in `)

Item Amount ` Item Amount `

Equity share capital 18,00,000 Loan from Director 1,50,000
Bank Loan 2,00,000 Sundry Creditors 7,50,000
Cash in hand 1,50,000 Bank balance 50,000
Provision for Tax 1,00,000 Current Liabilities 1,00,000
Revenue Reserves 4,00,000 Land 5,00,000
Building 10,00,000 Closing Stock 5,50,000
Machinery 2,50,000 Sundry Debtors 2,00,000
Misc. Expenses Loans & Advances 2,00,000
(Yet to be written off) 1,00,000 Investment in shares 3,00,000
Bills Receivable 2,00,000

5.  Peninsular Transport Company

Peninsular Transport Company began its trucking operations on January 1, 20X9. The company’s bank account
showed a balance of ` 90,000 on December 31, 20X9, which was in agreement with the bank statement received
on the same date. The company had ` 6,000 in cash, in the office and ` 4,000 worth of cheques received from
customers.
On December 31, accounts receivable outstanding amounted to ` 300,000. The company also had ` 30,000 worth
of promissory notes, signed by the customers. Employees had drawn festival advances, which were outstanding and
amounted to ` 6,000. Peninsular owed ` 3,60,000 to Southern Service Station as of December 31, 20X9.
During the year, the Peninsular purchased stationary and office supplies costing ` 11,000, from Ramalinga &
Sons for cash. The use of stationary and supplies during the year was estimated at ` 8,000.
Peninsular purchased eight trucks during the year, each costing ` 4,00,000. They owed ` 20,00,000 to Southern
Sales and Finance at the end of the year, on account of the trucks bought. The obligation was supported by a hire
50    FINANCIAL ACCOUNTING FOR MANAGEMENT

purchase agreement for the payment, at the rate of ` 50,000 per month. Depreciation was at ` 80,000 per truck for
the year. Spare parts and tyres inventory amounted to ` 13,000.
The company had rented, on a 30 years lease, a garage, an office space and a parking space at ` 1,00,000 a year,
on the NH 47, within the city imits. Because of the real estate boom, Peninsular could easily sublet the premises for
` 10,00,000 a year. On January 1, 20X9, when Peninsular started operations, tenants had paid the first two years’
rent in advance.
On December 31, 20X9, Peninsular purchased a car for office use, which cost ` 1,00,000. The insurance and
registration cost amounted to ` 8,000.
The company had a bulk storage tank for diesel needed by its trucks. The tank was filled on 4 occasions, with
50,000 liters each. On December 31, the meter reading indicated that 1,80,000 liters had been used during the year.
Average cost per liter of diesel was ` 3.00.
Peninsular paid the employees’ salary on the last day of each month. A bonus for the employees was due, amount-
ing to ` 2,12,000 for the year 20X9, which will be paid along with the first salary in 20X0.
The owners of Peninsular originally invested ` 6,00,000. The net income for 20X9 was ` 2,08,000. Drawings by
the owners during the year amounted to ` 1,00,000.
Required:
Prepare a balance sheet as of December 31, 20X9, in the accompanying blank proforma.
PENINSULAR TRANSPORT COMPANY
Balance sheet as at December 31 20X9

Assets Liabilities and capital

Current assets Current liabilities
Cash Accounts payable
Cash at Bank Accounts payable
Promissory notes Hire purchase payment due in one year
Accounts receivable Bonus payable to employees
Advance to employees Total current Liabilities
Office supplie3 inventory Long Term Liabilities
Prepaid insurance & license Hire purchase payable
Prepaid rent Capital
Inventory of diesel Owners capital
Spare parts inventory Net income for the year
Total current assets Less: owners drawings
Plant and Equipment
Trucks
Less: Accumulated Depreciation
Motor Car
Total assets Total liabilities & capital
 BALANCE SHEET   51

6.  Priyamvada’s Farm

Priyamvada wanted to be in business. She had a saving of ` 1,00,000 and decided to invest the same in the business.
She also found out from her bank that women entrepreneurs could borrow at concessional rate of interest of 6% p.a.
for the business venture. She decided to start a farm. She could lease a five-acre farmland on a thirty-year lease. Her
transactions for the first month on different dates are as follows:

