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Balance Sheet - Account Form
Balance Sheet - Account Form
Fixed assets
Land, building, plant, machinery, etc.
Less: depreciation
Investments (at cost)
Current assets
Inventory
Debtors
Cash and bank balance
Advance deposits, etc.
Less current liabilities and provisions
Bills payable
Creditors:
For goods
For expenses
(Contd.)
Customer’s advances
Unclaimed dividend
Provision for dividend
Provision for taxation
Net current assets
Other assets
Total net assets
Financed by
Share capital
Reserves and surpluses
Shareholder’s equity
Non–current liabilities
Debentures
Mortgages
Total obligations
ASSETS
Asset is a valuable resource owned by a firm acquired at
measurable money cost.
FIXED ASSETS
Fixed Assets are acquired to produce goods and services and
not for sale.
Tangible Assets have a physical existence and are shown net
of depreciation.
Salvage Value is the amount realised from sale of an asset
after its useful life.
Intangible Assets reflect the rights of a firm and are
amortised.
CURRENT ASSETS
Current Assets refer to assets/resources which are either held in the
form of cash or are expected to be realised in cash within the
accounting period or the normal operating cycle of the business
whichever is more.
(1) Marketable Securities are readily marketable and are shown at the
lower of the cost or the market price.
(2) Accounts Receivable is the amount the customers owe to the firm.
(3) Inventory is the aggregate of finished goods, work-in-process and
raw materials.
INVESTMENT
Investments are assets outside the business of a firm.
OTHER ASSETS
Included in this category of assets are what are called deferred charges,
that is, advertisement expenditure, preliminary expenses, and so on.
LIABILITIES
Liabilities are the claims of outsiders against the firm.
LONG-TERM LIABILITIES
Long-term Liabilities are obligations of a firm payable after
one year.
CURRENT LIABILITIES
Current liabilities are obligations which mature within a year
(1) Trade Credit arise out of credit purchases and are also
known as accounts payable.
(2) Short-term Bank Credit is another source of short-term
funds (current liability) in the form of overdraft, cash credit,
bill financing and loans and advances.
(3) Tax Payable refers to the amount to be paid to the
government as taxes.
OWNERS’ EQUITY
Note: In case the cost of goods manufactured (of finished output) is lower than
purchase/buy cost from market, production department is efficient.
Profit & Loss Account
Format 8: Trading Account of Hypothetical Limited (for the period …)
Dr. Cr.
Particulars Particulars
Amount Amount
To Cost of goods sold: By Sales revenue
Opening stock of finished (Gross)
goods Less Returns
Add production cost*
(transferred from
manufacturing A/c)
Less closing stock of
finished goods
To Gross profit (balancing
figure) transferred to P&L
A/c
*Purchase costs (including freight) are used in the case of
trading/non-manufacturing firms; in such firms, goods
purchased are sold without any further processing.
Profit & Loss Account
Format 9: Profit & Loss A/c of Hypothetical Limited (for the period …)
Dr. Cr.
Particulars Particulars
Amount Amount
To Administrative expenses: By Gross profit
Office salary By Operating profit
Office insurance By Other incomes:
Office rent Interest received
Depreciation on office Dividend received
equipments & furniture Commission received
Office electricity bills Discount received
Office stationary and postage Other incomes
(specify)
Office telephone, fax and
internet
Office traveling expenses
Other office expenses (specify)
To Selling expenses:
Advertising
Salesman salaries
Salesman commission
(Contd.)
Bad debts
Add provision for bad and doubtful
debts created during current year
Less provision created during last
year
Freight/Carriage on goods sold
Depreciation of deliver vans
(used to deliver goods at buyer
place)
Cost of free samples distributed
Other selling expenses (specify)
To Operating profit/EBIT
(balancing figure)
To Financial expenses:
Interest on borrowings
Bank charges By EBIT
Amortisation cost of raising funds
Other expenses (specify)
To Profit before taxes
To Provision for taxes
To Net profit after taxes By Profit before taxes
Format 10: Income Statement of Hypothetical Limited (for the period …)
Particulars Amount
Revenues:
Gross sales revenue
Less returns
Less operating expenses:
Cost of goods sold
Administrative expenses (specify each)
Selling expenses (specify each)
Operating profit/EBIT
Other incomes (specify each)
Less non-operating expenses:
Financial expenses (specify each)
Profit before taxes
Less provision for taxes
Net profit after taxes
Less appropriations:
Dividends (proposed)
General reserve
Others appropriations (specify each)
Retained earnings (out of current year profit)
P&L Appropriation Account
Profit and loss appropriation account deals with the
use/appropriation of profits
Format 11: P&L Appropriation Account of Hypothetical Limited
(for the period …)
Dr. Cr.
