CONTENTS

1. Management : An Introduction
 Meaning and Definition
 Features of Management
 Management Objectives
 Management Process
 Main functions/elements of Management
 Nature of Management
 Level of Management
 Managerial Style
 Areas of Management
 Importance of Management
 Administration and Management
 Essential leadership qualities/skills of a manager
 Manager's roles
 Concepts related to Management
 Current trends in Management
 Management of change and its Planned Process
2. Principles and Techniques of Management
 Meaning and Definition
 Nature or Characteristics of Principles of Management
 Importance of Principles of Management
 Development of Principles of Management
 Principles of Administrative Management
 Management Principles of Fayol
 Principles of Scientific Management
 Management Principles of Taylor
 Management Principles of Mary Parker Follett
 Theory executed by Peter Drucker
 Forest Theory of Management
 Other Important Principles of Management
 Management Techniques
 Management by Objectives
 Management by Exception
 Strategic Management Techniques
 POSDCORB Techniques of Management
3. Business Environment
 Meaning and Definition
 Characteristics of Business Environment
 Importance of Business Environment
 Classification of Business Environment
 Economic Environment of India
 Liberalization
 Privatization
 Globalization
 Modernization
 Effect of changes in Government Policies on Business and Industry
 Economic Reforms in India
4. Planning
 Meaning and Definition
 Types of Planning
 Criticisms or Limitations of Planning
 Steps in the Planning Process or Techniques of Planning
 Ideal / Effective Planning
 Basic Principles of Ideal/Effective Planning
 Planning
 Human Resource Planning
 Succession Planning
 Career / Career / Career Planning
5. Organization
 Meaning and Definition
 Objectives of the Organization
 Organization Structure Theory
 Nature or Characteristics of the Organization
 Elements of Organization
 Process of organization or steps required for organization
 Need and Importance of Organization
 Forms of Organization
 Organization Structure
 Classification of Organizations
 Departmentalization of organization
 Organization Chart
 organization manual
 Organizational Change Management
 Authority or Power in the Organization
 Centralization
 Decentralization
 Responsibility in the Organization
 Accountability in the Organization
 Delegation of Authority/Assignment
 Organizational Behavior
 Whistleblower/Informant
 SWOT Analysis
 Work Ethics in the Organization
6. Staffing
 Meaning and Definition
 Types of Staffing
 Steps in the Staffing Process
 Assessment of Manpower Requirements
 Recruitment
 Selection from applicants
 Orientation
 Training
 Development
 Performance Appraisal
 Promotion and Future Planning
 Remuneration
 Human Resource Management in Staffing
 Human Resource Management and Forecasting in Business
7. Direction
 Meaning and Definition
 Principles of Direction
 Objectives of Direction
 Importance of Direction
 Direction Work
 Characteristics / Traits Nature
 Elements of Direction
 Supervision
  Motivation
 Leadership
 Qualities of an Effective Leader
 Type of Leader
 Leadership Styles
 Personality
 Communication
 Verbal and Non-verbal Communication
 Written Communication
 Formal and Informal Communication and their Network
 Barriers to Effective Communication
8. Control
 Meaning and Definition
 Essential elements of an Effective Control System
 Control Type
 Steps/Elements of Control Process
 Features of Control
 Benefits/Importance of Control
 Principles of Control
 Controlling Techniques/Systems/Methods
 Limitations of Control
 Area of Control / Span of Control
 Different Concepts of Span of Control
9. Marketing
 Meaning and Definition
 Marketing Development
 Objectives of Marketing
 Characteristics and Behavior or Nature of Marketing
 Concept of Marketing
 Pillars/Principles/Assumptions based on Marketing Concept
 Functions of Marketing
 Marketing Management
 Types of Marketing
 Internal Marketing
 External Marketing
 Franchisee
 Mass Marketing
 Marketing Mix
 Products
 Product Definitions
 Product Concept
 Product Classification
 Product Planning
 Product Interstitial or Product Mix
 Branding
 Packaging
 Labelling
 Life Cycle of Product
 Location or Physical Distribution
 Enforcement or Conversion
 Personal Selling
 Sales Promotion
 Publicity
 Marketing Public Relations Concept
 Market Segmentation
10.Business Finance and Financial Management
 Meaning and Definition
 Types of Business Finance
 Business Contract
 Factoring
 Lease Financing
 Public Deposit
 Commercial Paper
 Issue of Shares
 Commercial Bank
 Term Loan
 Institutional Finance
 Financial Management
 Areas of Financial Management
 Objectives of Financial Management
 Nature/Features of Financial Management
 Functions of Financial Management
 Importance of financial management
 Limitations of Financial Management
 Responsibilities of Finance Manager
 Organization of finance work
 Financial Decisions
 Investment decision
 Factors Influencing Investment Decision / Capital Budgeting
 Financial
 funding Decision
 Dividend Decision
 Factors Affecting Dividend Decision
 Liquidity/Asset/Liquidity Decisions
 Methods of Capital Budgeting
 Capital Budgeting Decisions
 Methods to Remove Risk and Uncertainty in Capital Budgeting
 Risk
 Types of Risk
 Reward
 Components of Refund
 Financial Planning
 Types of Financial Planning
 Importance of Financial Planning
 Characteristics of Good Financial Planning
 Factors Determining Financial Planning
 Process of Financial Planning
 Limitations of Financial Planning
 Capital Structure
 Definitions
 Factors Affecting Capital Structure
 Capital Structure and Management Policies
 Principles of Capital Structure
 Capitalization
 Cost of Capital
 Fixed and Working Capital
 Leverage
 Types of Leverage
11.Accounting and Managerial Accounting
 Accounting: Meaning and Definition
 Objectives of Accounting
 Features of Accounting
 Advantages of Accounting
 Limitations of Accounting
 Accounting: as a source of information
  Role of Accounting
 Branches of Accounting
 Financial Accounting Standards Board and Accounting Standards
 Accounting: Principles/Concepts
 Economic Entity/Separate Entity Concept
 Currency Measurement Concept
 Sustainable Business or Continuity/Evolving/Establishment Concept
 Accounting Period Concept
 Cost Concept
 Bilateral/Dual/Dual Concept
 Revenue Recognition Concept
 Revenue Matching Concept
 Earning Concept
 Full Presentation Concept
 Uniformity/Uniformity/Permanence Concept
 Stereotypes Concept
 Abstraction/Substance Concept
 Objectivity Concept
 Basis of Accounting: Cash and Earnings
 Accounting Process
 Accounting Methods/Systems
 Recording of Business Transactions
 Classification of Accounts
 Final Accounts
 Business Owner
 Profit & Loss / Income Statement
 Notes to Account and Explanatory Notes
 Receipt and Payment Account
 Suspense Account
 Construction / Building Account
 Rules for Debit and Credit
 Entry
 Ledger
 Posting (Khatauni)
 Balance Calculation
 Journal
 Cash Book
 Capital Expenditure and Revenue Expenditure
 Discount or Discount
 Incomplete Accounts
 Final Entries
 Adjusting Entries
 Financial Statement
 Balance Sheet
 Order of Presentation of Balance Sheet of Assets and Liabilities
 Balance Check / Trial Balance / Raw Tally
 Trend Analysis
 Ratio Analysis
 Fund Flow Details
 Cash Flow Accounting
 Breakeven Analysis
 Budget
 Managerial Accounting: Intent, Meaning and Definition
 Features of Management Accounting
 Functions of Management Accounting
 Scope of Management Accounting
 Objectives of Managerial Accounting
 Nature of Management Accounting
 Tools and Techniques of Managerial Accounting
 Helpful Elements in Management Work by Accounting Method
 Importance of Managerial Accounting
  Establishment of Management Accounting System
 Advantages of Managerial Accounting
 Important Vocabulary
 Accounting Information System
 Accounting Information System
 Concept of DBMS
 Accounting Query
12.Financial Markets
 Market
 Major Elements/Characteristics of the Market
 Market Classification
 Financial Market
 Classification of financial market
 Money Market
 Capital Market
 Major Stock Exchange Indexes of India
 Stock Market
 Dividend
 Types of Dividend
 Issue of Shares
 BCG Matrix
 National Stock Exchange
 Mumbai (Bombay) Stock Exchange
 Over the Counter Exchange of India
 Residex
 Securities and Exchange Board of India - SEBI
 Raising capital from the international capital market
 Mutual Fund
 Futures Trading in India
 Securities Laws (Amendment) Act, 2014
13.Business, Entrepreneurship and Companies
 Business: Meaning, Meaning and Definition
 Business Features
 Business Objectives
 Responsibility of Business Towards Society
 Corporate Governance
 Professional Services
 Business Areas
 Business Type
 Sole Proprietorship
 Hindu Undivided Family and Family Business
 partnership
 Co-operative Societies
 Public Enterprises
 Modern Trends of Business
 E-commerce
 Mobile-Commerce
 Mobile Wallet
 Networking Marketing
 Online Marketing
 Strategic Business Unit
 Entrepreneurship: Meaning and Definition
 Principles of Entrepreneurship
 Characteristics of Entrepreneurship
 Need or importance of entrepreneurship
 Determinants of Entrepreneurship
 Efforts made by Entrepreneurs for Economic Development
 Role of Entrepreneurs in Enterprises
  Process of Entrepreneurship Development
 Areas of Entrepreneurship
 Types of Entrepreneurship
 Internet Entrepreneurship
 Environmental Entrepreneurship
 Women Entrepreneurship
 Venture
 Private Sector Enterprises/Undertakings
 Public Sector Enterprises/Undertakings
 Joint Ventures/Ventures
 Micro, Small and Medium Enterprises / Enterprises
 Entrepreneur
 Nature of Entrepreneur
 Types of Entrepreneur
 Qualities/characteristics of an entrepreneur
 Entrepreneurial Suitability
 Entrepreneurial motivation
 Entrepreneurial Values and Attitudes
 Startup India Scheme
 Company: Meaning and Definition
 Characteristics/Nature of the company
 Classification of Companies
 multinational Companies
 Corporate Social Responsibility
 Mergers & Acquisitions
 Green Channel
14.Consumer Protection
 Consumer Protection: Meaning and Definition
 Definition of Consumer, Need and Importance of Consumer Protection
 Available
 Officers of Prizes
 Responsibilities of the Consumer
 Remedial Relief Available to the Consumer
 Legal Protection to the Consumers
 Consumer Protection Act 2019
 Grievance Redressal Mechanism
 District Forum
 State Commission
 National Commission
 Ways and Means of Consumer Protection
 Consumer Protection (E-Commerce) Rules, 2020
 Consumer Organizations and NGOs; Role of Cheater
 CONTENTS
1. Management : An Introduction
 Meaning and Definition
 Characteristics of Management
 Objectives of Management
 Process of Management
 Main Functions/Elements of Management
 Nature of Management
 Level of Management
 Management Style
 Scope of Management
 Importance of Management
 Administration and Management
 Essential Leadership Qualities/Skills of a Manager
 Manager's Roles
 Concepts related to Management
 Current trends in Management
 Management of Change and its Planned Process
2. Principles and Techniques of Management
 Meaning and Definition
 Nature or Characteristics of Principles of Management
 Importance of Principles of Management
 Development of Principles of Management
 Principles of Administrative Management
 Management Principles of Fayol
 Principles of Scientific Management
 Management Principles of Taylor
 Management Principles of Mary Parker Follett
 Theory executed by Peter Drucker
 Jungle Theory of Management
 Other Important Principles of Management
 Techniques of Management
 Management by Objectives
 Management by Exception
 Strategic Management Techniques
 POSDCORB Techniques of Management
3. Business Environment
 Meaning and Definition
 Characteristics of Business Environment
 Characteristics of Business Environment
 Classification of Business Environment
 Economic Environment of India
 Liberalization
 Privatization
 Globalization
 Modernization
 Effect of changes in Government Policies on Business and Industry
 Steps of Economic Reforms
4. Planning
 Meaning and Definition
 Types of Planning
 Criticisms or Limitations of Planning
 Steps in the Planning Process or Techniques of Planning
 Ideal / Effective Planning
 Basic Principles of Ideal/Effective Planning
 Plan
 Human Resource Planning
 Succession Planning
 Career Planning
5. Organization
 Meaning and Definition
 Objectives of the Organization
 Principles of Organization Structure
 Nature or Characteristics of Organization
 Elements of Organization
 Process of Organization or Essential Steps required in Organization
 Need and Importance of Organization
 Forms of Organization
 Organizational Structure
 Classification of Organizations
 Departmentation of Organization
 Organization Chart
 Organization Manual
 Organizational Change Management
 Authority or Power in the Organization
 Centralization
 Decentralization
 Responsibility in the Organization
 Accountability in the Organization
 Delegation of Authority/Assignment
 Organizational Behavior
 Whistleblower
 SWOT Analysis
 Work Ethics in the Organization
6. Staffing
 Meaning and Definition
 Types of Staffing
 Steps in Staffing Process
 Assessment of Manpower Requirements
 Recruitment
 Selection from applicants
 Orientation
 Training
 Development
 Performance Appraisal
 Promotion and Future Planning
 Remuneration
 Human Resource Management in Staffing
 Forecasting in Human Resource Management and Business
7. Direction
 Meaning and Definition
 Principles of Direction
 Objectives of Direction
 Importance of Direction
 Functions of Direction
 Characteristics / Traits Nature
 Elements of Directing
 Supervision
  Motivation
 Leadership
 Qualities of an Effective Leader
 Type of Leader
 Leadership Styles
 Personality
 Communication
 Verbal and Non-verbal Communication
 Written Communication
 Formal and Informal Communication and their Network
 Barriers to Effective Communication
8. Control
 Meaning and Definition
 Essential elements of an Effective Control System
 Control Type
 Steps/Elements of Control Process
 Features of Control
 Benefits/Importance of Control
 Principles of Control
 Controlling Techniques/Systems/Methods
 Limitations of Control
 Span of Control
 Different Concepts of Span of Control
9. Marketing
 Meaning and Definition
 Marketing Development
 Objectives of Marketing
 Characteristics and Behavior or Nature of Marketing
 Concept of Marketing
 Pillars/Principles/Assumptions based on Marketing Concept
 Functions of Marketing
 Marketing Management
 Types of Marketing
 Internal Marketing
 External Marketing
 Franchisee
 Mass Marketing
 Marketing Mix
 Products
 Product Definitions
 Product Concept
 Product Classification
 Product Planning
 Product Interstitial or Product Mix
 Branding
 Packaging
 Labelling
 Life Cycle of Product
 Location or Physical Distribution
 Enforcement or Conversion
 Personal Selling
 Sales Promotion
 Publicity
 Marketing Public Relations Concept
 Market Segmentation
10.Business Finance and Financial Management
 Meaning and Definition
 Types of Business Finance
 Business Contract
 Factoring
 Lease Financing
 Public Deposit
 Commercial Paper
 Issue of Shares
 Debentures
 Commercial Bank
 Term Loan
 Institutional Finance
 Financial Management
 Areas of Financial Management
 Objectives of Financial Management
 Nature/Features of Financial Management
 Functions of Financial Management
 Importance of Financial Management
 Limitations of Financial Management
 Responsibilities of Finance Manager
 Organization of finance work
 Financial Decision
 Investment Decision
 Factors Influencing Investment Decision / Capital Budgeting
 Financing Decision
 Dividend Decision
 Factors Affecting Dividend Decision
 Asset/Liquidity Decisions
 Techniques of Capital Budgeting
 Capital Budgeting Decisions
 Methods to Remove Risk and Uncertainty in Capital Budgeting
 Risk
 Types of Risk
 Return
 Components of Return
 Financial Planning
 Types of Financial Planning
 Importance of Financial Planning
 Characteristics of Good Financial Planning
 Factors Determining Financial Planning
 Process of Financial Planning
 Limitations of Financial Planning
 Capital Structure
 Definitions
 Factors Affecting Capital Structure
 Capital Structure and Management Policies
 Principles of Capital Structure
 Capitalization
 Cost of Capital
 Fixed and Working Capital
 Leverage
 Types of Leverage
11.Accounting and Management Accounting
 Accounting: Meaning and Definition
 Objectives of Accounting
 Features of Accounting
 Advantages of Accounting
  Limitations of Accounting
 Accounting: As a Source of Information
 Role of Accounting
 Branches of Accounting
 Financial Accounting Standards Board and Accounting Standards
 Accounting: Principles/Concepts
 Separate Entity Concept
 Money Measurement Concept
 Going Concern Concept
 Accounting Period Concept
 Cost Concept
 Dual Aspect Concept
 Revenue Recognition Concept
 Matching Concept
 Accural Concept
 Full Disclosure Concept
 Consistency Concept
 Conservatism Concept
 Materiality Concept
 Objectivity Concept
 Basis of Accounting: Cash and Earnings
 Accounting Process
 Methods of Accounting
 Recording of Business Transactions
 Classification of Accounts
 Final Accounts
 Business Owner
 Profit & Loss / Income Statement
 Notes to Account and Explanatory Notes
 Receipt and Payment Account
 Suspense Account
 Manufacturing Account
 Rules for Debit and Credit
 Entry
 Ledger
 Posting (Khatauni)
 Balancing of Accounts
 Journal
 Cash Book
 Capital Expenditure and Revenue Expenditure
 Discount
 Incomplete Accounts
 Closing Entries
 Adjusting Entries
 Financial Statement
 Balance Sheet
 Order of Presentation of Balance Sheet of Assets and Liabilities
 Trial Balance
 Objectives of preparing the Trial Balance
 Techniques of Financial Statement Analysis
 Companies Financial Statement
 Common Size Financial Statement
 Trend Analysis
 Ratio Analysis
 Fund Flow Details
 Flow Accounting
 Break-even Analysis
 Budget
 Types of Budget
 Making of Budget
 Characteristics of Budget
 Management Accounting: Meaning and Definition
 Features of Management Accounting
 Functions of Management Accounting
 Scope of Management Accounting
 Objectives of Management Accounting
 Nature of Management Accounting
 Tools and Techniques of Managerial Accounting
 Helpful Elements in Management Work by Accounting Method
 Importance of Managerial Accounting
 Establishment of Management Accounting System
 Advantages of Managerial Accounting
 Important Vocabulary
 Accounting Information System
 Accounting Information System
 Concept of DBMS
 Accounting Query
12.Financial Markets
 Market- Meaning & Definition
 Major Elements/Characteristics of the Market
 Market Classification
 Financial Market
 Classification of Financial Market
 Money Market
 Capital Market
 Major Stock Exchange Indexes of India
 Stock Market
 Dividend
 Types of Dividend
 Issue of Shares
 BCG Matrix
 National Stock Exchange
 Mumbai (Bombay) Stock Exchange
 Over the Counter Exchange of India
 Capital
 Securities and Exchange Board of India - SEBI
 Raising capital from the international capital market
 Mutual Fund
 Futures Trading in India
 Securities Laws (Amendment) Act, 2014
13.Business, Entrepreneurship and Companies
 Business: Meaning and Definition
 Features of Business
 Objectives of Business
 Responsibility of Business Towards Society
 Corporate Governance
 Professional Services
 Areas of Business
 Types of Business
 Sole Trade
 Hindu Undivided Family and Family Business
 Partnership
 Co-operative Societies
 Public Sector Enterprises
 Recent Trends of Business
 E-Commerce
 Mobile-Commerce
 Mobile Wallet
 Networking Marketing
  Online Marketing
 Strategic Business Unit
 Entrepreneurship: Meaning and Definition
 Principles of Entrepreneurship
 Characteristics of Entrepreneurship
 Need or importance of entrepreneurship
 Determinants of Entrepreneurship
 Efforts made by Entrepreneurs for Economic Development
 Role of Entrepreneurs in Enterprises
 Process of Entrepreneurship Development
 Scope of Entrepreneurship
 Types of Entrepreneurship
 Netprepreneurship
 Ecopreneurship
 Women Entrepreneurship
 Venture
 Private Sector Enterprises/Undertakings
 Public Sector Enterprises/Undertakings
 Joint Ventures/Ventures
 Micro, Small and Medium Enterprises / Enterprises
 Entrepreneur
 Nature of Entrepreneur
 Types of Entrepreneur
 Qualities/characteristics of an Entrepreneur
 Entrepreneurial Suitability
 Entrepreneurial Motivation
 Entrepreneurial Values and Attitudes
 Startup India Scheme
 Company: Meaning and Definition
 Characteristics/Nature of the Company
 Classification of Companies
 Multinational Companies
 Corporate Social Responsibility
 Mergers & Acquisitions
 Green Channel
14.Consumer Protection
 Consumer Protection: Meaning and Definition
 Definition of Consumer, Need and Importance of Consumer Protection
 Responsibilities of the Consumer
 Remedial Relief Available to the Consumer
 Legal Protection to the Consumers
 Consumer Protection Act 2019
 Grievance Redressal Mechanism
 District Forum
 State Commission
 National Commission
 Ways and Means of Consumer Protection
 Consumer Protection (E-Commerce) Rules, 2020
 Role of Consumer Organizations and NGOs in Profiteering
NIRMAN IAS GWALLIOR
1. Balance sheet is a statement,
which reveals the following
information of an
organization.
(1) All of the above
(2) Liabilities
(3) Assets
(4) Owner's share
Answer- (1) (Group-1-2017)
2. Accounting Standard-1 in India
explains in this regard:
(1) Cash flow statement
(2) Disclosure of accounting
policies
(3) Depreciation Account
(4) Inventory evaluation
Answer-(2) (Labour Ins.-2017)
3. The primary function of
accounting is ______________.
(1) Capture of economic data
(2) Related to financial
transactions
(3) Providing information for
action
(4) Meeting non-economic
goals
Answer-(2) (Labour Ins.-2017)
4. Capital expenditure will be
reflected in …………….
(1) Trading accounts
(2) Profit and Loss Account
(3) Profit and Loss
Appropriation Account
(4) Balance sheet
Answer-(4) (Labour Ins.-2017)
5. Omitting amounts in a financial
statement and then rounding
off the figures is based on
…………….
(1) Materiality concept
(2) Duality concept
(3) Understanding concept
(4) Cost Concept
Answer-(1) (Labour Ins.-2017)
6. In accounting, the capital
invested by the owner on
account of .......... is shown as a
liability in the balance sheet.
NIRMAN Plus Powered by NIRMAN IAS GWALIOR
Accounting and Management Accounting
Previous Year Question
(1) Separate entity concept
(2) Sunam-establishment
concept
(3) Cost concept
(4) Monetary concept
Answer-(1) (Labour Ins.-2017)
7. Financial statement includes-
(1) Profit and Loss Account
only
(2) Balance sheet only
(3) Statement of cash flows
only
(4) All of the above
Answer-(4) (Labour Ins.-2017)
8. Bonds, debentures and term
loans are its parts-
(1) Current Liabilities
(2) Current asset
(3) Long term liabilities
(4) Investment
Answer-(3) (Labour Ins.-2017)
9. X, Y, Z Ltd. prepares P&L
Account for the year 2015-16.
It is following it.
(1) Understanding concept
(2) Duality concept
(3) Time period concept
(4) Evolving concept
Answer-(3) (Labour Ins.-2017)
10. Which of the following is an
example of 'use of money'?
(1) Increase in fixed assets
(2) Shortfall in cash
(3) Tax refund
(4) Increase in any liability;
Answer-(1) (Labour Ins.-2017)
11. In the balance sheet, prepaid
insurance is shown
…………….
(1) Asset
(2) Liability
(3) Capital
(4) Profit and Loss Account
only
Answer- (1) Labour Ins.-2017)
12. The statement prepared by a
business to determine its profit
or loss is called..................
1 BY SANJAY GUPTA
11
(1) Status statement
(2) Operational details
(3) Statement of profit or loss
(4) All of the above
Answer-(3) (Labour Ins.-2017)
13. Which of the following is an
intangible resource?
(1) Technology
(2) Machinery
(3) Raw material
(4) Capital
Answer-(1) (Labour Ins.-2017)
14. Depreciation is charged every
year on Rs.
(1) Equity
(2) Liabilities
(3) Fixed assets
(4) Current assets
Answer-(3) (Labour Ins.-2017)
15. BRS (bank solution) is
prepared for……
(1) To identify the difference
between the balance as per
bank statement and the
balance as per cash book
(2) To correct the mistakes in
the cash book
(3) Correcting mistakes in bank
details
(4) None of the above
Answer-(1) (Labour Ins.-2017)
16. An example of a current asset
is Rs.
(1) Land
(2) Building
(3) Sunam
as
(4) Table; Inventory
Answer-(4) (Labour Ins.-2017)
17. Recording transactions at full
cost and not at market value is
called……
(1) Time period concept
(2) Understanding concept
(3) Cost concept
(4) Materiality concept
Answer-(3) (Labour Ins.-2017)
NIRMAN IAS GWALLIOR Accounting and Management Accounting
Accounting Limitations of Accounting
The art of accounting has been used since ancient times. 1. Effect of personal decision.
Historians have found the use of accounting in Babylonia and 2. Based on Accounting Concepts.
3. Incomplete information.
Egypt 4000 years before Christ where the account of wages
4. Lack of qualitative information.
and payment of taxes was done on a strip of clay. Mention of
5. To be based on original cost.
accounting has also been found in Vedas, Ramayana and 6. Being influenced by appearance.
Mahabharata in India. The Arthashastra written by 7. Improper for future estimation.
Kautilya 2300 years ago also describes advanced accounting Accounting: As Source of Information
systems. The present day double accounting system In accounting, the financial statements (Profit and Loss
originated in Italy at the end of the 15th century. This system Account and Balance Sheet) are prepared at the end of the
was described by Lucas Pacioli in 1494 in his book accounting year by first identifying the economic transactions.
'De Computis et Scripturis'. He is referred to as the father The accounting information available throughout this process
of accounting and bookkeeping and he was the first person helps the users to take important decisions. Information about
to publish a work on the double-entry system of book- the financial condition of the business is obtained from the
keeping. profit-loss and position statement of the business through the
Lucas Pacioli is called the father of book keeping. In 1543, profit-loss account. On the basis of this information, it is
known whether the resources available in the business are
this book was translated into English by Hugh Old Castle in
being used properly or not. In summary, we can say that in the
London. In 1795, Edward Jones wrote a book on this subject
accounting process, economic transactions are the raw
titled English System of Book Keeping. material, and then information is the final product that comes
Accounting refers to monetarily recording, classifying out of it. This can be shown through the figure as follows:-
and collecting and summarizing business transactions so
that appropriate conclusions can be drawn from their analysis.
According to the American Accounting Association,
"Accounting is the process of identifying, measuring, and
communicating information to enable users of accounts to Types of Information
measure and make decisions." 1. Information related to profit and loss
According to R.N. Anthony, “Accounting system is a 2. Information related to financial condition
means of collecting, summarizing, analyzing and reporting 3. Cash Flow Information
Internal and External Users of Accounting Information:-
business related information in monetary terms.”
Internal users:-
Chatracteristics 1. Owner
1. Identification of Financial Transactions and Events 2. Manager
2. Measuring the Identified Transactions External users:-
3. Analysis and Interpretation 1. Directors and Potential Investors.
4. Identification, Measurement, Recording and 2. Lenders and Financial Institutions.
Communication, Classifying, Summarising 3. Suppliers and Creditors.
4. Government and Regulators.
5. Organization (or business undertaking whose objective is
5. Employees and Workers.
to earn profit or not.)
6. Customer.
6. Users of Information (Internal Users and External Users) 7. Taxation Authority.
Objectives of Accounting 8. Society
1. Accounting of all economic transactions. Role of Accounting
2. To calculate profit or loss of business. 1. In the role of the language of business.
3. To depict the financial condition of the business. 2. In the role of financial transaction of business
4. Effective control over business. 3. In the role of business information system.
5. Providing information to the users. 4. In the historical role of business.
5. In the role of serving the society.
Advantages of Accounting
1. Assistant in business management Branches of Accounting
2. Complete and orderly Accounts. The complexity in management work and the increase in the
importance of accounting information led to the birth of
3. Information of profit and loss.
various branches of accounting, which are as follows:-
4. Knowledge of economic condition.
1. Financial Accounting: In this branch the account of
5. Comparative study. financial transactions is kept. The information about the
6. Assistant in tax assessment. profit and loss in the financial year is known from the
7. Articles and forms to have legal recognition. business and profit and loss account and the information
8. Ease of selling business. about the financial condition of the business at the end of
9. Helpful in getting loan the financial year is known from the balance sheet.
10. Chances of fraud and forgery are less. Financial accounting is the process related to the
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preparation and accounting of financial statements.
Financial accounting provides essential information to
managers and other users.
2. Cost Accounting: Under cost accounting, the cost of the
products manufactured by the industries is determined so
that the value of the product can be determined.
3. Management Accounting: Under management
accounting, information is made available for making
policy related decisions of the managers. In this,
accounting is done for the future and with the help of this;
future plans for the business are made by the top
managers. Generally speaking, the management of
accounts is called management accounting.
Financial Accounting Standards Board and
Accounting Standards
An accounting standard is a written statement of accounting
rules, guidelines, and practices that bring consistency and
uniformity in financial statements to users of accounting
information. For this, in April, 1977, the Institute of
Chartered Accountants of India (ICAI) constituted the
Accounting Standards Board. This board prepares
accounting standards and presents them in ICAI. The
guidelines of the international standard setting body are also
kept in mind while preparing these as the Indian Board is a
member of the International Board. The Accounting Standards
Board evaluates these from time to time. By amending the
Indian Companies Act, 1956, compliance of accounting
standards has been made mandatory. Following are the
accounting standards issued by ICAI:-
1. Accounting Standard-1 Disclosure of Accounting
Policies.
2. Accounting Standard-2 Valuation of Stock.
3. Accounting Standard-3 Cash Flow Statement.
4. Accounting Standard-4 Contingencies and events after the
date of balance sheet
5. Accounting Standard-5 Net profit or loss for the period,
prior period items and changes in accounting policies.
6. Accounting Standard-6 Depreciation Accounting.
7. Accounting Standard-7 Construction Contracts.
8. Accounting Standard-8 Accounting for Research and
Development
9. Accounting Standard-9 Revenue Recognition.
10. Accounting Standard-10 Accounting for Fixed Assets
11. Accounting Standard-11 Accounting for the Effects of
Changes in Foreign Currency Exchange Rates.
12. Accounting Standard-12 Accounting for Government
Grants.
13. Accounting Standard-13 Accounting for Investments.
14. Accounting Standard-14 Accounting of Amalgamation.
15. Accounting Standard-15 Employee Benefits.
16. Accounting Standard-16 Borrowing Cost.
17. Accounting Standard-17 Fragmented Report.
18. Accounting Standard-18 Related Party Disclosures
19. Accounting Standard-19 Lease
20. Accounting Standard-20 Earning Per Share
21. Accounting Standard-21 Financial Statements
Incorporation
22. Accounting Standard-22 Accounting for Taxes on Income
23. Accounting Standard-23 Accounting for Investments in
Associates in the Consolidated Financial Statements
24. Accounting Standard-24 Discrete Processes
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25. Accounting Standard-25 Interim Reports
26. Accounting Standard-26 Intangible Assets
Accounting: Principles/Concepts
It has taken a long time to reach the current state of
accounting. Over the course of time, many concepts and
concepts or principles of accounting have evolved. These
concepts have been used by the accountants as a means to
calculate, conduct, summarize and analyze. The regulations