Day 1 The farm leased land from Bruno, paying annual rental of ` 10,000.
Day 2 Paid the contractor an advance of ` 10,000 for constructing sheds, and balance of ` 70,000 will be paid on handing
over of the building on 15th of the month.
Day 3 She deposited the balance of cash in the bank. Completed the loan formalities with the bank and bank granted her
a credit limit in the account up to ` 3,00,000 against security of all the assets of the business.
Day 4 The farm entered into an agreement with Udit Saraff for purchase of cows. The agreement was for 50 Ongole hy-
brid milch cows. An advance of ` 50,000 was paid by cheque. Cows are to be delivered on the 15th of the month.
Each cow is priced at ` 10,000. The balance of purchase price is to be paid in installments of ` 10,000 each at the
beginning of the month.
Day 5 The farm Purchased fodder for ` 5000.
Day 6 Paid a tractor owner ` 4000 for ploughing and sowing of guinea grass in the farm.
Day 7 Purchased a pump set for ` 5000. And signed a contract with Tulsi Tanti for laying a sprinkler system for ` 30,000
to be paid in 6 monthly installments starting with commissioning of the system on 25th of the month.
Day 8 Purchased equipment and containers, paid for by cheque ` 35,000.
Day 9 Purchased cattle feed from Goswami and sons by paying cash ` 50,000. Entered into a contract with local People
Diary to supply liquid milk from 15th onwards at the rate of ` 8 per liter. Each day’s price to be paid on the next day.
Day 10 Priyamvada left for Anand to visit the diary farms. She returned on 14th of the month. Cost of the trip on board and
lodging and travel amounted to ` 28,000.
Day 11 Hired 5 daily labour at the rate of ` 50 per day to be paid at the end of each week. Supplied 250 liters of milk to
the diary.
Amount of milk supplied during the rest of the month was as follows:
16th –400 liter, 17th –450 liter, 18th –300 liter, 19th –400 liter, 20th –500 liter, 21st –510 liter, 22nd –430 liter, 23rd –370 liter,
24th –400 liter, 25th –450 liter, 26th –440 liter, 27th –480 liter, 28th –300 liter, 29th –350 liter, 30th –400 liter, 31st –440liter.
Milk delivered on 28th was found to be curdled and therefore was not accepted by the diary.
Day 16 Purchased 20 dry cows from an auction for ` 85,000
Day 25 5 of the cows bought from the auction calved. With calf these cows have the same price in the market as the first
lot purchased.
Day 31 Inventory of fodder and cattle feed left behind is valued at ` 1200.

Note: You can assume the consumption of cattle feed and fodder to be equally distributed across the consumption days.

Required:
(a) Priyamvada would like to know her position after each transaction. Prepare a position statement after each
transaction.
(b) Did she make a profit or loss as at the end of the month? Explain the nature of profit/loss.
(c) Describe the main the accounting principle(s) applied in recording each transaction.
(d) Compare the position statements on 1st and 31st and comment on the difference.
52    FINANCIAL ACCOUNTING FOR MANAGEMENT

Answers to the “Let us Check Concepts”

1. Let us check concepts 1! 4. Let us check concepts 4!
(a) True (a) False
(b) False (b) False
2. Let us check concepts 2! 5. Let us check concepts 5!
(a) False (a) False
(b) True (b) True
3. Let us check concepts 3! 6. Let us check concepts 6!
(a) False (a) False
(b) True (b) True

SOLUTIONS TO Auxiliary Test Material

Solutions to Exercises

Solution 1.  Multiple Choice Questions

1. (b) 4. 7. (c) Assuming 8.
2. 5. (c) Building sold at 9. (b)
3. (d) 6. book value 10.

Solution 2.  True or False

(a) False (d) (g) False (j)
(b) (e) False (h)
(c) False (f) (i) True

Solution 3 
(i) (a) Increase in liabilities
(b) Increase in Equity
(c) Decrease in any other asset
(ii)
(iii) Liability
(iv)
(v)  Retained earnings
(vi)
(vii) Increase, Decrease
(viii)
(ix) Provision

Solution 5.  Fill in the Blanks

1. (a) Standard or Horizontal form, (b) Vertical form
2.
 BALANCE SHEET   53

3. Sundry debtors or trade receivables or trade debtors

4.
5. Accounting period or operating cycle
6.
7. Get converted into cash
8.
9. Lower of cost or market price
10.