Particulars Particulars
Amount Amount
To Statutory reserve By Net profit
To General reserve after taxes
To Long-term assets
replacement reserve
To Dividend (proposed)
To Dividend equalisation
reserve
To Other reserves
(specify)
To Balance (representing
retained earnings out
of current year profits
ACCOUNTING CYCLE AND STATEMENTS
OF FINANCIAL INFORMATION
ACCOUNTING CYCLE
BALANCE SHEET
(3) Preparation
(4) Adjustment
of
Entries
Trial Balance
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AND ACCOUNTING
STANDARDS
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
ACCOUNTING STANDARDS
Generally Accepted Accounting
Principles
Money Measurement Conservative Principle
Concept Concept
Separate Entity Concept Realisation Concept
Duality Concept
Going Concern Concept Accrual Concept
Cost Concept Matching Concept
Accounting Period
Concept Consistency Concept
Materiality Concept
Money Measurement Concept
Money measurement concept stipulates recording of
only those transactions which can be expressed
in monetary terms. It provides a homogenous
measuring yardstick for heterogeneous
items.
Realisation Concept
Realisation concept implies that revenue should be
considered as earned/realised on the date of
sale of goods/services to customers in
consideration for cash/claims to cash
and not on “pending” sales.
Accrual Concept
Revenue Expenses
Revenue expenses are expenses which benefit one accounting
year such as insurance, wages, telephone bills,
electricity and repairs etc.
Deferred revenue expenses are revenue expenses which
benefit more than one accounting year, e.g., research
and development expenditures.
Based on experience, the firms evolve some scientific criterion,
in practice, to apportion capital and deferred revenue
expenses over the years.
Consistency Concept
Consistency Concept requires that there should be a
consistency in accounting treatment of items (where
there exists more than one basis of dealing
them) year after year.
For example depreciation method (straight line or
diminishing balance method) in respect
of plant and machinery.
Method of valuation of inventory — LIFO, FIFO, weighted
average and so on.
Materiality Concept
Materiality Concept requires full disclosure of all
material information/events.
Accounting Standards (ASs)
Issued by ICAI
AS-1: Disclosure of Accounting Policies
AS-2: Valuation of Inventories
AS-3: Cash Flow Statements
AS-4: Contingencies and Events Occurring after the Balance Sheet
Date
AS-5: Net Profit or loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS-6: Depreciation Accounting
AS-7: Accounting for Construction Contracts
AS-8: Accounting for Research and Development
Contd.
AS-9: Revenue Recognition
AS-10: Accounting for Fixed Assets
AS-11: Accounting for the Effects of Changes in Foreign
Exchange Rates
AS-12: Accounting for Government Grants
AS-13: Accounting for Investments
AS-14: Accounting for Amalgamations
AS-15: Accounting for Retirement Benefits in the Financial
Statement of Employers
AS-16: Borrowing Costs
AS-17: Segment Reporting
AS-18: Related Party Disclosures
AS-19: Leases
Contd.
AS-20: Earnings per Share
AS-21: Consolidated Financial Statements
AS-22: Accounting for Taxes on Income
AS-23: Accounting for Investments in Associates in
Consolidated Financial Statements
AS-24: Discontinuing Operations
AS-25: Interim Financial Reporting
AS-26: Intangible Assets
AS-27: Financial Reporting of Interests in Joint Ventures
AS-28: Impairment of Assets
AS-29:Provisions, Contingent Liabilities and Contingent
Assets
Accounting Standard-1
AS-1 deals with the disclosure requirement of significant
accounting policies (such as methods of depreciation,
valuation of inventories, fixed assets and investments,
treatment of goodwill and contingent inabilities) in the
preparation and presentation of financial statements so
as to represent true and fair view of the state of affairs of
the enterprise.