principles and conventions are commonly known as the
Generally Accepted Accounting Principles (GAAP). These
concepts include the following concepts:-
1. Business Entity Concept
2. Money Measurement Concept
3. Going Concern Concept
4. Accounting Period Concept
5. Cost Concept
6. Dual Aspect or Duality Concept
7. Revenue Recognition Concept
8. Matching Concept
9. Accrual Concept
10. Full Discloser Concept
11. Consistency Concept
12. Conservatism (Prudence) Concept
13. Materiality Concept
14. Objectivity Concept
1. Business Entity Concept
 This concept assumes that the organization and business
owners are two independent entities. Hence, the business
translation and personal transaction of its owner are
different.
 For example, when the business owner invests his money
in the business, it is recorded as a liability of the business
to the owner. Similarly, when the owner takes away from
the business cash/goods for his/her personal use, it is not
treated as a business expense. Thus, the accounting
transactions are recorded in the books of accounts from the
organization's point of view and not the person owning the
business.
2. Money Measurement Concept
 The money measurement concept assumes that the
business transactions are made in terms of money i.e. in
the currency of a country. In India, such transactions are
made in terms of the rupee.
 Hence, as per the money measurement concept,
transactions that can be expressed in terms of money
should be recorded in books of accounts. For example, the
sale of goods worth Rs. 10000, purchase of raw material
Rs. 5000, rent paid Rs.2000 are expressed in terms of
money, hence these transactions can be recorded in the
books of accounts.
3. Going Concern Concept
 The Going concept in accounting states that bussiness
activities will be carried by any firm for an unlimited
duration this simply means that every business has
continuity of life.
 Hence, it will not be dissolved shortly. This is an important
assumption of accounting as it provides a base for
representing the asset value in the balance sheet.
3 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
4. Accounting Period Concept
 Accounting period concepts state that all the transactions
recorded in the books of account should be based on the
assumption that profit on these transactions is to be
ascertained for a specific period. Hence this concept says
that the balance sheet and profit and loss account of a
business should be prepared at regular intervals.
 This is important for different purposes like calculation of
profit and loss, tax calculation, ascertaining financial
position, etc. Also, this concept assumes that business
indefinite life is divided into two parts. These parts are
termed accounting periods. It can be one month, three
months, six months, etc. Usually, one year is considered
as one accounting period which may be a calendar year or
financial year.
 The year that begins on January 1 and ends on January 31
is termed as calendar year whereas the year that begins on
April 1 and ends on March 31 is termed as financial year.
5. Cost Concept
 The cost concept requires that all assets are recorded in
the book of accounts at their purchase price, which
includes cost of acquisition, transportation, installation
and making the asset ready to use.
 The concept of cost is historical in nature as it is
something, which has been paid on the date of acquisition
and does not change year after year.
6. Dual Aspect or Duality Concept
 This concept assumes that every transaction has a double
effect, i.e. it affects two accounts on their opposite sides.
Therefore, the transaction should be recorded at two
places.
 It means, both the aspects of the transaction should be
recorded in the books of accounts. It is also called
"Double Entry System".
7. Revenue Recognition Concept
 The concept of revenue recognition requires that the
revenue for a business transaction should be included in
the accounting records only when it is realised. Here arise
two questions in mind. First, is termed as revenue and the
other, when the revenue is realised. Revenue is the gross
inflow of cash arising from:
 The sale of goods and services by an enterprise; and
 Use by others of the enterprise‟s resources yielding
interest, royalties and dividends.
8. Matching Concept
 According to this concept, in order to find out the correct
profit and loss of any business, income and expenses of a
certain period should be matched properly. For this, by
taking the income of a financial year or a particular period,
the expenses incurred in obtaining that income should be
reduced.
 If the expenditure pertains to the next years then they
should not be deducted from the income similarly the
outstanding expenses should be deducted from the income
as they pertain to this financial year only.
9. Accrual Concept
 It is generally accepted in accounting that the basis of
reporting income is accrual. Accrual concept makes a
distinction between the receipt of cash and the right to
receive it, and the payment of cash and the legal obligation
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to pay it. This concept provides a guideline to the
accountant as to how he should treat the cash receipts and
the right related thereto.
 Accrual principle tries to evaluate every transaction in
terms of its impact on the owner‟s equity. The essence of
the accrual concept is that net income arises from events
that change the owner‟s equity in a specified period and
that these are not necessarily the same as change in the
cash position of the business. Thus it helps in proper
measurement of income.
10. Full Discloser Concept
 Under this concept, all important information should be
fully displayed.
 Material and essential facts may be mentioned in the
financial statements in the form of notes, footnotes.
11. Consistency Concept
 A company is forced to apply the similar accounting
principles across the different accounting cycles. Once this
chooses a method it is urged to stick with it in the future
also, unless it finds a good reason to perform it in another
way.
 In the absence of these accounting conventions, the ability
of investors to compare and assess how the company
performs becomes more challenging.
12. Conservatism (Prudence) Concept
 The concept of conservatism (also called „prudence‟)
provides guidance for recording transactions in the book of
accounts and is based on the policy of playing safe. The
concept states that a conscious approach should be adopted
in ascertaining income so that profits of the enterprise are
not overstated. If the profits ascertained are more than the
actual, it may lead to distribution of dividend out of
capital, which is not fair as it will lead to reduction in the
capital of the enterprise.
 The concept of conservatism requires that profits should
not to be recorded until realised but all losses, even those
which may have a remote possibility, are to be provided
for in the books of account.
13. Materiality Concept
 According to the concept of substance, accounting
concentrates only on the important facts. Such facts which
are not important in the determination of income are
omitted. Which fact is important depends on the nature,
ownership, management size and policies of the business.
 Generally speaking, the accountant leaves the money in a
financial statement, and then rounds it off with figures to
complete the balance sheet. Retailer tools may be
important for a retailer while wholesaler tools are not
important for a large product.
 A small number of nails are important, but in a steel
company, nails will be counted among immaterial items.
In this way, any such rational fact which is capable of
influencing the decision of the User shall be considered as
a material fact.
14. Concept of Objectivity
 According to the concept of objectivity, accounting of
transactions is expected to be done in an objective manner.
 Accounting should not be influenced by any influential
person or accountant; it is also possible when each
transaction can be verified by its source document or
4 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
voucher. One of the reasons for taking the historical cost of
the asset as the basis of accounting is that its purchase
invoices or cash receipts may be available but it is not easy
to ascertain the market value of the same asset as the
market value will not only vary from place to place Rather
it can also differ from person to person.
Basis of Accounting
The basis on which various financial transactions are recorded
in the books of accounts is called 'Accounting Basis'.
Generally, two bases are taken for accounting of income and
expenses, which are as follows:-
Cash Basis
 Accounting of financial transactions under cash basis is
done on the basis of cash receipt or cash payment, that is,
in this basis, income is considered as income only when
cash is received and expenditure is considered as
expenditure only when cash is paid. The life of the
business is long and sometimes income is received or
expenses are paid for a period longer than the period of the
current year.
 For example, goods purchased for cash or salary paid will
be booked in the books under this cash basis because the
cash amount has been paid but outstanding salary or
interest earned will not be booked under this basis because
the cash amount is has not been made and the cash amount
has also not been realised.
 This basis of accounting sometimes leads to very
misleading results- like if there are huge liabilities
outstanding at the end of one financial year and they are to
be paid in the next year, they will not affect the profit and
loss of this year, but on the contrary, they will affect the
profit and loss of the next year. The profit of the year will
be very less, so for business firms, the earning base
remains suitable. Cash basis is more useful for voluntary
organizations, charitable trusts, professional individuals
and government organizations.
Accrual Basis
 This is the basis of accounting in which transactions are
recognized in the fiscal year they occur, regardless of when
cash is received or disbursed. Revenue is recognized in the
fiscal year earned, and expenses are recognized when
incurred. This is also referred to as the full accrual basis of
accounting.
 According to the accrual basis of accounting revenue and
costs are recorded in the period in which they become due,
rather than when they are received or paid, Credit sales, for
example, are included in total sales for the period,
regardless as to whether money is received or not.
Similarly, if a company uses a service but does not pay for
it, the expenditure is recorded in the books in the year in
which the service is used, not in the year in which the
payment is made.
 For example, Rs.5000/- of salary is yet to be paid.
Although the rent has not yet been paid, yet this
outstanding rent will be charged to the debit side of the
Profit and Loss Account as the rent has become payable.
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Accounting Process
The process of identification, entry, classification and
preparation of final accounts (Profit and Loss Account and
Balance Sheet) of financial transactions in business is called
accounting process. The process of accounting is divided into
the following steps:-
1. Identification: First of all, in business transactions, those
transactions are recognized which are of financial nature and
have some evidence. This identification is done by the source
document which is generated as soon as the transaction takes
place. For example, cash memo for cash sales.
2. Recording: After recognizing the transactions, they are
written in the books of initial account i.e., Journal or
subsidiary books (Purchase Book, Sales Same, Purchase
Return Book, Sales Return Book etc.) This is the second
stage of the accounting process.
3. Classification: In this stage the transactions of the same
nature are brought to a single place, which is called an
account. The book in which this work is done is called
ledger.
4. Summarization: Under this step, trading account, profit-
loss account and balance sheet are prepared. Balance
sheet is prepared with the help of various accounts opened
in the ledger (such as personal, material and nominal
amounts) to prepare the final accounts. Trial balance is
prepared to check the mathematical correctness of the tax.
Chart of Accounting Process
Accounting Process
Identification
Recording
Classsification
Summarisation
Methods of Accounting
As accounting progressed, many of its methods were also
developed. There are mainly three methods of accounting.
Their description is as follows:-
1. Single Entry System/Method: The Single Entry System
in Accounting is an accounting approach under which
every accounting transaction is recorded with only a
single entry in the accounting records, centered on the
business enterprise‟s results, which are shown in the
statement of income of the company. In simple words, a
single entry system records a transaction with a single
entry and only maintains one side of every transaction. It
is the oldest method of recording financial transactions
and is less popular than the double entry system and is
mainly used for entries recorded in the income statement.
This term describes the problems associated with the
5 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
accounts from an incomplete transaction and is popularly
called „Preparation of Accounts from Incomplete
Records‟. The main features of the single entry method
are as follows:-
 Under this system, only one Cash Book is
maintained which mixes up both the private and
business transactions.
 Only individual accounts are used in this. Impersonal
and nominal sources are ignored.
 One has to depend on the original certificates for
information about various transactions.
 This method may differ from one institution to
another according to their own requirement because
no fixed rules are followed in it.
2. Double Entry System/Method: This system was born in
Italy and with the advent of the British, this system came
to India. In most countries of the world, counting is done
according to this system. It is a complete and scientific
system which has its own definite rules and principles. It
has been made mandatory to use double accounting
method in banks, insurance companies, government
offices, corporations, companies etc. This method is
reliable for all the parties. In this method every
transaction is accounted for in two accounts i.e. in the
debit side of one account and in the credit side of the
other account.In this method there are separate rules for
individual, real and unreal accounts on the basis of which
they are recorded in the books of accounts. Transactions
are recorded. In this system, mathematical inaccuracies in
accounts can be rectified by preparing trial balance.
Double accounting system is based on the following
principles:-
 Two parties- In every transaction essentially two
parties, one name and the other, are deposited.
 Ledger in both the parties- Every transaction is
ledger in both the parties.
 Equal effect on both the parties – The amount
debited to one party will be credited to the other party
in the same amount.
3. Mahajani Accounting System/Method: This is the
oldest method in the world. In this method, the
accountings are done according to the double accounting
system and this system is very simple and less expensive.
In this, accounting is done in long, folded ledgers and any
Indian language can be used for accounting, such as
Marwari, Gujarati, Sindhi, Marathi, Hindi etc. -The initial
entry of taxes is done in the tax ledger and after that the
final accounts are prepared. This method is used by small
and medium traders to keep their accounts. In the
computer age, the importance of the system has
diminished.
Green Accounting
It has also been given the noun of environmental accounting.
In the process of economic development, in order to increase
the national product, nature-provided resources – forest
wealth, mineral wealth, water resources etc. are continuously
getting weathered. Green accounting is a method of national
income estimation in which the weathering costs of nature-
provided resources used in the increase of national product
are subtracted from the national product, for replenishment
of natural resources that can be replenished. The costs of the
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efforts made are also adjusted from the gross national
product. In general, the consumption of man-made capital
assets ("capital") is adjusted when estimating GDP. If the
exploitation and consumption of natural resources are also
included, then the new figures obtained will be called
Environmentally Adjusted Gross Domestic Product or
Green GDP or Sustainable GDP. On comparing these
figures with the national income, it It can be ascertained that
the development of a country is not taking place at the cost of
environmental damage. It is known that green accounting is
the maximum amount of per capita wealth in a given period
of time, which can be obtained by keeping the natural wealth
of the nation constant. It is worth noting that Annual
accounting is done by the World Bank after every 10 years.
Recording of Business Transactions
 Business Transactions: Any event that occurs between
two or more entities, which has some value, is called a
business transaction.
 Source documents: Any document which confirms the
authenticity of a transaction is called a source document. In
other words, it is a written document that is prepared at the
time of transaction and contains the details of the
transaction. Various types of documents are used in
business to record various deals. Such as cash memo,
invoice, receipt, deposit note, salary slip and check etc.
1. Cash Memo: When goods are sold to a customer, firm
or institution, by making a cash bill. In this;
description, quantity, rate, total amount, date of
transaction, serial number and other conditions are
mentioned. For the buyer it is a proof of purchase of
goods in cash and for the seller it is proof of sale of
goods in cash.
2. Invoice: When goods are sold to a person, firm or
institution, an invoice is made. In this the description of
goods sold, rate, total selling price, name of person,
firm or organization is written. An invoice is a type of
business record that a firm can use to study the buying
habits of its customers.
3. Cheque: Check is a bill of exchange which is drawn on
a particular bank and is payable on demand. The check
book is issued by the bank to the customer.
Lock-Box System
This is an arrangement in which the institution rents a
lock-box each in post offices in different areas in big
cities. Customers are instructed as to which number of
lock-box they should deposit their cheques. According to
this instruction, every customer sends the check to the
address of the box number directed to him.
4. Debit Note: When a party is debited from any amount
for any reason, it is sent by making a name letter. For
example, when the selling price of the goods is reduced
by the seller, the seller sends a name letter to the buyer
of the goods for the difference amount.
5. Credit Note: When a party is credited with any amount
for any reason, it is sent by making a letter of credit,
such as the seller debiting the debtors with a higher
amount, depositing them with the difference amount.
The letter is sent.
6 BY SANJAY GUPTA
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Classification of Accounts
Nature of Accounts
Knowledge of the rules of debit and credit is very important
for recording transactions in the journal. Which is to be
debited and which is to be credited depends on the nature of
the account. In every type of business there are generally
following types of transactions:-
a. Business deals with a number of individuals or entities:
b. The business has assets in the form of cash, furniture,
building, stock, machinery etc. for its operations; and
c. The business has to pay expenses like rent, salary, wages,
stationery, advertisement, commission, electricity expenses
etc. and earns income from various means from business
operations.
Therefore, in order to give a complete account of all the
transactions to the business, the Accounts are classified on two
bases:-
1. On the basis of Accounting Equation
2. On Conventional Basis
On the basis of Accounting Equation
1. Asset Accounts: Accounts related to tangible and
intangible assets are called asset accounts. For example-
furniture, land, machinery, building, goodwill, cash etc.
2. Liability Accounts: Such accounts, other than the owner
of the business, which provide finance or credit facilities to
the external persons and organizations in the business, are
called liability accounts. For example, loan account given
by bank or individual, creditor's account, bill payable
account, bank overdraft etc.
3. Capital Account: Those accounts which are related to the
owners of the business are called capital accounts such as-
Capital Account, Drawing Account etc. When the owner of
the institution or organization withdraws money/goods
from the institution for his personal use, it will be reported
in the Withdrawal Account.
4. Income Accounts: Accounts related to income from
selling goods, interest, dividend, providing services are
called income accounts. For example – Sales Account,
Interest Received Account, Dividend Received
Commission Account, Received Book Account etc.
5. Expenditure Accounts: Accounts related to expenses
incurred to earn income in business are called expense
accounts, such as purchase account, interest payable
account, salary, wages, rent etc.
On Conventional Basis
1. Personal Accounts: Personal accounts are related to
individuals, debtors and creditors. For example, the
account of Ram & Co., a credit customer or the account of
Jhaveri & Co., a supplier of goods is the account of the
capital owner, so it is also a personal account, but
adjustments are made on account of profit and loss, in this
account are again divided into three categories:-
A. Natural Personal Accounts: These are related to the
transactions of individuals like Ram, Anju etc.
B. Artificial (Legal) Individual Entities: For business
purposes, business entities are treated as separate
entities. In the eyes of the law, they are treated as
persons dealing with others. For example,
government companies, (private and limited clubs),
co-operative societies, etc.
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C. Representative Personal Pronouns: These are not
in the name of any person or organization, but are
expressed in the form of personal pronouns. For
example, unpaid liability and prepaid debt, capital
debt, drawing debt.
2. Real Accounts: Accounts which relate to the assets of the
firm but not to its debts. For example, accounts relating to
land, building, investments, fixed deposits etc. are real
accounts. Cash in hand and bank accounts are also real
accounts. Accounts of various items are realized as
permanent accounts on the balance sheet.
3. Nominal/Income/Expenditure Accounts: Such accounts
are related to expenditure, loss, profit, income etc. such as
salary account, rent account; interest paid account, and
commission received account of all unreal accounts. The
net result is reflected in profit or loss which is transferred
to the capital account. Hence, unrealized accounts are
temporary in nature.
 Based on the activities of a period of business
organizations, it is made to find out the results of the said
period. This account is prepared on the basis of receipt
and payment account and additional information.
 In this only receipts and payments of income nature are
shown.
 It is a nominal amount account. Expenses and losses are
shown on the debit side and income and profit are shown
on the right side, which are of income nature.
 Income and expenses of a certain accounting period are
recorded whether received or not or paid or not.
 This accrual is made on retention i.e. dues and advances
are adjusted.
 There is no opening balance in this. It‟s closing balance
shows the excess or deficiency which is added or
subtracted to the capital fund in the balance sheet.
Final Account
For information about the economic condition of the
business:-
1) Business and profit-loss and
2) A balance sheet is prepared.
The profit or loss earned by the business in a certain
accounting period is ascertained from the business and profit-
loss account and the balance sheet is a useful account
statement for information about the financial position on a
certain date. Together these are called the last ones. This is the
last step in the accounting process. Bad Debts received at this
stage are posted to the profit and loss account.
Final casts matter to all parties, business owners, managers,
government, and the public. All these parties get information
about many facts like business strength, solvency, policy
setting, and tax assessment.
Business Account
In the category of unrealized income, there is such income that
gives information about the gross profit of the business. It acts
as a bill of lading for the merchant. Opening stock, purchases
and direct expenses are taken on the debit side and sales and
closing stock on the credit side.
The difference between the two sides is called gross
profit or loss. If the sum of the credit side of this account is
more than the debit side, it shows gross profit and the opposite
situation shows loss.
7 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
Profit & Loss Account/ Income Statement
Income statement shows the details of profit and loss of a
financial year. The purpose of the profit and loss account is to
calculate the net profit that can be planned. This is also called
dynamic analysis of profit and loss. Profit and loss account
is prepared when there is a share of profit in the account.
Losses are debited and income relating to the current year is
credited.Types of expenses charged to the debit of profit and
loss can be classified into the following categories:-
1. Operating Expenses: These are related to the normal
operation of the business.
a) Selling and Distribution Expenses-
 Salesman's Salary, Commission etc.
 Advertisement Expenses
 Vikram Carriage Fare or Outward Carriage etc.
 Export Duty
 Sinking
 Warehousing and Packing Expenses
 Insurance of Goods
 Expenses of Delivery Vehicles
b) Administrative and Office Expenses-
 Wages/Salary of Office Staff, Officers
 Rent of Office Building
 Stationery, Printing Expenses
 Audit Expenses
c) Financial Expenditure
 Interest on Loan (By Financial Institution)
 Discounts and Rebates to Customers
d) Others
 Drowning Event
 Battatta Event
2. Non-Operating Expenses: Those which are not related to
the normal operation of the business, these are irregular in
nature of non-recurring nature.
 Payment of interest
 Loss by fire or theft
3. The following items are not shown in the statement of
Profit and Loss:-
 Drawing-Capital account is debited.
 Sales Tax and Income Tax- Till the time the sales
tax is not deposited in the government treasury, it
should be debited in the liability side of the balance
sheet and income tax being a personal expense
should be debited in the capital account.
Finding Initial and Closing Capital
1. Determining the Initial Capital: In the beginning of the
year, the initial capital is determined by preparing the
initial position sheet from the balances of assets and
liabilities. Initial Capital = Initial Assets - Initial
Liabilities.
2. Determining the Final Capital: At the end of the year,
the final capital is determined by making the final position
sheet from the balances of assets and liabilities. Final
Capital = Assets at the end of the year - Liabilities at
the end of the year.
Notes to Accounts and Explanatory Notes
Notes to Account, Balance Sheet and Profit and Loss
Account are given below. It contains a detailed description
of the items shown therein, while explanatory notes are a
statement of accounting policies and explanations with
respect to material items.
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Operating Profit
Operating profit is the profit earned by the normal operations
and activities of the business. Operating profit is obtained by
subtracting operating expenses from operating income. Non-
operating income and expenses are not taken into account
while calculating it and it is profit before tax and interest.
Operating Profit = Gross Profit – Operating Expenses
Operating expenses are related to the normal operations of the
business such as office expenses, selling and distribution
expenses etc.
Receipt and Payments Account
Receipts and Payments Account is a summary of the cash
book. Receipt and payment account is prepared from time to
time with the help of cash book to account for cash
transactions by the institutions. It is a memoranda account i.e.
it is not based on double accounting system. In this account,
the receipts and payments during the year are written item
wise. Its debit side shows the opening balance of cash and
various receipt items and the credit side shows the amounts of
cash payments and closing cash balance. With the help of
receipt and payment account, income-expenditure account and
balance sheet can also be prepared and cash book can be
controlled. The following are the objectives of preparing
Receipts and Payments Account-
1. To control the cash book.
2. To get item-wise information of year-end receipts and
payments.
3. It is prepared for the purpose of preparing income-
expenditure account and balance sheet.
Suspense Account
When the errors are not detected even after a lot of efforts
before closing the balance sheets and the totals of both the
sides of the trial balance are not equal, then in order to save
time and prepare the final balance, the difference in trial
balance is taken up. This account is also called mistake
account, outstanding account, and suspended account. If the
sum of the debit side of the trial balance is more than the
credit side, then this account will be credited and By writing
the credit balance in the credit side of the trial balance, the
sum of both the sides of trial balance will be equal.Similarly if
the total of the credit side of trial balance is more than the
debit side, then Suspense account will be debited by this
amount and this account will be debited. By writing the
balance in the debit side of the trial balance, the total of trial
balance will become equal.
Manufacturing Account
In business establishments where goods are produced or
manufactured without purchasing the goods, Manufacturing
Account is prepared to ascertain the cost of goods produced. It
is a part of the asset account of the trading account. Opening
and closing stock, purchases, sales, wages, freight and direct
expenses are shown in the trading account, but many
manufacturing expenses (such as depreciation, repairs, factory
insurance etc.) are not shown. For this reason it becomes
necessary to build in manufacturing institutions.
Rules for Debiting and Crediting
The following methods can be used to make entries in the
journal according to the nature of the amounts used in
business transactions:-
8 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
A. Accounting Equation Method
To make entry in the journal, the accounts can be divided into
five main parts:-
1. Rules related to Assets: When there is an increase in an
asset, then that asset will be debited and if there is a
decrease, it will be credited. Note that there will always
be a debit balance (in terms of income) of asset sources.
Examples of asset sources- Cash balance, debtors, bank
balance, land, building, furniture, machinery etc. Debit
balance is also called favorable balance.
2. Rules related to Liability: When there is an increase in
any liability, then that liability account will be credited
and if there is a decrease in the liability, it will be debited.
Keep in mind that the liability accounts will always have
a credit balance (referred to).
3. Rules related to Capital: When the owner of the
business makes available the funds of his resources and
he increases his capital, then the capital account will be
credited and on withdrawal, there is a decrease in the
capital, in fact the capital account will be debited. Keep in
mind that the capital account will always have a credit
balance.
4. Rules related to Income: When there is income in the
business, then the capital of the businessman increases.
Therefore, the account of increase in income will be done
by crediting the Income Account. Keep in mind that the
Income Account will always have a credit balance (refer
to Income Account). Examples of Income Accounts are
Interest Received Account, Commission Received
Account, and Rent Received Account etc.
5. Rules related to Expenses: When any expenditure is
incurred, the capital of the merchant decreases, so the
expenditure account will be debited to account for the
