NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Financial Accounting & Analysis

Submitted By: Akansh Rathore

Answer 1:

Analysis of the given accounting transactions using the accounting equation framework:

No. Transactions Assets (₹) = Liabilities (₹) + Capital (₹)

1 Introduced ₹ 500000 through a cheque by the ₹500000 ₹500000

owner as the Initial capital in the business.
(Introduced capital through bank so it is
increasing bank as well as capital.)
Bank = Capital + Liability
5,00,000 = 5,00,000
2 Purchased goods on credit from Ms. Ritu at ₹540000 ₹40000 ₹500000
₹40000.
(Purchased goods on credit so it is increasing
our goods as well as liability.)
Bank + Goods = Capital + Liability
5,00,000 + 40,000 = 5,00,000 + 40,000
3 Paid ₹10000 as salary to the employees. ₹530000 ₹40000 ₹490000
(Paid salary so it is going to reduce bank as well
as capital as it is expense.)
Bank + Goods = Capital + Liability
4,90,000 + 40,000 = 4,90,000 + 40,000
4 Invested ₹200000 in a fixed deposit account. ₹530000 ₹40000 ₹490000
(Investing in fixed deposit so it is reducing bank
but also increasing out other asset as fixed
deposit.)
Bank + Goods + Fixed Deposit = Capital +
Liability
2,90,000 + 40,000 + 2,00,000 = 4,90,000 + 40,000
5 Paid school fees of the kid ₹25000, from the ₹505000 ₹40000 ₹465000
business’s bank account.
(Paid fees so it is decreasing bank as well as
capital.)
Bank + Goods + Fixed Deposit = Capital +
Liability
2,65,000 + 40,000 + 2,00,000 = 4,65,000 + 40,000
Journal entries for the above transactions:

No. Particulars L.F. Dr. Amount Cr. Amount

(₹) (₹)
1 Bank a/c Dr. 5,00,000

To Capital a/c 5,00,000

(Being owner introduced Capital through a
cheque)
2 Purchases a/c Dr. 40,000

To Ms. Ritu a/c 40,000

(Being goods bought on credit from Ms.
Ritu)
3 Salary a/c Dr. 10,000

To Bank a/c 10,000

(Being salary paid by cheque)
4 Bank a/c Dr. 2,00,000

To Investment in FD a/c 2,00,000

(Being money invested in a Fixed Deposit as
an investment)
5 Drawings a/c Dr. 25,000

To Bank a/c 25,000

(Being school fees of the owner paid from
company Bank account)

Answer 2:

The five terms commonly used by the different users of accounting information for the sake of
understanding the financial statements are:

1. Asset:

Assets are economic resources controlled by an entity whose cost (or fair value) at the
time of acquisition could be objectively measured. Assets are resources with economic
value which companies expect to provide future benefits. These can reduce expenses,
generate cash flow or improve sales for businesses. Types of assets include fixed, current,
liquid and prepaid expenses. Assets may include long-term resources like buildings and
equipment. An asset can be cash or something that can be converted into cash (e.g.
accounts receivable), goods that are expected to be sold and cash received from them and
items that are to be used in the future activities that will generate cash flows. Current
 assets include all assets a company expects to use or sell within one year. Liquid assets
can easily convert to cash in a short time-frame. In general, you can turn a current asset
into cash or cash equivalents quickly, whereas fixed assets are meant to be held for the
long term. Prepaid expenses include advance payments for goods or services a company
will use in the future.
For example, land and building, furniture and fixtures, plant and machinery, inventories,
creditors, debtors and cash balances are all considered as assets. Assets can also be
intangible such as copyrights and trademarks.

2. Liability:

Liabilities are claims to assets. A liability is something a person or company owes,

usually a sum of money. Liabilities are settled over time through the transfer of economic
benefits including money, goods, or services. Recorded on the right side of the balance
sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds,
warranties, and accrued expenses. A liability (generally speaking) is something that is
owed to somebody else. Liability can also mean a legal or regulatory risk or obligation.
In accounting, companies book liabilities in opposition to assets. Current liabilities are a
company's short-term financial obligations that are due within one year or a normal
operating cycle (e.g. accounts payable). Long-term (non-current) liabilities are
obligations listed on the balance sheet not due for more than a year. The most common
liabilities are usually the largest like accounts payable and bonds payable.
For example, a business has assets worth ₹10 million which are financed by owners’
funds of ₹6 million and loans for ₹4 million. The loan of ₹4 million represents a claim to
40% of the assets and is termed as a liability of the business.

