MGT101 - Financial Accounting - I

MGT101 - FINANCIAL ACCOUNTING I
Lesson No. 1 2 3 4 % & $ + 1. 11 12 13 14 1% 1& 1 1$ 1+ 2. 21 22 23 24 2% 2& 2 2$ 2+ 3. 31 32 33 34 3% 3& 3 3$ 3+ 4. 41 42 43 44 4% TOPICS Basic Concepts of Accounting ... Record Keeping and Some Basic Concepts Systems of Accounting and Some Basic Terminologies . Single and !ou"le #ntry Record Keeping .. Classification of Account ... 'lo( of Transactions ..... Basic Boo)s of Accounts .. *ntroduction to 'inancial Statements .. *ntroduction to 'inancial Statements ,Continued- .. #/ercises0 Recording of Transactions . #/ercises0 Recording of Transactions ,Continued- . Accounting #1uation . 2ouc3ers and 4osting to 5edger Accounts . 4osting to 5edgers 6 Recording of Stoc) ... Recording of Stoc) ,Continued- . Cost of goods Sold Statement 6 2aluation of Stoc) ... 'i/ed Assets and !epreciation ... 7et3ods of C3arging !epreciation 7et3ods for C3arging !epreciation ,Continued- ... !epreciation on 4urc3ase and !isposal of 'i/ed Assets Re8aluation of 'i/ed Assets ... Ban) Reconciliation Statement .. Ban) Reconciliation Statement ,Contd.-. !e"tors9 Creditors9 Accruals and 4ro8ision for Bad !e"ts 4ro8ision for Bad !e"ts and Control Accounts Control Accounts ,Contd.- Control Accounts ,Contd.- Rectification of #rrors 4resentation of 'inancial Statements .. 4resentation of 'inancial Statements ,Continued- .. Types of Business #ntities .. 'inancial Statements of Sole 4roprietors3ip .... 'inancial Statements of 7anufacturing Concern 'inancial Statements of 4artners3ip .... 7ar) :p on Capital and !ra(ings . *ntroduction to Companies Components of 'inancial Statements . 'inancial Statements of 5imited Companies .. 'inancial Statements of 5imited Companies ,Contd.-.. 'inancial Statements of 5imited Companies ,Contd.-.. Cas3 'lo( Statement ...... Cas3 'lo( Statement ,Contd.- 'inancial Statements of 5isted;<uoted Companies ... 'inancial Statements of 5isted Companies ,Contd.- ... 'inancial Statements of 5isted Companies ,Contd.- 6 'inancial Ratios... Page No. 1 4 $ 13 1& 21 2% 2+ 3$ 4 4 $2 $ +3 1.4 111 11% 121 12% 131 13% 14. 14% 1%. 1%& 1&% 1&+ 1 4 1 $ 1$1 1$% 1+4 2.. 21. 214 21 22. 22% 23. 23% 23+ 244 2%1 2%$
'inancial Accounting = * > 7?T1.1 BASIC CONCEPTS OF ACCOUNTING Learning Ob e!"i#e
VU Lesson-1
T3e o"Aecti8e of t3is lecture is to introduce t3e su"Aect of B'inancial AccountingC to t3e students and gi8e t3em an idea as to 3o( did accounting de8elopD $%a" is Finan!ia& A!!o'n"ing( *t is t3e maintenance of daily record of All financial transactions in suc3 a manner t3at it (ould 3elp in t3e preparation of suita"le information regarding t3e financial affairs of a "usiness or an indi8idual. $%) is Finan!ia& A!!o'n"ing nee*e*( T3e need for recording financial transactions arises "ecause t3e indi8idual or "usiness (ants to )no( t3e performance of t3e "usiness and to assist t3e person in ma)ing decisions related to t3e "usiness. $%a" are Transa!"ions( *n accounting or "usiness terms9 any dealing "et(een t(o persons in8ol8ing money or a 8alua"le t3ing is called "ransa!"ion. Euman "eings are social animals and are "ound to adopt a community li8ing style. 5i8ing in a community9 essentially means t3at people interact (it3 ot3er people and are dependant on eac3 ot3er to fulfil t3eir needs. #8ery person cannot fulfil all 3is needs li)e food9 clot3ing9 3ousing etc. on 3is o(n. Ee9 t3erefore9 depends on ot3er people for 3is needs9 in return to t3is pro8iding ot3ers (it3 some of t3eirs. *t means t3at one (ill fulfil 3is needs from ot3ers and (ill pro8ide ot3ers t3e t3ings of t3eir need in return. #8ery instance (3ere one Fgi8es somet3ingG to Fget somet3ingG is called a "ransa!"ion. +o, *i* i" *e#e&o-( Hearly all de8elopments 3appen "ecause of 3uman "eingGs need for t3e same. Accountancy is no different. T3ere (as times (3en goods (ere "artered or e/c3anged. But (3en t3e concept of money (as introduced9 it "ecame a little more difficult. $%a" is a B'*ge"( Budget is a plan of income9 e/penses 6 ot3er financial operation for a future period. Con!e-" o. Cos"ing A person ma)ing or producing any t3ing must not only )no( 3o( muc3 it costs to ma)e "ut also to 3elp in determining t3e selling price. *t is necessary t3at t3e person not only )no(s t3e cost of (3at is "eing produced "ut also t3e cost of eac3 component (3ic3 3as gone into production. T3e control of t3e costs "eing incurred is also necessary ot3er(ise t3e same can e/ceed t3e estimates. All t3is is only possi"le if t3e costs and data relating to production is properly recorded and analysed. *t is an e/ercise t3at only carries out "y t3e Accountant. I/-a!" o. IT on A!!o'n"ing T3e old Munshi, (3o )ept record of t3e financial dealings (as t3e original accountant. But 3e is no( of no use9 as 3e lac)s t3e capa"ility for analysing t3e information recorded and forecasting financial information. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
'inancial Accounting = * > 7?T1.1
VU
*n fact9 t3ere is no need for any e/pert in (riting of "oo)s. *nformation Tec3nology 3as ta)en o8er. But some one 3as to tell t3e Soft(are de8eloper 3o( "oo)s are (rittenD T3e need for an Accountant (3o is (ell 8ersed in t3e art of (riting up "oo)s still remains. T3e role 3as c3anged. *nformation Tec3nology soft(are can no( produce t3e reports and analysis "ut need t3e e/pert to interpret all of t3is remains. T3e need for t3e professional to descri"e t3is 3as not yet "een o8erta)en "y *nformation Tec3nology. Bar"er Tra*ing an* Bar"er Transa!"ions Trading one commodity or ser8ice for anot3er commodity or ser8ice is called FBar"er "ra*ing0. IR #8ery transaction (3ere goods are e/c3anged for goods is called a FBar"er Transa!"ion0. Since e8ery person cannot produce e8ery t3ing t3at 3e needs. T3erefore9 3e needs to gi8e ; sell (3at 3e produces in order to get ; "uy (3at 3e (antsD *n early days (3en FmoneyG (as not introduced9 people used to e/c3ange goods for goods. T3is )ind of trade9 (3ere goods are e/c3anged for goods9 is called bar"er "ra*e. *n fact9 in "arter trade9 8alue of one commodity is 1uoted in terms of ot3er commodity9 for e/ample t3e price of 1. )g of (3eat may "e e1ual to 2 meters of clot3 or % litres of mil). Alt3oug39 t3ere is no in8ol8ement of money "ut still e8ery commodity 3as a 8alue9 (3ic3 means t3at you 3a8e to gi8e a specific 1uantity of one commodity to "uy a specific 1uantity of anot3er commodity. Mone) Meas're/en" Con!e-" Jit3 t3e passage of time9 t3e trading 8olumes and types of commodities a8aila"le in t3e mar)et are increased and it "ecame difficult to e/c3ange commodity (it3 ot3er commodity. T3at is (3y t3e concept of cas3 ; money is introduced and people started 8aluing all goods ; ser8ices in terms of a common commodity called money. Ho( t3e price of 1. )g (3eat (ould "e Rupees &. instead of 2 meters of clot3. Similarly9 t3e price of 2 meters of clot3 and % litres of mil) (ould also "e Rupees &.. *n accounting9 e8ery transaction t3at is (ort3 recording is recorded in terms of money. *n ot3er (ords any e8ent or item t3at cannot "e translated in terms of money is not recorded in "oo)s of accounts. Cas% an* Cre*i" Transa!"ions Translating e8ery transaction in terms of money does not al(ays mean t3at t3e money c3anges 3ands9 t3e same time at (3ic3 t3e transaction ta)es place. *t may "e paid "efore or after t3e goods are e/c3anged. J3en t3e money 8alue of an item "eing purc3ased is paid9 at t3e same time (3en t3e item is e/c3anged. T3e transaction is said to "e a !as% "ransa!"ion or in ot3er (ords9 if t3e 8alue of transaction is met in cas3 at t3e time of t3e transaction suc3 )ind of transaction is said to "e cas3 transaction. In t3e ot3er 3and9 if t3e payment is delayed to a future date9 t3e transaction is termed as a !re*i" "ransa!"ion. 1i..eren" T)-es o. B'siness Organi2a"ions 1. So&e Pro-rie"ors%iAccording to !.J.T. Stafford9 B*t is t3e simplest form of "usiness organiKation9 (3ic3 is o(ned and controlled "y one manC
@ Copyrig3t 2irtual :ni8ersity of 4a)istan
VU
Sole proprietors3ip is t3e oldest form of "usiness organiKation (3ic3 is o(ned and controlled "y one person. *n t3is "usiness9 one man in8ests 3is capital 3imself. Ee is all in all in doing 3is "usiness. Ee enAoys t3e (3ole of t3e profit. T3e features of sole proprietors3ip are0 #asy 'ormation :nlimited 5ia"ility I(ners3ip 4rofit 7anagement #asy !issolution