increase in the expenditure. Keep in mind that the
expenditure account is always debited; the coupon will be
referenced. Examples of expense items are Salary
Expenses, Rent Expenses, Stationery Expenses, etc.
B. Traditional method
1. Rule of Personal Accounts: “Debit the account of the
receiver and credit the account of the giver.”
2. Rule of Real Accounts: “Debit the account of the item that
comes in and credit the account of the item that goes out.”
3. Rule of Nominal Accounts: “Debit the accounts of fixed
expenses and losses and credit the accounts of all incomes
and gains.”
Entry
Opening Entry
At the end of the previous year, the entry which is made to
bring the remaining balances of the balance sheet or journal
towards the asset or liability side, in the current year's ledger
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books / ledgers is called opening entry. This entry is made at
the beginning of the current year with the help of the journal
of the previous year. To make this entry, the accounts shown
on the assets side of the balance sheet of the previous year are
debited and the liabilities and capital accounts are credited.
With this entry, these accounts get dissolved in the journal.
Simple/Single Entry
When only two accounts are affected in a transaction, the
journal entry for that transaction is called a simple entry. For
example, sold goods to Anamika. In this transaction, only the
Goods Account (or Sales Account) and the account of
Anamika will be affected. The Goods Account is divided into
five parts, viz. Purchases Account, Sales Account, Purchases
Return Account, Sales Account and Stock Account.
Compound Entries
Sometimes, transactions of the same nature or related to a
particular person or thing happen more than once in a day,
then in such a situation, instead of making separate entries for
each transaction, they should be entered in one entry. are
taken, which is called mixed entry. For example, salary and
stationery expenses were paid. Salary account, stationery
account and cash account will be affected in this transaction.
Ledger Account
Bookkeeping is the initial stage of accounting because
accounting work is done on the basis of bookkeeping only.
Bookkeeping is derived from the English language, which
means to keep books. Under the bookkeeping, the details of
the daily transactions in the business are given in a systematic,
time-wise and date-wise manner. From which information
about the economic condition of the business and profit-loss
etc. is obtained.
Definition of bookkeeping according to different
scholars
 According to Mr. North Cart, "Bookkeeping is the art
of recording the monetary aspect of financial transactions
in the books of accounts."
 According to Carter, "Bookkeeping is the art and
science of systematically recording in books all those
business transactions which result in the transfer of
money or money's value."
 According to C. Cropper, "Bookkeeping is the science
of accounting for transactions relating to money or
monetary value."
 According to Sarkar, “Bookkeeping is a science and an
art. By which the business transactions of a person or
institution are accounted for in this way to reflect the
monetary effects of that transaction.
 According to Mr. Rowland, "The intention of book-
keeping is to record the transactions on the basis of
certain principles."
 According to Arthur Pfieldhouse, “Bookkeeping is the
science and art of recording monetary transactions in the
books of account so consistently and accurately that you
can at any time see the results during a given period and
your financial affairs at the end of that period.” or be able
to determine with clarity and speed the correct condition
of any part thereof.
 Spicer and Pegler "Bookkeeping is the art of recording
business transactions in the form of money."
9 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
After the transactions are recorded in the journal, the
recorded bills are classified and grouped by making accounts,
hence the book in which all types of accounts (i.e. personal,
real and unreal accounts) are kept is known as ledger
book. It is considered to be the main book of stars in which
the rest of the stars are known in the sequence of stars.
A journal is a book in which various accounts (of
personal, objective and unreal nature) are kept. In this way, it
can be said that the account book is the book in which the
accounts of all the individuals, firms, institutions, companies,
properties, goods and items of income-expenditure are taken
and all the transactions related to them are recorded in the
accounts. Measurement is done. Hence ledger is a set of
accounts in which business related transactions are recorded,
classified and summarized.
Utility of Ledger
Ledger is the main ledger of double entry system. In this book,
different things are written for all the transactions according to
their nature, so that the business owner gets information about
all the transactions from the same book.
Specimen of Ledger Accounts
The two sides of a ledger are debit and credit. There are four
entries each in both the debit and credit sides- 1. Date, 2.
Description, 3. Journal folio (i.e. the page from which the
entries are taken for accounting), and 4. Amount.
Posting (Khatauni)
The process of transferring debits and credits to the classified
accounts in the ledger from the journal is called 'posting'.
Rules Regarding Accounting of Entries in the Ledger
1. For each account a separate account is opened in the ledger
and the entries from the journal are adjusted in the
corresponding account.
2. It is a practice that while reporting the transactions in the
ledger, the words 'To‟ and 'By' are used. 'To' is used in the
description column with the accounts written on the debit
side and 'By' is used in the column with the details written
on the credit side. These 'To' and 'By' do not carry any
meaning but are used for the expression of debited and
credited amounts.
Balancing of Accounts
Balancing of accounts means adding the debit and credit sides
of the account and writing off the difference on the side which
is less.
At the end of the accounting period, usually all the
accounts are closed and the balance is withdrawn. The main
reason for calculating the balance is to know the clear position
of the business at a given point of time or period of time. It is
necessary to know here that only the balances of fixed items
are carried forward to the balance sheet. Assets, liabilities and
capital are examples of fixed assets. All short term accounts
i.e. revenues and expenses are not balanced, but at the time of
closing, they are transferred to trading and profit and loss
account.
Journal
Journal is the primary book for recording business transactions
sequentially and date wise. First of all, the merchant records
his transactions in this book. For small businessmen, the
journal is the only book of initial accounting. With the help
of the journal, various accounts are reported in the journal.
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M.J. Keeler has defined Journal as, 'Journal is a business
record in which business transactions are basically recorded
and which presents all the transactions in an organized form
and in order of date at one place.' Journal prepared. Before the
process of recording, it is very important to know the nature of
the characters to be recorded in it.
Characteristics
 Transactions are entered in the journal in a time-wise
(date-wise) manner.
 This is the book of initial entry, in which transactions
before Khatauni are analysed.
 In this, using the double entry system, the transactions are
written on the credit side and on the debit side.
 An entry in the journal contains the complete information
of a transaction.
Cash Book
Cash book is the book in which all the transactions related to
cash receipts and payments are recorded. It is this book which
serves the purpose of both journal and ledger as the primary
entry of transactions is made in the cash book. Hence it is also
called the book of original entry. Generally, it is a practice that
when the cash book is maintained, then the cash related
transactions are neither recorded in the journal nor any other
account is made for cash and cash at bank. Mainly the cash
book is of the following four types:-
1. Simple Cash Book: All the cash related transactions of the
business are recorded in the simple cash book, that is, it is
a complete document of cash receipts and payments. When
all the business transactions are done in cash only, then in
that case a simple cash book is prepared.
2. Two Columns Cash Book: A two column cash book has two
columns on each side for amounts. One cell is for discount
and the other cell is for cash transactions. In its debit side it is
shown in kbvndj and in credit side it is shown.
3. Three Columns Cash Book: In this type of cash book, there
are three columns each for the amount on each side - and
nowadays, in most of the business organizations, the number
of bank related transactions is very large, sometimes it is also
an effort to keep track of all the receipts. Or the payments
should be made through the bank only.
4. Retail Cash Book: Every business establishment has to
make a large number of small payments, such as traveling
allowance, postal expenses, freight, telephone and other
expenses (miscellaneous expenses) etc.
Capital Expenditure and Revenue
Expenditure
Capital Expenditure
Capital expenditure are those expenses, the benefits of which
are available to the business for more than one financial year
or those expenses which are incurred for acquiring a fixed
asset for the business. To identify the capital expenditure in
any business concern, at least one of the following conditions
must be satisfied for any expenditure to be considered as
capital expenditure:-
1. Expenditure incurred on purchase, acquisition and
installation of any visible or invisible permanent.
2. Expenditure for the improvement of a property, in which a
property is increased or expanded or is improved in such
an extraordinary way, which increases the production
10 BY SANJAY GUPTA
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capacity or increases the profit earning power, is called
capital expenditure. .
3. Expenditure incurred for obtaining the right to carry on the
business.
4. Expenses for obtaining capital and loan
5. New Businesses.
Examples of Capital Expenditure
Expenditure is capital or not, mainly depends on the nature of
the business, like- a businessman is in the business of buying
and selling machines, then for this business there is no
expenditure on purchase of machines, but if any is into the
business of clothes, then in this case the expenditure incurred
on purchase of machines is considered as capital
expenditure.Mainly the following expenditure are considered
as capital expenditure:-
1. Expenditure incurred on the purchase and construction of
machinery and furniture,
2. Cost of building
3. Cost of trade marks, copyrights, patents and patterns
4. Cost of setting up the machine
5. Expenses incurred on any invention.
6. Expenditure incurred on addition of building, machinery,
furniture etc.
7. Cost of Motor Car and Truck
8. Cost of leased asset
9. Cost of Goodwill
10. Cost of electricity and fitting of fans, cost of fitting tools
11. Expenses of acquisition of capital assets other than the
cost of these assets
12. Expenses of bringing capital assets to use
13. Autonomous property and
14. Expenditure on development of mines etc.
Revenue Expenditure
Revenue expenses mean such expenses, which are incurred in
the management and operation of the business which are
incurred for maintaining the functionality of the fixed assets
and are incurred in the purchase and sale of business goods
and these expenses are of recurring nature i.e. these expenses
are incurred repeatedly or continuously, in short the expenses
incurred for the following purposes are called revenue
expenditure.
1. Expenses incurred for obtaining raw material or
merchandise.
2. Expenses of managing and operating the business.
3. Maintenance expenses and depreciation of fixed assets.
4. Selling and distribution expenses such as advertising
expenses, discounts given to customers, delivery expenses
etc.
Deferred Revenue Expenditure
If the amount of revenue expenditure is huge in a year and the
benefit of that expenditure continues to be available in the
coming years apart from the current year, then such
expenditure is called deferred revenue expenditure. Since
the benefit of deferred revenue expenditure is available for
many years. Hence it is written off from the profit and loss
account in the specified years in which the profit is made.
Examples-
1. Preliminary Expenses
2. More expenditure on advertisement
3. High expenditure on repairs
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4. Special Research Expenses
5. Expenses of moving the business to a good location
6. Commission on issue of shares and debentures.
Discount
Deducting some amount from the selling price of the article by
the trader is called discount. This discount is of two types.
1. Trade Discount: When the trader reduces some percentage
of the selling price while selling the goods, it is called trade
discount. The invoice is made only by reducing the amount
of this discount from the selling price. The purpose of
giving such a discount is to encourage sales. Thus no
separate entry is made for the discount, it is deducted from
the selling price and the sale entry is made from the
remaining amount.
2. Cash Discount: Some discount is given by the businessman
in an effort to induce his debtors to pay before the due date.
The amount of this discount is called cash discount. The
businessman also gets this type of discount from his
creditors. When cash discount is allowed to its debtors, it is
a kind of loss for the businessman.
Incomplete Account
Such a method in which double accounting of transactions is
not done but accounting is done through cash book and
personal accounts are called incomplete account. In the
incomplete accounting method, one-sided accounting of some
transactions, some double accounting is kept and some
transactions are not accounted, hence it is appropriate to call it
incomplete accounting method.
Closing Entries
In every business, after recording the various transactions
during the accounting year in the journal, they are debited in
the ledger. After this, the final accounts are prepared with the
help of the balances of accounts by closing the various
accounts at the end of the year. Final entries are not necessary
for personal accounts (debtors and creditors accounts) and
assets and liabilities accounts. The balances of these accounts
are shown on the asset or liability side of the balance sheet.
The accounts having debit balance are shown on the asset side
of the balance sheet and the accounts having credit balance are
shown on the liability side.
At the end of the financial year, the entries by which the
balances of nominal or unreal accounts are transferred to the
trading account and profit and loss account are called Closing
entries.
Adjustment Entries
In order to find out the correct and net result of the business
and the correct economic condition through the final accounts,
it is necessary to see whether all the necessary accounts have
been done or not. Before making the final accounts, if we look
at the accounting books, it will be known that some
transactions have not been accounted, some transactions have
been incompletely written, some accounts have gone wrong,
and there have been errors in writing some accounts. There are
some accounts which are related to the next year, there are
some accounts which are related to the previous year,
similarly there are some accounts which are settled only on the
last day of the year.
Therefore, the creation and modification of such practices in
the last are called adjustments and the journal entries made to
11 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
account for them are called adjustment entries. The major
adjustments to be made before preparing the final accounts are
as follows:-
1. Closing Stock
The meaning of closing stock is that goods which remain
unsold at the end of the year. Closing stock should be valued
at actual cost price or market price, whichever is lower. After
valuing the closing stock, the following journal entry is made
in the accounting books.
While preparing the final accounts of the respective year, the
closing balance is shown to the credit side of the trading
account and shown to the assets side in the balance sheet.
 Opening Stock: The value of unsold goods with the
business at the beginning of the accounting year is called
the opening stock.
 Live Stock: The animals, horses, bulls etc. which are
used as property in business are called livestock or live
stock.
 Dead Stock: The assets which are continuously used for
the operation of the business are called dead stock. For
example, machinery, furniture etc.
After ascertaining the gross profit and loss, the opening
stock and closing stock are determined from the following
formulas:-
Basic Formula
 Opening Stock + Purchases + Direct Expenses + Gross
Profit = Selling Price + Closing Stock
 Opening Stock + Purchases + Direct Expenses – Closing
Stock = Selling Cost.
Various calculations can be done with their help
as follows-
 Opening Stock = (Sales Price + Closing Stock) –
(Purchase + Direct Expenses + Gross Profit)
 Opening Stock = (Cost of Sales = Closing Stock) –
(Purchase + Direct Expenses)
 Opening Stock = Selling Price + Closing Stock + gross
loss in case of gross loss – (Purchases + direct expenses)
 Closing Stock = (Opening Stock + Purchases + Direct
Expenses + Gross Profit) – Sales
 Closing Stock = (Opening Stock = Purchases = Direct
Expenses = Cost of Sales)
 Gross loss is given- Closing Stock = (Opening Stock +
Purchases + Direct Expenses) - (Sales + Gross Loss)
2. Outstanding Expenses
At the end of the year, there are some expenses, the benefit of
which is received in the related year, but it is not paid till the
date of preparation of final accounts. Such expenses are called
outstanding expenses. It is a distraction, because it is for
distractions that we have to give. The entry for its adjustment
will be as follows:-
The amount of the outstanding expenditure is added to the
related expenditure in the business or profit and loss account
and shown on the liability side of the balance sheet.
3. Prepaid Expenses
A company prepaying for an expense is to be recorded as a
prepaid asset on the balance sheet and is termed as „prepaid
expense‟. The entry is being simultaneously added with
another entry (the payment account) that reduces the cash
balance of a business unit. Prepaid expense, being an
„expense‟ is still recorded in the asset side of the balance sheet
as this is an advanced payment for the goods and services to
be received in the future.
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4. Accrued Income
Accrued Income is the income that has been earned but not yet
received. Accrued Income is to be recognized in the
accounting period in which it arises but not in the subsequent
period when it is received. For the journal entry, the income is
to be credited to record the accrued income and a related
receivable is to be debited to balance the transaction. The
accounting entry will be as follows:-
The amount of accrued income is added to the related income
in the profit and loss account and is written towards assets in
the balance sheet.
5. Unearned Income
This is the income which has been received in advance and its
full utility has not yet been given, that is, the unearned income
is not related to the current year but to the next year. Suppose
some part of the business building is taken on rent on 1st
November and three months' rent is taken in advance in the
beginning itself and final accounts are being prepared on 31st
December, then in such a situation the profit and loss account
of the current year will only write the amount of rent for two
months and the amount of one month's rent will be related to
the next year, which will be called accrued rent.
6. Depreciation
To support the business, every businessman has fixed assets
like building, machinery, furniture, motor vehicles, etc., whose
value depreciates due to continuous use. This decrease is
called depreciation or depreciation or deduction. It is also
an expense like other business expenses. Therefore, to find out
the net profit of a year, it is necessary to write the amount of
depreciation of assets in the debit of profit and loss.
It is written on the debit side of the profit and loss account and
shown by deducting it from the related assets on the assets side
of the balance sheet. If the adjustment entry in respect of
depreciation is made before preparing the trial balance, the
amount of depreciation and the reduced value of the asset are
shown as debits in the trial balance. The amount of depreciation
or amortization will be shown on the debit side of profit and
loss and the asset will be written in the balance sheet at the cost
shown in the trial balance (written down value).
7. Interest on Capital
The money that the owner of the business invests in his
business is called his capital. Interest is charged on this capital
at a fixed percentage which is provided by the business to its
owner. For this the following adjustment entry is made:-
Interest on capital is revenue expenditure; therefore, to find
out the net profit of the business, it is written in the debit of
the profit and loss account and this interest increases the
balance of the business's capital, hence it is a liability of the
economic balance. It is shown by adding it to the capital side.
8. Interest on Drawings
When the owner of the business withdraws some amount from
the business for personal expenditure, it is called Drawing.
On this he has to pay interest, which is called interest on
drawings. Interest on drawings is a gain for the business and a
personal loss for the trader. For this the following adjustment
entry is made-
Interest on drawings is written on the credit side of the profit
and loss account and shown on the liability side of the balance
sheet by adding to the drawings and deducting them from the
capital.
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NIRMAN IAS GWALLIOR
9. Bad Debts
"This is the soul of business." In today's era of competition,
the importance of selling has increased a lot. For this reason,
the seller's amount remains deposited with the buyer, which he
is entitled to, but sometimes the buyer refuses to pay this
amount, then this amount becomes bad debt or bad debt for
the seller.
The amount of bad debts is written in the debit side of the
profit and loss account and if it is recovered, it is credited to
the P-S-account and shown by deducting it from the amount of
liability in the balance sheet.
10. Reserve for Doubtful Debts
Those debts (or such debtors) whose chances of recovery are
questionable or doubtful are called doubtful debts. A certain
percentage of provision is made for bad and doubtful debts of
trade debtors. Provision for doubtful debts is part of indirect
expenses.
Financial Statements
 According to John N. Mayer, “Financial statement
summarizes the accounts of business concerns. Balance
sheet shows assets, liabilities and capital at a given date
and income statement shows the results of activities
during a given period of time”.
 Henri Fayol, “Financial statements are the eyes of any
enterprise.”
 According to R.N.Anthony, “Financial statement refers
to the statement which reveals the financial condition of
the business and the result of business operations at the
end of the accounting period.” According to Section 2
(40) of the Companies Act 2013, the following shall be
included in the financial statements of the company:-
 Balance sheet at the end of the financial year
 Statement of profit and loss for the financial year
 Cash flow statement for the financial year
 Statement of changes in equity, if applicable
 Explanatory Notes
In general terms, the meaning of financial statement is
'that balance sheet of the organization in a financial year,
which contains the summary of its accounts ie profit-loss
details and tells the flow of cash in that year.'
Nature of Financial Statements
Financial statements give information about the economic
condition of the business and the results achieved during the
period under consideration, but the values shown in these
statements never reflect the current value or the real value
because the figures shown in the financial statements are
based on written facts, accounting conventions and personal
judgments. There are collective results. Following are the
important points regarding the nature of financial statements:-
 Recorded Facts: Business transactions are recorded in the
business books on the date and at the same value when
they are transacted. With the passage of time, these
accounts are historically captured and with the help of
these accounts, financial statements are prepared. Hence,
financial statements are based on recorded facts.
 Accounting Conventions and Concepts: Financial
statements are based on a number of accounting principles,
concepts and conventions. Classification of business
expenses into capital and revenue expenses, selection of
depreciation method, stock valuation etc. are affected.
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 Personal Judgement: Although accounting concepts and
conventions act as a guide for the accountant, yet the use
of these concepts and conventions depends on his personal
judgment. It depends on the personal judgment of the
accountant which of the various methods of inventory
valuation to be used.
Financial statement is a major source of financial
information. On the basis of which conclusions are drawn
about the profitability and economic condition of the business.
Objectives of Financial Statements
 To provide reliable financial information about economic
resources and obligations of a business firm.
 To provide other needed information about changes in
such economic resources and obligations.
 To provide reliable information about changes in net
resources (resources less obligations) arising out of
business activities.
 To provide financial information that assists in estimating
the earning potentials of business.
 To disclose, to the extent possible, other information
related to the financial statements that is relevant to the
needs of the users of these statements.
Essential Qualities of Financial Statements
 Promptness: Financial statements should be available
immediately at the end of the financial period. If these are
not made available at the appropriate time, the prepared
financial statements become meaningless and useless.
 Comparability: Financial statements should be prepared
in such a way that the progress of the current year can be
compared with that of the previous year. Along with this,
inter-firm comparison can also be possible with their help.
 Understandibility: The main objective of financial
statements is to provide information regarding the
resources and performance of the tasks of the enterprise.
Therefore, the information given in these should be clear,
simple and understandable, which even a common man,
who does not have knowledge of accounting principles,
can easily understand.
 Completeness: The information given in the financial
statements should be complete in itself. Financial
statements with incomplete information fail to serve their
purpose. Therefore, to clarify the meaning of the
information given in these details, comments, discussions,
tables etc. should be given.
 Reliability: The information given in the financial
statements should be such that it is reliable. The reliability
of financial statements also depends on the correctness of
the accounts.
 Relevance: Only that information should be disclosed in
the financial statements, if they explain the objectives of
the company. No matter of relevance should be left out. If
the financial statements do not contain information in
accordance with the objectives. So the conclusions drawn
on their basis will be wrong and will be of no importance.
Characteristics of Financial Statements
 Financial statements are related to the past, hence they are
historical documents.
 Financial statements are presented in monetary terms.
 It shows the financial position of an organization from the
statement of position and the profitability from the profit
and loss statement.
 Accruals are made on basis and not on cash basis.
13 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
Importance/Uses of Financial Statements
Financial statements are mirrors in which the financial
position and operational strength or weakness of the
organization are reflected. These statements are prepared for
the interests of the stakeholders (managers, investors,
creditors, bankers, employees, government administrative
bodies and the general public). George O. May points out the
following major uses of financial statements:-
1. As a report of stewardship;
2. As a basis for fiscal policy;
3. To determine the legality of dividends;
4. As guide to advise dividend action;
5. As a basis for the granting of credit;
6. As informative for prospective investors in an enterprise;
7. As a guide to the value of investment already made;
8. As an aid to government supervision;
9. As a basis for price or rate regulation;
10. As a basis for taxation.
Limitations of Financial Statements
Following are the major limitations of financial statements:-
 Influenced by Personal Bias and Knowledge: The
figures displayed in the financial statements are silent,
anything can be inferred from them. Therefore, the
conclusions drawn on the basis of these are affected by
the personal feelings and knowledge of the user.
 Non-inclusion of Non-monetary Facts: Financial
statements do not present the true picture of the business
because only monetary facts are included in them. While
non-monetary elements also affect the business. For
example, the skill, ability and power of the managers to
work, possible difficulties in getting raw materials or
facilities etc.
 Lack of Precision: There is no precision in the facts of
the financial statements because the figures of these
statements are determined on the basis of accounting
assumptions and concepts and personal judgment of the
accountant. That's why there is a lack of subtlety in the
information received from them.
 Non-reflection of Price Changes: Financial statements
do not reflect changes in the price level. Therefore, the
facts shown in the financial statements of different years
are not comparable.
 Historical Documents: Financial statements are
historical documents. Hence, they do not give a true
picture of the present status of the undertaking. autopsy
 Interim Reports: Financial statements are interim reports
because the actual profit of the business can be known
only after the complete closure of the business.
Balance Sheet
Balance Sheet is made to assess the financial position of the
business on a certain date with the help of the balances of the
actual (excluding goods related accounts) and personal
accounts of the ledger. In the balance sheet, debit balances of
all personal and material accounts are shown on the asset side
and credit balances are shown on the liability side. There are
two sides of the balance sheet:-left side and right side.
Liabilities are shown in the left side and assets in the
right side and the words “To” and “By” are not used in this
because it is a statement sheet, not an account.
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According to Friedman, “A balance sheet is
a financial statement that reports a company's
assets, liabilities and shareholder equity at a specific point in
time.”
According to Palmer, Balance Sheet is a statement
of a given date which shows the assets and liabilities of the
businessman on the one hand and the responsibilities on the
other.
In summary it can be said that:-
1. Balance sheet is prepared to find out the financial
condition of the business on a certain date. Usually it is
made at the end of the year.
2. This is a Statement, not an Account.
3. It contains details of the source of capital.
4. There is a description of the investment of its capital.
5. It is prepared from the balances of all real (except goods
related accounts) and personal accounts of the ledger.
6. The sum of the assets and liabilities side of the balance
sheet is equal.
7. The balance sheet contains the details of the organization's
assets, liabilities/liabilities and the share of the trader i.e.
the owner.
8. Accounts of various items are kept in the form of
permanent accounts on the balance sheet.
Why is a journal made or the purpose of making a
Ledger?
1. Financial statement to ascertain the financial position of
