Financial Accounting

Prof Padmini Srinivasan

 Recap Class 2

What is Balance Sheet

- Concepts used in Balance sheet
- Contents of the Balance Sheet
- Give the Limitations
Balance Sheet
EQUITY AND LIABILITIES

1)Shareholders’ Funds

2) Non-current liabilities

3) Current liabilities

ASSETS
1) Non-current assets

(2) Current assets

Form as per Companies Act.

Balance Sheet
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share capital
(b) Reserves and surplus

(2) Non-current liabilities

(a) long-term borrowings
(b) Deferred tax liabilities
(c) Other long term liabilities
(d) long-term provisions

(3) Current liabilities

(a) Short term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Statement of Profit and Loss or
Income Statement
 Statement of Profit and Loss

- Also called as Income Statement is prepared for

a period of time
- What is the period of time ???

Consists of :
- Revenues ( Sales) and Expenses
 Revenues (Sales) result from operating the business
say from sale of goods, performance of services, the
rental of property, or lending of money.
 Revenues results in increase in assets.
 Revenue other than main operation is shown as other
income
 EXPENSES

 Expenses results from operating the

business.
 They are the cost of resources consumed
or services used in the process of earning
revenue.
 Expenses include rent expense, electricity,
raw material consumed, salary, etc
Profit and Loss Account
 When Sales exceed expenses
 PROFIT results (also termed as Net Income)
 When expenses exceed sales,
 NET LOSS RESULTS

The net profit or loss ultimately ‘belongs’ to the

“owners” and is shown as Retained Earning
or Reserves and Surplus (after distribution of
dividends if any)
Problem of Time Cycle
Accounting Period Concept
 This period defines the time range over which
business transactions are accumulated into
financial statements
 Net income for life of company:
 = Income – Expenses
 Accounting year = Fiscal year /Calendar year or
any other period as determined by the company
 A the period can be for 1 year, 1 quarter, 1
month or even 1 day
Problem of time cycle
 Revenues and Expenses do not synchronize
with the accounting period.

 PL Related concepts follows

 Class Exercise

 Rajesh started “A One” Coffee, with a capital of Rs.

5000 and borrowings of Rs.2000. Early morning he
purchased all necessary materials for Rs.1000 by
paying cash. Additionally, extra sugar for Rs. 200 was
purchased. A coffee-making machine was taken on a
rent of Rs. 1000 per day. He paid Rs.500, and promised
to pay the balance rent the next day.
 100 glasses of A1-Coffee was brewed, and the neatly
packed into insulated glasses to keep it hot.
Strategically they were priced at Rs 40 each. By 11.30
a.m., Sold all the coffees. 10 people who already
consumed the coffee, did not have enough cash and
promised to pay the next day. A group of 40 people
paid Rs. 40 each in advance and reserved the coffee for
the next day. !! At the end of the day the all materials
were consumed only extra sugar also remained unused.

 What is the profit made by Rajesh at the end of the day.

Concepts related to P&L
 Accounting period
 Realization
 Accrual
 Matching
The realization Concept

Revenue is recognized as and when

earned or the earning process is
complete
Accounting Concept

Nov Dec. Jan Feb Mar.

XYX
XYXsigned
signedaacontract
contracton onNovember
November15, 15,
2016
2016totoprovide
provideRepair
Repairservices
servicesfor
for33
months
monthsbeginning
beginningDecember
December11for forRs.3000
Rs.3000
per
permonth
monthpayable
payablein inone
oneinstallment
installmentMar
Mar
1,1,2017.
2017. How
Howmuch
muchisisthetheRevenue
Revenueforforthe
the
y.e.
y.e.31.12.16?
31.12.16?
The Accounting concept

Nov

One
Oneoption
optionmight
mightbebeto
torecord
recordthetherevenue
revenuein
inthe
themonth
month
the
thecontract
contractisissigned.
signed.
The Accounting Concept

Nov Dec Jan Feb Mar

Another
Anotheroption
optionmight
mightbe beto
torecord
recordthe
therevenue
revenuewhen
when
cash
cashisisreceived
receivedininMarch.
March.
The Accounting Concept

Nov Dec Jan Feb

AAthird
thirdoption
optionmight
mightbebeto
torecord
recordthe
therevenue
revenuewhen
when
services
servicesare
areprovided,
provided,from
fromDecember
Decemberthrough
through
February,
February,at
atthe
therate
rateofofRs.3,000
Rs.3,000per
permonth.
month.
The Realization Concept

Nov. Dec. Jan Feb Mar

The
Thecompany
companyshould
shouldrecord
recordthe
therevenue
revenuewhen
whenservices
services
are
areprovided,
provided,from
fromDecember
Decemberthrough
throughFebruary,
February,at atthe
the
rate
rateof
ofRs.3,000
Rs.3,000perpermonth.
month.Since
Sincepayment
paymentisisnot
not
received
receiveduntil
untilMarch,
March,aareceivable
receivablemust
mustbebeestablished
established
as
asat
atDecember
December31,31,2016.
2016.
 Realisation Concept

The Profit or loss for a period must reflect the

actual revenues irrespective of the fact whether
they have been received or not.

We therefore establish a “Receivable” on that

date if cash is not received
 The Accrual Concept

•Payment of Cash is not the basis of recording

Expenses.

The Profit or loss for a period must reflect the

actual expenses irrespective of the fact whether
they have been paid or not.

We therefore establish a “Payable ” on that date

if cash is not paid
 Matching Concept

Match Expenses with Revenues

earned
The Matching Concept
 Matching compares “Cause and Effect” or the
accomplishment with effort
- Step involved:
- Determine the revenues (Sale of Goods/services)
- Match the expenses (traced to products/services)
incurred to generate the revenue
- Matching concept results in Inventory when items
are not sold
- Other Expenses not related to the product are
“Period Expenses” and are expensed in the
accounting period itself
Check this out
 Axle Ltd paid an amount of Rs. 45000 to its
employees during the year:1-4-20 to 31-3-21.
 The amount included Rs. 4000 as advance
against salary for April 2021.
 Rs. 5000 related to the salary for the month
of March 2020 (Previous year).
 What is the salary expenses for the period
2020-21 to be taken to P and L
Check this out
 Axle Ltd received an amount of Rs. 100000
during the year:1-4-17 to 31-3-18 from its
customers.
 The amount included Rs. 10000 as advance
for future services.
 Rs. 5000 is yet to be paid by some customers
for services rendered during the year
 What is the Sales(Revenue) for the period
2017-18
Expanded Accounting
equation
 Assets = Liability + Equity
 Assets = Liability +(Capital + Retained Earnings)
 Assets = Liability +(Capital + (Income – Expenses

– Dividends*)
Give some transactions
EXPENSE RECOGNITION PATTERN

 EXPENSES V/S EXPENDITURE

Provides No Apparent
Provides Future Benefits
(Unexpired Cost)
Cost Future Benefit
(Expired Cost)
Incurred=
Expenditure

Benefits Decrease
Asset Expense
Summary
 Preparation of P and L
 Find the accounting period
 Remember Realization and accrual concepts
 Remember Matching concept

 Type of adjustment needed

 Prepaid Expenses
 Unearned Revenue
 Accrued Revenue
 Accrued Expenses

All of the above covered in chapter 3