Chapter 2: Nature of Financial Accounting Principles

3.8Matching Concepts
The following standard equation is applied to determine the net income of a business enterprise.
p = SR SE

where

p = Profit SR = Sum of Revenues SE = Sum of Expenses (Costs Incurred)

Chapter 4A: Accounting Process Journal

Objective 7: Traditional Approach for Recording Business Transactions and DebitCredit Rules for Three Types of Accounts
DebitCredit rules for three types of accounts are:
Type of Account 1. Personal Accounts 2. Real Accounts 3. Nominal Accounts Debit The Receiver What Comes In Credit The Giver What Goes Out

All Expenses and All Incomes, Gains and Losses Profits

Notes Capital = Assets Liabilities Goodwill = All liabilities + Capital All assets

Rules Of Debit And Credit As Per Accounting Equation Approach

Category of Accounts 1.Assets Accounts 2.Liabilities Accounts (Creditors Equities) 3.Capital Accounts (Owners Equities) 4.Incomes and Gain A/c (Revenue Account) 5.Expenses and Losses Debit the Increase Decreas e Decreas e Decreas e Increase Credit the Decrease Increase Increase Increase Decrease

Accounting Equation Assets = Equities Assets = Owners Equity + Outsiders Equity Assets = Capital (owners) + Liabilities (creditors)

Chapter 5a: Accounting Process From Trial Balance to Final Accounts and Final Accounts of Non-corporate Business Entities
Purchases (adjusted) = Net Purchases (i.e., Cash Purchases + Credit Purchases Purchase Returns) + Opening Stock Closing Stock Cost of Goods Sold = Opening Stock + Purchases + Direct expenses Closing Stock (Operating Profit = Gross Profit Operating Expenses) Operating Loss = Operating Expenses Gross Profit

Chapter 8: Measurement of Business Income

(i) Ex-ante income is calculated with reference to present value at the beginning of the year (X level) Ex-ante income: BX AX (ii) Ex-post income is calculated with reference to present value at the end of the year (Y level) Ex-post income: BY AY where B Value of capital at the end of the year A Value of capital at the beginning of the year

Chapter 10: The Nature of Depreciation

10.1.2Formula
1. Amount of Depreciation = Original Cost Residual value/Expected Useful Life of the Asset 2. Rate of Depreciation = Amount of Depreciation/Original Cost100 While applying the formula, the following hints will be of much use to the students: (a) (b) (c) (d) Book Value (as on date of sale) = Original Cost Total Depreciation (till date). Profit = Sale Proceeds Book Value (as on date of sale). Loss = Book value (as on date of sale) Sale Proceeds. In case of an exchange of asset, Sale price is the amount at which the vendor agrees to acquire the old asset (trade in allowance). (e) In case of destruction of an insured asset, Sale price is the Claim admitted by the insurance company with the sale value if any.

10.2.2Formula: Rate of Depreciation (WDV Method)

s R = 1 n 100 c R = Rate of depreciation in % N = Useful life of the asset S = Scrap value at the end of useful life of the asset C = Cost of the Asset.

Chapter 11: Inventory Valuation

Weighted average price = Total cost of goods in stock Total quantity of goods in stock

(whereas Total cost = Quantity Cost per unit)

Chapter 12: Accounting for Hire-Purchase and Installment

Cash Price Installment = Net Cash Price Hire-Purchase Installment / Hire-Purchase Price. Hire-Purchase Price = Cost Price + Profit Margin + Interest on Outstanding Balance. If the installments are paid monthly at regular intervals for 1 year, then the total of series beginning from 1 and progressing by 1 can be calculated by applying the formula: n(n + 1)/2 [n = total number of items]. The following information is extracted from such hire-purchase sales registered to ascertain profit / loss hire purchase transactions: Cost Price of Goods sold on Hire Purchase: Cost Price = No. of units sold on H.P. Cost Price per unit Hire-Purchase Price: Hire-Purchase Price = No. of units sold on H.P. Hire-Purchase Price per unit. Total Cash received from Hire Purchase Customers = Cash received = Cash Down Payment + Amount of installment received. Total installment due but unpaid: Due but unpaid = Amount of installment which became due but not received during the accounting period. Total installment not yet Due: Not yet due = Amount of Installments which became due but not received during the accounting period. (Stock still with customers) Load=H.P. Price of (Opening stock or Closing Stock or Goods sold on H.P.) Hire Purchase Price Cost

Hire Purchase Price Stock out on hire: Stock out on hire at cost means stock with the customers Stock out on hire = Amount of installments not due Profit margin At the ending of the accounting period, it is valued as: Stock out on hire = Cost Amount of installments not yet due/Total amount of installment including deposit. Cost of Goods sold on hire purchase is worked out as follows: Opening Stock at the shop: ------Add: Purchases during the year ------Less: Closing stock at the shop ------Cost of Goods sold ***** Goods sold on Hire Purchase: Opening Stock at the shop: ------Add: Purchases during the year ------Less: Closing stock at the shop ------Add: Load on Mark Up ------Cost of Goods sold *****