Solution 6
Asset
Loose Tools; Salary Advance; Bill
Receivable; Accounts Receivable;
Building; Advance from Customers;
Liability Owner’s equity
Term Loan; Accounts Payable; Electricity Preference Shares Issued
Bill Payable; Dividend Payable; Wages
Payable; Debentures Issued;

Solution 8
Sl. No. Transaction Asset Liability Capital
(a) Mohan commenced Cash 0 Equity
business 70,000 70,000
(b) Bought Goods Cash + Inventory Creditors Equity
on Credit 70,000 + 14,000 14,000 70,000
(c) Drawings Cash + Inventory Creditors Equity – Drawing
[70,000 – 3,000] + 14,000 14,000 70,000 – 3,000
(d) Bought Goods Cash + Inventory Creditors Equity – Drawing
on Cash [70,000 – 3,000 – 10,000] + [14,000 + 10,000] 14,000 70,000 – 3000
(e) Wages Cash + Inventory Creditors Equity – Drawing – Expenses
[70,000 – 3,000 – 10,000 – 2,000] + [14,000 14,000 70,000 – 3,000 – 2,000
+ 10000]
(f) Paid to Creditors Cash + Inventory Creditors Equity – Drawing-Expenses +
[70,000 – 3,000 – 10,000 – 2,000 – 13,000] + 14,000- Income
[14,000 + 10,000] 14,000 70,000 – 3,000 – 2,000 + 1,000
(g) Sold Goods on Cash + Inventory + Debtors Creditors Equity – Drawing – Expenses +
Credit [70,000 – 3,000 – 10,000 – 2,000 – 13,000] + 14,000- Income
[14,000 + 10,000 – 10,000] + 15,000 14,000 70,000 – 3,000 – 2,000 +
[1,000 + 5000]
(h) Sold Goods Cash + Inventory+ Debtors Creditors Equity – Drawing – Expenses +
“for Cash [70,000 – 3,000 – 10,000 – 2,000 – 13,000 + 14,000- Income
6,000] + [14,000 + 10,000 – 10,000 – 3,000] 14,000 70,000 – 3,000 – 2,000 +
+ 15,000 [1,000 + 5,000 + 3,000]
(i) Purchased Cash + Inventory+ Debtors + Fixed Assets Creditors Equity – Drawing – Expenses +
Furniture [70,000 – 3,000 – 10,000 – 2,000 – 13,000 + 14,000- Income
6,000 – 2,000] + [14,000 + 10,000 – 10,000 – 14,000 70,000 – 3,000 – 2,000 +
3,000] + 15,000 + 2,000 [1,000 + 5,000 + 3000]

A=L+C
74,000 = 0 + 74,000
54    FINANCIAL ACCOUNTING FOR MANAGEMENT

Balance Sheet as at date

Assets Amount  Liabilities & Owners Equity   Amount

Current Assets Current Liabilities  
Cash in Hand 46,000
Inventory 11,000 Sundry Creditors 0
Sundry Debtors 15,000 Total Current Liabilties 0
Total Current Assets 72,000

Long-Term Assets
Furniture 2,000
 
Owners Equity  
  Capital less drawings 67,000  
Retained Profits 7,000  
Total Long Term Assets 2,000 Total Owners Equity 74,000
   
Total Assets 74,000 Total Liabilities & Owners Equity 74,000

Note: 1. Due to no information, we do not consider any depreciation charges

Solution 10. Match the Following

(a) Fixes Assets – 5. Assets used to run the business long-term
(b)
(c) Debtors – 7. Amount owed to company
(d)
(e) Cash & Bank – 4. Physical cash, money deposited on short term basis with a bank
(f)
(g) Accruals – 3. Amounts borrowed from third parties and repayable within a year
(h)
(i) Long term creditors – 11. Amounts owed to the suppliers of services
(j)
(k) Drawings – 8. Money taken out of the business by the owner. A reduction of owner’s capital

Solutions to Discussion Questions

Solution 1
Vertical format of company balance sheet is a presentation of Balance Sheet items in a vertical form:
Net Worth + Long-term Liabilities = Fixed & Other Assets + (Current Assets − Current Liabilities).
 BALANCE SHEET   55

Solution 2
Capital Expenditure refers to the expenditure incurred for acquiring (or building) fixed assets or acquiring assets
which increase the earning capacity of the business. The benefits of capital expenditure to the firm extend to a
number of accounting periods.
Revenue expenditure, on the other hand, is an expenditure incurred in the course of normal business transactions
of a concern and its benefits are availed of during the same accounting year. Salaries, carriage etc. are examples of
revenue expenditure.

