Financial Accounting And Analysis

Answer 1:
Introduction:
Every business or company whether it is small or large must have accounting
function as it helps for the business decision making, business performance measurement, and
cost planning. Accounting is the process of recording transactions related to the business.
Accounting process includes analysing, summarizing and reporting these transactions. In a
small company a single accountant Keeps the record of the transactions and make an entry and
in a large company a separate account department is made to record the transactions and make
an entry. Every business has to maintain its Balance Sheet, Income Statement, Capital Account
and Cash Flow Statement. Balance sheet is a summary of the financial balances of a company
whether it is a corporation, business partnership, a private company or other organisation. It is
a statement of assets, liabilities and owner’s equity. It has two columns on the left side is the
assets lists and on the right side is the liabilities lists and owner’s equity of the company. The
total of assets must be equal to liabilities and owner’s equity. Income statement is a financial
statement it shows the company’s income and expenditure. It shows whether a company is
making a profit or loss for a given period. There are four key items of income statement that is
revenues, expenses, gains and losses. Capital account is also known as owner’s equity for a
sole proprietorship or shareholder’s equity for a corporation. It shows the net worth of a
business at a specific point. Capital is equal to assets – liabilities it is based on the accounting
equation. Cash Flow statement is a financial statement that shows all the cash inflows and cash
outflows of business during a given period.

Concept and Application:

A company financial position is determine by its two fundamental statements of
financial components that is assets and liabilities .Accounting equation demonstrate three
essential that is assets, liabilities and owner’s equity or shareholder’s equity. Where assets is a
resource that an individual or a company owns or control by having a future benefit and
liabilities is something that is owed by a company and owner’s equity or shareholder’s equity
represent the ownership claim on total assets.
Accounting equation: Accounting equation states that the business total assets is equal to
its total liabilities plus owner’s or shareholder’s equity that is Accounting Equation is Assets =
Liabilities + Owner’s or Shareholder’s Equity.
Double Entry: Double entry is a method of recording that relies on a two-sided accounting
entry to maintain financial information. It is used to satisfy the accounting equation. In double
entry transactions are recorded in debit and credit such that if one account is debited then the
other account is credited. For example, purchase of computer ₹20000 /- by the company so
there will be decreased in company cash account of ₹20000/- and increase in the company
assets as computer of ₹20000/-.
Journal Entry: Books of original entry for all transactions. It records the transactions as
and when they occur. A journal entry is to record every transactions of business in at least two
places. Journal entry are arranged in the order in which the events happened and it follows the
double – entry accounting system it mean that it will have both a credit and a debit column.

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 Financial Accounting And Analysis

Analysing the accounting transactions using the accounting equation framework:

Transaction 1: Introduced Rs500000 through a cheque by the Owner as the Initial capital in
the business
Analysing: The business received cheque of Rs500000, it is an asset to the business. The
business owes this amount to the owner. Therefore it represent the capital of the business.
Capital of Rs500000 is equal to Assets that is Bank account of Rs500000.
Transaction 2: Purchased goods on credit from Ms.Ritu at Rs40000
Analysing: Purchased of goods on credit increases goods (asset) and also increases creditor
a/c (a liability) that is Ms.Ritu. Therefore the sum of liabilities and capital is now Rs540000
matched by assets of Rs540000.
Transaction 3: Paid Rs10000 as salary to the employees
Analysing: Payment of salary to the employees Rs.10000 decreases asset by Rs10000 and also
decreases capital by Rs10000.After this transaction the liabilities is Rs40000 and capital is
Rs490000 and assets is Rs530000.
Transaction 4: Invested Rs200000 in a fixed deposit account
Analysing: Investment is an asset to the business. Therefore it is increase in the assets as fixed
deposit account and also decrease in the asset from the bank account.
Transaction 5: Paid school fees of the kid Rs25000, from the business’s bank account.
Analysing: Payment of school fees of the kid of Rs25000 is a personal expense and is decreases
from capital account as personal drawings and also decreases from assets from Bank account.

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 Financial Accounting And Analysis

Journal Entry from the above transactions are as follows:

Journal Entry

Transaction Particulars Debit Credit

No (Rs) (Rs)
1 Bank A/c -------Dr 500000
To Capital A/c 500000

(Being cheque deposited into

the bank towards capital by the
owner)

2 Purchases A/c------Dr 40000

To Ms Ritu A/c 40000

(Being goods purchased on

credit from Ms Ritu)

3 Salary A/c ------Dr 10000

To Bank A/c 10000

(Being salary paid to the

employees from the bank)

4 Fixed Deposit A/c-----Dr 200000

To Bank A/c 200000

(Being fixed deposit created)

5 Drawings A/c ------Dr 25000

To Bank A/c 25000

(Being drawings made for

paying fee to kid’s school fees)

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 Financial Accounting And Analysis

Accounting Transactions using the Accounting Equation for the above transactions:
Trans # Assets = Liabilities + Owner’s Equity

Bank Fixed Deposit Inventory = Accounts Payable Capital

1 500000 = 500000

2 40000 = 40000

3 (10000) = (10000) (Salary exp)

4 (200000) 200000 =

5 (25000) = (25000) (Drawings)

Total 265000 200000 40000 = 40000 + 465000

Conclusion:
Hence, the conclusion can be drawn from the above accounting equation that the company
follows and record every transaction that is happen in the business .Where all transactions are
in order and shown in the journal entry. As technology is evolving many business use their
own software for recording its transactions.