3. Par"ners%iAccording to 4artners3ip Act9 1+329 B4artners3ip is t3e relation "et(een persons (3o 3a8e agreed to s3are t3e profits of a "usiness carried on "y all or any of t3em acting for all.C 4artners3ip means a la(ful "usiness o(ned "y t(o or more persons. T3e profit of t3e "usiness s3ared "y t3e partners in agreed ratio. T3e lia"ility of eac3 partner is unlimited. Small and medium siKe "usiness acti8ities are performed under t3is organiKation. *t 3as t3e follo(ing features0 5egal #ntity 4rofit and 5oss !istri"ution :nlimited 5ia"ility Transfer of Rig3ts 7anagement Hum"er of 4artners
4. 5oin" S"o!6 Co/-an) According to S. #. T3omas9 BA company is an incorporated association of persons formed usually for t3e pursuit of some commercial purposesC A Aoint stoc) company is a 8oluntary association of persons created "y la(. *t 3as a separate legal entity apart from its mem"ers. *t can sue and "e sued in its name. *n t3e Aoint stoc) company9 t3e (or) of organiKation "egins "efore its incorporation "y promoters and it continues after incorporation. T3e Aoint stoc) company 3as t3e follo(ing feature0 Creation of 5a( Separate 5egal #ntity 5imited 5ia"ility Transfera"ility of s3ares Hum"er of 7em"ers Common Seal
'inancial Accounting = * > 7?T1.1 7ECO71 8EEPING AN1 SOME BASIC CONCEPTS Learning Ob e!"i#e
VU Lesson-2
T3e e8olution of accounting stated in t3e pre8ious lecture continues (it3 a slig3t emp3asis on 3o( actual record )eeping startedD *n addition9 some "asic concepts li)e capital9 profit9 and "udget are also introduced. 1i..eren" T)-es o. B'siness En"i"ies Co//er!ia& Organi2a"ions 9Pro.i" Orien"e*: o Sole proprietor o 4artners3ip o 5imited companies Non-Co//er!ia& Organi2a"ions 9Non-Pro.i" Orien"e*: o H?IGs ,Hon=go8ernment IrganiKationso Trusts o Societies
T%e Basi! Con!e-" o. 7e!or* 8ee-ing Je can maintain a diary of transactions and note t3e daily transactions li)e sale9 purc3ase etc. in it. Prob&e/s Fa!e* in Main"aining 1iar) o. Transa!"ions Eo( (ill (e come to )no( t3e income and e/penses from 8arious sourcesD Je only 3a8e a s3eet ; page on (3ic3 daily transactions are listed. Je do not )no( (3ic3 product is selling "etter and (3ic3 is not.
1iar) o. Transa!"ions Transa!"ions o. 5an 30-P a r " i ! ' & a r s Sold % nos. of *tem A 4urc3ased 1. nos. of *tem B Sold 1 no. of *tem C #lectricity "ill paid Sold 1 no. of *tem A Sold 2 nos. of *tem B Sold % nos. of *tem A 4urc3ased 1. nos. of *tem B Sold 1 no. of *tem C Telep3one "ill paid Salary paid 7s. 19... ,1%9...29... ,19%..%.. 49... 19... ,1%9...29... ,19...,19%..-
'inancial Accounting = * > 7?T1.1 A#ai&ab&e A&"erna"e
VU
Ine can go t3roug3 all t3e transactions at t3e end of t3e mont3 and note different types of transactions on different pages. So t3at e8ery page gi8es complete detail for a different type of transaction li)e sales of different products and e/penses of different types Ho( try to go t3roug3 t3ese transactions and separate transactions of different types. B'" ,%a" i. "%e n'/ber o. "ransa!"ions is &arge( *s it really possi"le to go t3roug3 3undreds or t3ousands of transactions at t3e mont3 end and analyse t3em to o"tain re1uired results. Cas% an* Cre*i" Transa!"ions Sales and purc3ase are not al(ays for cas3. Some times t3e payment ; receipt is delayed to a future date ,Sale;purc3ase for B:!EARC-. T3e diary t3at (e 3a8e discussed a"o8e9 records cas3 transactions only. T3e :!EAR ,credit- transactions may "e noted in separate diary. Ho( (e 3a8e t(o diaries one for cas3 and one for credit. Je need to )no( total sales and purc3ases ,"ot3 cas3 and credit- and ot3er information li)e t3e amount t3at is paya"le and recei8a"le. +o, ,i&& ,e ge" o'r re;'ire* res'&"s no,( !o (e need anot3er diary to com"ine information from "ot3 t3ese diariesD But (3en (e recei8e or pay cas3 for t3e credit transactions (ill (e again record t3e transactions on t3e day9 J3en cas3 is recei8ed or paidD *f so9 (3ere to recordD So t3e pro"lems )eep on increasing (it3 t3e siKe or 8olume of "usiness. But one t3ing is "ecoming certain and t3at is t3at an accurate reflection of "usiness transacted can only "e o"tained if "ot3 cas3 and credit transactions are recorded in suc3 a manner t3at t3ere is no duplication and yet t3e transactions are completely recorded. T3is is possi"le only under Commercial Accounting. Co//er!ia& A!!o'n"ing Commercial Accounting is done t3roug3 a system t3at is )no(n as !ou"le entry "oo) )eeping. Sing&e En"r) an* 1o'b&e En"r) A!!o'n"ing Sing&e en"r) a!!o'n"ing<Cas% a!!o'n"ing.
T3is system records only cas3 mo8ement of transactions and t3at too up to t3e e/tent of recording one aspect of t3e transactions. T3is means t3at only receipt or payment of cas3 is recorded and no separate record is maintained ,a"out t3e source of receipt and payment- as to from (3om t3e cas3 (as recei8ed or to (3om it (as paid. 1o'b&e en"r) boo6 6ee-ing<Co//er!ia& a!!o'n"ing.
!ou"le entry or commercial accounting system records "ot3 aspects of transaction i.e. receipt or payment and source of receipt or payment. *t also records credit transactions i.e. recording of #lectricity Bill or accruals of Salary payment etc. . T3is concept (ill "e e/plained in detail in t3e ne/t lectures "ut for t3e time "eing it s3ould "e noted t3at in cas3 accounting date of receipt ; payment of actual cas3 is important (3ile in commercial accounting @ Copyrig3t 2irtual :ni8ersity of 4a)istan
VU
t3e date on (3ic3 t3e e/pense is caused ,(3et3er paid or not- as (ell as t3e spreading of t3e cost of certain items o8er t3eir useful life "ecomes important. Ca-i"a& Ho "usiness can run (it3out money or resources "eing in8ested t3erein. J3ate8er money or resources from onesG o(n poc)et are put in a "usiness is referred to as CAPITAL. Capital is t3e in8estment of t3e I(ner in t3e "usiness. T3is capital or in8estment must earn a return or profit on its use e8en if it is coming out of onesG poc)et. T3is return is also )no(n as P7OFIT. So no capital s3ould "e (it3out a profit or a return. Also9 no Capital e8en if coming from t3e "usiness o(ner can "e (it3out cost. J3yD Because if t3e same sum t3at (as used in a "usiness (as put in t3e "an) or used to "uy !efence Sa8ings or Hational Sa8ings Certificates9 a certain amount of profit (ould 3a8e "een earned. By putting t3is money in "usiness9 a return must "e e/pected. Mone) Va&'e o. Ti/e Anot3er important concept to remem"er in all "usinesses is t3at of MONE= VALUE OF TIME. Time spend "y t3e o(ner also 3as 8alueL 3e s3ould "e remunerated for it. ,T3e time of t3e proprietor or "usiness persons spent on t3e "usiness is also a "usiness cost and must "e paid for "y t3e "usiness in addition to t3e profit-. J3y "ecause9 if t3e "usiness person 3ad employed some"ody else in 3is place9 t3e person (ould "e paid a salary. T3erefore9 a "usiness personGs "i/e an* /one) "ot3 3a8e costs attac3ed to t3em. Hot3ing is free nor s3ould "e e/pected to "e free of cost. Goo*,i&& T3is is simply t3e 8alue attac3ed to t3e good reputation earned t3roug3 good and clean conduct of "usiness o8er a num"er of years. T3is good reputation also 3as a 8alue and "ecomes part of in8estment in "usiness Is Cas% in +an* o'r Pro.i"( Hot unless (e 3a8e deducted from cas3 sales it is t3e total amount of e/penses t3at are accrued or are on credit and added to it to t3e sales made on credit for (3ic3 cas3 is to "e recei8ed at a later date. T3e simple e1uation for calculation of profit (ould t3us "e0 Cas3 Sale=Cas3 4ayment M ,Credit Sale=Credit #/penseAlso remem"er t3at certain items 3a8e a long life and (ill "e used during t3at time to earn more money for "usiness. T3e cost of suc3 items (ill as "e spread o8er t3eir life and also accounted for accordingly in t3e a"o8e e1uation. . B'*ge" Budgeting is anot3er important aspect of "usiness planning. T3e "udget is made to ensure t3at t3ere is at least a "alance "et(een *ncome earned and t3e e/penses incurred on earning t3is income in t3e first instance9 and to pro8ide a reasona"le return on t3e capital used in t3e "usiness. Eo(e8er9 if t3ere is a s3ortfall "et(een of *ncome as against e/pense9 it means t3at more is "eing spent and less earned. !ecisions (ill "e re1uired to "ring t3e situation to "alance or if it cannot "e so t3en to arrange for loans or more capital to ensure "usiness continues. But "usiness cannot "e run on loans and t3ese must "e repaid. Budget *s an IrganiKationGs 4lan of a 'uture 4eriod #/pressed in 7oney Terms.