the business at the end of the accounting year.
2. Information about cash and bank balance, net profit of
business, reduction or increase in drawn capital is obtained
from the balance sheet.
3. To find out the amount to be received from the debtors and
receivable bills of the business.
4. To find out the amount to be paid to the creditors and
payable bills of the business.
5. To know the amount of unpaid expenses, prepaid
expenses, earned income and unearned income at the end
of the year and to reflect capital expenditure.
6. Opening entries at the beginning of the New Year to
ascertain the closing stock remaining at the end of the
previous year.
7. To find out the amount of short term and long term
liabilities of the business and through them to check the
short term and long term solvency (paying ability) of the
business.
Assets
Tangible or intangible possessions existing in the business that
have economic value to the owners of the business are called
assets. It is helpful in running the business.
The resources such as cash, equipment etc. used by the owner
of an organization or institution for its operation is called
assets.
According to R.N. Anthony, “Assets are the valuable
resources of the business which are owned by the business and
acquired at a cost measured in money.
Classification of Assets
Assets are divided into different classes according to their
nature. Their description is as follows:-
1. Fixed Assets
a. Tangible or Visible Assets
14 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR
b. Intangible or Invisible Assets
c. Artificial Assets
d. Degradable or Decaying Assets
2. Current or movable assets
3. Liquid assets
4. Appropriation
a. Short Term Investment
b. Long Term Investment
Fixed Assets
They are assets which are purchased for a long period of time
with the objective of earning income in the business. They are
not bought for the purpose of resale and their benefits are
available in the business for many years. The classification of
fixed assets is as follows:-
a) Tangible or Visible Assets: Those assets which are
physically present in the business. We can see, feel and
touch them. Fixed assets are depreciated but land is not
depreciated. Such as land, building, plant, machine,
furniture and furnishings, vehicle, office equipment etc.
b) Intangible or Invisible Assets: are those assets which are
not visible in the business, we can only feel them. These
assets are also of permanent nature and their benefits are
also available for many years. Such as technology,
privilege rights, goodwill, patent, trademark, copyright,
brand, computer software, masthead, intellectual property
rights, design and prototype, formula, license etc.
c) Artificial Assets: Artificial assets are not real assets.
These are the expenses and losses which have not been
written off. Since these expenses and losses have debit
balances, they are shown on the assets side. For example,
initial expenditure, underwriting commission, discount on
issue of shares and debentures, heavy advertisement
expenditure etc.
d) Degradable or Decaying Assets: These assets are also of
permanent nature, but by extracting material from these
assets or using them, they become empty. For example,
mines, ditches, oil wells etc.
Current or Movable Assets
These are the assets that the businessman does business that is,
they are bought for resale. Liquid assets can be easily
converted into cash.
For example: Raw materials, Finished goods, Debtors, Cash
balance, Bank deposits, Bills receivable, Prepaid expenses,
Short term investments, Trade balances, Stores and spares,
small tools, goods in transit etc. Current assets are usually
converted into cash within a year.
Liquid Assets
Liquid assets are those assets which can be converted into
cash immediately or within a short period of time. These are
part of current assets. For example, cash at bank, cash in hand,
bills receivable, debtors, etc.
Appropriation
When the money is not required in the business, the trader
appropriates it outside the business. There are two types of
appropriations:-
1. Short Term Investment: When additional funds are
appropriated for a short time (usually less than 1 year), it is
called short-term investment, such as investment in bank
fixed deposits, purchase of shares and debentures, etc.
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2. Long Term Investment: When additional funds are not
required in the business for a long time. So the
businessman appropriates it for the long term, it is called
long term investment. Income is received in the form of
interest and dividend on investments.
Short term investment is included in current assets and long
term investment is included in fixed assets.
Liabilities
They are liabilities or debts that the business has to pay to
external parties at some point in the future. It represents the
claim on the assets of the firm to the creditors. Whether a
business is small or big, at some point of time it needs to
borrow money and buy things there.
Classification of Liabilities
The classification of liabilities to be shown in the balance
sheet is as follows:-
1. Internal Liability or Capital
2. External Liability
A. Current or Short-Term Liabilities
B. Permanent or Long-Term Liability
3. Doubtful Liability
(i) Internal Liability or Capital: The amount invested in
the business by the owner of the business is the capital of
the business. It is the internal liability of the business.
Capital is paid after all external liabilities are paid. The
amount of capital is determined by deducting external
liabilities from the total assets.
Capital= Net Assets - External Liabilities
(ii) External Liabilities: Are those liabilities which are paid
to outsiders other than the owner of the business. It
includes both current liabilities and permanent liabilities.
a) Current or Short Term Liabilities: Current
liabilities are those liabilities which are to be paid
within a period of one year. In other words, the
liabilities which have to be paid immediately in the
business are called current liabilities. Such as bank
overdraft, bills payable, sundry creditors, unpaid
expenses, proposed dividend etc.
b) Permanent or Long-Term Liabilities: Permanent
liabilities are those liabilities which have to be paid
after one year. In other words, the liabilities whose
payment period is longer are called long term
liabilities. For example, long term loan, mortgage
loan, secured loan, letter of credit etc.
c) Suspicious / Contingent Liabilities: Suspicious
liabilities are those liabilities which depend on the
occurrence of some event in the future. These
liabilities do not arise till the date of preparation of
final accounts. Hence these are not shown on the
liability side of the balance sheet, but are shown as
notes/notes on account at the bottom of the balance
sheet. Like- liability of bills discounted, liability of
surety, liability in relation to the pending claim in the
court.
Accounting Equation
1. (Assests = Capital + Liabilities) A = C+L
2. (Liabilities = Assets – Capital) L = A-C
3. (Capital = Assets -Liabilities) C = A-L
At the end of the year, the net profit arising from income and
expenditure is added to the capital account and the net loss is
15 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR Accounting and Management Accounting
subtracted. That is why income and expenditure accounts are Generally trial balance is prepared at monthly intervals to
written along with capital in the accounting equation. check the mathematical correctness of accounts. But due to the
In this case the accounting equation will be:- adoption of double accounting system, trial balance can be
A = L + C + Revenue – Expenses prepared at any time. It is better that it is made at the end of
A=L+C+R-E the accounting year so that the mathematical correctness of all
Order of Presentation of Balance Sheet of the figures can be ascertained before the preparation of the
financial statements.
Assets and Liabilities It is worth mentioning here that trial balance is a description,
(1) Liquidity Order not a account and profit-loss cannot be assessed in it.
According to this the asset which can be converted into cash Objectives of Preparing the Trial Balance
first is shown first. Thus the assets are presented in the order 1. Trial balance assures that accounting and other accounting
of realization. That's why it is called recovery sequence. So procedures have been performed without any mathematical
the possible sequence would be as follows: inaccuracy. In other words, trial balance helps in
Assets establishing mathematical correctness of the books.
1. Cash in hand 2. Financial statements are generally prepared on the basis of
2. Cash in bank reconciled trial balance otherwise the work may become
3. Bills receivable monotonous and lengthy. Thus, the preparation of financial
4. Debtor statements serves the second purpose of trial balance.
5. Appropriation 3. In fact, Trial balance is a summary of the details occurring
6. Inventory in the ledger. Ledger has to be given only when detailed
7. Stores and spares description of a particular account is to be given.
8. Prepaid expenses Errors that not Affect the Trial
9. Furniture
10. plant and machinery balance
11. land and building It is worth mentioning that the receipt of trial balance is not
12. Good will an irrefutable proof of purity. In other words, the inaccuracy
Liability may remain when trial balance is mixed. These can be of the
1. Bill payable following types:-
2. Creditor 1. Errors of Omission: Errors arising out of forgetting to
3. Outstanding expenses record a transaction in the books of initial account are
4. Bank loan included in this category. This will not affect the total
5. Capital of trial balance because the transaction does not get
(2) Permanence Order included in the books of account.
2. Errors of commission/ Accounting / Transposition:
In contrast to the liquidity order, those assets which can be
Errors in calculation or costing due to overstatement,
converted into cash last are listed first.
addition or subtraction in the ledger are called errors of
Note- Net profit and interest are added to the capital and the
cost determination. Such errors have a mixed effect.
interest on the drawings is credited. Thereafter it is disclosed
 Example- Ram paid Rs.3,500. Purchased goods for
in the balance sheet.
Rs. 5,300 and posted in Purchases Book or Journal
Trial Balance Rs. Accounted from 5,300 in both Ram and
Meaning of Trial Balance Purchases accounts while posting in the ledger. The
amount will be written off and trial balance will
Along with the cash book, details the debit and credit remain unaffected. If Khatauni deposits Rs.5,300 in
balances of all accounts. an account. And Rs.3,500 in the second account. This
After recording the accounts in the Posting (Khatauni), a error will have an effect on the trial balance. So, as if
statement is prepared to show the debit and credit balances. the total of purchase book is more, the total trial
This statement is called Trial balance, it can be prepared by balance will be affected, but the sum of trial balance
listing each account and the totals on the debit and credit sides will not be affected if the amount received from Ram
must be reconciled with the totals of the individual accounts. is written in Ramesh's account.
In the event of non-matching of both the sides, it is assumed 3. Errors of Principle: Inaccuracies arising out of non-
that some arithmetical error has been left somewhere. observance of accounting principles are called statistical
It is clear from the fact that is in double accounting errors. Such errors do not affect the trial balance. For
system, the totals of debits of different accounts are always example, repairs and maintenance are wrongly treated as
equal to the totals of credits of other accounts. Hence must revenue expenditure instead of capital expenditure. The
match the totals of the debit side also the sum of the debit account was debited to an additional machinery account
balances should be equal/corresponding to the sum of the such as the order of furniture in the Purchases Account, not
credits. Once the balances are reconciled, there is complete accounting for adjustments such as unpaid expenses.
confidence that the accounting work is free from clerical error, 4. Compensatory Error: If the effect of one error in
although this is not considered evidence of 100% accuracy as accounting is nullified by another error, then it is called
it contains theoretical and compensatory inaccuracies. (There compensatory error. When the net effect of two or more
may be a possibility of this happening) errors is zero, it is called compensating errors. For
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example, instead of Rs. 500 in the debit side of Mohan, Rs.
50 is written and in the debit side of Sohan, Rs. Rs 500
should be given in place of 50. This error will give the sum
of trial balance.
5. Errors of Duplication/Reversal: These errors usually
arise when a transaction is re-entered in the original books
and also entered twice in the ledger. For example, suppose
that Rs. 300 received and it should be written twice in the
books and twice in Ram's account. Such mistakes happen
due to carelessness. These errors have no bearing on the
reconciliation of trial balance. Audit can detect such errors
only through routine checks.
Errors that Affect the Trial Balance
Due to these inaccuracies, the sum of trial balance is affected
and the purpose of making trial trial seems to be meaningful.
i. The sum of the subsidiary books may be more or less.
ii. In the ledger, the balance of an account is wrongly taken
out, wrongly reported, credit is written instead of debit,
the total of the subsidiary book is not written in the
ledger, etc.
iii. To make mistakes in making a Trial balance:-
(a) Forgetting to enter the balance of an account in the
trial balance
(b) Incorrect calculation of trial balance
(c) Writing amounts on the wrong side of the trial
balance, etc.
Methods of Preparation of Trial Balance
There are three methods of making trial balance-1. Balance
Method 2. Total Method 3.Total cum Balance Method
(i) Balance Method - In this method, this list is prepared by
taking the balance of all the accounts from the cash book
including the account book.
(ii) Total Method: By this method the totals of all the
accounts including the trial balance and cash book are
taken. It is noteworthy that practically this method is not
used, as it does not help in preparing the final accounts of
the business.
(iii) Total cum balances method - This method is a
combination of both the Total Method and Balance
Method.
Techniques of Financial Statement
Analysis
The methods used to study the horizontal or vertical analysis
of the items of financial statements of a business enterprise in
order to gain knowledge of its financial position and earning
power are called techniques of financial analysis. But the most
commonly used are the following-
1. Comparative Financial Statements
2. Common Size Financial Statements
3. Trend analysis
4. Ratio Analysis
5. Fund Flow Analysis
6. Cash Flow Analysis
7. Break-even analysis
Comparative Financial Statement
It is a major technique of analyzing financial statements. In
these statements, showing the data of two or more years, the
changes between them are shown. This point has also been
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emphasized in the Companies Act 1956. Every company
should display the information of the current year as well as
the previous year in its published financial statements.
Comparative financial statements are prepared to reflect the
following objectives:
(i) Absolute figure (in currency value or in rupees)
(ii) Expressing the increase or decrease as a percentage.
(iii) Expressing increase or decrease in absolute entities.
Common Size Financial statements
Under comparative financial statements, changes in total
assets, some liabilities, total owners' equity and total sales are
not shown, due to which it cannot be compared with other
companies or with the entire industry. To overcome this
deficiency, Common size financial statements are prepared.
According to Kennedy and McMullan, “If the data in the
balance sheet and the income statement are shown in the form
of analytical percentages, i.e., in the ratio of total assets, total
liabilities, ownership equity and net sales, then a common
basis for comparison is prepared. The statements thus prepared
are known as common size financial statements.”
Trend Analysis
Trend refers to the trend of business activity, which is
calculated by considering any period data from the available
financial data. Generally, the first year is considered as the
base year. In order to make the items comparable, the same
items of other years are converted into percentages or ratios,
taking the amount of the base year as 100. In this way, the
following are the main methods of finding the trend:-
(i) Trend Percentage
(ii) Trend Ratio
(iii) Graphic and Graphical Representation
Ratio Analysis
Meaning of a Ratio- Ratio establishes a mathematical
relationship between any two numbers; here the relationship is
established between two individual items or group items.
According to J.Betty “Accounting ratios are used to show the
position statement, profit and loss account, accounting control
system or any part of the accounting organization. It is used to
reveal important relationships between numbers.
Importance of Ratio Analysis
1. It helps the management in future financial planning and
policy making.
2. It throws light on the efficiency of the business
organization.
3. This analysis helps in comparing the data of the firm with
the data of other firms in the same industry.
4. This analysis helps in cost control.
5. It brings more clarity in the data for decision making. So
that a problem can be considered in the right perspective.
6. With this, the solvency and profitability of the firm can be
accurately measured.
7. In this analysis, it is possible to condense very large data
into two or three digits.
8. It is helpful in investment decision, capital structure
decision and dividend decision.
9. On the basis of this analysis the trend can also be known.
10. On the basis of this analysis the unknown factors of
balance sheet or profit and loss account can be found.
17 BY SANJAY GUPTA
 NIRMAN IAS GWALLIOR
Limitations of Ratio Analysis
Ratio analysis has the following limitations which make its
use limited or risky-
1. There is no universal standard of ratio analysis hence
scientific analysis is not possible.
2. Ratio analysis cannot throw full light on the efficiency of
any activity of the firm due to the absence of universally
accepted standards.
3. Ratio analysis is based on financial statements and when
financial statements are affected by misrepresentation,
ratio analysis can also give distorted and false
conclusions.
4. Ratio alone does not reveal the true position.
5. Many problems are less numerical and more qualitative it
is not possible to analyze them correctly by this method.
6. On the basis of these, it cannot be known immediately
where and how the fault is.
7. This analysis does not consider the market and the
changes outside the firm.
Classification of Ratios
Ratios are classified in many ways, out of which the following
two are important-
A. Structural classification
B. Functional classification
A. Structural Classification- The basis of structural
classification is the financial statement, balance sheet and
profit -loss of the organization. Therefore, the ratios are
calculated on the basis of the information given in these
financial statements. On this basis the ratios can be
classified into the following parts-
1. Balance Sheet Ratios- These are also called
financial ratios. These ratios are found between two
items or groups of items given in the balance sheet.
Main ratios in this are current ratio, liquid ratio, debt-
equity ratio, ownership ratio and capitalization ratio
etc.
2. Profit-Loss Statement Ratio- These are also called
Income Statement Ratio or Operating Ratio.
These ratios are found among the items or groups of
items given in the profit and loss statement. Main
ratios in this are gross profit ratio, net profit ratio,
operating ratio, ratio of sales to various items of
expenditure, inventory turnover ratio etc.
3. Combined Ratio- Those ratios, while calculating
which one item is taken from the balance sheet and
the other item from the profit and loss statement, are
called combined ratios. Main ratios in this are return
on capital employed, return on total assets, total asset
turnover ratio, average holding period, earning per
share etc.
B. Functional Classification- When the ratios are classified
according to the needs of various parties having interest in
the business organization. For example, banks and
financial institutions are more interested in short-term
solvency, lenders are more interested in solvency, and
investors are more interested in profitability. Therefore,
keeping in mind the objectives of various parties, the
following types of ratios are calculated-
1. Liquidity Ratio- Current ratio is an indicator of the
liquidity of the business. Liquidity refers to the ability
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of an organization to meet its current obligations.
Liquidity ratios provide an idea of the short-term
solvency of the firm. These ratios indicate whether the
firm is in a position to meet its short-term liabilities
from its short-term assets. In the form of these ratios the
following ratios are calculated-
(a) Current Ratio
(b) Liquid or Quick Ratio
(c) Absolute Liquidity Ratio
(a) Current Ratio- Current ratio can also be calculated by
dividing current liabilities by current assets and if the
quotient is two or more then the short term solvency of
the organization is considered satisfactory. Its formula is
as follows:-
Current Assets
Current Ratio =
Current Liabilities
(b) Quick Ratio- This ratio is also known as acid test ratio.
Many times the current ratio does not give a correct idea
of the short term solvency of the firm. If the firm has to
pay its current liabilities immediately or very soon,
whether the firm is capable of doing so. To find out the
quick ratio is calculated. For this, current liabilities are
divided into quick current assets.
Quick Assets
Quick Ratio =
Current Liabilities
(c) Absolute Liquidity Ratio- This ratio is also known as
Cash Position Ratio or Super Liquidity Ratio .To
calculate this ratio, total liquid assets are taken, which is
the sum of cash balances, bank balances and marketable
securities, and current liabilities are divided into it.
Absolute Liquid Assets
Absolute Liquidity Ratio =
Current Liabilities
2. Capital Structure / Leverage ratio/Solvency Ratio-
Solvency ratios provide information about the long-term
solvency of the organization. These ratios are also called
capital structure or leverage ratios. From these ratios it
is known that how much money is invested by the owners
in the institution and how much money is taken from the
lenders. It establishes a relationship between the capital
invested by the owners in the business and the amount
received from the lenders. The following ratios are
calculated in the form of these ratios:-
(a) Debt-Equity Ratio
(b) Proprietary Ratio
(c) Solvency or Debt to total Assets ratio
(d) Interest Coverage Ratio
(e) Capitalization Ratio
(f) Cash Service Ratio
(a) Debt-Equity Ratio- It refers to the contribution of equity
shareholders, and creditors (both long-term and short-term)
in the management of all the assets of the organization or
firm. Therefore, debt-equity ratio is calculated to know
how much the creditors have in the firm as compared to
the shareholders and what is the long-term solvency of the
firm.
Debt Equity Ratio=
External Equities or External Liabilities
Internal Equities or Owner's Funds
(b) Proprietory Ratio- Through this ratio the relationship
between the funds of the owners and the total assets is
established and it is shown. How much is the contribution
of the owners in the finance of the total assets.
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Proprietary Funds
Proprietary Ratio = × 100
Total Assets
(c) Solvency Ratio or Debt to Total Assets Ratio- With the
help of this ratio, the long-term solvency of any business or
firm can be measured; by this ratio it is known that in the
finance of the total assets of the firm. What is the
contribution of creditors (long term and short term). If the
firm becomes insolvent, whether the total external liabilities
can be paid by selling the total assets of the firm or not.
Solvency Ratio =
Total Debt (Long Term + Short Term)
Total Assets
If we subtract the ownership ratio from 100, we get the
Solvency ratio.
(d) Debt Service Ratio or Interest Coverage Ratio- This
ratio reflects the interest solvency of the institution. In
this, it is calculated that the net income before interest of
the institution is what times the interest.
Debt Service Ratio =
Net Profit (before Interest & Tax)
Interest Payable
(e) Capital Gearing Ratio- This ratio is very important in
the analysis of the capital structure of the organization.
This ratio establishes the relationship between variable
cost of capital and fixed cost of capital.
Capital Gearing Ratio=
Variable Cost Gearing Capital
Fixed Cost Gearing Capital
(f) Cash to Debt Service Ratio - Instead of debt service
ratio, the calculation of cash debt service ratio is
considered more superior. In this ratio, a relation is
established between cash inflow and interest payable.
Cash to Debt Service Ratio
Annual Cash Inflow before Interest and Tax
=
Interest + Sinking Fund Appropriation
3. Activity Ratio- Activity ratios give knowledge of
whether the capital or assets have been used effectively or
not. Higher activity/turnover ratios are indicative of
efficient utilization of resources, resulting in higher
profits. The following ratios are calculated in the form of
these ratios-
(a) Stock Turnover Ratio
(b) Trade Receivables Turnover Ratio
(c) Average Collection Period
(d) Trade Payables Turnover Ratio
(e) Average Payment Period
(f) Total Assets turnover Ratio
(g) Fixed Assets Turnover Ratio
(h) Current Assets Turnover Ratio
(i) Debtor Turnover Ratio or Debtor‟s Velocity
(j) Creditor‟s Turnover Ratio
(k) Working Capital Turnover Ratio
(l) Capital Turnover Ratio
(a) Stock or Inventory Turnover Ratio: This ratio gives an
idea of whether the firm is managing its inventory
efficiently or not. Through this ratio, the appropriateness
of the investment made in the stock and the adequacy of
the stock is checked. It establishes a relationship between
the average inventory of goods and the cost of goods
sold.
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(b) Trade Receivables Turnover Ratio: This ratio is used
to know whether the recovery policy of the organization
is successful or unsuccessful.
Net Credit Sales
Receivable Turnover Ratio =
Receivables
(c) Average Collection Period- This period is calculated to
determine the credit policy of the firm and the amount of
debtors. More clarity can be known about the quality.
The longer the average collection period, the more late
the payment is received by the firm, the amount
appropriated to debtors increases and the possibility of
increasing the amount of bad debtors increases.
Average Collection Period=
Days in a year
Debtor's Turnover Ratio
(d) Trade Payable Turnover Ratio- This ratio shows the
short term liabilities.
(e) Average Payable Period- A firm can find out the
average payment period with the help of creditors
turnover ratio.
Days in a years
A.P.P =
Creditors Turnover
(f) Total Assets Turnover Ratio- Not only fixed assets but
all assets contribute in the generation of sales in a
business, therefore, by ascertaining the total asset
turnover ratio, it is known that all assets are being used
effectively. Is it or not. In this ratio, a relation is
established between the total assets employed in the
business and the total net sales generated on their basis or
the cost of goods sold.
Total Assets Turnover Ratio=
Net Sales or Cost of Goods Sold
Total Assets
(g) Fixed Asset Turnover Ratio- This ratio establishes a
relationship between the depreciated value of fixed assets
and the net sales and cost of goods sold.
Fixed Assets (Net) Turnover Ratio=
Net Sales or Cost of Goods Sold
Fixed Assets
(h) Current Asset Turnover Ratio- This ratio establishes
the relationship between current assets and net sales or
goods sold.
Current Assets Turnover Ratio=
Net Sales or Cost of Goods Sold
Current Assets
(i) Debtors Turnover Ratio or Debtor‟s velocity- Debtors
and bills receivable form an important part of the current
assets of an organization. Hence their good quality
determines the liquidity of the firm.
This ratio establishes the relationship between the
net sales and average debtors of the firm.
(j) Creditor‟s Turnover Ratio – Just as the firm sells
goods on credit, it also purchases goods on credit. The
sum total of creditors and bills payable is called total
creditors. On the other hand, this ratio is known by
dividing the amount of total creditors in the amount of
purchases. The provision for discount to creditors is not
deducted from the amount of creditors.
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Creditor‟s turnover Ratio=
Net Credit Purchases
Total or Average Payables
(k) Working Capital Turnover Ratio- This ratio is
calculated by dividing Net Working capital to the Net
Sales or Cost of Goods Sold.
Working capital Turnover Ratio=
Net Sales or Cost of Goods Sold
Net Working Capital
(l) Capital Turnover Ratio – This ratio establishes the
relationship between the capital employed in the business
and the net sales of Cost of goods Sold.
Total Capital Turnover Ratio=
Net sales of Cost of Goods Sold
Total Capital Employed
4. Profitability Ratios- Profitability ratios measure the
profitability or efficiency of the firm. The final results of
the business operations can be easily seen from these
ratios. Profitability ratios can be viewed from three points
of view-
(i) Profitability Ratio based on Sales
(ii) Profitability Ratio based on Assets or Investments
(iii) Profitability Ratios for analysis from the point of
view of the owners/Investment Analysis Ratios.
I. Profitability Ratios Based on Sales: The
calculation of the following profitability ratios is
important on the basis of sales of a firm:-
(a) Gross profit ratio
(b) Operating Ratio
(c) Operating profit Ratio
(d) Net profit Ratio
a) Gross Profit Ratio- This ratio establishes the
relationship between gross profit and net sales of the
firm. Gross profit is obtained after deducting the direct
cost of goods sold from net sales. If profit is divided
by net sales and multiplied by 100, gross profit is
calculated as a percentage of sales. In general terms,
gross profit is calculated by deducting the cost of
goods sold from the sales price.
Gross Profit
Gross Profit ratio= × 100
Net Sales
For example, if the total revenue of a business for a
year is Rs.240000 and the gross profit is Rs.60000,
then the gross profit ratio will be:
60000
Gross Profit ratio= × 100 =25 %
240000
b) Operating Ratio- This ratio expresses the relationship
between operating cost and sales.
c) Operating Profit Ratio- Through this ratio, we
establish a relationship between the operating profit of
the firm and its net sales. For this, we have to divide
the operating profit of the firm by net sales and
multiply by 100. Operating profit is calculated net of
all direct costs of sales as well as all other indirect
expenses related to the core business of the firm,
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Those related to sales and distribution are deducted.
Operating profit can be calculated by subtracting
operating expenses from gross profit or by adding all
operating expenses to the cost of goods sold.
Operating Profit
Operating Profit Ratio = ×100
Net Sales
d) Net Profit Ratio: This ratio establishes the
relationship between net profit and net sales after tax
of the business. Net profit is calculated by adding non-
operating income to operating profit and non-
operating expenses. Net profit after tax is taken after
deducting the amount of tax.
Net Profit
Net profit Ratio= ×100
Net Sales
II. Profitability Ratio based on Assets of
Investment- Profitability ratios can be calculated
on the basis of assets or investment of the
business. If the firm is not able to earn
satisfactory return on its assets or investment, it
would mean that the firm is misusing the assets.
In these the following ratios are important-
1. Return on Proprietary Funds or Shareholders'
Investment
2. Return on Equity shareholders Funds
3. Return on Total Assets.
4. Return on Capital Employed.
1. Return on Proprietary Funds or Shareholders'
Investment- This is a very simple ratio in which relation
is established between Proprietary Funds or Shareholders'