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 Financial Accounting And Analysis

Answer 2:
Introduction:
Financial Accounting is one of the important part of an organisation. As it keep
the detail of the financial condition of the company by keeping the records and any
transaction details that happens in a company. As it helps to analyse that company output
and standing in the market by checking the records or transactions done in the company
and various aspect. From an investors point of view he checks the Balance sheet, Income
statement and Cash flow Statement of the company so that he can make a decision before
investing in that company. By having a proper records of the entry in these statement the
investors or a bank can pass a loan or invest in the company. In a small company a single
accountant keeps the record of the transaction and makes an entry and in a large company
a separate account department is made to record the transactions and make an entry.
Accountants do the follow – up of sales and purchases checking the profit and loss using
the Accounting formulation that is Asset = Liability + Equity. Accounting helps the
organisation to check whether to make investment or borrow money and it also help them
to make a budget.

Concept and Application:

Financial Statements are reports that have reports of the business operations, cash
flow and financial position of the business. There are many terms used in the financial
statements that are used by such business to maintain their finances.
The Five Terms which are commonly used by different users of accounting information for
the sake of understanding the financial statements are as follows:
 ASSETS: It is an important resource of an organisation as it increase the value of
its company by purchasing it. It is a resource that an individual or a company owns
or control by having a future benefit. Asset is recorded in a balance sheet of firm as
it increase the value of the company. It can also be used as generating cash flow in
the future for the company. If an asset is purchased such as a machinery to
manufacture goods it can also improve the sale of the company. Assets is also
further classified as current assets, liquid assets and a fixed assets. In which current
assets are those which can be converted into cash as soon as possible for example
Stock, Debtors .Fixed Assets are those which is acquire for long term use for
example Plant and Machinery, Land and Building. Liquid assets are those current
assets which are already in as cash or can be converted in cash for example
Government Securities.
 LIABILITY : It is something that is owed by a company .Liability is claim against
assets as they are existing debts and obligations .A company raises funds from
owners and the outside people that is Bank by taking loan to finance or purchase of
assets , hence they both have the claim against that assets depending upon the ratio
they have been finance by them .For example A company purchase a machinery of
₹10,00,000 which is finance by ₹7,00,000 by owner and ₹3,00,000 through bank
loan .Hence there is a 30 percent claim of assets over the machinery and it is to be
claimed as liability. Liability is also further classifies as Current liabilities,
Contingent liabilities and Non-current liabilities. In which current liabilities are

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those which have short time period like in a year such as bills payable ,trade
creditors and contingent liabilities are those which depends upon a certain events
,if such events not happens no liability is incurred. Non – current liabilities are those
which have a longer time period like five to seven years such as long term loans.
 OWNER’S EQUITY or CAPITAL: It is the amount invested in a company by
the owner. Owner’s equity represent the ownership claim on total assets. That is
Owner’s Equity = Total Assets – Total Liabilities. There happens an increase and
decrease of owner’s equity that is if there is an investment or a profit in the company
it increases but if there is a withdrawal or loss in the company it decreases. There is
subdivision of owner’s equity that are drawings, expenses, revenues and capital.
Let’s take an example to explain the owner’s equity they are as follows:

Owner’s Equity of a company has the following assets and liabilities:

 Fixed Assets : Rs100 (in lakhs)
 Current Assets : Rs50 (in lakhs)
 Current Liabilities : Rs40 (in lakhs)
 Long-term Liabilities : Rs20 (in lakhs)
Calculate the Owner’s Equity.
Solution: Owner’s Equity = Total Assets – Total Liabilities
= (100+50-40) – 20
= 110 – 20
Owner’s Equity = 90
Therefore the Owner’s Equity is Rs90 (in lakhs)
 DEBTORS (ACCOUNTS RECEIVABLE): Debtors refers to a person who owes
money to the business for the goods purchased from the business. It means that the
company have provided a credit score line or a credit limit to the person for the
purchased of its product such as it is term as bills receivables. Bills receivables is a
credit given to its consumer by the company for a period of time which must be
received after the credit time is over. Debtors are also called issuers if the debt are
in form of securities and borrowers if they owe money from bank.
 CREDITORS (ACCOUNTS PAYABLE): Creditor refers to a person whom
company owes the money by purchasing the goods from him. It means that the
company was given credit limit by the person on purchased of its goods such as
bills payable. Bills Payable is a credit that a company takes to purchase the goods
which must be paid within a period of time. Creditors make money by charging
interest on the credit they extend. Types of creditors such as real creditor, secured
creditor, unsecured creditor.

Conclusion:
The Conclusion from the above can be said as these five are the key accounting terms
which are commonly used by different users of accounting information for the sake of
understanding the financial statements.