'inancial Accounting = * > 7?T1.1 S=STEMS OF ACCOUNTING AN1 SOME BASIC TE7MINOLOGIES Learning Ob e!"i#e After studying t3is lecture9 t3e students s3ould "e a"le to0 !istinguis3 "et(een Cas% A!!o'n"ing and A!!r'a& A!!o'n"ingL :nderstand (3at is o In!o/e o E>-enses o Pro.i" or Ne" Pro.i" !istinguis3 "et(een Cas% in +an* and Pro.i". !istinguis3 "et(een Ca-i"a& E>-enses and 7e#en'e E>-ensesL and :nderstand (3at is 5ia"ilityD Cas% A!!o'n"ing an* A!!r'a& A!!o'n"ing Cas% A!!o'n"ing *t is t3e accounting system in (3ic3 e8ents are recorded (3en actual cas3 ; c3e1ue is recei8ed or paid.
VU Lesson-3
5etGs ta)e t3e e/ample of utility "ills li)e electricity9 telep3one etc. T3e "ill of Nanuary is recei8ed on 1%t3 'e"ruary and paid on 2%t3 'e"ruary. *f t3e organiKation is follo(ing cas3 accounting practice it (ill record t3e e/pense of electricity ; telep3one on 2%t3 'e"ruary "ecause t3e actual payment is made on t3at day. T3e same principle applies for income and ot3er transactions as (ell i.e. income is recorded (3en cas3 is actually recei8ed instead recording (3en it is earned. A!!r'a& A!!o'n"ing *t is t3e accounting system in (3ic3 e8ents are re!or*e* as an* ,%en "%e) o!!'r. T3is means t3at income is recorded (3en it is earned and e/pense is recorded (3en incurred i.e. t3e organiKation 3as o"tained t3e "enefit from it. Consider t3e a"o8e e/ample. T3e electricity is utiliKed in t3e mont3 of Nanuary so t3e e/pense s3ould "e recorded in t3e mont3 of Nanuary. Similarly t3e company t3at is pro8iding t3e electricity s3ould record t3e income in t3e mont3 of Nanuary. In!o/e *ncome is "%e #a&'e o. goo*s or ser#i!es t3at a "usiness c3arges from its customers. Businesses can "e distri"uted in t(o maAor categories. Ine t3at pro8ides ; sells goods and t3e ot3er t3at pro8ides ser8ices. *f t3e organiKation is commercial t3en t3ese goods or ser8ices (ill al(ays "e pro8ided at some price. T3is price at (3ic3 t3ese goods ; ser8ices are pro8ided is t3e income of t3e organiKation9 pro8iding t3e goods ; ser8ices. E>-enses #/penses are t3e !os"s in!'rre* "o earn re#en'e. *n order to earn re8enue9 one 3as to spend some money suc3 as t3e cost of goods t3at are sold or t3e money paid to t3e indi8iduals (3o are pro8iding ser8ices plus ot3er costs. T3ese costs t3at are incurred ; spent "y t3e "usiness to earn t3e re8enue are t3e e/penses of t3e "usiness. Pro.i" or Ne" Pro.i" Het income or Het 4rofit is t3e amount "y (3ic3 t3e income e/ceeds e/penses in a specific time period. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
'inancial Accounting = * > 7?T1.1 IR 4rofit is (3at is left of t3e income after all e/penses ,paid and incurred- 3a8e "een deducted from it. Ne" Pro.i" ? In!o/e E>-enses Cas% in +an* an* Pro.i"
VU
Je 3a8e said t3at profit is (3at is left of income after deducting t3e e/penses. *s it t3e income recei8ed in cas3 less t3e e/penses paid in cas3D Ir do (e 3a8e to consider ot3er t3ings as (ellD *t can "e e/plained (it3 t3e 3elp of follo(ing e/ample. A trader purc3ases some goods from a supplier for Rs. 19%.. and promises to pay in t(o (ee)s time. ,Remem"er credit transactions from lecture .2-. T3e same day 3e sells t3ese to a customer for Rs. 29... (3o pays Rs. 19... and promises to pay t3e "alance amount after one (ee). Ho( at t3e end of t3e day9 t3e trader 3as Rs. 19... in 3is 3and. After one (ee)9 3e (ill 3a8e anot3er Rs. 19... and 3e (ill pay Rs. 19%.. after t(o (ee)s. J3at is profitD *s Rs. 19... t3at 3e 3as in 3is 3and on day one is 3is profit. T3e ans(er is Ho. Ee still 3as to recei8e Rs. 19... and pay Rs. 19%.. to t3e supplier plus any ot3er e/penses t3at 3e may 3a8e incurred in t3e process of t3is trade. Eis actual profit is Rs. %.. less any ot3er e/penses t3at 3e incurs9 (3ic3 is t3e difference of t3e total amount t3at 3e recei8es from customer and t3e amount t3at 3e pays to t3e supplier less ot3er e/penses. J3at (e understand form t3is e/ample is t3at cas3 in 3and is not al(ays t3e profit. To (or) out t3e profit (e 3a8e to consider t3e total income and total e/penses irrespecti8e of t3e fact t3at actual payment 3as "een made or not. Ca-i"a& an* 7e#en'e E>-enses Je 3a8e esta"lis3ed9 to calculate t3e profit9 all e/penses are deducted from income. Are all payments t3at (e ma)e are e/penses and 3a8e to "e deducted from t3e incomeD Consider t3e different types of payments t3at could "e made "y a "usiness organiKation. T3e payments could "e for utility "ills9 salaries9 fuel "ills or purc3ase of 8e3icle9 furniture etc. Iut of t3e types discussed a"o8e utility "ills9 salaries and fuel "ill are t3e payments for (3ic3 t3e organisation 3as already enAoyed t3e "enefit. J3ereas 8e3icle and furniture are t3e types from (3ic3 t3e company (ill deri8e t3e "enefit for a long time. *f t3e payment made for 8e3icles and furniture is su"tracted from t3e income of t3e period in (3ic3 payment (as made9 t3e profit for t3at period (ill "e too lo(. J3ereas9 in t3e future period (3en t3e item (ill still "e pro8iding "enefit to t3e company t3ere (ill "e no e/pense to matc3 t3e "enefit of t3at e/pense. T3is means t3at (e 3a8e to distinguis3 "et(een t3e payments ; e/penses t3at pro8ide "enefit to t3e company immediately and t3ose t3at last for a longer period. *n accounting t3e e>-enses "%a" -ro#i*e bene.i" i//e*ia"e&) are !a&&e* @7e#en'e E>-ensesA an* "%ose e>-enses ,%ose bene.i" &as" .or a &onger -erio* are !a&&e* @Ca-i"a& E>-ensesC. Liabi&i"ies 5ia"ilities are t3e *eb"s and ob&iga"ions of t3e "usiness. 5ia"ility is t3e o"ligation of t3e "usiness to pro8ide a "enefit or asset on a future date. Je 3a8e discussed credit transactions. J3ene8er a person purc3ases somet3ing on credit 3e promises to pay for t3e goods on a future date. T3is is 3is o"ligation to pay cas3 at a future date and t3us it "ecomes 3is lia"ility.
'inancial Accounting = * > 7?T1.1 SINGLE AN1 1OUBLE ENT7= 7ECO71 8EEPING Learning Ob e!"i#e T3e o"Aecti8e of t3is lecture is to de8elop an understanding in t3e students a"out t3e "asic concepts li)e0 o T3e separate "usiness entity o Single and dou"le entry "oo)=)eeping o !e"it and Credit o T3e dual aspect of a transaction o Accounting e1uation
VU Lesson-4
Se-ara"e En"i") Con!e-" *n accounting9 BT%e B'siness0 is "rea"e* in*e-en*en"&) from t3e persons (3o o(n it. T3is means9 alt3oug3 anyt3ing o(ned "y t3e "usiness "elongs to t3e o(ners of t3e "usiness and anyt3ing o(ed "y t3e "usiness is paya"le "y t3e o(ners "ut for accounting purposes9 (e assume t3at t3e "usiness is independent from its o(ners. T3is means9 if t3e "usiness purc3ases a mac3ine or piece of e1uipment9 "usiness (ill o(n and o"tain "enefit from t3at mac3ine or e1uipment. 5i)e(ise9 if t3e "usiness "orro(s money from FsomeoneG it (ill 3a8e to repay t3e money. T3is FsomeoneG includes e8en t3e o(ner of t3e "usiness.
T%is "rea"/en" o. "%e b'siness in*e-en*en"&) .ro/ i"s o,ners is !a&&e* "%e BSe-ara"e En"i") Con!e-"0.
