Professional Documents
Culture Documents
Accounting For Managers
Accounting For Managers
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(iv) Sale proceeds of Investments:
Cost of investments sold (2,50,000 – 1,00,000)
1,50,000
Add: Profit on sale of investments
7,500
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1,57,500
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(v) Calculation of dividends and
corporate dvd tax thereon paid
Retained Earnings on 31.3.2000 8,60,000
Add: Net Profit for the yr ended 31.3.2001 4,16,000
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12,76,000
Less: Retained Earnings as on 31.3.2001 9,46,000
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Dividends and corporate dvd tax paid 3,30,000
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Cash Inflows Activities Cash Outflows
Payments to suppliers
And employees for
Materials and services
Double Entry
Profit & Loss Effect
Balance Sheet
Account
Result: Net
Profit or Loss
Transferred to Balance
Sheet
We start with Trial Balance
Give double-entry effect to all adjustments
Take some of Trial balance items to trading
and Profit & Loss A/c
Take result of P & L A/c to Balance Sheet
Take rest of items of Trial Balance to Balance
Sheet
Balance Sheet has to tally.
Asset side should be equal to Liability
side.
Utilization of Funds (Assets) should
be equal to Sources of Funds
(Liabilities).
Treatment of Adjustments for
expenses and incomes in B/S
Outstanding exp. show on Liability side
Prepaid expenses show on Assets side
Income recd in advance – Liability side
Income earned but not recd, and income
accrued but not due – show on Asset
side
Fixed Assets are recorded at cost minus
Depreciation
Closing Stock to record at cost price or
market price whichever is less.
Trading A/c reflects gross profit or loss
arising out of trading and manufacturing
operations.
Profit & Loss A/c reflects the net profit or
loss of the business after duly accounting
for all administrative and selling expenses
Profit & Loss Appropriation A/c reflects
various appropriations made out of
disposable profits like dividends, transfer
to reserves etc.
Capital, Revenue and Deferred
Expenditure
Cost of air-conditioning the office of
the General Manager –
This is capital expenditure because the
benefit of this expenditure will be
available for a number of years. In any
case, the machine installed will be
there and can be disposed of
whenever desired.
Cost of overhauling and painting a
secondhand truck newly purchased –
When a secondhand machine is
purchased, all expenditure incurred in the
beginning to make it fit for working is
treated as capital expenditure. The value
of machine is increased by the amount
spent. Therefore, the cost of overhauling
and painting the truck is capital
expenses.
Cost of the annual taxes and
insurance premium paid on the truck
–
Annual taxes and annual premium
paid on the truck are revenue
expenditure because they do not add
to the value of the truck and their
benefit will be exhausted within a
year.
Wages paid to workers for
installation of machinery –
This is capital expenditure because it
is necessary to put the machine in
working condition.
Cost of making more exits in a
cinema hall under orders of the
Government –
Making more exits in a cinema hall
does not increase the capacity of the
hall and, therefore, it should be
treated as revenue expenditure.
Cost of re-decorating a cinema hall –
Cost of re-decorating a cinema hall is
not capital expenditure because it
does not add to the capacity of the
hall. But the cost is fairly heavy and
the benefit will be there for a number
of years. Therefore the cost should be
treated as Deferred revenue
expenditure.
Cost of putting a gallery in a theatre
hall –
When a new gallery is put up, it will
increase the number of seats in the
hall thereby increasing capacity of
the hall. Therefore, this cost should
be treated as capital expenditure.
Cost of acquiring the goodwill of an
old firm –
This is capital expenditure because
the use of that firm’s name will
benefit the purchaser for a long time.
Cost of heavy advertisement for a
new product and removal of works to
a new and better site –
The expenditure is heavy but not of
capital nature because no new asset
is acquired. But since the benefit of
the expenditure will be available for a
number of years, it should be treated
as deferred revenue expenditure.
Capital and Revenue Receipts
Amount realized from sale of old
furniture –
Sale of old furniture only means
conversion of one asset into another.
Therefore, it is a capital receipt.
Amount received from a debtor
whose account was previously
written off as bad –
This amount is to be treated as a
revenue receipt because it is not to
be refunded to the customer and the
amount was previously written off as
a loss.
Amount of loan taken from a bank –
The loan taken from bank is
repayable and, therefore, is a
liability. This is capital receipt.
MEANING OF ACCOUNTING
Accounting, as an information
system is the process of
identifying, measuring and
communicating the economic
information of an organization to
its users who need the
information for decision making.