Funds and net profit after interest and tax.
Return on Shareholders‟ Investment =
Net Profit after Tax
× 100
Proprietor's funds
2. Return on equity shareholders' funds-Equity
shareholders are the real owners of a company, so it is
known by calculating the return on the funds appropriated
by them.
Return on Equity Shareholders Funds=
Net Profit after Tax - Preference Dividend
Equity Shareholders funds
3. Return on Total Assets- This ratio is established relation
between net profit after tax but before interest and total
appropriated funds or total assets. Net in total assets
(fixed assets, current assets and non-trading investments
are included.
4. Return on Capital Employed- It is most important in the
profitability ratios. It examines the efficiency of the
management in the use of all the resources in the
business.
III. Investment Analysis Ratios- These ratios are
helpful in analyzing the future investments made
by a shareholder in the company. These ratios are
as follows:-
(a) Return of Equity- The profitability of the funds
invested by the shareholders is measured by
this.
Profit after Tax
R.O.E=
Net Worth or Proprietors Funds
(b) Earnings Per Share- Earning per share is
known by dividing the net profit after tax
available for equity or ordinary shareholders by
the number of ordinary shares.
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E.P.S=
Net Profit after Tax available for Equity Shareholders
Number of Ordinary Shares
(c) Dividend Per Share - The amount of profit or
income available to the shareholders of the
company is not distributed among all of them.
Rather a part of it is retained and only a part is
distributed among the shareholders. So dividend
per share refers to how much profit per share
has been distributed by the company.
Dividend per Share =
Total Profits Distributed to Equity shareholders
Number of Equity Shares
(d) Price-earnings ratio - If the market price of a
company's common share is divided by the
earnings per share, then this ratio is obtained.
Market Price for Ordinary Share
P.E. Ratio =
Earning per Share
(e) Dividend Payout Ratio – Dividend payout
ratio is calculated by dividing the earnings per
share by the dividend per share and multiplying
by 100. From this ratio it is known that what
percentage of earnings per share is distributed
among the shareholders.
Dividend payout Ratio = ×100
Fund Flow Statement
Funds flow statement explains the changes in various assets
and liabilities between the balance sheet of two dates. In other
words, the fund flow statement is a technique with the help of
which changes in the financial position of an organization
between two dates Changes are studied and with the help of
this it can also be ascertained that why and how the financial
condition of the organization has changed between two dates.
In fact, changes in the economic condition are due to the flow
of funds only.
In general terms, the movement of funds in the business is
called fund flow. Since funds refer to working capital,
changes in working capital on this basis are called fund
flows. The change in working capital will take place only
when the account related to current asset or current liability is
affected on the one hand and the account related to non-
current asset or non-current liability is affected on the other. If
both the accounts pertain to current assets or current liabilities,
there will be no change in working capital. On the contrary, if
both the accounts pertain to non-current assets or non-current
liabilities, there will be no fund flow.
From which sources the funds were received in a particular
financial year and on which items this fund has been used, it
cannot be known from these financial statements (statement of
position and profit and loss account). For example, if a loan of
Rs.500000 is taken in a year and the loan is repaid in the same
year, then this behavior will not have any effect on the balance
sheet, but it is important information for the analyst that from
where the loan was taken in this particular financial year taken
and where it was used and how it was paid. Therefore, in
addition to the profit and loss account of the position
statement, Statement of Changes in Financial Position is
prepared to reflect the changes between the position
statements prepared on two different dates.
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Definition of Funds Flow Statement
 According to R. N. Anthony, "Funds flow statement
discusses the sources from which additional funds were
received and on which items it was spent?"
 According to Smith and Brown, “Funds flow statement is a
statement prepared in the form of summary, which gives
knowledge of changes in financial conditions over time of
balance sheets (sheets) made on two different dates.”
Objectives of Fund Flow Statement
The main purpose of the fund flow statement is to clarify how
funds were created (sources) and where they were used during
a given period.
According to Howard and Upton- "The basic objective of
the study of fund flow statement is to provide the financial
management past picture in relation to the financing of the
assets necessary for the business."
According to Perry Mason, from this statement the answers
to the following questions are easily known to the financial
manager:-
1. Where is the amount of profit used?
2. Why are net assets low even when net profit is high? Why
are net assets low even though net profit is high?
3. Why should the dividend not be higher?
4. How was the higher dividend distributed even when there
was a net loss or less profit during the period?
5. How was the plant and machine expanded?
6. How was the amount received from the sale of plant etc.
used?
7. What was the use of the amount obtained from the issue of
shares and debentures?
8. How were the debentures redeemed?
9. Why was money taken there to buy new plant and
machinery?
10. By what means the increase in working capital was
arranged?
Importance of Fund Flow Statement
Fund Flow is very useful for managers, shareholders, banks
and financial institutions and creditors. The importance of
fund flow statement is as follows:-
1. Knowledge of Changes.
2. More Information.
3. Pathfinder.
4. Estimation of Working Capital.
5. Capital Control.
6. Knowledge of Financial Soundness.
7. Financial Impact Study.
8. Helpful in getting loan.
9. Support from Dividend Policy.
10. Best Use of Funds.
Net Working Capital Concept
According to this concept, funds refer to the funds available
for working capital or Net Working Capital, which is actually
different from cash funds. Net working capital refers to the
difference between Total Current Assets and Total Current
Liabilities.
Net Working Capital = Current Assets - Current
Liabilities
In this sense, the fund includes not only cash, but also cash
and assets and other claims that can be converted into cash in
21 BY SANJAY GUPTA
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a financial period, such as debtors will soon be converted into  Fixed Assets are Acquired from Current Assets
cash, cash will be obtained by selling finished goods. This is  Operations Losses
currently the most prevalent concept of considering funds as When there is no Flow of Funds
net working capital in the form of current assets The statement
Funds flow does not happen only in the following situations-
of changes in financial position is generally called the Funds
 Inflow of Current Assets Simultaneously Creating
Flow Statement.
Current Liabilities
Funds flow statement is also referred to by the following
 One Current Asset Converted into-another Current Asset
names:-
 Current Assets are used to Discharge Current Liabilities
1. Fund Statement
 Fixed Assets are acquired through Fixed Liabilities
2. Application of Fund Statement
 One Fixed Liability is converted into another Fixed
3. Statement of Funds Provided and Applied
Liability
4. Application and Sources of Funds Statement
 One Fixed Asset is acquired out of other Fixed Asset
5. Where Got Where Gone Statement
 When a Transaction does not affect the working capital
Meaning of Fund Flow
Sources and Uses of Funds
For preparing fund flow statement, the term fund is used as net
Business items which increase funds i.e. net working capital
working capital i.e. excess of total current assets over the total
current liabilities. are considered sources of funds and those items which
Following are the detailed description of current and non- decrease net working capital are considered uses of funds.
current items appearing in the position statement: Sources of Funds
Current Items 1. Profit from operations
Current Assets Current Liabilities 2. Issue of Share Capital or Equity
Stock Creditors 3. Long term loans
Marketable Securities Bill Payable 4. Sale of Fixed Assets and Investments
Debtors Bank Overdraft 5. Non-Operating Receipts
Bank Outstanding Expenditure
Cash Unclaimed Dividend
Debt
Prepaid Expenses Unearned Income When an organization / institution or company borrows money
Advance Tax for purchase and investment, which is usually unaffordable
Accrued Income and has to be repaid with interest within a certain time. Such
Non-Current Items borrowed amount is called loan.
Debt is a cheaper source of funds as interest paid on loans is
Non Current Assets Non Current Liabilities
treated as an expense and hence reduces the taxable income.
Fixed Assets, Freehold Share Capital, Equity,
Premises, Land & Building , Preference
Sources of Credit-
Plant & Machinery, Furniture 1. Formal Sources- The loans given by banks and
and Fittings etc. government societies are called formal sources of credit.
2. Informal Sources- The loans taken by moneylenders,
Intangible Assets, Trade Reserve & Surplus- Capital
Mark, Patent , Copyright Reserve, General Reserve, businessmen, owners, relatives and friends are called
Securities Premium, Other informal sources of credit.
Reserves or Funds P & L  Formal lenders demand collateral from the borrower,
a/c) while informal lending does not require any collateral.
Investment Long Term Long Term Loans,  Formal lenders lend at a fixed and low rate of interest
Govt. Securities and Debentures, Institutional while informal lenders lend at arbitrary and high interest
Commercial Securities Loans, Non-Institutional rates.
loans.  The formal lending institutions are controlled and
Fictitious Assets, Preliminary Provision for Depreciation, supervised by the Reserve Bank of India while there is no
Expenses, Miscellaneous Provision for taxation, body to oversee the activities of the lenders in the
Expenditure, Discount on Proposed Dividend informal sector.
Issue of Debentures, Deferred  Formal credit is larger in size while informal credit is
Revenue Exp, Underwriting smaller.
Commission Debt Capital
Profit & Loss a/c-Loss Along with the expansion of business enterprises, their
When there is a Flow of Funds financial requirements increase, which are met by debt capital
in addition to ownership capital. Since this capital is
1. On the basis of this classification, there will be an inflow of
provided by the lenders, it is called debt capital. Funds
funds only in the following situations:-
from debt capital can be obtained to meet the short term,
 Current Assets Creating Fixed Liabilities
medium term and long term financial needs of the company.
 Fixed Assets are sold for Current Assets
Short term loans meet that part of working capital which is
 Profits from Business Operations
seasonal in nature.
2. On the basis of this classification, there is an outflow of
Taking a loan for an organization is not considered to be a
funds in the following cases-
sign of its weak financial condition, but successfully running
 Fixed Liabilities are discharged through Current
the business by taking a loan is considered a symbol of the
Assets
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efficiency of financial management.
The main purpose of taking loan in the financial system of a
company is to obtain more capital without giving rights to
outsiders in its management so that the income of the
members of the company can be increased. The ability of the
company to take loans depends on its own financial condition,
the confidence of the lenders towards it, the condition of the
capital market, etc. Today all the commercial companies
obtain a part of their capital from proprietary securities and the
remaining part from debt capital. Government bonds,
mortgages etc. are instruments of obtaining credit.
Application or Uses of funds
1. Loans from Operations
2. Redemption of Preference Shares, Debentures
3. Purchases of Fixed Assets
4. Payment of Dividend and Tax
5. Repayment of Long Term Loans
6. Non Trading Payment
7. Drawings
Limitations of Fund Flow Statement
1. Funds flow statement is more concerned with past
analysis. This description tells whether something has
happened. It is not possible to know from this distribution
what will be the status of the fund or how much will be
required in future.
2. This statement does not provide the basic information
about the financial condition or change of the business.
This statement only provides some information by
changing the form of the figures displayed by the balance
sheet and profit and loss account or by regrouping them.
3. If the statement presents the statement of flow of funds
only, it does not present the change in cash position. Due
to this, all the cash receipts and payments are not known,
due to which the information obtained from this statement
can present misleading conclusions.
Cash Flow Accounting
 The cash flow statement analyzes the changes in the cash
balance of the business between two time periods. The
cash flow statement is a tool for measuring cash flow that
is used by management to measure the short-term cash
flow of a firm.
 Cash infusion refers to such a process under which the
ownership capital and debt capital are arranged first. After
that raw material is purchased with cash, then goods are
produced by paying wages and other production expenses.
Cash is obtained again by selling the goods produced and
this process continues continuously.
 Only listed companies are required to prepare and submit
cash flow statement.
 The accounting period of the cash flow statement is the
same for the period for which the profit and loss account
and balance sheet are prepared.
 As per Section 2(40) of the Companies Act 2013, One
Person Companies , Small Companies and
Dormant/Secret Companies are exempted from preparing
cash flow statement along with their financial statements.
Objectives of Cash Flow Statement
 Helpful in Financial Policies and Cash Evolution
 Helpful in Control
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 Helpful in Internal Financial Management
 Knowledge of Variation in Cash Balance
 Helpful in Short Term Decision
 Helpful in Forecasting
 Measurement of Managerial Efficiency
Cash Flow Requirement
The primary purpose of the cash flow statement is to report the
cash receipts and cash payments of an organization over a
period of time.
1. Where did the cash come from during that period?
2. What is the amount of cash used in that period?
3. What was the change in the cash balance during that
period?
Sources of Cash
 Cash From Operation
 Issue of Shares
 Issue of Debentures
 Long & term Loans Raised
 Sale of Fixed Assets
Playing The Float
It is a technical process by using which a firm can make
optimum use of its cash funds. Float refers to the amount lying
in the checks written by the firm. These checks have been
written by the institution. But these have not been produced by
the creditors. It is a common fact that there is a time lag
between the issuance of a check by an institution and the time
it is presented for payment. That is why the actual balance
in the bank account of the firm is more than the balance
shown in the books of the firm. This is called float. The
longer the period of float, the more profit the firm can make,
that is, the firm can operate with less money by issuing checks
of higher amounts. If the institution can estimate the free float
correctly, then it can also earn profit by depositing the extra
amount elsewhere.
These floats can be of many types. Billing Float, Mail Float,
Check Processing Float and Banking Processing Float are
specifically mentioned in the context of retail cash book
management.
Application/Use of Cash
 Redemption of Preference Shares
 Redemption of Debentures
 Repayment of Loans
 Purchase of Fixed Assets
 Payment of Dividend
Types of Cash Flow
Cash flow is of the following two types-
1. Inflow- Inflow of cash means cash coming in from outside
i.e. increase in cash and use of money. Cash sale of goods,
amount received from debtors, amount received by share
issue etc.
2. Outflow- Cash outflow means cash going out of the
business. For example, cash purchase of goods, payment of
wages, cash purchase of fixed assets etc. are examples of
cash outflow.
Cash does not mean only cash in hand, but it also
includes demand deposits in the bank and cash equivalents
mean short-term and highly liquid investments that can be
immediately converted into cash and close to maturity without
the risk of change in value (due to change in interest rates).
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Hence it is clear that such investments are included in the cash
equivalent. Whose original maturity period is three months or
less. Commercial Paper, Treasury Bills, Certificate of Deposit,
Money Market Deposits etc. are generally considered as cash
equivalents.
1. As per Revised Accounting Standard - 3 (A.S.3) such
cash inflows and outflows are due to operating, investing
and financing activities which are explained below-
A. Cash Fund- Cash fund includes-
 Cash in hand
 Demand deposits with banks
B. Cash Equivalent Items
 Cash equivalents refer to short-term and highly
liquid investments that are readily convertible into
known amounts of cash and have an insignificant
risk of change in their value.
2. The statement shows three main categories of cash
inflows and cash outflows: operating appropriations and
financing activities.
A. Operating Activities- Major revenue generating
activities of the enterprise. According to the inflow
and outflow of cash, they are divided into two parts-
Operational activities include activities other than
appropriation and financial activities.
(i) Cash Inflow (ii) Cash Outflow
 Cash Sales  Cash Purchase
 Cash from Debtors  Payment to Creditors
 Cash Received from  Cash operating
Commission and Fees Expenses
 Royalty and Other  Payment of Wages
Income  Income Tax
There are two methods of calculating cash flow from
operating activities Direct method and Indirect method: The
guidelines of the Securities and Exchange Board of India
satisfy only the direct method:-
a) Direct Method- Under the direct method, the
difference between cash received from customers and
payments to suppliers and other expenses is called
cash generated by operations. Under this, all non-cash
transactions such as price, goodwill, primary
expenses, discount on shares and debentures, etc. and
profit or loss on sale of investments and assets are not
taken into consideration. Similarly, non-operating
income such as interest and dividend income is also
ignored. Cash flow from some unusual items like bad
debts recovered, insurance received, stock destroyed
by fire, earthquake etc., cash flow from dividend or
interest received and its payment should be shown
separately.
b) Indirect Method- Under this method profit or loss is
adjusted from non-cash, items and non-operating
income. The profit or loss shown in the profit and
loss account cannot be treated as cash from
operations. As you know, some items like capital,
goodwill, preliminary expenses etc. are shown on the
debit side of the profit and loss account but they do
not affect the cash. Such items are added to net profit.
Similarly, non-trading income such as profit from
sale of fixed assets, interest and dividend from
investments, refund of taxes, provision for discount
on creditors, etc. are shown on the credit side of the
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profit and loss account and are used while computing
cash from operations is deducted from net profit. In
addition to the above mentioned items, there are some
items which are not shown in the profit and loss
account but which affect the cash, such items come
from the changes in current assets and current
liabilities. All these items are adjusted against the
profit or loss shown by the profit and loss account in
determining the cash flow from operations.
 Extraordinary items: Cash flows related to
extraordinary items are classified as those
arising from operating, investing and financing
activities. For example, amount received from
insurance company in lieu of loss of stock or
loss in earthquake should be treated as flow
from operating activities.
B. Inverting Activities- These investing activities
include the acquisition and sale of long-term assets
and other investments that are not included in cash
equivalents. According to the inflow and outflow of
appropriation activities, they are divided into two
parts-
(i) Cash Inflow
 Cash sale of fixed assets
 Sale of investments
 Interest received
 Dividend receipt
(ii) Cash Outflow
 Cash purchase of fixed assets
 Purchase of investments
C. Financial Activities- Those activities which change
the size and structure of the owner's capital
(participation rights of the company) and the debt of
the undertaking. According to the inflow and outflow
of financial activities, they are divided into two
parts:-
(i) Cash Inflow
 Cash from issue of shares
 Cash from issue of debentures
 Long term borrowings and short term
borrowings
(ii) Cash Outflow
 Cash payment of loans
 Payment of interest on loans and debentures.
 Payment of dividends on equity and
preference shares – e.g., a company decides
to pay Rs 2 lakh in cash as dividend.
Effect of Current Assets and Liabilities on
Cash Flow
 Current Assets
 Due to increase in the items of current assets, there is
a decrease in the cash inflow because the cash is
blocked in the current assets.
 Decrease in the item of current assets leads to
increase in cash inflow from current assets.
 Current Liabilities
 An increase in the item of current liability leads to a
decrease in cash outflow as it saves cash.
 A decrease in the item of current liability leads to an
increase in cash outflow as the liability is paid off.
Therefore,
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Cash from Operations = Operating profit before changes
in Current Capital + Net Decrease in Current Assets + Net
Increase in Current Liabilities - Net Increase in Current
Assets and Net Decrease in Current Liabilities.
Break-Even Analysis
There is a close relationship between production quantity,
cost, profit and selling price of an item. As the cost depends
on the quantity produced and the quantity produced depends
on the selling price of the commodity and its demand, inter
alia. While profit depends on the selling price and cost of the
item. Therefore, when these factors are analyzed at any stage
of production and a relationship is established between them,
then it is called cost-only profit analysis. This is also called
'break-even analysis' because there is a level of production
where total cost and selling price are equal. Hence cost-only-
profit analysis or break-even analysis is a technique to study
the profit position of a business firm at different levels of sales
by analyzing its revenues in terms of sales volume.
 According to Martz, Kuri and Frank, "The break-even
analysis indicates at what level costs and revenues are in
equilibrium."
 According to I.C.W, London, "Cost-volume-profit
analysis is the study of the effect on future profits of
changes in fixed costs, variable costs, selling price,
quantity and mix."
Objectives
In general, break-even analysis provides solutions to the
following questions to the managers, which helps them in
decision-making:
 What will be the amount of production cost and profit at
different production levels?
 What will be the quantity of sales at which the fixed and
variable costs of production will be equal to the selling
price and the profit and loss will be zero?
 What should be the level of sales volume to earn the
specified profit?
 In the event of less demand for the commodity, how
much should the costs be reduced so that the pre-
determined amount of profit remains the same?
 How will a change in sales mix or plant expansion affect
the cost-volume relationship?
 Whether the sale of any article or operation of any plant
should be stopped or the firm should be closed down
permanently.
Contribution
Contribution margin is the difference between selling price
and marginal cost of sales, also known as gross margin. It is a
type of fund which is first used to meet the fixed expenses and
the rest is part of the profit of the business. Thus the sum of
fixed costs and benefits is also called contribution.
Contribution= Sales – Variable or Marginal Cost or C= S- V
(i) Contribution= Fixed cost + Profit or C = F + P
Profit Volume Ratio or P/V Ratio
Profit-only ratio (P/V Ratio) is studied to find out what is the
effect on the amount of profit due to changes in sales. The
profit-only ratio explains the relationship between contribution
and selling price, which can also be expressed as a percentage.
It is also called Contribution/Sales Ratio or Marginal
Income Ratio.
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Break Even Point
“The break-even point is defined as a method of studying the
relationship between sales revenue, fixed costs, and variable
expenses in order to determine the minimum volume at which
production can be profitable.”
In the words of Charles T-Horngren, "The break-even point
is the point of activity (sales volume) where total revenue and
total expenditure are equal; at this point there is neither profit
nor loss."
1. B.E.P. in Units- In the case of entities producing the same
commodity, it is better to find the break-even point in
units. As already mentioned, the break-even point is based
on the cost-only benefit relationship.
2. B.E.P. in Values- In the case of organizations producing
many items, it is better to find out the break-even point
values i.e. in total forms. It is calculated by multiplying the
units at the break-even point by the selling price per unit.
Margin of Safety
The difference between the total sales and the sales at the
break-even point is called the margin of safety.
Limitations of Break-even Analysis
1. The nature of break-even analysis is static. It is
applicable only in relatively stable conditions.
Therefore, it is less applicable in the changed
conditions of cost and revenue.
2. This analysis is suitable only for the short run; it is not
an effective technique for long term use, because all
costs become variable in the long run.
3. In practical life, neither a cost is completely fixed nor
completely variable.
4. One of the basic assumptions of break-even analysis is
that the cost-revenue relationship is only linear, but in
practice this is not found.
5. The assumption of this analysis that higher production
leads to higher profit is not correct.
6. This analysis does not take into account capital
employed which is an important factor in managerial
decision.
7. In this analysis, the relationship between production
and selling costs does not remain constant over a long
period of time.
8. The assumption of a constant sales mix is unrealistic in
this analysis. Because when there is a change in the
demand for any one item in the market, the sales mix
becomes different from the predetermined mix.
9. In addition to the unrealistic belief of perfect
competition, in practical life it is unrealistic to consider
the price of the commodity as constant for the
unlimited sales area.
10. In break-even analysis, all factors other than sales
volume are assumed to be constant and uncorrelated. In
reality, these factors do not remain constant for a long
time. It is difficult to completely remove the effects of
these factors even with the use of statistical methods.
Budget
Budget is a French word meaning lists of income and
expenditure. A budget is a financial plan prepared in advance
of a future period. A financial or quantitative statement
prepared before a specified period to achieve the set goals is
25 BY SANJAY GUPTA
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called a budget. It refers to the expected results of a future
period given in numerical terms.
It is a tool of the management class, with the help of which
solid operation of business is done for policy making,
achievement of goals and profit making. Brown and Howard
have written that the budget gives a predetermined statement
of management policy for a given period, which provides a
standard for comparison with actual results.
According to I.C.M.A. England, 'Budget is a financial and
quantitative statement of the policy prepared before a certain
period and with the objective of achieving the goals to be
implemented in that period.'
Describing the process of preparing the budget, J.Betty has
called budgeting to predict and record future events in
advance.
Features of Budget
(i) Pertains to a definite period.
(ii) Made ahead of time.
(iii) Financials are monetary and quantitative statements.
(iv) Policy is determined to achieve the goal.
(v) It is based on forecasts of both income and
expenditure.
Budgetary Control
It is an important tool of management by which efforts are
made to minimize the cost, control and earn maximum profit
from limited resources.
According to I.C.M. England, 'Budget control means
determining the responsibility of the managers, comparing the
budget with the actual results and making amendments on the
basis of that.'
According to J.Betty, 'Budget control is a system by which
all aspects related to production etc. are planned and
controlled by the budget.'
Terry has described budget as a means and budgetary
control as the end result.
Budgetary control includes planning, coordination, recording,
controlling, reviewing actual results by comparing them with
budgeted standards, and taking corrective action.
Objectives of Budgetary Control
(i) Control over costs- Due to pre-planning, control over
material-labour-expenditure is maintained.
(ii) The production work is conducted efficiently.
Disruption does not arise due to advance determination
of policies.
(iii) Forecasting of production and future development
by considering all the possibilities in advance, the
availability and requirement of money and materials for
production is determined and development plans are
made.
(iv) Effective administration can do effective work by
pre-planning about the means of production and their
availability.
Essential Elements of Effective Budgeting
1. Budget is a collective work; hence efficient organization
is a must.
2. The staff can also oppose the changes made by the
budget, so the top management should agree to the
budget and it should take the form of cooperation.
3. The work of preparing the budget should be done by the
implementing officers only.
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4. Time to time comparison of budgeted targets and actual
results is essential so that effective control can be
exercised.
5. Education related to budget should be imparted to the
employees and responsible officers so that the targets
can be achieved.
6. Expenditure on budget preparation should not be
excessive and efforts should be made to achieve the
target with limited means.
Limitations of Budgetary Control
(i) It increases the cost.
(ii) Collective co-operation is based on the spirit of joint
responsibility.
(iii) It is based on estimates. Due to market conditions,
government policies, monetary pressures it is not
possible to achieve the desired goal.
(iv) It is a means of achieving the goal. Its success
depends on the efficiency and efficiency of the
managerial class.
Budgetary Control Process
It is a technique adopted for cost control of management
and its form depends on the nature and size of the industry.
For this the following procedure can be adopted:-
 Budget centers should be established.
 To make effective arrangements for obtaining necessary
statistical information related to the budget.
 An organization chart of the officers responsible for
budget preparation should be made so that the
responsibility of each concerned party can be
determined. The flow of organization chart can be like
this:-
Managing Director → Budget Committee → Budget
Officer → Managers of Various Departments.
Departmental managers (purchase, sales, production,
research and development) prepare budgets according to
the means and needs of departments related to their
departments and send them to higher officials for
decision.
(i) Budget Committee- It does the work of coordinating
all the budgets and preparing the master budget. It
includes the Chief Executive Officer, accountant,