Sing&e En"r) Boo6-6ee-ing T3is is t3e con8entional style of )eeping records of financial transactions. *n single entry "oo) )eeping system9 as it is clear from t3e name9 on&) one as-e!" o. "%e "ransa!"ion is re!or*e*. T3is actually is not a system "ut is a procedure "y (3ic3 small "usiness concerns9 li)e retailers and small s3op)eepers9 )eep record of t3eir sale ; income. *n t3is system9 t3ere are usually ",o "o "%ree regis"ers @8%a"aA. *n one register cas3 recei8ed from customers is recorded9 (3ereas t3e ot3er one is a person= (ise record of goods sold on credit Udhar Khata. T3ere may or may not "e a register of suppliers to (3om money is paya"le. T3at means9 only one aspect of transaction i.e. eit3er cas3 receipt or t3e fact t3at money is recei8a"le from someone is recorded. 1o'b&e En"r) Boo6-6ee-ing T3e concept of dou"le entry is "ased on t3e fact t3at e8ery transaction 3as t(o aspects i.e. recei8ing a "enefit and gi8ing a "enefit. T%e a!!o'n"ing s)s"e/ "%a" re!or*s bo"% "%e as-e!"s o. "ransa!"ion in T3e account t3at recei8es t3e "enefit is de"ited and t3e account t3at pro8ides t3e "enefit is credited. F!e"itG and FCreditG are denoted "y F!rG and FCrG respecti8ely. T3e ultimate result of t3e system is t3at for e8ery !e"it ,!r- t3ere is an e1ual Credit ,Cr-. Sing&e C 1o'b&e En"r) Boo6-6ee-ing 1is"ing'is%e* T3e dou"le entry system is a more sop3isticated9 compre3ensi8e and relia"le form of single entry "oo) )eeping system. Single entry system records only one aspect of t3e transaction suc3 as0 o Cas3 recei8ed from sale is recorded in cas3 register only9 o ?oods sold on credit are recorded in t3e indi8idualGs account only9 o J3en cas3 is recei8ed from t3e customer9 to (3om somet3ing (as sold on credit9 t3e receipt may Aust "e recorded in t3e account of indi8idual only. !ou"le entry system records "ot3 t3e aspects of t3e transactionL @ Copyrig3t 2irtual :ni8ersity of 4a)istan
boo6s o. a!!o'n"s is !a&&e* *o'b&e en"r) s)s"e/.
'inancial Accounting = * > 7?T1.1 o
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J3en good are sold on cas3 t3e t(o aspects of t3e transaction are > t3e seller 3as sold goods and recei8ed cas3 against t3em. T3e goods sold are "enefit transferred to t3e purc3aser ,Credit- (3ereas t3e cas3 recei8ed if t3e "enefit against t3e goods sold ,!e"it-. J3en t3e goods are sold on credit t3e "enefit gi8en is t3e same i.e. goods sold "ut t3e "enefit recei8ed is not cas3 "ut a rig3t to recei8e cas3 from t3e customer. T3erefore9 in t3is case !e"it is gi8en to customerGs account ,account recei8a"le- instead of cas3. J3en cas3 is recei8ed from t3e customer t3e rig3t to recei8e cas3 ceases. So9 t3e "enefit recei8ed is cas3 and "enefit transferred is t3e rig3t to recei8e cas3. Eere cas3 (ill "e de"ited and customer (ill "e credited.
Adopting t3e dou"le entry accounting system can9 t3erefore9 3a8e follo(ing "enefits0 o #8ery transaction 3as e1ual !e"it and CreditL 3ence t3e total of all !e"it accounts (ill "e e1ual to t3e total of all Credit accounts at any gi8en time. T3is ser8es as a 1uic) test of mat3ematical accuracy of "oo) )eeping. Since all aspects of transactions are recorded9 t3erefore9 t3e "oo)s are more informati8e. *n t3e a"o8e e/ample of trader9 if 3e )eeps records under dou"le entry system (ill )no( t3e e/act figure of total sale9 cas3 in 3and and recei8a"le from customers from t3eir respecti8e accounts at any desired time.
1ebi" an* Cre*i" !e"it and Credit are t(o 5atin (ords and as suc3 it is difficult to say (3at do t3ese mean. But (e can de8elop an understanding as to (3at does t3ese terms stand for. 1ebi" I" signi.ies "%e re!ei#ing o. bene.i". In si/-&e ,or*s i" is "%e &e." %an* si*e. !#B*T is a record of an inde"tednessL specifically an entry on t3e left=3and side of an account constituting an addition to an e/pense or asset account or a deduction from a re8enue9 net (ort39 or lia"ility account. Cre*i" I" signi.ies "%e -ro#i*ing o. a bene.i". In si/-&e ,or*s i" is "%e rig%" %an* si*e. CR#!*T9 in accounting9 is an accounting entry system t3at eit3er decreases assets or increases lia"ilitiesL in general9 it is an arrangement for deferred payment for goods and ser8ices. 1'a& As-e!" o. Transa!"ions 'or e8ery de"it t3ere is an e1ual credit. T3is is also called t3e *'a& as-e!" o. "%e "ransa!"ion i.e. e8ery transaction 3as t(o aspects9 de"it and credit and t3ey are al(ays e1ual. T3is means t3at e8ery transaction s3ould 3a8e t(o=sided effect. 'or e/ample 7r. A starts 3is "usiness and 3e initially in8ests Rupees 1..9...;= in cas3 for 3is "usiness. Iut of t3is cas3 follo(ing items are purc3ased in cas3L o o o A "uilding for Rupees %.9...;=L 'urniture for Rupees 1.9...;=L and A 8e3icle for Rupees 1%9...;=
T3is means t3at 3e 3as spent a total of Rupees %9...;= and 3as left (it3 Rupees 2%9... cas3. Je (ill apply t3e !ual Aspect Concept on t3ese e8ents from t3e 8ie(point of "usiness. J3en 7r. A in8ested Rupees 1..9...;=9 t3e cas3 account "enefited from 3im. T3e e8ent (ill "e recorded in t3e "oo)s of "usiness as9
10
'inancial Accounting = * > 7?T1.1 1ebi" Cre*i" Cas3 Rs.1..9 ...
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7r. A
Rs.1..9 ...
Analyse t3e transaction. T3e account t3at recei8ed t3e "enefit9 in t3is case is t3e cas3 account9 and t3e account t3at pro8ided t3e "enefit is t3at of 7r. A.
Building purc3ased > T3e "uilding account "enefited from cas3 account 1ebi" Cre*i" Building Cas3 Rs.%.9 ... Rs.%.9 ...
'urniture purc3ased > T3e furniture account "enefited from cas3 account 1ebi" Cre*i" 'urniture Cas3 Rs.1.9 ... Rs.1.9 ...
2e3icle purc3ased > T3e 8e3icle account "enefited from cas3 account 1ebi" Cre*i" 2e3icle Cas3 Rs.1%9 ... Rs.1%9 ...
Basi! Prin!i-&e o. 1o'b&e En"r) Je can de8ise t3e "asic principle of dou"le entry "oo)=)eeping from our discussion to t3is point B#8ery !e"it 3as a CreditC (3ic3 means t3at BAll !e"its are al(ays e1ual to All CreditsC. Asse"s Assets are t3e -ro-er"ies an* -ossessions o. "%e b'siness. 4roperties and possessions can "e of t(o types0 o Tangib&e Asse"s t3at 3a8e p3ysical e/istence , are furt3er di8ided into 'i/ed Assets and Current Assetso In"angib&e Asse"s t3at 3a8e no p3ysical e/istence #/amples of "ot3 are as follo(s0 o Tangi"le Assets > 'urniture9 2e3icle etc. o *ntangi"le Assets > 4atents9 Copyrig3ts9 ?ood(ill etc. A!!o'n"ing E;'a"ion 'rom t3e a"o8e e/ample9 if t3e de"its and credits are added up9 t3e situation (ill "e as follo(s0 1ebi"s Cas3 Building 'urniture 2e3icle 7r. A Cas3 Rs.1..9...;= %.9...;= 1.9...;= 1%9...;= Rs.1..9 ...;= %9...;=
Cre*i"s
11
'inancial Accounting = * > 7?T1.1 T%e "o"a& E;'a"ion be!o/esD 1EBITS Cas3 M Building M 'urniture M 2e3icle 1..... M %.... M 1.... M 1%...
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? O O
C7E1ITS Cas3 M 7r. A %... M 1..9...
Cas3 on 5eft Eand Side is Rupees 1..9...;= and on Rig3t Eand Side it is Rs. %9 ...;=. *f it is gat3ered on t3e 5eft Eand Side it (ill gi8e a positi8e figure of Rupees 2%9...;= ,(3ic3 you (ill notice is our "alance of cas3 in 3and-. Ho( t3e e1uation "ecomes0 1EBITS Cas3 M Building M 'urnitureM 2e3icle 2%9... M %.9... M 1.9... M 1%9... O O O C7E1ITS 7r. A 1..9...