Disclosure: Any change in the accounting policies which
causes a material effect in the current
period or is likely to have effect in a after
period(s) should be disclosed.
Accounting Standard-2
AS-2 deals with computing the cost and value of
inventories as well as adequate disclosure of the
accounting policies followed in this regard by an
enterprise. While cost of inventories comprise cost of
purchase, duties and taxes, freight inwards and other
expenditures directly attributable to the purchase,
inventories should be valued at the lower of cost and net
realisable value.
Cost of inventory should be computed using either FIFO
or weighted average method.
Disclosure: The financial statements should disclose (i)
Accounting policies and (ii) Total carrying
amount of inventories.
Accounting Standard-4
AS-4 is concerned with the treatment in financial
statements of (i) contingencies and (ii) events occurring
after balance sheet date.
If the contingency is likely to result in a loss, it is
prudent to provide for that loss by charging to profit and
loss account whereas contingent gains are not to be
recognized. Further, material events occurring between
the balance sheet date on which financial statements are
approved by the Board of Directors need to be adjusted.
Disclosure: The AS also requires full disclosure of the
nature of contingency as well as the nature
of the event(s) occurring after the balance
sheet date.
Accounting Standard-5
AS-5 requires classification and disclosure of
extraordinary and prior-period items, disclosure of
certain items related to ordinary activities in the profit
and loss account as well as the impact on financial
statements of changes in accounting policies.
Period items should be separately disclosed in the
income statement in a manner so that their impact on
the current profit or loss can be perceived.
Disclosure: Profit or loss from ordinary activities and
extraordinary items should be separately
disclosed.
Accounting Standard-6
AS-6 deals with the disclosure of accounting policy for
depreciation followed by an enterprise. The depreciable
amount of a depreciable asset should be allocated on a
systematic basis to each accounting period during the
useful life of the asset. In the case of a change in the
method, depreciation should be recalculated with the
new method from the date of the asset coming into use.
Disclosure: The depreciation methods used, the total
depreciation for the period for each class of
assets, the gross amount of each class of
depreciable assets and the related accumulated
depreciation are also required to be disclosed.
Accounting Standard-10
AS-10 provides for accounting for fixed assets defined
as asset which are held with the intent to be used in
business and not for sale in the ordinary course of
business.
Disclosure: The disclosure requirements in the financial
statements are gross and net book values of fixed
assets at the beginning and end of an accounting
period (showing additions, disposals, acquisitions),
expenditure incurred on fixed assets in the course of
construction or acquisition, revalued amount of fixed
assets, the method used for revaluation and so on.
Accounting Standard-13
AS-13 deals with accounting for current as well as long-term
investments. Their acquisition cost should be considered
inclusive of acquisition charges, such as brokerage fees and
duties. While interest and dividend incomes should be
accounted for in the income statement, interest or dividend
received relating to the pre-acquisition period should be used
to reduce the acquisition cost of investments. Gain or loss
from the disposal of investments should be dealt in the
income statement.
Disclosure: The disclosure requirements in the financial
statements, inter-alia, are classification of investments,
accounting policies adopted for determination of carrying
amount of investments, interest and dividend income from
investments, profit or loss from disposal of investments
and break-up of quoted and unquoted investments.
Accounting Standard-20
AS-20 provides the basis of determination of the basic
earnings per share (EPS) and the diluted EPS. The EPS
(whether positive or negative) should be shown in the
profit and loss account with equal prominence.
Disclosure: The basic EPS, the diluted EPS, the
unadjusted and the adjusted net profit or loss figures
attributable to equityholders and weighted and
adjusted weighted number of equity shares
outstanding should also be disclosed.
Accounting Standard-22
AS-22 deals with accounting for taxes on income. There
may be differences in the taxable income and
accounting income. Differences are classified into
permanent and timing differences. While permanent
differences cannot be reversed in one or more
subsequent accounting periods, timing differences can
be reversed.