Budget Officer and Departmental Manager.
(ii) Budget Manual- In this document, detailed
description of rights, responsibilities, budget control
program, and necessary accounting records of the
concerned officers is recorded.
(iii) Determination of Fault Factor- Production and its
cost can be affected by any one factor (material,
labour, plant capacity, capital, sales management
etc.). Therefore, at the time of budget making, future
estimates and policy should be determined by
determining that factor.
(iv) Determining the Level of Functionality- This level
is determined on the basis of the performance
capacity of the previous years, the highest efficiency,
and the existing efficiency.
Budget v/s Forecast
1. Budgeting is a planning process while forecasting is
based on ad hoc information.
2. Budget is a target to be achieved whereas forecast is an
estimate of future events.
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3. Cost control is done by budgeting and budget control
whereas it is not possible in forecasting.
4. Comparison of targets and actual results is possible
under budget control whereas it is not possible in
forecasting.
Types of Budget
Budget control is done on the following grounds-
On the Basis of Time
(i) Long Term Budget- The budget which is made for the
operation of schemes from 3 to 20 years is called long
term budget. Like capital budget. Usually this budget is
made in physical units.
(ii) Short-Term Budget- The budget (from 1 week to 1
month) prepared for solving short-term problems is
called short-term budget. It is made in monetary unit.
(iii) Financial Budget- The budget prepared for one year
only in relation to the present conditions is called
financial budget. Like the financial budget of the
government.
On the Basis of Actions
(i) Work-wise Budget- This budget is made for a
particular work of the business. Budget is prepared for
all the activities like sale purchase production material,
labour, overhead capital expenditure, cash etc.
(ii) Sales Budget- This budget is essential for the
organization because sales are the basic factor. Sales of
previous years, estimates based on the advice of sales
agents and their experiences, policies of the
organization, purchasing power of customers, quality
of goods, design of goods, government policies, etc.
are kept in mind for preparation of sales budget. Plant
capacities, economic condition of the business,
availability of finance, urbanization, industrialization
also affect the sales budget.
(iii) Serial Budget- This budget presents a detailed account
of the cup in the period under consideration. The
budget is made keeping in mind the stock, stock level,
economic order quantity, financial resources, self-
generated production etc.
Quantity to be Purchased = Consumption during
Period + Requireed Closing Stock-Expected
Opening Stock
(iv) Production Budget- The objective of this budget is to
produce the goods desired by the sales budget at
minimum cost. It is made on the basis of sales budget
and desired stock.
The budget should be made keeping in mind the non-
availability of general labour, plant etc. of the
production, the demand of the customers and its supply
capacity.
Estimated Production = Estimated Sales + Desired
Ending Stock - Expected Opening Stock
(v) Production Cost Budget- Its main purpose is to
provide cost information for achieving the set
production targets and implementing the plan. This
budget is an abbreviation for materials, labour,
overheads, etc. Material budget (revealing the quantity
and cost of direct materials required for production),
Labor budget (including required labor, their
availability, wages, cost of facilities) Production
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overhead budget (revealing indirect materials, indirect
labor and indirect expenses) Production cost budget is
prepared on the basis of administrative overheads,
selling and distribution overheads etc.
(vi) Capital Expenditure Budget- This long-term budget
presents the details of plans for fixed assets and their
rehabilitation, improvement in production methods and
high-level management. Its purpose is to expect the
expected rate of return on the schemes. It is a tool to
control capital expenditure.
Rationing in Capital Budgeting
Rationing in capital budgeting refers to a situation where a firm
is not in a position to invest in all profitable projects due to lack
of available allocable funds. Generally, each firm has limited
resources which do not satisfy all the needs. Therefore, despite
having many profitable projects in front of a firm, the firm does
not start all the projects but chooses some projects so that the
profitability of the firm can be maximized.
(vii) Cash Budget- The cash budget for the budget period
under consideration is forecasted through this budget.
Discusses the position of cash receipts payments,
balances, availability, solvency etc. Lack of cash where
there is a hindrance in the progress of the business. On
the other hand, excess reduces the profit rate and
causes loss of interest.
(viii) Master Budget- According to I.C.M.A. London, the
master budget is a summary budget which includes the
main points and factors of different budgets. This
budget is prepared by coordinating the budgets of
various activities (sales, purchases, production, cash
etc.). This budget prepared by the budget officer is
approved by the budget committee, after which the
board of directors approves it. This budget is used by
the management to determine the level of efficiency for
various stages.
On the Basis of Elasticity
(i) Fixed Budget- This budget is prepared at the
operational level only and does not change with the
change in the production level. In a business
organization, production quantities and levels keep on
changing due to market conditions, internal financial
position etc. So this budget is not very useful.
(ii) Elastic Budget- The budget prepared keeping in mind
the operating level from minimum level of production
to maximum level of production and the conditions of
production is called elastic budget. Changes keep
happening in this budget at different operational levels.
The budget is prepared by dividing the indirect
expenses into fixed and semi-variable overheads.
Budget Creation
In preparing the business budget, special attention should be
paid to the following points:-
 True Forecast- Forecasting is the cornerstone of business
income-expenditure. In fact, various types of budgets are
prepared on the basis of business forecasts.
 Method of Complete and Planned Accounting - For
successful budget preparation, it is also necessary that the
method of accounting should be complete and properly
planned, because in the case of contaminated method of
accounting, neither an excellent budget can be prepared nor
its successful operation can be possible.
27 BY SANJAY GUPTA
NIRMAN IAS GWALLIOR Accounting and Management Accounting
 Complete and Planned Method of Cost Accounting- Difference between Forecast and Budget
Efficient method of cost accounting is absolutely necessary Variance Forecast Budget
for the construction of income-expenditure, because if the Basis
ratio of costs is contaminated then the budget based on them Planning The forecast is based The budget is
cannot be correct. on contingent facts. completely based
 Efficient Organization with Fixed Responsibility- it is Pre-announcement of on planning; it
absolutely necessary for the preparation of the budget and its rain, storm by the cannot depend
operation that the arrangement of the organization in the Meteorological much on
factory is adequate and the best. Department on the contingent facts.
 Formation of Budget Committee- Budget making is a co- basis of some facts is
operative work. In small organizations only accountant or forecast.
accountant prepares the budget in consultation with the Sequence Forecasts are made In the budgeting
manager, director and heads of departments, but in large first. system, budgets
business organizations this work cannot be left to accountant. are prepared on the
In big business organizations, there is often a budget basis of forecasts
committee in which all departments are headed and a skilled only.
and experienced person is its director. That operator is called Target There is no set goal in There is a goal in it
the budget officer. The most important work of the budget forecasting. It is only a and full efforts are
committee is to receive forecasts, departmental budgets and statement. made to achieve it.
periodic reports. Resilience There is a lot of There is relatively
 Clearly Defined Business Policies - For the making of a flexibility in less flexibility in
great budget, it is also very important that the business forecasting. the targets of the
policies are completely clear, because they are the budget.
cornerstone of the budget. Control No kind of control is Budgetary control
 Statistical Information- It is also necessary for budgeting possible from method can be
that necessary information related to each department should forecasting. benefited by the
be available in the form of statistics, such as department's budget.
forecast, amount of raw material, amount of working capital, Compare Forecasts are not By comparing the
labor force, etc. Sales forecasting is absolutely necessary for compared to actual budget figures with
the preparation of production budget. results. Modification the actual results,
and treatment is not the reasons for the
 Full sympathy of the Upper Class Manager - By
possible by differential difference are
'sympathy' we mean that the head of each department should
analysis. ascertained and
always maintain a close relationship with the management
later by their
and administration.
analysis,
 Budget Period- Generally, the period of budget depends on
amendment and
the nature of the business; however, it should be broad remedial work is
enough to cover all seasonal changes, financial activities, possible.
total production, etc. Although the budget is made for the Reliability It is not based on Budgets cannot be
whole year, but for the convenience of execution, half-yearly scientific analysis but prepared on the
or monthly budget should be made. on the ambition of the basis of intuition.
Precautions in Preparing the Budget organization and the For this reason the
 While preparing the budget, it should be kept in mind that intuition of the budget figures are
whatever goals are set, they can be achieved without officers. It is doubtful, more accurate and
difficulty. which is not sure to be reliable.
 Some lazy tendency managers repeat the previous goals while pure and correct.
preparing the budget. This situation is very flawed, because Management Accounting
with the change in time and situation, it becomes necessary to Managerial Accounting is made up of two words, Managerial
change the goals. + Accounting. Management refers to that art, which leads,
Features of Budget guides and conducts human power to achieve a certain
objective. On the other hand, accounting is the art of
 Due to the flexibility of the budget, the work of cost control
recording, classifying and summarizing those transactions and
becomes easy and convenient.
events which are wholly or partly of financial nature in a
 While preparing the budget, along with past details and
significant manner in terms of money and interpreting the
experience, full attention should be paid to the current results arising out of them.
circumstances. For institutional purposes in managerial accounts, the accounts
 The budget is a co-operative process in which all the are presented, classified, summarized and selected in such a
department heads have full cooperation. way that the information becomes important from the point of
 The budget should be a specific statistical statement. view of the managers. In short, such a method of presentation
 The highest administration should take special interest in the of accounts, which helps the managers in taking decisions, is
making of the budget. called managerial accounting.
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The idea of management accounting originated with the presented before the management after analyzing and
original ideas and efforts of James H. Bliess. He says that 'by interpreting it according to the managerial requirement, so that
the intelligent and effective use of accounting data, the it can perform its tasks efficiently. In this way the functions of
management can obtain complete information regarding managerial accounting are as follows:-
business operations and exercise maximum control over them. 1. Forecasting and Planning
The term managerial accounting was first used by a 2. Organising
British group of accountants visiting the United States in 3. Co-ordinating
1950 under the auspices of the Anglo-American Productivity 4. Controlling Performance
Council. 5. Motivating Employees
A technique such as standard costing method, budgeting 6. Financial Analysis and Interpretation
techniques, marginal cost analysis, profit-only analysis, break- 7. Communication
even point, etc. have been included in managerial accounting 8. Special Cost and Economic Studies
and at present managerial accounting has become a systematic 9. Providing necessary information to various officials of the
study. Management accounting is accounting for the future. organization
Managerial accounting maintains control over the internal Scope of Management Accounting
systems of the business and achieves business goals.
1. According to Robert Anthony, "Management accounts Under managerial accounting, all those subjects, methods and
are concerned with accounting information, which is techniques are included, on the basis of which all the
useful to managers." information is collected and various statements are prepared.
2. In the words of J.Bateley, "Managerial accounting refers The following areas are included under this-
to those accounting methods and systems, in which, 1. Financial Accounting
through special knowledge and ability, managers are 2. Cost Accounting
helped in maximization of profits or minimization of 3. Budgeting and Forecasting
losses." 4. Historical Cost Accounting
3. According to Cost and Management Accountant, 5. Reporting
London, "Accounting is such a presentation of 6. Tax Accounting
professional abilities and knowledge for the preparation 7. Interpretation of Data
of information, which helps managers in the formulation 8. Internal Audit
of policies, planning and control for enterprises." 9. Office Service
4. According to the Anglo-American Council of Objectives of Management Accounting
Productivity, “Management accounting is the
1. To Ensure Responsibilities
presentation of information in such a way that it helps
2. To help in Decision Making
managers in the implementation of their day-to-day
policies within an enterprise.” 3. To Help in Co-ordination
5. According to the Institute of C.A.London, "The 4. To help in Organising
presentation of accounts which enables the business to 5. Helpful in Reporting
achieve maximum efficiency is called Management 6. To assist in Motivating
Accounts." 7. To help in communicatoin
8. To help in Planning
Characteritics of Management Accounting
Nature of Management Accounting
1. Management accounting is an integrated method.
Managerial accounts provide necessary data and information
2. It is highly conscious of managerial needs.
to the managers for decision making and provide financial and
3. In managerial accounting, fixed rules and formats are not
non-financial information from internal and external sources
followed like financial accounting.
as per the requirement of the managers. These collected
4. Managerial accounting is selective in nature.
information and data are analyzed and interpreted to make
5. Special emphasis is laid on the study of 'nature of cost
them useful for the managers. All these systems are part of the
elements' in managerial accounting and the total cost is
'information system'. Therefore, the nature of managerial
divided into fixed, variable and semi-fixed costs.
accounting can be understood on the basis of the following
6. Management accounting provides data, not judgement.
characteristics-
7. Managerial Accounting lays special emphasis on the
1. An Integrated System- Managerial Accounting provides
cause and its effect.
coordination and assistance in each of the activities
8. Managerial Accounting deals with the future. For
example, in budgetary control system of managerial towards achieving the set goals. In this way the action
accounting, standard outlay system etc., future forecasts achieves its goals by co-ordinating the different divisions
are prepared. of the organisation. Its various divisions include cost
accounts, financial accounts, statistical, budgetary control
Functions of Management Accounting and other divisions related to it.
Managerial accounting is a branch of accounting which has 2. An Information System- The entire managerial
been developed to help the management in the efficient accounting is related to the 'Communication Method'.
performance of its functions. The primary function of Various reports, details, facts are essential parts of the
accounting is related to financial transactions. In this, the information system. On the basis of these information, it
information obtained from the financial accounting method is helps in keeping the organization smooth and running.
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3. Descision Making System- Managerial accounts do not
take any decision in themselves, but on the basis of
various information, they are helpful in making decisions
for selecting the best option from various possible
alternatives. In this way, with the help of complete
managerial accounting, managers can take appropriate
decisions as per the requirement. The manager also faces
a trade-off between return and risk in deciding the right
level of a current asset.
4. Future Based- Managerial accounting is related to the
future. It is useful for the managers in taking decisions as
well as planning various future activities. For this reason,
predictions can be made on the basis of various
information, facts and figures.
5. A Corrective Action Plan- First of all the correct factors
and deviations are detected from managerial accounting,
and then proper corrective action is taken after analyzing
it. Various corrective measures are included in the next
plan so that such deviations do not recur. In this way, a
work process in which obstacles and problems are
removed by corrective measures.
6. Service Criterion- Managerial accounting is a service
function under which facts and information are made
available as per the requirement. Based on these,
managers get help in taking decisions.
7. A Systematic Approach- Management accounting ensures
a systematic process, in which various techniques and
methods are used. Each of the activities efficiently co-
ordinates and cooperates with each other. Thus, managerial
accounting is a systematic endeavor of the business.
8. Professional Development- Management accounting has
become essential for the organization at present. Along with
this, techniques, processes and methods become majorly
helpful in the smooth and proper functioning of the
organization. As a result of this arrangement, various
professional persons and institutions are getting prominence.
Institutions like Institute of Chartered Accountants, Institute
of Cost Accountants and the contribution of qualified
professionals are increasing day by day.
9. Result Oriented- Managerial Accounting provides facts
and information to the managers and the entire efforts are
towards achieving the goals. Thus, managerial accounting
is goal oriented.
10. Analytical Based- Managerial accounts are completely
an 'analyzed method', in which special attention is paid to
all those reasons, such as finding out the reasons for
increasing or decreasing profit and loss, reviewing the
reasons for profitability, etc. A subtle and deep study of
information, data and facts is very useful to reach the
right conclusion.
Tools and Techniques of Management
Accounting
Managers require a variety of accounting information in order
to perform their functions efficiently. This accounting
information is received by the manager through a number of
tools. No one device can provide complete management
information. Various tools and techniques used by the
management for obtaining information are being described
below:-
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1. Financial Planning- Under financial planning, the work of
planning future activities for the management of long term
and short term capital for the business comes so that there
is no financial difficulty in the future and the work of the
organization continues without any hindrance. . Financial
planning is the essential foundation stone for achieving the
basic goals of the organization. Under this, estimating the
total requirement of capital, determining their sources,
making a comparative study of the profitability of the
capital received from different sources and determining the
best amount of investment of the received capital in various
permanent, temporary assets, etc.
2. Financial Accounting and Analysis- Every transaction
of business is marked under financial accounts and on this
basis profit-loss account and balance sheet are prepared.
On the basis of the information obtained by financial
accounting, techniques such as analysis of financial
statements, comparative study, ratio analysis, trend
analysis etc. can be adopted and the trend of business can
be known. The information sent by financial analysis is
helpful to the managers, administrators and lenders in
reaching a certain decision, it also provides information
about future income earning, the ability of the enterprise
to pay interest on the loan and the possibility of proper
dividend policy etc.
3. Fund Flow Analysis- Funds flow analysis is an important
managerial tool in order to study the change in financial
position between two different dates. From this analysis,
it can be known from which sources the additional funds
have been received and where they have been used. This
method provides necessary guidance for financial
analysis, comparative study and price control.
4. Historical Cost Accounting- Historical cost accounting
means recording the costs on the date they are incurred or
immediately after this date. Basically there are Job
Costing and Process Costing; however the use of these
methods is very essential for the success of Standard
Costing.
5. Standard Costing- This technique is adopted to control
the cost. Under this method, some standards are already
fixed on the basis of average efficiency for a sub-task
(Job or Process), and later on execution of the work, by
comparing the actual cost with the pre-determined norms,
efforts are made to find out the amount of variation and
the reasons for it so that the cost is as close as possible to
the pre-determined norms.
6. Marginal Costing- Under this technique, the cost of
production is divided into fixed or fixed cost and variable
or variable cost. In historical cost accounting, the fixed
cost is apportioned to different cost centers, while in this
method, the fixed cost is deducted from the total sales for
that period. Marginal cost accounting helps a lot in policy
making and decision making related to determining the
volume of production. As a part of marginal cost
accounting method, the most profitable production level is
determined by analyzing profit-cost and production
volumes.
7. Budgetary Control- The technique of budgetary control
helps a lot in the control work of the manager. Under this
method, various budgets are prepared and the
responsibility of all the working persons is fixed. Through
budgetary control, the efficiency of the departments can
also be evaluated and their inefficiency can be stopped.
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NIRMAN IAS GWALLIOR
8. Decision Accounting- In fact, there is no separate method
of accounting for decision accounting. Managers have to
take many decisions. Managers have many options to
perform a task. One has to choose such best option from
those available options. So that the maximum profit can
be made on the minimum expenditure and the uncertainty
of "experiment and error" can be avoided.
9. Return on Capital Investment- This technique is used to
determine the profitability of the capital employed in the
business venture. It is also used to determine the
economic soundness of the capital expenditure to be made
on various projects.
10. Control Accounting- Under this, the management
accountant can give some useful information to the
managers with his intelligence skills, imagination and
talent. To do this they have to interpret, analyze and
present this information. For control work, mainly the
methods of standard cost accounting and budgetary
control are taken. Apart from this, internal audit, internal
prevention, statutory audit etc. are also considered as a
useful part of control. Under this, cost information is
presented in such a way that the concerned officer can be
held accountable for his work.
11. Statistical Charts and Graph Techniques- Many
statistical charts and graphs are also used under
managerial accounting. With their experiments, problems
can be studied broadly in one view. Sales Profit Chart,
Investment Chart, Regression Lines, Linear
Programming, Statistical Variety Control, Statistical
Quality Control are similar techniques.
12. Revaluation Accounting- This method is also called
replacement value. The meaning of replacement value is
to assure that the capital of the organization is completely
safe. The profit of the business is also calculated keeping
this fact in mind.
13. Reporting or Communication- Under this, various
necessary information is presented to the management
from time to time so that the management can get help in
policy making and decision making work. Under this
method, various information is displayed through reports,
statements, tables, graphs, pictures etc.
Requirements for making Accounting
Methods useful to Management
Financial accounting method can help in managerial functions
only when the following things are necessarily contained in it-
1. Up-to-Date Accounting- Financial accounting can be
useful to managers only if it is up-to-date. In other words,
the profit account and balance sheet relating to a given
period should reach the hands of the managers
immediately after the period. If these are available long
after the expiry of that period, they are of no use and
become useless.
2. Use of Principle of Comparison- After receiving the
profit and loss account and position statement, the benefit
of the information that becomes clear from them can be
availed only then, while the principle of comparison can
be used as follows-
 Mutual comparison of Figures of Position-
Statement and Profit- Under this method,
comparative analysis of various items of position-
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statement and profit account is done by extracting
different ratios. On the basis of these ratios,
knowledge can be obtained about the breakeven
position, liquid position, long term and short term
financial position, earning capacity etc. of the
business. Various ratios to be computed in the
Balance Sheet and Profit and Loss Account are
described under the chapter titled “Ratio Method of
Analysis”.
 Comparing the Profit Account and Balance Sheet
of the Previous Year with the Profit Account and
Balance Sheet of the Current Year- Under this
method, various items of the Profit Account and
Balance Sheet of the last few years are compared
with the Profit Account and Balance Sheet of the
current year. By this method it is known where the
business is going. That is, its tendency is to come
towards progress or to go towards degradation. This
method is discussed in detail under "trend
analysis". This method is all the more important
because of the dynamic nature of business.
 Comparing the Current Position Statement with
the Budgeted Position Statement- The future
position of the business is estimated in the capital
position budget. The budgeted position statement can
be compared with the current position statement to
check to what extent this assumption has turned out
to be correct. Similarly purchase budget can be
compared with current profit and loss accounts and
forecasts can be appraised.
3. Use of Statistics- Accounting data is in the form of a pile
of numbers when it needs to be used for policy making,
planning and decision making. If we want to give some
information to the managers from these data, then they
have to be properly stored, classified and analyzed in the
form of various tables or graphs. All these tasks can be
completed only when statistics are used in the work of
accounting.
4. Preparing Interim Accounts- Profit and loss accounts
and position statements are generally prepared after the
end of one year period, but managers may need them even
in the middle of the year, because the work of policy-
making, planning or decision-making can be done at any
time may be deemed necessary. The main reason for this
is that as a result of demand and supply situation, change
in supply of material and labor etc., entry of new
competitor in the market, need of advertisement,
amendment in government policies, etc. result in change
in market situation.
Difficulties in preparation of interim accounts
a) Outstandings and Accruals
b) Valuation of Stock
c) Provision- The meaning of planning is to arrange the
amount of expenditure of that income, whose exact
amount is difficult to ascertain. It is very important to
include them at the time of making interim letters.
Events can be of two types-
(i) Recurring items- Events related to debt are
regularly held in business, for example, events
for bad and doubtful debts, events for income
tax, etc. To know the amount of doubtful and
bad debts, arrangements can be made by
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ascertaining the percentage of Debtors and
Doubtful-Bad Debt of the last few years and
making it the basis.
(ii) Non-recurring items- The related events are
those that are not done regularly in the business,
but they arise suddenly – for example, the burden
of repaying a guaranteed loan, a sudden decrease
in the value of the stock or the decision of the
ongoing case in the court. It is the responsibility
of the managers to adjust the amount of events to
be organized by chance, being in favor or
opposition etc.
d) Reserves Reserves are that part of surplus profit
that is set aside for possible losses and the purpose of
which is to prevent profit sharing. The problem of
adjusting different types of accumulations in the
interim account can be studied as follows-
(i) Capital Reserve- This accumulation is made
from the profit from the sale of property, profit
received on shares, etc. These items are very
obvious so it is relatively easy to incorporate
them in interim letters and it is done by the
managers. In relation to specific reserves, the
work of adjustment in the interim accounts can
be done automatically by the management
accountant according to the prescribed policies
of the institution, while the amount of general
reserves is not included in the interim accounts.
(ii) Revenue Reserve- Revenue Reserve can be in
the form of general as well as can be in the form
of specific accumulation. How much part of
profit should be taken to general reserve and how
much to special reserve is decided by the
managers. In relation to specific reserves, the
management accountant can automatically do the
work of adjustment in the interim accounts,
according to the prescribed policies of the
organization, while the amount of general
reserve should not be included in the interim
accounts, because how much of the profit in the
general reserve should be taken in the general
reserve. It should be decided by the management
keeping in mind the amount of profit at the end
of the year.
Importance of Managerial Accounting
1. Increase in Efficiency
2. Proper Planning
3. Evaluation of Performance
4. Effective Management Control
5. Maximum Profit
6. Improvement in Customer Service
7. Quick and right decision
8. Reduction in risks
Installation of Management
Accounting System
The following important points should be kept in
mind by the management accountant at the
beginning of the management accounting system
in the office:
1. To thoroughly study the various methods and techniques
of Management Accounting.
2. To choose the appropriate method according to the needs
of the business organization.
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3. Establishment of management accounting system
gradually.
4. Incorporating all the necessary things in the management
accounting system.
In order to establish the management
accounting system in a business concern, the