Keeping t3e entity concept in mind (e can see t3at t3e "usiness o(ns t3e "uilding9 furniture9 8e3icle and cas3 and (ill o"tain "enefit from t3ese t3ings in future. Any t3ing t3at pro8ides "enefit to t3e "usiness in future is called BAsse"0. Similarly t3e "usiness 3ad o"tained t3e money from 7r. A and t3is money (ill 3a8e to "e returned in form of eit3er cas3 or "enefits. Any t3ing for (3ic3 t3e "usiness 3as to repay in any form is called BLiabi&i")0. So cas39 "uilding9 furniture and 8e3icle are t3e assets of t3e "usiness and t3e amount recei8ed from 7r. A for (3ic3 t3e "usiness (ill 3a8e to pro8ide a return or "enefit is t3e lia"ility of t3e "usiness. T3erefore9 our e1uation "ecomes0 Assets O 5ia"ilities
T3e lia"ilities of t3e "usiness can "e classified into t(o maAor classes i.e. t3e amounts paya"le to FoutsidersG and t3ose paya"le to t3e Fo(nersG. T3e lia"ility of t3e "usiness to(ards its o(ners is called BCa-i"a&0 and amount paya"le to outsiders is called &iabi&i"). T3erefore9 our accounting e1uation finally "ecomes0 Asse"s ? Ca-i"a& E Liabi&i"ies
12
'inancial Accounting = * > 7?T1.1 CLASSIFICATION OF ACCOUNTS Learning Ob e!"i#e T3is lecture (ill co8er o Classification of accounts into Assets9 5ia"ilities9 *ncome and #/penses9 and o Rules of !e"it and Credit for t3ese classes. A!!o'n"
VU Lesson-5
An accounting system )eeps separate record of eac3 item li)e assets9 lia"ilities9 etc. 'or e/ample9 a separate record is )ept for cas3 t3at s3o(s increase and decrease in it. T3is re!or* "%a" s'//ari2es /o#e/en" in an in*i#i*'a& i"e/ is !a&&e* an A!!o'n". C&assi.i!a"ion o. A!!o'n"s T3e accounts are classified into follo(ing 3eads0 o Assets o 5ia"ilities o *ncome o #/penses ,furt3er di8ided into capital and re8enue e/pensesAsse"s Assets are t3e -ro-er"ies an* -ossessions o. "%e b'siness "o -a) in .'"'re. Can be a/o'n" -a)ab&e .or /a"eria& -'r!%ase*F e>-enses e"!. 4roperties and possessions can "e of t(o types0 o Tangib&e Asse"s t3at 3a8e p3ysical e/istence ,are furt3er di8ided into 'i/ed Assets and Current Assets-. o In"angib&e Asse"s t3at 3a8e no p3ysical e/istence #/amples of "ot3 are as follo(s0 o Tangi"le Assets > 'urniture9 2e3icle etc. o *ntangi"le Assets > Rig3t to recei8e money9 ?ood (ill etc. Liabi&i"ies 5ia"ilities are t3e *eb"s and ob&iga"ions of t3e "usiness. 5ia"ility is t3e o"ligation of t3e "usiness to pro8ide a "enefit or asset on a future date. Asset is a rig3t to recei8e and lia"ility is an o"ligation to pay9 t3erefore9 t3ese are opposite to eac3 ot3er. A!!o'n"ing E;'a"ion Assets are created out of capital in8ested plus lia"ility to t3ird party. Asse"s ? Liabi&i"ies E O,ner0s e;'i") In!o/e *ncome ; Re8enue is "%e #a&'e o. goo*s or ser#i!es t3at a "usiness c3arges from its customers Ir t3e re(ard ; return recei8ed from t3e resources committed in t3e "usiness. E>-enses #/penses are t3e !os"s in!'rre* "o earn "%e re#en'e. T3e resources spent and t3e efforts made to earn t3e income9 (3en translated in money terms are t3e e/penses of t3e "usiness Pro.i" 4rofit is t3e e/cess of income o8er e/penses in a specific period. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
13
'inancial Accounting = * > 7?T1.1 Loss 5oss is t3e e/cess of e/penses o8er income in a specific period. Ca-i"a& E>-en*i"'re
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*t is t3e e/penditure to create an asset t3at 3elps in generating future income and its life is more t3an 12 mont3. 'or e/ample mac3inery purc3ases9 furniture purc3ases etc. IR Capital #/penditure is t3e amount used during a particular period to ac1uire or impro8e long=term assets suc3 as property9 plant or e1uipment. 7e#en'e E>-en*i"'re *t is t3e day to day e/penses (3ose "enefit is dra(n immediately. 'or e/ample9 salary of t3e employee9 rent of t3e "uilding9 etc. IR Re8enue #/penditure is t3e cost of resources consumed or used up in t3e process of generating re8enue9 generally referred to as e/penses. 7'&es o. 1ebi" an* Cre*i" 'rom our discussion up to t3is point9 (e 3a8e esta"lis3ed follo(ing rules for !e"it and Credit0 Any account t3at o"tains a "enefit is !e"it. IR Anyt3ing t3at (ill pro8ide "enefit to t3e "usiness is !e"it. Bot3 t3ese statements may loo) different "ut in fact if (e consider t3at (3ene8er an account "enefits as a result of a transaction9 it (ill 3a8e to return t3at "enefit to t3e "usiness t3en "ot3 t3e statements (ill loo) li)e different sides of t3e same picture. 'or credit9 Any account t3at pro8ides a "enefit is Cre*i". IR Anyt3ing to (3ic3 t3e "usiness 3as a responsi"ility to return a "enefit in future is Cre*i". As e/plained in t3e case of !e"it9 (3ene8er an account pro8ides "enefit to t3e "usiness t3e "usiness (ill 3a8e a responsi"ility to return t3at "enefit at some time in future and so it is Credit. 7'&es o. 1ebi" an* Cre*i" .or Asse"s Similarly (e 3a8e esta"lis3ed t3at (3ene8er a "usiness transfers a 8alue ; "enefit to an account and as a result creates some t3ing t3at (ill pro8ide future "enefitL t3e Ft3ingG is termed as Asse". By com"ining "ot3 t3ese rules (e can de8ise follo(ing rules of !e"it and Credit for Assets0 o J3en an asset is created or purc3ased9 8alue ; "enefit is transferred to t3at account9 so it is !e"ited i. o In!rease in Asse" is 1ebi"
Re8ersing t3e a"o8e situation if t3e asset is sold9 (3ic3 is termed as disposing off9 for say cas39 t3e asset account pro8ides "enefit to t3e cas3 account. T3erefore9 t3e asset account is Credited ii. 1e!rease in Asse" is Cre*i"
7'&es o. 1ebi" an* Cre*i" .or Liabi&i"ies @ Copyrig3t 2irtual :ni8ersity of 4a)istan
14
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Anyt3ing t3at transfers 8alue to t3e "usiness9 and in turn creates a responsi"ility on part of t3e "usiness to return a "enefit9 is a Liabi&i"). T3erefore9 lia"ilities are t3e e/act opposite of t3e assets. o J3en a lia"ility is created t3e "enefit is pro8ided to "usiness "y t3at account so it is Credited iii. In!rease in Liabi&i") is Cre*i" J3en t3e "usiness returns t3e "enefit or repays t3e lia"ility9 t3e lia"ility account "enefits from t3e "usiness. So it is !e"ited i#. 1e!rease in Liabi&i") is 1ebi"
7'&es o. 1ebi" an* Cre*i" .or E>-enses Nust li)e assets9 (e 3a8e to pay for e/penses. 'rom assets9 (e dra( "enefit for a long time (3ereas t3e "enefit from e/penses is for a s3ort run. T3erefore9 #/penditure is Aust li)e Asset "ut for a s3ort run. :sing our rule for !e"it and Credit9 (3en (e pay cas3 for any e/pense t3at e/pense account "enefits from cas39 t3erefore9 it is de"ited. o Ho( (e can lay do(n our rule for #/penditure0 #. In!rease in E>-en*i"'re is 1ebi" Re8ersing t3e a"o8e situation9 if (e return any item t3at (e 3ad purc3ased9 (e (ill recei8e cas3 in return. Cas3 account (ill recei8e "enefit from t3at #/penditure account. T3erefore9 #/penditure account (ill "e credited #i. 1e!rease in E>-en*i"'re is Cre*i"
7'&es o. 1ebi" an* Cre*i" .or In!o/e *ncome accounts are e/actly opposite to e/pense accounts Aust as lia"ilities are opposite to t3at of assets. T3erefore9 using t3e same principle (e can dra( our rules of !e"it and Credit for *ncome #ii. #iii. In!rease in In!o/e is Cre*i" 1e!rease in In!o/e is 1ebi"
15
'inancial Accounting = * > 7?T1.1 FLO$ OF T7ANSACTIONS Learning Ob e!"i#e T3is lecture (ill co8er follo(ing areas0 o An o8er8ie( of t3e flo( of transactions. o An introduction to t3e "asic "oo)s of accounts. o T3e ?eneral 5edger9 and o T3e ledger "alance
VU Lesson-6
The Flow of Transactions

Occurrence of an Event
The Voucher
General Journal Cash/Bank Book
General Ledger
Trial Balance
Profit & Loss Account
Balance Sheet
E#en" #8ent is t3e 3appening of any t3ing "ut in accounting (e discuss monetary e8ents Mone"ar) E#en"s *f t3e financial position of a "usiness is c3ange due to t3e 3appening of e8ent t3at #8ent is called 7onetary #8ent T%e Vo'!%er 2ouc3er is documentary e8idence in a specific format t3at records t3e details of a transaction. *t is accompanied "y t3e e8idence of transaction.