Disclosure: Tax expense for the period, comprising
current and deferred tax, should be included in the
determination of net profit or loss for the period. The
break-up of deferred tax assets and deferred tax
liabilities, along with the nature of evidence, should
be disclosed in notes to accounts.
Accounting Standard-26
AS-26 prescribes the accounting treatment for intangible assets. An
intangible asset should be recognised only when it is probable that future
economic benefits that are attributable to the asset will flow to the
enterprise and the cost of the asset can be reliably measured. In the case of
separate acquisition, as a part of amalgamation and by way of a
Government grant, the cost of the intangible assets can be measured
reliably. Internally generated goodwill should not be recognised as an
asset. The internally generated brands, publishing titles and customer lists,
expenditure incurred on research and development should be recognised
as an expense.
After initial recognition, the depreciable amount of an intangible asset
should be allocated on a systematic basis over the best estimate of its
useful life but not exceeding 10 years. Straight-line method should be
normally used as a method of amortisation and the amortisation charge
should be recognised as an expense. In general, the residual value of an
intangible asset should be assumed to be zero.
Disclosure: The financial statements should disclose the useful life or
amortisation rates used, amortisation methods used, gross carrying
amount and accumulated amortisation at the beginning and end of the
period for internally generated intangible assets and acquired intangible
assets.
Accounting Standard-28
The objective of AS-28 is to prescribe the procedure that should be applied
by an enterprise to ensure that its assets are carried at no more than
recoverable amount.
An asset that is carried at more than its recoverable amount (if its carrying
amount exceeds the amount to be recovered though use or sale of the
assets) is described as impaired asset. The impairment loss should be
recognised by charging as an expense in income statement. Impairment
loss recognised in the previous year(s) can be reversed or reduced if there
are favourable indications (based on external and internal sources of
information) towards increased recoverable amount. A reversal of an
impairment loss is to be recognised as income.
Disclosure: The financial statements should disclose the amount of
impairment losses as well as the amount of the reversal of impairment
losses. The main classes of assets affected by impairment losses, if
these losses are material in aggregate to its financial statements,
should also be disclosed.
Accounting Standard-29
The objective of AS-29 is (i) to ensure that appropriate recognition criteria
and measurement bases are applied to provisions and contingent liabilities
and that sufficient information is disclosed in the notes to the financial
statements to enable users to understand their nature, timing and amount
and (ii) to lay down appropriate accounting for contingent assets.
Provisions should be recognised only when
(i) an enterprise has a present obligation to pay it as a result of past
event,
(ii) resource outflow will take pace to settle it and
(iii) its reliable estimate can be made.
In contrast, an enterprise should neither recognise a contingent liability nor
a contingent asset. Contingent liabilities are shown in notes to accounts.
For each class of provision, an enterprise should disclose the opening and
closing balances, additional provisions made during the period and amount
used.
Disclosure: Disclosure should be made for each class of contingent liability
and brief description of the nature of contingent liability and, wherever
feasible, the estimate of the financial effect and the reimbursement
possibility are required to be stated.
Account
1 2 3
Nominal Personal Real
Nominal Account
Debit all expenses and losses and Credit all
revenues, incomes and gains.
Personal Account
Debit the receiver and Credit the giver.
Real Account
Debit what comes in and credit what goes out.
Trial Balance
Trial balance is a statement which contains the account
names along with the balances in each account at a
given point of time. It shows debit balances in one
column and credit balances in another column.
Tallying of the two sides of trial balance is a signal of
arithmetic accuracy of records made in accounting
books (journal and ledger).
Errors of Omission
Error of omission arises from omission of a
transaction from the journal.
Errors of Principle
Errors of principle arises from treatment of revenue
expenditure as capital expenditure and vice-versa.
Errors of Compensation
Errors of compensation result from offsetting of one
error by another error.
Accounts Records
There are two systems of keeping accounting
records.
In case company uses one bank book and operates with more
than
one bank, there will be additional amount columns
(for each additional bank) on both sides.
Special Ledger
Posting procedure from Special journals to
Special ledger
1. Sales Book
Total of credit sales book is posted to the credit side of the
sales account and debit side of the individual debtors
account.