Basis of Difference Capital Expenditure Revenue Expenditure

1. Purpose
2. Earning capacity
3. Periodicity of benefit
4. Placement in financial
statements
5. Occurrence of expenditure
It is incurred for acquiring of fixed
assets.
It increases the earning capacity of the
business.
Its benefits are spread over a number of
years.
It is an item of Balance Sheet and is
shown as an item of asset.
It is non-recurring in nature.
It is incurred for the maintenance of fixed
assets.
It helps in maintaining the earning capacity of
the business intact.
Its benefits accrue only in one accounting
year.
It is an item of Trading and Profit and Loss
and is shown on the debit side of either of the
two.
It is usually a recurring expenditure.

Solution 4
(i) Current Assets (ii) Fixed Assets (iii) Current (iv) Long-term (v) Owner’s (vi) Fixed
Liabilities Liabilities Equity items intangible
assets
 
(g) accrued (a) Building (i) Bill payable (h) Mortgage loan (b) Equity (d) patent rights
interest investors
investment
 
(k) Bills receivable (c) Machines (j) Supplier (e) Trade mark
(p) Bank balance  (f) O
 ffice (r) A
 ccrued wages
furniture and salaries
payable
(q) Stock in trade (l) L
 easehold
land
(s) Office supplies (m) Computer
software
(t) prepaid (o) Land
advertising
56    FINANCIAL ACCOUNTING FOR MANAGEMENT

Solutions to Review Questions

1.  Dr. Bansi Yadav

Assets Amount (`)  Liabilities & Owners Equity   Amount (`)

Current Assets Current Liabilities  
Cash in Hand & Bank 75,000 Salary Payable 5,000
Sundry Debtors 25,000 Sundry Creditors 1,00,000
Total Inventory 1,50,000 Total Current Liabilities 1,05,000
Pre-paid Insurance 5,000  
Total Current Assets 2,55,000 Long-Term Liabilities  
Loans for Friends & Relatives 1,50,000
Long-Term Assets Long-Term Liabilities 1,50,000
Land 2,50,000  
Building 5,00,000 Owners Equity  
Total Long Term Assets 7,50,000 Contributed Capital 7,00,000  
Profit for the Year 1,00,000  
Less: Withdrawals 50,000  
Total Owners Equity 7,50,000
Total Assets 10,05,000 Total Liabilities & Owners Equity 10,05,000

3.  Dimple Parathas

Assets Amount (`) Liabilities & Owners Equity Amount (`)

Current Assets Current Liabilities  
Cash in Hand 50,000 Provision for Taxation 50,000
Bills Receivable 2,00,000 Sundry Creditors 1,00,000
Sundry Debtors 1,50,000 Total Current Liabilities 1,50,000
Total Current Assets 4,00,000 Long-Term Liabilities  
Bank Loan 1,50,000
Long-Term Assets Debentures 2,00,000
Land 8,00,000 Total Long-Term Liabilities 3,50,000
Building 2,00,000  
  Owners Equity  
  Share Capital 10,00,000  
Net, Plant and Machinery 5,00,000 Retained Profits 4,00,000  
Total Long Term Assets 15,00,000 Total Owners Equity 14,00,000
Total Assets 19,00,000 Total Liabilities & Owners Equity 19,00,000
 BALANCE SHEET   57

5.  Peninsular Transport Company

Peninsular Transport Company
Balance Sheet As at December 31, 20X9

Assets Amount (`) Liabilities and capital Amount (`)

Current assets   Current Liabilities  
Cash 10,000 Accounts payable 3,60,000
Cash at Bank 90,000 Hire purchase payment due in one year 6,00,000
Promissory notes 30,000 Bonus payable to employees 2,12,000
Accounts receivable 3,00,000 Total Current Liabilities 11,72,000
Advance to employees 6,000    
Office supplies inventory 3,000 Long Term Liabilities  
Prepaid insurance & license 8,000 Hire purchase payable 14,00,000
Prepaid rent 1,00,000 Total Long Term Liabilities 14,00,000
Inventory of diesel 60,000    
Spare parts inventory 13,000 Capital  
Total Current Assets 6,20,000 Owners capital 6,00,000
    Net income for the year 2,08,000
Plant and Equipment   Less: owners drawings 1,00,000
Trucks 32,00,000 Total Owners Equity 7,08,000
Less: Accumulated Depreciation 6,40,000    
Motor Car 1,00,000    
Total Fixed Assets 26,60,000    
Total Assets 32,80,000 Total Liabilities & Capital 32,80,000