16
'inancial Accounting = * > 7?T1.1 A Sa/-&e Vo'!%er Na/e O. Co/-an) T)-e O. Vo'!%er 1a"eD 1-1-30-1es!ri-"ion Cas% Ca-i"a& Co*e G 01 03 NoD 1ebi" A/o'n" 100F000 01 Cre*i" A/o'n" 100F000
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To"a&D Narra"ionD Pre-are* B)D T%e Genera& 5o'rna&
100F000 Ca-i"a& In"ro*'!e* in Cas% b) O,ner C%e!6e* b)D
100F000
T3e Nournal is used to record financial transactions in c3ronological ,day=to=day- order. All 8ouc3ers (ere first recorded in "oo)s of accounts. *t (as also called t3e Boo) of Iriginal #ntry or !ay Boo). But in present day accounting and especially (it3 t3e introduction of computers for accounting9 t3is "oo) is not in use any more. Genera& Le*ger T%e BT0 A!!o'n" 5edger > is a "oo) t3at )eeps separate record for eac3 account ,Boo) of Accounts-. T3e Account or Eead of Account is systematic record of transactions of one type. An account in its simplest form is a T=s3ape and loo)s li)e t3is0
Title of Account Left hand side. The Debit side.

A S"an*ar* Genera& Le*ger Since t3e ledger )eeps record of transactions t3at affect one 3ead of account9 t3erefore9 it s3ould pro8ide all t3e information t3at a user may need. :sually t3e ledger is re1uired to pro8ide follo(ing information0 o Title of account o 5edger page num"er9 called 5edger 'olio ; Account Code o !ate of transaction o 2ouc3er num"er o Harration ; particulars of transaction o Amount of transaction
Right hand side. The Credit side.
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'inancial Accounting = * > 7?T1.1 A S"an*ar* Genera& Le*ger Capital Account ,Title of Account!ate 2.== Nan .1 .1 Capital Account Capital *ntroduced in cas3 "y I(ner 7e!or*ing Fro/ Vo'!%er "o Genera& Le*ger 2ouc3er !ate0 1=1=2.== !escription Cas3 account Capital account Harration0 Code P .1 .2 Ho0 !e"it Amount 1..9... 1..9... .1 Credit Amount 1..9... 2ouc3er Hum"er 4articulars ; Harration Account Code .2 !e"it Credit Amount Amount
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Capital *ntroduced in Cas3 "y I(ner
Capital Account ,Title of Account!ate 2.== Nan .1 .1 Cas3 account 2ouc3er Hum"er 4articulars ; Harration
Account code .2 !e"it Amount Credit Amount 1..9...
Co/-&e"ing "%e 7e!or*ing Bo"% E..e!"s !escription Cas3 account Capital account Harration0 Code !e"it P Amount .1 .2 1..9... 1..9... Credit Amount
Capital *ntroduced in Cas3 "y I(ner
Capital Account Account Code .2 !ate 2.== Nan .1 .1 Cas3 account 1..9... 2ouc3er 4articulars ; Harration Hum"er !e"it Credit Amount Amount
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'inancial Accounting = * > 7?T1.1 Cas3 Account !ate 2.== Nan .1 .1 Capital account 1..9... Account Code .1 !e"it Credit Amount Amount
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2ouc3er 4articulars ; Harration Hum"er
A Simple Presentation of a Recorded Transaction is as under:

Cash Account Capital 100,000 Code 01
Capital Account
Code 02
Cash 100,000
T%e Le*ger Ba&an!e *n t3e earlier lecture9 (e 3a8e discussed t3at in order to 3a8e t3e total figure in respect of eac3 3ead of e/pense;income9 asset;lia"ility9 (e need to maintain different accounts. Je 3ad also said t3at eac3 account may 3a8e figures on t3e de"it as (ell as on t3e credit side. T3erefore9 t3e difference "et(een t3e de"it and t3e credit sides9 )no(n as t3e BALANCE9 (ould represent t3e re1uired total of t3e particular account. T3e total of all "alances on t3e !e"it side is A5JAQS e1ual to t3e total of all "alances on t3e Credit side. T3is is called t3e "alancing of "oo)s of accounts. Je (ill study a"out t3is concept at a later stage. T3e "alance may "e (ritten out after e8ery transaction in a t3ird column or calculated at t3e end of a specific time period ,an accounting period-. A !e"it "alance is s3o(n (it3out "rac)ets and a Credit "alance is s3o(n in "rac)ets ,RQS-. Cas3 Account !ate 2.== Nan .1 Nan .1 .1 .2 Capital account Building account @ Copyrig3t 2irtual :ni8ersity of 4a)istan 1..9... %.9... 1..9... %.9... 2ouc3er Hum"er Harration ; 4articulars Account Code .1 !e"it Amount Credit Balance Amount !r;,Cr-
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'inancial Accounting = * > 7?T1.1 Nan .2 !ate 2.== Nan .1 .1 Cas3 account 1..9... ,1..9....3 2ouc3er Hum"er 'urniture account Account Code .2 !e"it Amount Credit Balance Amount !r;,CrHarration ; 4articulars 1.9... 4.9...
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Capital Account
20
'inancial Accounting = * > 7?T1.1 BASIC BOO8S OF ACCOUNTS Areas Co#ere* in "%is &e!"'reD Cas3 "oo) and "an) "oo). Accounting 4eriod. Trial Balance and its limitations. F&o, o. Transa!"ionsD *n 'inancial Accounting9 any "usiness transaction flo(s as follo(s0
VU Lesson-7
1. T3e "usiness transaction is recorded in a #o'!%er. T3e 8ouc3er is t3e first document prepared in t3e financial accounting. 2. All financial transactions are t3en posted in t3e o'rna& .ro/ #o'!%ers. 3. *n t3ese days9 8ouc3er is directly fed in t3e "oo)s of accounts "y means of computers. It3er(ise ledgers are prepared for eac3 account from t3e Nournal. 4. 'rom t3e "oo)s of accounts9 "ria& ba&an!e is prepared9 (3ic3 s3o(s t3e arit3metic accuracy of t3e accounting system. %. 'inally9 .inan!ia& s"a"e/en"s. i.e.9 4rofit 6 5oss Account and Balance S3eet is prepared from trial "alance. Cas% Boo6 C Ban6 Boo6 Cas3 "oo) and "an) "oo) are part of general ledger. All entries including paya"les and recei8a"les are recorded in t3e general ledger. #/penses9 income9 assets and lia"ilities are recorded in different 3ead of accounts to analyKe t3e e/penses incurred in different 3ead of accounts. !ue to large 8olume of transactions9 entries related to cas3 and "an)s are recorded in t3e separate "oo)s. Cas% Boo6 All cas3 transactions ,receipts and payments- are recorded in t3e cas3 "oo). Cas3 "oo) "alance s3o(s t3e amount of cas3 in 3and at a particular time. 'ormat of cas3 "oo) is 3ere under0 Cas% Boo6 Receipt Side !ate Ho. Harration ; 5edger 4articulars Code A!!o'n" Co*e 01 4ayment Side Receipt !ate Ho. Harration ; 5edger 4ayment Amount 4articulars Code Amount
O7 Cas% Boo6 !ate 2ouc3er Hum"er Harration ; 4articulars A!!o'n" Co*e 01 5edger Receipt 4ayment Balance Code Amount Amount !r;,Cr-
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T(o formats of cas3 "oo) are s3o(n a"o8e. *n t3e first format9 receipt side and payment side are s3o(n separately. *n t3e second format9 t(o columns are s3o(n for receipt and payment (it3 an e/tra column of "alance. T3e "alance column s3o(s t3e net "alance of cas3 a8aila"le for use. T3e ledger code s3o(s t3e code of t3at 3ead of account (3ic3 contains t3e second effect of t3e cas3 transactions "ecause de"its and credits are al(ays e1ual in financial accounting. Bo"% o. "%ese .or/a"s are !orre!". A b'siness !an 'se an) .or/a" !onsi*ering i"s -o&i!ies an* re;'ire/en"s. Ban6 Boo6 All "an) transactions ,receipts 6 payments- are recorded in t3e "an) "oo). T3e "alance of "an) "oo) reflects t3e cas3 a8aila"le at "an) at a particular time. 'ormat of "an) "oo) is 3ereunder0 Ban6 Boo6 9Ban6 A!!o'n" N'/ber: !ate 2ouc3er Hum"er C31. Ho. Harration ; 4articulars 5edger Code A!!o'n" Co*e 03 Receipt Amount 4ayment Amount Balance !r;,Cr-
T3e format of "an) "oo) is same as t3at of cas3 "oo) e/cept t3e column of c3e1ue no. T3is column is added in t3e format "ecause all payments are made "y c3e1ue and t3e num"er of c3e1ue is (ritten in t3at column in order to )eep t3e accounting record updated. A!!o'n"ing Perio* Accounting period is any period for (3ic3 a 'inancial Statements are prepared. T3e lengt3 of t3e accounting period can "e anyt3ing "et(een one day to one year. T3e legal or statutory definition of accounting year is a ma/imum of one year. T3e only e/ception in t3is case is t3e formation of a ne( company (3ic3 is formed "efore t3e start of accounting period. Finan!ia& )ear 9A -erio* o. 13 /on"% *'ra"ion: *n 4a)istan9 financial year starts from 1st of Nuly and ends on 3.t3 of Nune. #/ceptions are for specialiKed "usiness suc3 as te/tile mills9 "an)s9 Sugar mills etc. 'inancial reports can "e made for a (ee) or a mont39 depending upon t3e re1uirements of t3e company. 1ebi" C Cre*i" Ba&an!es *t 3as already "een mentioned t3at "ot3 sides i.e. !e"it and credit side of a ledger must "e e1ual. *f de"it side of a ledger is greater t3an credit side9 t3e "alance (ill "e (ritten on t3e credit side and it (ill "e called 1ebi" Ba&an!e. T3e reason "eing9 t3e "alance is (ritten on t3e credit side "ecause of e/cessi8e de"it "alance. T3erefore9 it is called !e"it Balance. 'or e/ample0
Title of Account Debit Side Narration / Date No. Particulars 1 2
Receipt Amount 100,000 20,000 120,000
Date
Account Code 01 Credit Side Narration / No. Particulars 3 4 Balance
Payment Amount 80,000 30,000 110,000 10,000
A Debit Balance 22
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Title of Account Debit Side Date No. 1 2 Balance Narration / Particulars Receipt Amount 80,000 30,000 110,000 10,000 Date No. 3 4
Account Code 01 Credit Side Narration / Particulars Payment Amount 100,000 20,000 120,000
A Credit Balance
Similarly9 if credit side is greater t3an de"it side9 t3e "alance (ill "e (ritten on t3e de"it side. T3is "alance is called. Cre*i" Ba&an!e. 'or #/ample0 Tria& Ba&an!e At t3e end of accounting period9 a list of all ledger "alances is prepared. T3is list is called trial Balance. Trial "alance is a listing of t3e accounts in your general ledger and t3eir "alances as of a specified date. A trial "alance is usually prepared at t3e end of an accounting period and is used to see if additional adAustments are re1uired to any of t3e "alances. Since t3e "asic accounting system relies on dou"le=entry "oo))eeping9 a trial "alance (ill 3a8e t3e same total de"it amount as it 3as total credit amounts. Bot3 sides of trial "alance i.e. !e"it side and credit side must "e e1ual. *f "ot3 sides are not e1ual9 t3ere are some errors in t3e "oo)s of accounts. Trial "alance s3o(s t3e mat3ematical accuracy of t3e "oo)s of accounts. Li/i"a"ions o. Tria& Ba&an!e 1. Trial "alance only s3o(s t3e mat3ematical accuracy of t3e accounts. 2. *f "ot3 sides of trial "alance are e1ual9 "oo)s of accounts are considered to "e correct. But t3is mig3t not "e true in all t3e cases. 3. *f any transaction is not recorded at all9 trial "alance can not detect t3e omitted transaction. 4. *f any transaction is recorded in t3e (rong 3ead e.g. if an e/pense is de"ited to an assets account. Trial "alance (ill not "e a"le to detect t3at mista)e too.