3. Capital:

Capital is a broad term that can describe anything that confers value or benefit to its
owner, such as a factory and its machinery, intellectual property like patents, or the
financial assets of a business or an individual. While money itself may be construed as
capital is, capital is more often associated with cash that is being put to work for
productive or investment purposes.
In general, capital is a critical component of running a business from day to day and
financing its future growth. Business capital may derive from the operations of the
business or be raised from debt or equity financing. When budgeting, businesses of all
kinds typically focus on three types of capital: working capital, equity capital, and debt
capital. A business in the financial industry identifies trading capital as a fourth
component. Changes in capital/owners’ equity occurs when, owners either invest in or
withdraw cash or other assets from the business.
Any financial asset that is being used may be capital. The contents of a bank account, the
proceeds of a sale of stock shares, or the proceeds of a bond issue all are examples. The
proceeds of a business' current operations go onto its balance sheet as capital.
4. Expense:

All costs incurred by an entity are not expenses. An expertise is that cost which relates to
the operations of an accounting period (e.g. rent) or to the revenue earned during the
period (cost of goods sold) or the benefits of which do not extend beyond that period.
Expenses, thus, have a relation with the accounting period and represent that part of the
cost of an asset or services that is consumed during the accounting period. Expenses in
accounting are the money spent or costs incurred by a business in an effort to generate
revenue. Hence, expenses in accounting are the cost of doing business, including a sum
of all the activities that will hopefully generate profit for you.
For example, a businessman dealing in televisions buys 1,000 television set at a cost of
₹20 million during an accounting year. This amount of ₹20 million is a cost as it
represents the amount of resource (cash) used. During this accounting period, the
businessman sells only 800 televisions. The cost of 800 televisions, that is, ₹16 million is
the expense of that accounting year as it represents the cost that corresponds to the
revenue earned during the year from the sale of 800 televisions.

5. Revenue:

Revenue is also referred to as sales revenue. Revenue is the amount of gross income
gained through sales of items, products, or services. An easy way to calculate revenue is
by multiplying the number of sales and the sales price or average service price. Revenue
is the total earnings that your business generates through its operations, such as the sale
of service or products, rent on the property, interest on borrowings, etc. Revenue is the
value of all sales of goods and services recognized by a company in a period. Revenue
(also referred to as Sales or Income) forms the beginning of a company’s income
statement and is often considered the “Top Line” of a business. Expenses are deducted
from a company’s revenue to arrive at its Profit or Net Income.
For example, cookie seller's revenue is generated through the sale of cookies; hairdressers
earn their revenue by providing services, and banks generate their revenue in the form of
interest on the loans to borrowers. Your company's revenue is reported on the first line of
your income statement. It is usually described as sales or service revenues. Hence,
revenue is the amount that is earned from clients and customers before subtracting your
current expenses.

Answer 3a:

Total Purchases = Closing Stock - Opening Stock + Cost of Goods Sold

= 70 – 40 + 580= 610

Credit Purchases = Creditor’s Closing Balance + Cash Paid - Opening Creditor Balance

= 100 + 45– 60 = 85

Payment to Creditor
= Cost of Goods Sold + Increase in Inventory - Increase in Accounts Payable

580 + 30 - 40 = 570

Answer 3b:

Net book value is the amount at which an organization records an asset in its accounting
records. Net book value is calculated as the original cost of an asset, minus any
accumulated depreciation, accumulated depletion, accumulated amortization, and
accumulated impairment. Given these deductions, net book value represents an
accounting methodology for the gradual reduction in the recorded cost of a fixed asset. It
does not necessarily equal the market price of a fixed asset at any point in time.
Nonetheless, it is one of several measures that can be used to derive a valuation for a
business.

Accumulated depreciation is the total amount an asset has been depreciated up until a
single point. Each period, the depreciation expense recorded in that period is added to the
beginning accumulated depreciation balance. An asset's carrying value on the balance
sheet is the difference between its historical cost and accumulated depreciation. At the
end of an asset's useful life, its carrying value on the balance sheet will match its salvage
value. Accumulated depreciation is the sum of all recorded depreciation on an asset to a
specific date. Accumulated depreciation is presented on the balance sheet just below the
related capital asset line.

Net Book Value = Original Asset Cost – Accumulated Depreciation

Net Book Value = 400 – 80 = 320

Let’s assume Cash Proceeds is x,

Gain from Sale = Cash Proceeds (x) – Cost – Accumulated Depreciation
50 = x – 400 – 80
50 = x – 320
X = 370

Therefore, the cash proceeds from sale of investment is 370 (in lacs).