Chapter 16: Accounting Ratios

Current Assets/Current Liabilities = Current Ratio To find out the value of Current Liabilities by using the formula: (As Working Capital = Current Assets Current Liabilities) Current Liabilities = Current Assets Working Capital Value of Current Assets = Liquid Assets + Stock Debtors + Prepaid Expenses Liquid Ratio = Liquid Assets/Current Liabilities Liquid Assets = Current Assets (Stock + Prepaid Expenses) Absolute Liquid Ratio = Absolute Liquid Assets/Liquid Liabilities Absolute Liquid Assets = Cash, Bank and Short-term Investments. Liquid Liabilities = Current Liabilities Bank overdraft. Debt Equity Ratio = Debt (Long-term Loans)/Equity (Shareholders Funds) Proprietary Ratio = (Shareholders Fund)/Total Assets Shareholders Funds (Equity) = Equity Share Capital + General Reserve Gross Profit Ratio = Gross Profit/Net Sales 100 Gross Profit = Sales Cost of Goods Sold Cost of Goods Sold = Opening Stock + Purchases Closing Stock (or) = Sales Gross Profit Net Sales = Gross Sales (Cash Sale + Credit Sale) Sales Returns Net Sales = Cash Sale + Credit Sale Sales Return Net Profit Ratio = Net Profit/Net Sales 100 Operating Profit Ratio = Operating Profit/Net Sales 100 Operating Profit = Net Profit + Non-operating Expenses Non-operating Income Non-operating Expenses = Interest on Loan and Loss on sale of assets Non-operating Income = Dividend, Interest received and Profit on sale of asset Or Operating Profit = Gross Profit Operating Expenses Net Sales = Gross Sales = Cash Sales + Credit Sales Sales Revenue Operating Ratio = Cost of Goods Sold + Operating Expenses/Net Sales 100 or Operating Ratio = Operating Cost/Net Sales 100 Inventory or Stock Turnover Ratio = Cost of Goods Sold/Average Inventory (or) Stock Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivable (iv)Working Capital Turnover Ratio = Sales/Working Capital Working Capital = Current Assets Current Liabilities Formula = Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory Debtors Turnover Ratio = Net Credit Sales/Average Debtors

Net Credit Sales Average Debtors

= Gross Credit Sales Sales Returns = Debtors in the beginning + Debtors at the end 2 Net Credit Purchases/Average Creditors Gross Credit Purchases Returns Creditors in the beginning + Creditors at the end 2

Creditors Turnover Ratio = Net Credit Purchases = Average Creditors =

Profitability Ratios relating to Sales

(i) (ii) (iii) (iv) (v) (vi) (A) (B) (C) (D) Cost of Goods Sold = Cost of Goods Sold/Net Sales 100 Operating Expenses Ratio = Administrative Expenses + Selling Expenses/Net Sales 100 Administrative Expenses Ratio = Administrative Expenses/Net Sales 100 Selling Expenses Ratio = Selling Expenses/Net Sales 100 Operating Ratio = Cost of Goods Sold + Operating Expenses/Net Sales 100 Financial Expenses Ratio = Financial Expenses/Net Sales 100 Return on Assets (ROA) = Net Profit after Taxes/Average Total Assets 100 ROA = Net Profit after Taxes + Interest/Average Total Assets 100 ROA = Net Profit after Taxes + Interest/Average Tangible Assets 100 ROA = Net Profit after Taxes + Interest/Average Fixed Assets 100

Profitability Ratios relating to Investments

Return on Capital Employed

ROCE also can be computed in various ways: (A) ROCE = Earnings Before Interest and Taxes (EBIT) /Average Total Capital Employed 100 (B) ROCE = Net Profit after Taxes + Interest Tax advantage on Interest/Average Total Capital Employed 100 (C) ROCE = Net Profit after Taxes + Interest Tax advantage on Interest/Average Total Capital Employed Average Intangible Assets 100 ROCE, in total, assess the firms profitability, taking owners funds and lenders funds together.

Return on Equity Funds = Net Profit after Taxes Preference Dividend 100 Average Ordinary Shareholders Equity (or) Net Worth Earnings Per Share = Net Profit (after taxes and dividend on performance shares)/No. of Ordinary Shares Outstanding 100

Total Dividend to equity holders D/P Ratio = Total net profit belonging to equity holders D/P Ratio = DPS (Dividend Per Share) 100 EPS (Earnings Per Share) From this, Retention Ratio is computed. Retention Ratio = 100 D/P Ratio Earnings and Dividend Yield (i) Earnings Yield = EPS/Market Value Per Share 100

100 or

(ii) Dividend Yield = DPS/Market Value Per Share 100

P/E Ratio = Market Price of Share EPS

ROI = Profit before Interest, Tax and Dividend 100 Capital Employed