management and management accountant
usually take the following steps:
1. An Accounts Manager must have technical skills to
understand raw reconciliation, profit and loss account,
balance sheet.
2. Preparation of organization manual for the entire
organization in writing.
3. To clearly determine the rights and responsibilities at each
level of management.
4. Pre-determination of different routes of conduction.
5. Appointing skilled, experienced and trained Management
Accountant for smooth and orderly implementation of
Management Accounting System.
6. Timeliness of managerial reporting system and pre-
determination of details and formats of reports.
7. Recruitment of appropriate number of employees to assist
the Management Accountant, their training and paying
special attention to their efficiency level.
8. Establishment of cost centers, appropriation centers and
budget centers in the business organization from the very
beginning.
9. Pre-determination of main objectives and subsidiary
objectives of management accounting method. The main
objective of management accounting method is to provide
assistance in decision making, planning and control of the
management and other objectives are considered as
subsidiary objectives.
10. Incorporation of marginal costing method, budgetary
control method, standard costing method, variance, fund
flow statement, integrated audit, ratio analysis and cash
flow statement in the accounting method. In this context it
is necessary to keep economy in mind.
Advantages of Managerial Accounting
1. Better Production in Low Cost
2. Maximum Profit
3. Easy in Scientific Management
4. Helpful in Planning
5. Safety from Trade Circle
6. Easy in Decision making
7. Determination of Object
8. Availability of information on different levels
9. Increase in Productivity
10. Proper Control and Management
Important Vocabulary
 Dissolution of the Firm- According to Section 39 of the
Indian Partnership Act, 1932, “The termination of
partnership among all the partners of a firm is called
dissolution of the firm or winding up of the firm.”
Bank Account
A bank account is the safest place to keep your money.
There are many government and private banks in India,
where you can open your account and deposit your money
in it and keep your money safe.
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Types of Bank Accounts
There are mainly four types of bank accounts. But mostly
savings accounts and current accounts are opened in
banks.
Saving Account
This is the most frequented bank account in the bank. This
bank account is opened by ordinary citizens. This is a
common savings account in which you can deposit your
money, withdraw it when needed; along with this you are
also given many facilities like ATM, net banking, check
book etc.
You are also given some percentage of interest on the
amount deposited in this account. Interest may vary from
bank to bank.
There is also a limit to transact money in the savings
account. Consumers cannot exceed this limit, failing which
a penalty can be imposed by the bank.
Current Account
This bank account is mainly used by big businessmen,
industries and companies. No interest is earned on the
amount deposited in this bank account. Apart from this, you
get all those services which are available in the savings
account. In addition to this, you also get the facility of
overdraft in the current account, through which you can
withdraw more money from your bank account than the
money you have in your bank account. That is, you can
borrow from the bank.
There is no limit for doing transactions from the current
account. Consumers can do as many transactions as they
want from this bank account. That's why this account is
used by big companies, because they have transactions of
crores of rupees.
 Revenue- Revenue refers to the income of the business. It
also means income received regularly or income of
recurring nature. Income increases capital. Examples of
revenue are receipts from the sale of goods, interest
earned, commission earned, rent earned, dividend earned,
discount earned, etc.
 Debtor- The person, institution, firm, company or
corporation, etc., from whom money is to be recovered or
to whom the amount of the institution is due, are called
debtors. Debtors account is also there in the balance sheet.
Debtors account appears in the ledger only when credit
sales are made. Self-financing is also included in this
account. In other words, debtors account is not a cash
account, but a credit account.
 Creditor- The person, institution, firm, company or
corporation, etc., to whom money is payable by the trader
for credit purchase or loan, are called the creditor of the
trader.
 Goods- The things that a trader trades are called his
'goods'. For example, if a trader deals in wheat, then
wheat will be called his goods, if he deals in furniture,
then furniture will be called his goods. When a
commodity is manufactured or purchased with the
intention of selling it, then that commodity is called a
commodity. Goods have also been defined in section 2(7)
of the Sale of Goods Act, 1930. According to this, “every
kind of movable property except actionable claim and
money is goods.
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 Cost- Cost is the amount spent or to be spent on a
particular item, product or activity.
 Purchases- Buying of the goods with which the merchant
does business is called purchase. If the purchase is made
in cash, it is called cash purchase and if the purchase is
made on credit, it is called credit purchase.
 Purchases Returns- After purchasing the goods, if it is
known that the goods are not received as per the sample
or there is any defect in it or any other reason, then the
amount of goods returned is called purchase return.
Purchase returns are also called outward returns.
 Sales- The sale of the goods in which the merchant deals
is called sales. If this sale is for cash then it is called cash
sale and if it is on credit then it is called credit sale.
According to section 4 of the Sale of Goods Act, 1930, a
contract of sale is a contract whereby the seller transfers
the ownership of goods to the buyer for a fixed price. The
sale may be unconditional or with conditions.
 Sales Returns- After the goods have been sold, if the
buyer of the goods understands that he has not been sold
the goods of the kind promised to be sold to him, he shall
return the goods to the extent of defective goods. There
may be other reasons for returning goods sold. Therefore,
the goods that are returned after making a sale are called
Sales Returns S/R. Sales return is also called Returns
Inward R/I.
 Gain- The word 'Gain' is used for the profit of irregular
nature, such as - Capital Gain.
Example- The cost of the machine is 1,00,000. If it is sold
for Rs.1,25,000 then Rs.25,000 will be considered as
profit. A
 Vouchers- When the transaction of money is done for
purchase and sale of goods, and then the documents
which are prepared to certify it are called Vouchers.
 Discount- Sometimes traders leave some value by not
taking the full value of the goods from their customers i.e.
give some concession in the value of the goods. Hence,
the lesser value taken is called discount. For example, if
goods worth Rs.1000 are sold and only Rs.900 is taken
from the customer as full payment, then Rs.100 will be
called a discount.
i) Trade Discount- This discount is written in the list
of prices and is given to all the customers who deal in
the same item. The purpose of this reduction is only
that the customer increases. Transactions that have a
trade discount are accounted for after deducting the
trade discount.
ii) Special Discount- This discount is given by some
businessmen only to those customers who become
permanent customers. Its purpose is to make the
customer a permanent customer. This type of
deduction has brought great benefits to the business,
but often this deduction is not given to new persons.
iii) Cash Discount- This deduction is given to those
traders who pay the price before a certain date.
It may also happen that a permanent customer will
get all these three types of deductions, because
business deduction is given to everyone, so the
permanent customer will also get it and if he makes
the cash payment by a certain date; he will also get
the cash discount. And he will have the right to get
special discount because he is a permanent customer.
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 Equity: The word equity means equity and liabilities. It is
of two types-
Owner's Equity- eg- Capital.
Equity of outsiders – bills payable, etc. These are also
called 'outside liabilities'.
 Solvent- A businessman is said to be solvent when he is
fully capable of paying all his liabilities.
 Debit- The word debit is derived from the Latin word
Kmiipjanu, which means - payable to him; it is called
'debit’.
 Credit- The word credit is derived from the Latin word, it
means, due to him, it is called deposit or accumulation.
 Receivables- The term receivables include both 'trade
debtors' and 'bills receivable'. The combined amounts of
these two are shown in the accounts receivable.
Receivables are assets for the organization.
Thus, Receivables = Debtors $Receivables = Debtors +
Bills Receivales
 Insolvent- Insolvent refers to a person whose assets are
insufficient to meet all his liabilities (or debts).
 Manufacturing Cost- It includes direct material cost,
direct labor cost, direct other expenses and total factory
expenses (both variable and fixed factory expenses). In
this method the opening stock and closing stock of
manufactured goods can be valued at factory cost. Gross
profit is determined by deducting the factory cost of
goods sold (Opening Stock+ Manufacturing Cost-
Closing Stock) from the sales of the period.
Accounting Information System
The use of information and technology in accounting is called
Accounting Information System. Through this computer is
used in various areas related to financial accounting, such as
tax audit, budgeting etc.
 Determining the information needed for management.
 Collecting and analyzing information for information
management.
 Information storage.
 Using information.
 Information flow.
 Accounting reports.
 Management Information System and Data Interface.
Concept of DBMS
This information system provides information for
management decisions through various types of data. A
database is a collection of data that is used by different people.
The work of organizing all these data and converting them
into information as required is done through the database
management system. A system is a set of programs designed
to manipulate correlation data. Its purpose is to collect data
through software and do the work of managing it by accessing
it as needed. It also converts the collected data into definite
information. The security of these information is assured, as
well as keeps the data safe in case of system failure. It is used
in various fields. Like- railway reservation, bus reservation,
examination control, wing, parole storage, salary related to
employees, attendance etc.
Database Management System mainly controls three
activities-
a) The data base engine provides the data and modifies it as
required. The act of fully controlling the data depends on
the database engine.
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b) Data is the source of information.
c) The bounded data base scheme drives the structure of the
entire process.
In this way, it is a centralized information system, in
which many types of data are used by the users through
computer in different types of decisions according to their
convenience.
Functions of Database Management System
1) The main function of database management system is to
provide a way to store and retrieve various types of data
information from suitable medium. For example, the
information of students studying in a school can be stored
in the following way, student's name, roll number,
address, father's name, class, class, date of birth etc.
2) This system manages all these information in a planned
manner by developing a group of large information of an
organization.
3) Provides the facility of data creation, modification and
correction to its users.
4) It is a concurrent system, which allows different users to
work on the same database at the same time. In this way
DBMS stimulates multiplayer environment.
5) From the point of view of data security, it allows only its
actual user to use the data. According to this facility, the
user is able to work on the data of his own department.
Due to which the security of information of other
departments is maintained.
6) It harmonizes the data and reduces redundant data,
thereby making the data comprehensive. This detailed
data makes it easy to make decisions.
7) DBMS provides various views to its users. For example,
the user of the sales department will see a different screen
and the user of the accounting department will see a
different one. According to this, the data can be used
according to the use through the same database.
8) DBMS Electronic security is provided to all data used in
A certain password is given to access it. User cannot use
information of other department without permission. Data
security is provided by different departments at different
levels. Unauthorized person cannot access the
information.
Elements of Database Management System
Database - It is a set of stored data which are related to each
other, through which certain information is created. In the
above data the attendance of the students in the class etc. can
also be calculated. Data base through D.B.M.S. The
processing system of
 Data Collection
 Data Editing
 Data Manipulation
 Data Storage
 Data Review
 Projection
Types of Database Management System
1. Hierarchical
2. Network
3. Relational
1. Hierarchical - The databases designed in the past were
hierarchical, whose structure was like tree like in the
order of top to bottom, in which one main root and the
rest were considered branches. It has nodes and flows
from one to many. This does not make it a mutable
structure. No one can reconnect to the network and the
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flow of data is in one direction only. Due to these
shortcomings, further the design of the database was
changed so that the data can be used fully and
appropriately at the right time.
2. Network - In the network system, all the databases of the
database are connected to each other, so that It should be
made available from where it is required i.e. it is many-to-
many relationship in which sometimes due to high data Entity Relationship Model – Entity Relationship Model
availability, the situation of data clutter comes, like in the Entity model is based on entity and its properties. Entity is an
case of simultaneous data integration of two devices. Due object based on a particular person. For example, in a hospital
to which the data either gets entangled with each other or database, there is a patient entity and its attribute are name,
does not reach the proper place. date of birth, father's name, date of admission to the hospital,
name of the disease, etc., based on the model.
Accounting Query
In a computerized accounting system, an accounting query is
used to obtain any type of information. A query is a question
that can be put to a database through software to retrieve a
certain amount of information. From which specific financial
3. Relational – Keeping in mind all the disadvantages of information is obtained from complex databases. For example,
hierarchal and network in relational database, all three an accountant or a user has to identify all the debtors or
types of data flow were created, which are in one-to-one- consumers who have not paid within the credit limit period,
many and many-to-many form. Due to which the then such information can be retrieved through Structured
problems related to the database are solved by using them Query Language. This type of facility is not included in the
as per the requirement. manual accounting method.
Practice Set
1. BRS is prepared for …….. 7. Goodwill is an example of ………
(1) Update balance in cash book (1) Fixed Asset (2) Current Asset
(2) Reconciliation of difference between cash book and (3) Intangible Asset (4) Virtual Asset
bank book Answer- (3) (Labour Ins. -2017)
(3) Both (1) and (2) 8. That asset, which can be converted into cash within a
(4) none of the above short period of time, is called ……….
Answer- (2) (Labour Ins. -2017) (1) Fixed Asset
2. Management Accounting is - (2) Liquid Asset
(1) Post mortem duty (3) Fixed And Liquid Assets
(2) Accounting for the future (4) None Of The Above
(3) Accounting for current Answer- (2) (Labour Ins. -2017)
(4) Represents the position of a business in its entirety. 9. Which of the following is not an example of an indirect
Answer- (2) (Labour Ins. -2017) asset?
3. The following balance sheet is based on the accounting (1) Franchisee Officer (2) Credit
equation ………….. (3) Patent (4) Land
(1) Assets = Liabilities + Capital Answer- (4) (S.S.S.V.-2017)
(2) Assets + Liabilities = Capital 10. Which of the following equations correctly represents
(3) Assets - Liabilities = Capital any deviation from the basic accounting equation?
(4) Assets + Capital = Liabilities (1) Assets + Liabilities = Owner's Share
Answer- (1) (Labour Ins. -2017) (2) Assets - Liabilities = Owner's Share
4. Which of the following is not a current asset? (3) Owner's share = assets
(1) Cash (2) Inventory (4) all of the above
(3) Prepaid Expenses (4) Building Answer- (2) (S.S.S.V.-2017)
Answer- (4) (Labour Ins. -2017) 11. According to which of the following accounting
5. Financial accounts are prepared for the transactions concepts, an entity is assumed to continue in operation
that take place within the time period of ……….the for an indefinite period of time in the future?
financial year. (1) Economic entity concept
(1) 6 months (2) 3 months (2) Good will-Foundation-Concept (Going-Concern
(3) 12 months (4) 8 months Concept)
Answer- (3) (Labour Ins. -2017) (3) Cost concept
6. That accounting concept, which suggests that the (4) Cash concept
business will continue for a long period of time. Answer- (2) (Group-2- AG1 & A3-2018).
(1) Good will-establishment concept 12. Which of the following does not constitute current
(2) Separate entity concept liabilities?
(3) Cost concept (1) Trade Creditors (2) Outstanding Expenses
(4) Monetary concept (3) Proposed dividend (4) Debtors
Answer- (1) (Labour Ins. -2017) Answer- (4) (Labour Ins. -2017)
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13. Contingent liabilities appear in …………. 24. ………..is a set of accounts.
(1) Balance Sheet (1) Ledger (2) General
(2) Chairman's report (3) Entry (Posting) (4) None Of These
(3) Notice to shareholders Answer- (1) (Labour Ins. -2017)
(4) Notes on Accounts to the Balance Sheet 25. The balance sheet is the details of:
Answer- (4) (Labour Ins. -2017) (1) Only assets and liabilities
14. Under this rule, the trial balance should always (2) Only sources of capital and investment of capital
match………… (3) Both (1) and (2)
(1) Finally, all the transactions are transferred to the trial (4) none of these
balance (trial balance). Answer – (Labour Ins. -2017)
(2) Every debit has a corresponding credit 26. The process of transferring debit and credit items
(3) Assets and liabilities are equal from general to account in the ledger is called -
(4) There are credit and debit balances of income and
(1) Entry (2) Transfer
expenditure.
(3) Authorization (4) Recording
Answer- (2) (Labour Ins. -2017)
Answer- (1) (Labour Ins. -2017)
15. A bank reconciliation statement is prepared with the
27. Debit, which comes and credit, which goes. This is the
help of ……….
(1) Bank column of cash book and bank statement rule of ………..
(2) Cash column of cash book and bank statement (1) Personal Account
(3) Cash column of cash book and bank column of cash (2) Asset Account
book (3) Income-Expenditure Account
(4) Both the debit and credit columns of the bank (4) Account of assets
statement Answer- (2) (Labour Ins. -2017)
Answer- (1) (Labour Ins. -2017) 28. For an Accounts Manager, understanding the basics of
16. Purchase of a machinery is an example of- crude reconciliation, profit and loss account and
(1) Revenue expenditure (2) Capital expenditure balance sheet will be considered as……… a skill.
(3) Current Expenses (4) None (1) Conceptual (2) Technical
Answer- (2) (Labour Ins. -2017) (3) Design (4) Non-technical
17. What is the process of recording, classifying and Answer- (2) (Labour Ins. -2017)
summarizing transactions called? 29. In the Trial Balance, if wages are clubbed with wages
(1) Bookkeeping and shown as 'Salaries and Wages', it is recorded
(2) Financial accounting in……..
(3) Financing details (1) Trading Accounts
(4) Preparation of Income Statement (2) Profit and Loss Account
Answer- (1) (Labour Ins. -2017) (3) Balance Sheet
18. Debit balance in cash book means- (4) proprietary account
(1) Bank loan (2) Overdraft Answer- (2) (Labour Ins. -2017)
(3) Favorable balance (4) Unfavorable balance 30. Which one of the following is not the purpose of Trial
Answer- (3) (Labour Ins. -2017) Balance?
19. The process of transferring a journal entry to the (1) To check the arithmetical accuracy of the accounting
ledger is called ……….. entries.
(1) Journalizing (2) Balancing (2) Forming the basis for the financial statement.
(3) Analyzing (4) Entry
(3) Summarizing ledger.
Answer- (4) (Labour Ins. -2017)
(4) To assess the profit of the business.
20. The trial balance (raw balance) is ….
Answer- (4) (Labour Ins. -2017)
(1) Statement (2) Account
31. When the owner of the business withdraws
(3) Summary (4) Ledger
Answer- (1) (Labour Ins. -2017) money/goods from the business for his personal use, it
21. Interest on loan given by a business to a financial is called:
institution is an example of- (1) Withdrawal (2) Capital
(1) Expenses (2) Income (3) Cash outflows (4) Depreciation
(3) Asset (4) Liability Answer- (1) (Labour Ins. -2017)
Answer- (1) (Labour Ins. -2017) 32. When you prepare the final accounts, where will you
22. A cheque is a type of ……………. transfer the recovered Bad Debts account?
(1) Promissory Note (2) Bank Draft (1) Profit and loss account
(3) Bill of Exchange (4) Demand draft (2) In the provision for bad debt (n) account
Answer- (3) (Labour Ins. -2017) (3) In Debtors Account
23. Profit and Loss Appropriation Account is prepared: (4) In accounts receivable
(1) When the entire profit is distributed among the Answer- (1) (Labour Ins. -2017)
owners. 33. Accounting entries are recorded in accordance with
(2) When there is no profit in the business. generally accepted accounting principles. If any of
(3) When a share of profits is held. these principles are violated or ignored, then errors
(4) When merger and acquisition takes place. arising due to this violation are called ……….
Answer- (3) (Labour Ins. -2017) (1) Errors of omission
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NIRMAN IAS GWALLIOR Accounting and Management Accounting
(2) Offenses of negligence (2) Determination of capital projects
(3) Errors of principle (3) Ignoring the expected rate of return on each project
(4) Errors of compensation (4) Putting a stop to cost overruns on projects
Answer- (2) (Labour Ins. -2017) Answer- (3) (Labour Ins. -2017)
34. Which of the following is not a fixed asset? 45. Which of the following can be considered as 'use of
(1) Credit (2) Small tools money'?
(3) Vehicle (4) Leasehold (1) Decrease in creditor account
Answer- (2) (Labour Ins. -2017) (2) Shortfall in cash
35. The financial statement which shows the financial (3) Increase in liability account
position of an undertaking at a particular point of (4) Increase in cash
time is called - Answer- (3) (Labour Ins. -2017)
(1) Balance Sheet 46. Imprest System/Float is followed in case of ……….
(2) cash flow statement (1) Petty cash book
(3) Income statement (2) Sales book
(4) Explanatory Notes to the Financial Statements (3) Pass book
Answer- (1) (S.S.S.V.-2017) (4) cash book
36. Which of the following is a type of business record that Answer- (1) (Labour Ins. -2017)
a firm can use to study the buying habits of its 47. Bad Debt is displayed-
customers? (1) To the debit side of the Profit and Loss Account
(1) Forecast (2) Marketing budget (2) To the credit side of the Profit and Loss Account
(3) Invoice (4) Annual Report (3) on the asset side of the balance sheet
Answer- (3) (S.S.S.V.-2017) (4) on the liabilities side of the balance sheet
37. Cash, equipment and other resources that an entity Answer- (1) (Labour Ins. -2017)
owns and uses for its operations are called: 48. Net working capital refers to ………..
(1) Accounts (2) tangibles (1) Net assets - Fixed assets.
(3) Liabilities (4) Assets (2) Current assets - Current liabilities
Answer- (4) (Group-2- AG1 & A3-2018). (3) Current Assets - Inventory
38. Formal sources of credit do not include- (4) current assets
(1) None of these (2) Friend Answer- (2) (Labour Ins. -2017)
(3) Co-operative (societies) (4) Banks 49. In the balance sheet, good will appears as………
Answer- (2) (Group-1- 2017) (1) Deferred Liability
39. The uses and sources of wealth statements shall be (2) Intangible Asset
examined as part of the …………. (3) Fixed Asset
(1) A predictive technology (4) Current Liability
(2) A Ratio Analysis Answer- (2) (Labour Ins. -2017)
(3) Preparation of Balance Sheet 50. Maintenance of personal accounts and cash accounts
(4) Fund Flow Analysis is called ………
Answer- (4) (Labour Ins. -2017) (1) Net Single Entry System
40. ……………., refers to the expected results of a future (2) Simple Single Entry System
period given in numerical terms- (3) Semi Single Entry System
(1) Projects (2) Budget (4) None of the above
(3) Program (4) Methodology Answer- (2) (Labour Ins. -2017)
Answer- (2) (Labour Ins. -2017) 51. The cost of goods sold is………...
41. The cash flow statement classifies cash flows on the (1) Opening stock + Purchases - Closing stock + Direct
basis of: cost
(1) Operating activities only (2) Buying - selling
(2) Operating and financial activities only (3) Opening Stock + Sales
(3) Operating and investing activities only (4) Opening Stock + Purchases
(4) Operating, financing and investing activities Answer- (1) (Labour Ins. -2017)
Answer- (4) (Labour Ins. -2017) 52. The total revenue of a business in a year is Rs.240000
42. Profitability Index is also known as ……………. and the gross profit is Rs.60000. What is Gross Profit
(1) ARR (2) NPV Ratio?
(3) IRR (4) Benefit cost ratio (1) 24 percent (2) 25 percent
Answer- (4) (Labour Ins. -2017) (3) 40 percent (4) 50 percent
43. The total current assets of a business are Rs.400000 Answer- (2) (Labour Ins. -2017)
and current liabilities are Rs.200000. The current 53. A collection of data, which is designed to be used by
ratio is- different people, is called ……….
(1) 2 : 1 (2) 1 : 1 (1) Organization (2) Relationship
(3) 0.5 : 1 (4) 3 : 1 (3) Database (4) Profile
Answer- (1) (Labour Ins. -2017) Answer- (3) (Labour Ins. -2017)
44. The objectives of capital expenditure budget are- 54. Funds for a business can be raised through……….
(1) To estimate expenditure (1) Equity only
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NIRMAN IAS GWALLIOR Accounting and Management Accounting
(2) Debt only 64. To retrieve specific financial information from a
(3) Both debt and equity complex database, the user has to set the following:
(4) none of the above (1) Queries
Answer- (3) (Labour Ins. -2017) (2) tabs
55. When a company provides a fixed amount of (3) Symbols
percentage from its income, then it is called ………… (4) Panels
(1) Dividend Tax Policy Answer- (1) (S.S.S.V.-2017)
(2) Dividend Correct Ratio Policy 65. The database management system should have the
(3) Dividend Payout Ratio Policy following features-
(4) Dividend Purchase Ratio Policy (1) Extended Access
Answer- (3) (Labour Ins. -2017) (2) Security/reliability of stored information
56. The value of a fixed asset after deducting depreciation (3) Data protected from system failure
from the cost is called ……….
(4) All of the above
(1) Fair Value
Answer- (4) (S.S.S.V.-2017)
(2) Written Down Value
66. The ratio, which focuses on the relationship of
(3) Market Value
monetary current assets with current liabilities, is
(4) Net Realizable Value
Answer- (2) (Labour Ins. -2017) called ……….
57. When a mistake is made during the calculation of the (1) Return on Investment
subsidiary book, it is called ……….. (2) credit rating ratio (acid test ratio)
(1) Error in costing (3) Debt Equity Ratio (Debt Equity Ratio)
(2) Error of forward carriage (4) Current ratio
(3) Error of entry Answer- (2) (Group-2- AG1 & A3-2018).
(4) Error of principle 67. Miscellaneous on the Balance Sheet Accounts
Answer- (1) (Labour Ins. -2017) arranged for trade items are known as-
58. Gross profit is calculated by the formula………. (1) Reserve Fund Account (Reserve Accounts)
(1) Cost of goods – Sales (2) Sales - all expenses (2) Permanent Accounts
(3) assets liabilities (4) Sales liabilities (3) Temporary Accounts (Temporary Accounts)
Answer- (1) (Labour Ins. -2017) (4) Cash Accounts (Cash Accounts)
59. A company decided to declare Rs.200000 in cash as Answer- (2) (Group-2- AG1 & A3-2018).
dividend to the shareholders. This will be reflected in 68. What is the distinguishing feature of current account
the cash flow statement as a cash outflow under as compared to savings account in banks?
Lending………….. (1) High Interest
(1) Operating Activities (2) Financial activities (2) There is no need for KYC norms
(3) Investing Activities (4) Accounting activity (3) Joint account can be opened
Answer- (2) (Labour Ins. -2017) (4) No restrictions on transactions
60. Bad debt was recovered from a customer. It will be Answer- (4) (MP Sahkari Bank Maryadit-2018)
…………. 69. What happens if the loans are repaid on time?
(1) Deduction from debtors in the balance sheet (1) Get good reputation
(2) adding debtors to the balance sheet (2) There is no tension
(3) Credited to P & L Account (3) Loan is easily available in future
(4) shall be recorded in the balance sheet as (4) all of the above
Answer- (3) (Labour Ins. -2017)
Answer- (4) (S.S.S.V.-2017)
61. Financial accounting is concerned with:
70. In deciding the appropriate level of current assets for
(1) Recording of transactions.
the firm, the management is faced with a trade-off
(2) Recording, classification and summary of transactions.
between………..
(3) Preparation of financial statements only.
(4) Preparation of financial statements and bookkeeping. (1) Beneficiaries and Risks
Answer- (4) (Labour Ins. -2017) (2) Liquidity and Sellers
62. According to the Financial Accounting Standards (3) Equity and Debt
Board (FASB), which of the following is a cash flow (4) All of the above
from financing activities? Answer- (1) (Labour Ins. -2017)
(1) Cash outflow to the government for taxes 71. Which of the following is an asset account?
(2) Cash outflow to shareholders in the form of dividend (1) Salary Account
(3) Outflow of the river to the lenders in the form of (2) Shri Ram's account
interest (3) Building Account (Construction Account)
(4) Cash outflow to purchase bonds issued by another (4) Interest Expenditure Account
company Answer- (3) (Labour Ins. -2017)
Answer- (2) (Labour Ins. -2017) 72. Self financing covers …………..
63. The word ………. means pre-determined profit due to (1) Creditor Accounts
the company's inability to produce. (2) Liability Accounts
(1) Opportunity cost (2) Marginal cost (3) short term loans
(3) Overhead cost (4) All of the above (4) Series of loans
Answer- (1) (S.S.S.V.-2017) Answer- (2) (Labour Ins. -2017)
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NIRMAN IAS GWALLIOR Accounting and Management Accounting
73. Gross profit minus sales is……………. 76. Identify the Income-Expenditure Account from the list
(1) All expenses given below.
(2) Office and Administration Expenses (1) Machinery Account (2) Cash Account
(3) Selling and distribution expenses (3) Rent Account (4) Debtors Account
(4) Cost of goods sold Answer- (3) (Labour Ins. -2017)
Answer- (4) (Labour Ins. -2017) 77. The total of common shareholders' equity reported on
74. Which of the following is an indicator of liquidity of the balance sheet is referred to as ……………..
business? (1) Book value
(1) current ratio (2) par value (par value)
(2) Share profit
(3) Retained Earnings
(3) Debt Service Coverage Ratio
(4) Corporate stock (treasury stock)
(4) Ratio of share to total external liabilities
Answer- (1) (Group-2- AG1 & A3-2018).
Answer- (1) (Labour Ins. -2017)
78. Which account is not a liability account?
75. Debtors will appear in the ledger when………………
(1) Cash
(1) Cash sale should be done.
(2) The sale should be done there. (2) Accounts Payable
(3) Cash purchase should be made. (3) Accrued Expenses
(4) Should be purchased there. (4) Notes Payable
Answer- (2) (Labour Ins. -2017) Answer- (1) (S.S.S.V.-2017)