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A Sa/-&e Tria& Ba&an!e Title Balance Trial Balance As on 31st !ec. 2..====== Account !e"it Code Amount .1 .2 .3 .4 .% .& . /y /y /y /y /yK
Title of Account Cas3 in Eand Cas3 at "an) Capital Assets 5ia"ilities *ncome #/penses Total
Credit Amount
/y /y /y /yK
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'inancial Accounting = * > 7?T1.1 INT7O1UCTION TO FINANCIAL STATEMENTS
VU Lesson-8
Learning Ob e!"i#e After studying t3is c3apter9 you (ill "e a"le to0 o !ra( up 4rofit 6 5oss account from t3e information gi8en in trial "alance. o !ifferentiate t3e term9 Receipt 6 4ayment9 *ncome 6 #/penditure and 4rofit 6 5oss account. Finan!ia& S"a"e/en"s !ifferent reports generated from t3e "oo)s of accounts to pro8ide information to t3e rele8ant persons. #8ery "usiness is carried out to ma)e profit. *f it is not run successfully9 it (ill sustain loss. T3e calculation of suc3 profit 6 loss is pro"a"ly t3e most important o"Aecti8e of t3e accounting function. Suc3 information is ac1uired from B'inancial StatementsC. 'inancial Statements are t3e end product of t3e (3ole accounting process. T3ese s3o( us t3e profita"ility of t3e "usiness concern and t3e financial position of t3e entity at a specified date. T3e most commonly used 'inancial Statements are Fprofit 6 loss accountG F"alance s3eetG 6 Fcas3 flo( statementG. Pro.i" C Loss A!!o'n" 4rofit 6 5oss account is an account t3at summariKes t3e profita"ility of t3e organiKation for a specific accounting period. 4rofit 6 5oss account 3as t(o parts0 o 'irst part is called Tra*ing a!!o'n" in (3ic3 ?ross 4rofit is calculated. ?ross profit is t3e e/cess of sales o8er cost of goods sold in an accounting period. *n trading concern9 cost of goods sold is t3e cost of goods consumed plus any ot3er c3arge paid in "ringing t3e goods in sala"le condition. For e>a/-&e9 if "usiness purc3ased certain items for resale purpose and any e/pense is paid in respect of carriage or "ringing t3e goods in store ,transportation c3arges-. T3ese (ill also "e grouped under t3e 3eading of Fcost of goods soldG and (ill "ecome part of its price. *n /an'.a!"'ring !on!ern9 cost of goods sold comprises of purc3ase of ra( material plus (ages paid to staff employed for con8erting t3is ra( material into finis3ed goods plus any ot3er e/pense in t3is connection. o 2nd part is called Pro.i" C Loss a!!o'n" in (3ic3 Het 4rofit is calculated. Ne" Pro.i" is (3at is left of t3e gross profit after deducting all ot3er e/penses of t3e organiKation in a specific time period. +o, "o -re-are Pro.i" C Loss A!!o'n"( Ine (ay is to (rite do(n all t3e !e"it and Credit entries of *ncome and #/pense accounts in t3e 4rofit and 5oss Account. But it is not sensi"le to do so. T3e ot3er (ay is t3at (e calculate t3e net "alance or (e can say Closing Balance of eac3 income and e/pense account. T3en (e note all t3e credit "alances on t3e credit side and all t3e de"it "alances on t3e de"it of profit and loss account. *f t3e net "alance of profit and loss is Credit ,credit side is greater t3an de"it side- it is 4rofit and if t3e net "alance is !e"it ,!e"it side is greater t3an credit side- it is a loss. In!o/eF E>-en*i"'reF Pro.i" C Loss In!o/e is t3e 8alue of goods and ser8ices earned from t3e operation of t3e "usiness. *t includes "ot3 cas3 6 credit. For e>a/-&e9 if a "usiness entity deals in garments. J3at it earns from t3e sale of garments9 is its income. *f some"ody is rendering ser8ices9 (3at 3e earned from rendering ser8ices is 3is income. E>-enses are t3e resources and t3e efforts made to earn t3e income9 translated in monetary terms. *t includes "ot3 e/penses9 i.e.9 paid and to "e paid ,paya"le-. Consider t3e a"o8e mentioned e/ample9 if any sum is spent in running t3e garments "usiness effecti8ely or in pro8ision of ser8ices9 is termed as e/pense. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 Pro.i" is t3e e/cess of income o8er e/penses in a specified accounting period. Pro.i"? In!o/e - e>-enses
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*n t3e a"o8e mentioned e/ample9 if t3e "usiness or t3e ser8ices pro8ider earn Rs. 1..9... 6 t3eir e/penses are Rs. %9.... T3eir profit (ill "e Rs. 2%9... ,1..9...= %9...-. Loss is t3e e/cess of e/penses o8er income in a specified period of time. *n t3e a"o8e e/ample9 if t3eir e/penses are Rs. 1..9... 6 t3eir income is Rs. %9.... T3eir loss (ill "e Rs. 2%9.... 7'&es o. 1ebi" C Cre*i" *ncrease in e/pense is !e"it ,!r.!ecrease in e/pense is credit ,Cr.*ncrease in income is credit ,Cr.!ecrease in income is !e"it ,!r.C&assi.i!a"ion o. E>-enses *t 3as already "een mentioned t3at a separate account is opened for eac3 type of e/pense. T3erefore9 in large "usiness concerns9 t3ere may "e a large num"er of accounts in organiKationGs "oo)s. As profit 6 loss account is a summariKed record of t3e profita"ility of t3e organiKation. So9 similar accounts s3ould "e grouped for reporting purposes. T3e most commonly used groupings of e/penses are as follo(s0 o Cost of goods sold o Administration e/penses o Selling e/penses o 'inancial e/penses Cos" o. goo*s so&* is t3e cost incurred in purc3asing or manufacturing t3e product9 (3ic3 an organiKation is selling plus any ot3er e/pense incurred in "ringing t3e product in salea"le condition. Cost of goods sold contains t3e follo(ing 3eads of accounts0 o 4urc3ase of ra( material;goods o Jages paid to employees for manufacturing of goods o Any ta/;freig3t is paid on purc3ases o Any e/pense incurred on carriage;transportation of purc3ased items. A*/inis"ra"i#e e>-enses are t3e e/penses incurred in running a "usiness effecti8ely. 7ain components of t3is group are0 o 4ayment of utility "ills o 4ayment of rent o Salaries of employees o ?eneral office e/penses o Repair 6 maintenance of office e1uipment 6 8e3icles. Se&&ing e>-enses are t3e e/penses incurred directly in connection (it3 t3e sale of goods. T3is 3ead contains0 o Transportation;carriage of goods sold o Ta/;freig3t paid on sale *f t3e e/pense 3ead FsalariesG includes salaries of sales staff t3en it (ill "e e/cluded from salaries 6 appear under t3e 3eading of Fselling e/pensesG. Finan!ia& e>-enses are t3e interest paid on "an) loan 6 c3arges deducted "y "an) on entityGs "an) accounts. *t includes0 o 7ar) up on loan @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 o Ban) c3arges
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7e!ei-" C Pa)/en" A!!o'n" A receipt 6 payment account is t3e summariKed record of actual cas3 receipts and actual cas3 payment of t3e organiKation for a gi8en period of time. T3is is a report t3at pro8ides cas3 mo8ement during t3e reported period. *n ot3er (ords9 it can "e defined as t3e summariKed record of t3e cas3 "oo) for a specific period. 7e!ei-" C Pa)/en" Vs Pro.i" C Loss A!!o'n" Receipt 6 payment account is t3e summariKed record of actual cas3 receipts and actual cas3 payment during t3e period (3ile profit 6 loss account also includes Recei8a"le and 4aya"le. In!o/e C E>-en*i"'re Vs Pro.i" C Loss A!!o'n" T3ese are t(o similar terms. Inly difference "et(een t3ese t(o terms is t3at income 6 e/penditure account is prepared for non profit oriented organiKations9 e.g. Trusts9 H?IGs9 (3ereas profit 6 loss account is prepared in profit oriented organiKations9 e.g. 5imited companies9 4artners3ip firms etc. *n case of *ncome and #/penditure account9 Surplus;!eficit is to "e find and in case of 4rofit and loss account9 profit or loss is to "e found. A sa/-&e o. Pro.i" an* Loss A!!o'n" Na/e o. "%e En"i") Pro.i" an* Loss A!!o'n" For "%e -erio* En*ing ---1EBIT PA7TICULA7S Cost of sale ?ross profit c;d ,*ncome > cost of salesTo"a& Admin e/penses Selling e/penses 'inancial e/penses Het profit ,?ross profit > e/pensesTo"a& AMOUNT 7s. &.9... *ncome 4.9... C7E1IT PA7TICULA7S AMOUNT 7s. 1..9...