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 Financial Accounting And Analysis

Answer 3a)
Introduction:
Creditor is a person or company to whom money is owing. It means that the company
was given credit limit by the person on purchased of its goods. Creditors make money by
charging interest on the credit they extend. Types of creditors such as real creditor such as bank
or credit card issuer, secured creditor, unsecured creditor. The person or company who owes
the money is called as debtor. It means that the company have provided a credit score line or a
credit limit to the person for the purchased of its product. Debtors are also called issuers if the
debt are in form of securities and borrowers if they owe money from bank

Concept and Application:

Every business or company give and takes some goods on credit and pay it on a later
date Business also have to maintain a good credit score. A business credit score is a number
which indicates whether it is good to receive a loan or become a business customer. Total
purchases it include the value of all goods and services purchased during the accounting period
for resale or consumption in the production process, excluding capital goods. A credit
purchases is a purchase in which you receive the good today and you will pay for it at a later
date. When a company owe some debts to the creditors it needs to make a journal entry when
the cash is paid out later to the in order to settle those debts. Payment to creditors means
decrease an asset and decrease a liability.
For Calculating the Total Purchases we must take the following data:
 First we must calculate the total price of the opening stock and closing stock and also
the cost of goods sold.
 Then we must subtract the closing stock with the opening stock.
 After that we must add the cost of goods sold.
Calculating the Total purchases from the given data:
Total purchases = (Closing Stock – Opening Stock) + Cost of Goods Sold
= (70 – 40) + 580
= 30 + 580
Total purchases = 610
Hence, The Total Purchases is ₹610 /- (in lakhs).

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Calculating the Credit Purchases from the given data:

Total Purchases = Cash Purchases + Credit Purchases
610 = 45 + Credit Purchases
Therefore, Credit Purchases = Total Purchases – Cash Purchases
= 610 – 45
Credit Purchases = 565
Hence, The Credit Purchases is ₹565/- (in lakhs).

Calculating the Payment of Creditors from the given data:

To calculate the payments of creditors lets create a Creditor Account with the given
data:
Creditors Account
Dr. Cr.
Particular Amount (₹ in lakhs) Particulars Amount (₹ in lakhs)
To Cash 525 By Balance b/d 60
(balancing figure)
By Purchases A/c 565
To Balance c/d 100
Total 625 Total 625

Therefore, The Payments made to the creditors is ₹525 /- (in lakhs).

Conclusion:
The Conclusion is that in every organisation there is the involvement of credit and cash
purchases in the total purchases. Where Creditors also play a vital role in the business.

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Answer 3b)
Introduction:
Every tangible assets or physical assets has it useful life to calculate its cost during its
useful life depreciation accounting method is used for example, a computer is useful for about
five years. There are many types of depreciation such as straight line method .Straight line
method (SLM) is the most basic method to record the depreciation it charge same depreciation
expense each year throughout its useful life until the entire asset is depreciated to its salvage
value. Assets like machinery and equipment are expensive so instead of taking the entire cost
of it in year one, companies use depreciation to spread out the cost and match the depreciation
expenses to the related revenues in the same reporting period. This helps the company to write
off an asset’s value in its useful life. There needs to be a criteria to depreciate an asset as per
IRS sets guidelines that is the company must own the asset and use it in business to generate
income ,it needs to determine its useful life and it is to last more than one year.

Concept and Application:

Net Book Value: Net Book Value is the amount at which an organization records in its
accounting book. It is the original amount of the asset which is later deducted by the
accumulated depreciation, accumulated amortization, accumulated depletion. Assets cost can
also include items like delivery charges, custom duty, sales tax and setup costs. Depreciation ,
Amortization and Depletion is associated with asset as it is the process in which the original
cost of the asset is charged over its use and finally it come down to its salvage value. Hence,
the net book value of an asset should be decline at a continuous rate in its useful life.
Formula:
Net Book Value = Original Asset Cost – Accumulated Depreciation

Accumulated Depreciation: Depreciation is the value which is deducted by an organisation

from its capital asset value over each year of its useful life. This means that the capital assets
is put to use and generates revenue. Accumulated Depreciation is the total amount an asset
have been depreciated in a single point. Carrying value of an asset is its original cost minus
accumulated depreciation.

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 Financial Accounting And Analysis

Calculating the net book value and cash proceeds from sale of investment with the given
data:
 Original cost of equipment sold = ₹400 /- (in lakhs)
 Gain on the equipment sold = ₹50/- (in lakhs)
 Accumulated depreciation on the equipment = ₹80/-(in lakhs)

Net Book Value = Original Asset Cost – Accumulated Depreciation

= 400 – 80
= 320
Therefore, the Net Book Value is ₹320/- (in lakhs)

Cash proceeds from sale of investment = (Original cost of equipment sold - Original cost
of equipment sold) + Gain on the equipment sold
= (400 – 80) + 50
= 320 + 50
= 370
Therefore, The Cash proceeds from sale of investment is ₹370/- (in lakhs)

Conclusion:
Hence, the conclusion from the calculations is that the net book value of the asset is ₹320/-
(in lakhs) and the cash gain from the sale of investment is ₹370/- (in lakhs).It state that there is
a gain of ₹50/-(in lakhs).

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