Activities covered under
Accounting
Identifying the transaction and
events – e.g. purchase of raw
material, use of raw material for
production, sale of goods etc.
Measuring the identified
transactions and events in the
terms of common measurement
unit, that is the ruling currency of a
country
Recording – of identified and measured
financial transactions in an orderly
manner soon after their occurrence in
the proper books of account.
Classifying – the recorded transactions
in a group of similar type at one place.
i.e. opening / maintaining different
accounts in ledger.
Summarising the classified transactions in a
manner useful to the users. This function
involves the preparation of Financial Statements
such as Income Statement, Balance Sheet,
Statements of Changes in Financial Position,
Statement of Cash Flow etc.
Analysing the data derived from Income
Statement and or Balance Sheet for the purpose
of identifying the financial Strengths and
weaknesses of the enterprise
Interpreting – It is concerned with
explaining the meaning and significance
of the relationship so established by the
analysis. Nowadays, the first six
functions are performed by electronic
data processing devices and the
accountant has to concentrate mainly on
the interpretation aspect of accounting
The accountants should interpret the
statements in a manner useful to the
users, so as to enable the users to make
reasoned decisions out of alternative
course of action.
The accountant should explain –
not only what has happened but also
why it happened, and
what is likely to happen under specified
conditions.
Communicating the summarized,
analysed and interpreted
information to the users to enable
them to make reasoned decisions.
Accounting is an information
system which communicates the
accounting information to the
users (whether internal or
external) to enable them to
make reasoned decisions. As an
information system, accounting
may be viewed as under –
Input ---------- Process -------- Output
| | |
| | | |
To maintain To calculate To ascertain To
communicate
Accounting the results of the financial the
information
Records operations position to the
users
BASIC ACCOUNTING
TERMINOLOGY
Entity / enterprise / organization –
means an economic unit that performs
economic activities e.g. Birla Industries,
Reliance Industries, Bajaj Auto.
Event – An event is a happening of
consequences to an entity. For example
– use of raw material in production
Transaction – is an exchange in which each
participant receives or sacrifices value. It
involves exchange of goods or services on
cash or credit basis. It is an event involving
transfer of money or money’s worth.
Voucher – is a document which serves as an
evidence of a transaction. i.e. cash
purchases – cash memos, credit purchases –
purchase invoice. The vouchers are source
documents for recording business
transactions in the books of accounts.
Entry – is the record made in the
books of accounts in respect of a
transaction or event. An entry is
passed on the basis of vouchers.
Assets – refer to tangible objects or
intangible rights of an enterprise
which carry probable future benefits
Current Assets – Cash, Stock of - Raw
Materials (R/M), Work-in-Progress (WIP),
Finished Goods, Debtors (Drs), Bills
Receivables (B/R).
Fixed Assets – are the assets held for
purpose of producing goods or
providing services and those are not
held for resale in the normal course of
business. Fixed assets classified into
Tangible fixed assets which can
be seen and touched e.g. Land and
Building, Plant and Machinery,
Furniture and fixture (ii) Intangible
fixed assets – which cannot be seen
and touched. E.g. Goodwill, Patent,
Trademark, Copyrights etc
Liabilities – refer to financial obligations of an
enterprise other than owner’s funds/equity. (a)
Current liabilities – refer to those liabilities
which fall due for payment in a relatively short
period (normally not more than 12 months
from the date of B/S). e.g. Bills Payable (B/P),
Trade Creditors, outstanding expenses, bank
overdraft etc. (b) Long –term liabilities –
refer to those liabilities which do not fall due for
payment in a relatively short period. E.g. Long
term loans, Debentures etc.
Capital – is the excess of assets over
external liabilities. It refers to the
amount invested in an enterprise by
the owners. This amount is increased
by the amounts earned and amount of
additional capital introduced and is
decreased by the amount of losses
incurred and the amount withdrawn. It
is owner’s claim / equity/net assets/net
worth.
Drawings – an amount of cash or
goods withdrawn by the proprietor /
partner for personal use.
Purchases – the total amount of
goods obtained by an enterprise for
resale or for use in the production of
goods or rendering of services in the
normal course of business.
Sales – The term ‘sales’ refer to the
amount for which the goods are sold
or services are rendered.
Stock / Inventory- The term ‘stock’
refers to tangible property held for sale
in the ordinary course of business or for
consumption in the production of goods
or services for sale.
Trade Debtors – The term ‘Trade
Debtors’ refers to the person from
whom the amounts are due for goods
sold or services rendered on credit
basis
Trade Creditors – are the persons
to whom the amounts are due for
goods purchased or services
rendered on credit basis.