NIRMAN Plus Powered by NIRMAN IAS GWALIOR 39 BY SANJAY GUPTA

 Time:- 11:00 AM

Biology
1. 08-01-2023  (Inrtroduction)
 (Cell)
GENERAL
 (Biological Classification)
SCIENCE  (Tissue)
 (Nutrition)
 (Digestive System)
 (Vitamins)
 (Excretary System)
 (Respiratory System)
 (Blood Circulatoty System)
 (Endocrine System)
 (Slceletal System)
 (Reproductive System)
 (Genetics)
 (Human Disease)
 (Photosyntesis)
(Biology)  (Transpiration)
 (Plant Hormone)
 Miscellaneous
(Chemistry)
2. 12-01-2023  (Matter)
 (Atomic Structure)
GENERAL
 (Radioactive Element)
SCIENCE  (Acid, Base, Salt)
 (Metal, Non-Metal Metelloids)
 (Chemical Reastion)
 (Polymer)
 (Hydrocarbon)
(Chemistry) 


(Fuel)
(Explosive)

1
  (Soap, Cement, Glass)
 Miscellaneous)
Physics
3. 16-01-2023  (Mechanics)
GENERAL
SCIENCE  (Sound & Wave)
 (Heat & Temperature)
 (Light)
 (Electricty)
 (Mangnetism)
(Physics)
 Miscellaneous
 (Number System)
4. 20-01-2023 GENERAL  Classification of Numbers
MATHS  Divisiblity Rule
 Highest Power
 Number of Zero
 Remainder Theorem
 Unit Digit
 Simplification
 Surds and Indices
 HCF and
LCM
 Algebra
 Quadratic Equation
 (Percentage)
 (Profit and Loss)
 (Discount)
5. 24-01-2023 GENERAL  (Simple Interest)
MATHS  (Compound Interest)
 (Ratio and Proportion)
 (Ages)
 (Average)
 (Mixture)
 (Partnership)
 (Time and Work)
 (Pipe and Cistern)
 (Time, Speed and Distance)
 (Train)
 (Boat and Stream)
 (Permutation and Combination)
 (Probability)
 (Data Interpretation)

6. 27-01-2023 (Introduction of Computer)
GENERAL 
COMPUTER 
KNOWLEDGE 



2
 




Types of Software)






 Disk
 Disk

 (PATCH)

 (Hardware)
 CPU)
 ALU
 CU
 Motherboard

(Peripheral Devices)


 (Memory)

Types of Memory

 RAM, ROM

 SSD
 CD, DVD




 ICS
 Buses




7. 30-01-2023 Operating System)
GENERAL  O/S
COMPUTER  O/S
KNOWLEDGE  O/S
 BIOS
 O/S
 Boot MBR



 O/S

3
 


 EFS

 Dos/Linux/Unix




Programing Language)



 Oops
 C, C++ , Cobol, Fortran, Basic, Html




 DFD’s Flow Chart’s
 (Multimedia )





 (Windows)





 (GUI)











 (Ms-Office)








4
  (DBMS)


 SQL/MYSQL








(Network/Internet)














 (WWW)
 ISO






 PAN
 LAN
 MAN
 WAN



 (URL)

TCP/IP, SMTP, FTP, POP, POP3, STP, HTTP






 Article
8. 02-02-2023  Noun
GENERAL  Number
ENGLISH  Gender

5
  Case
 Pronoun
 Adjective
 Verb
 Modal Auxiliaries
 Adverb
 Preposition
 Conjunction
Determiners
9. 05-02-2023  Degree
GENERAL  Tense
ENGLISH  Voice
 Narration
 Subject-Verb Agreement
 Transformation
 Sentence Arrangement
 Spelling Mistake
 Narration
 Question Tag
 Reading Comprehension
 Prefix and Suffix
Vocab
 Idioms
 Phrasal verb
 One word Substitution
 Root words
 Pair of words
 Synonyms
 Antonyms

10. 08-02-2023 























6
 
11. 10-02-2023 


12. 12-02-2023 GENERAL 

MANAGEMENT 

13. 14-02-2023 

GENERAL 

MANAGEMENT 

14. 16-02-2023  (Coding-Decoding)

GENERAL  (Classification)
REASONING  (Analogy)
ABILITY  (Number Series)
 (Missing Numbers)
 (Repeated Series)
7
  (Inequality)
 (Arrangment of Words)
 (Mathematical Operation)
 (Sequence Test)
 (Equation)
 (Ranking)
 (Direction Test)
15. 18-02-2023  (Blood Relation)
GENERAL  (Counting of Figures)
REASONING  (Sitting Arrangment)
ABILITY  (Ages)
 (Venn Diagram)
 (Syllogism)
 (Calander)
 (Dice)
 (Cube)
 (Clock)
 (Mirror Image)
 (Water Image)
16. 20-02-2023  (M.P. General Knowledge)
GENERAL  (Indian History)
KNOWLEDGE &  (Indian Polity)
APTITUDE
17. 22-02-2023  (Geography of India and
GENERAL World)
KNOWLEDGE &  (Environment)
APTITUDE  (Science and Technology)
 (Indian Economy)
 (Current Affairs)
 (Sports)
 (Global Organizations)
 (Miscellaneous)
18. 24-02-2023 /Section-A  (General Science)


 (General English)
 (General Maths)
19. 26-02-2023 /Section-A  (General Science)


 (General English)
 (General Maths)
20. 28-02-2023 /Section-B  (General Knowledge and
Aptitude)
 (General Computer Knowledge)
 (General Reasoning Ability)

8
  (General Management)
21. 02-03-2023 /Section-B  (General Knowledge and
Aptitude)
 (General Computer Knowledge)
 (General Reasoning Ability)
 (General Management)
22.
04-03-2023 (Full Syllabus)

23. 05-03-2023 (Full Syllabus)

24. 06-03-2023 (Full Syllabus)

25. 07-03-2023 (Full Syllabus)




2/3, Aziz Complex, New Khedapati Colony,

Phool Bagh Road, Infront of G.D.A. Office, Gwalior Mob- 9111532427

MPSET, MPESB/PEB