100F000 To"a& 1%9... ?ross profit ";d %9... %9... 1%9... H0F000 To"a&
100F000 4.9...
H0F000
Ca&!'&a"ions o. Gross -ro.i" an* Ne" -ro.i" ?ross profit O *ncome > cost of sales O 1.....=&.... O 4.... Het profit O ?ross profit > #/penses O 4.... > ,1%...M %...M%...O 1%...
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'inancial Accounting = * > 7?T1.1 A sa/-&e o. In!o/e S"a"e/en" Na/e o. "%e En"i") In!o/e s"a"e/en" For "%e -erio* En*ing ---PA7TICULA7S AMOUNT AMOUNT 7s. 7s *ncome;Sales;Re8enue 1..... 5ess0 Cost of sales ,&....Gross -ro.i" H0000 5ess0 Administration e/penses 1%... Selling e/penses %... 'inancial e/penses %... ,2%...Ne" -ro.i" 1I000 7e!ogni"ion o. In!o/e an* E>-en*i"'re A!!o'n"D *ncome > s3ould "e recogniKed ; recorded at t3e time (3en goods are sold or ser8ices are rendered. #/penses > s3ould "e recogniKed ; recorded (3en "enefit relating to t3at e/pense 3as "een dra(n.
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'inancial Accounting = * > 7?T1.1 INT7O1UCTION TO FINANCIAL STATEMENTS 9CONTINUE1: Learning Ob e!"i#e After studying t3is c3apter9 you s3ould "e a"le to0 o #/plain (3at are Assets and 5ia"ilities and o !ra( up simple Balance S3eet from gi8en information in trial "alance
VU Lesson-9
Asse"s are economic resources t3at are o(ned "y a "usiness and are e/pected to "enefit future operations. *n most cases9 t3e "enefit to future operations comes in t3e form of positi8e future cas3 flo(s. T3e positi8e future cas3 flo(s may come directly as t3e asset is con8erted into cas3 ,collection of a recei8a"les- or indirectly as t3e asset is used in operating t3e "usiness to create ot3er assets t3at result in positi8e future cas3 flo(s ,"uilding 6 land used to manufacture a product for sale-. Assets may 3a8e definite p3ysical form suc3 as "uilding9 mac3inery or stoc). In t3e ot3er 3and9 some assets e/ist not in p3ysical or tangi"le form9 "ut in t3e form of 8alua"le legal claims or rig3t. #/amples are accounts recei8a"les9 in8estment in go8t. "onds and patent rig3ts etc. Liabi&i"ies are de"ts and o"ligations of t3e "usiness. T3e person or organiKation to (3ic3 t3e de"t is o(ed is called !re*i"ors. All "usinesses 3a8e lia"ilitiesL e8en t3e most successful companiesG purc3ase stoc)s9 supplies and recei8e ser8ices on credit. T3e lia"ilities arising from suc3 purc3ases are called A!!o'n"s -a)ab&e. 7'&e o. 1ebi" an* Cre*i" .or Asse"s an* Liabi&i"ies Assets ,increase in assets is de"it and decrease in asset is credit5ia"ilities ,*ncrease in lia"ility is credit and decrease in lia"ility is de"itC&assi.i!a"ion o. Asse"sD T3ere are t(o types of assets0 1. Tangib&e Asse"s (3ic3 3a8e p3ysical e/istence and can "e seen or touc3ed. *t includes 'i/ed as (ell as Current assets. 3. In"angib&e asse"s (3ic3 3a8e no p3ysical e/istence li)e good(ill9 patents and copyrig3ts etc. Fi>e* Asse"s Are t3e assets of permanent nature t3at a "usiness ac1uires9 suc3 as plant9 mac3inery9 "uilding9 furniture9 8e3icles etc. 'i/ed assets are su"Aect to depreciation. Long Ter/ Asse"s T3ese are t3e assets of t3e "usiness t3at are recei8a"le after t(el8e mont3s of t3e "alance s3eet date. 'or e/ample9 if "usiness 3as in8ested some money for t(o years in any sa8ing sc3eme or 3as purc3ased sa8ing certificates for more t3an one year9 it is a long term asset.
C'rren" Asse"s Are t3e recei8a"les t3at are e/pected to "e recei8ed (it3in one year of t3e "alance s3eet date. !e"tors9 closing stoc) 6 all accrued incomes are t3e e/amples of Current Assets "ecause t3ese are e/pected to "e recei8ed (it3in one accounting period from t3e "alance s3eet date. T%e )earF in ,%i!% &ong "er/ asse" is e>-e!"e* "o be re!ei#e*F &ong "er/ asse" is "rans.erre* "o !'rren" asse"s in "%a" )ear. C&assi.i!a"ion o. Liabi&i"ies Ca-i"a& is t3e funds in8ested "y t3e o(ners of t3e "usiness. Business 3as a lia"ility to return t3ese funds to t3e o(ner. Je )no( t3at for t3e purpose of accounting9 "usiness is treated separately from its o(ners. T3is is )no(n as Separate #ntity Concept i.e. Business is a separate entity. T3erefore9 if t3e @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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o(ner gi8es somet3ing ,can "e in form of Cas3 or Some ot3er Asset- to t3e "usiness t3en t3e "usiness9 not only 3as to return t3e amount to t3e o(ner "ut it also 3as to gi8e some return on t3at money. T3at is (3y (e treat Capital ,I(ners 'unds- as a 5ia"ility. Pro.i" C Loss A!!o'n" T3e net "alance of t3e profit and loss account i.e. eit3er profit or loss also "elongs to t3e o(ners. J3ile e/plaining capital (e said t3at t3e "usiness 3as to gi8e return to t3e o(ners. Ho( if t3e "usiness is managed successfully9 t3en t3is return (ould "e a 'a8ora"le figure ,4rofit-. T3is return (ill9 t3erefore9 "e added to t3e I(nersG in8estment. In t3e ot3er 3and9 if t3e "usiness is not managed successfully t3en t3is return (ould "e an un=fa8ora"le figure ,5oss-. *t (ill9 t3erefore9 "e deducted from t3e I(nersG *n8estment. Long Ter/ Liabi&i"ies T3ese are t3e lia"ilities t3at (ill "ecome paya"le after a period of more t3an one year of t3e "alance s3eet date. 'or e/ample9 if "usiness 3as ta)en a loan from "an) or any t3ird person and it is paya"le after ten years9 it (ill "e treated as a long term lia"ility for t3e "usiness.
C'rren" Liabi&i"ies T3ese are t3e o"ligations of t3e "usiness t3at are paya"le (it3in t(el8e mont3s of t3e "alance s3eet date. Creditors and all accrued e/penses are t3e e/amples of current lia"ilities of t3e "usiness "ecause "usiness is e/pected to pay t3ese "ac) (it3in one accounting period. T%e )ear in ,%i!% &ong "er/ &iabi&i") is "o be -ai* ba!6F &ong "er/ &iabi&i") is "rans.erre* "o !'rren" &iabi&i") in "%a" )ear. Ba&an!e S%ee" *t is a position statement t3at s3o(s t3e standing of t3e organiKation in 7onetary Terms at a Specific Time. :nli)e 4rofit and 5oss t3at s3o(s t3e performance of t3e entity o8er a period of time9 t3e Balance S3eet s3o(s t3e 'inancial State of Affairs of t3e entity at a gi8en date. Balance s3eet is t3e summariKed analysis in a FTG form of all assets and lia"ilities of t3e entity9 (it3 lia"ilities listed on left 3and side and assets on rig3t 3and side. Asset is any o(ned p3ysical o"Aect ,tangi"le asset- or a rig3t ,intangi"le asset- 3a8ing economic 8alue to t3e o(ner. 5ia"ility is an o"ligation of t3e "usiness to deli8er goods or to pro8ide a "enefit in future. For/a" o. Ba&an!e S%ee" 9A!!o'n" For/: Na/e o. "%e En"i") Ba&an!e S%ee" As A"------A/o'n" 7s. 'i/es Assets
Liabi&i"ies Capital Add Het 4rofit 5ong Term 5ia"ilities Current lia"ilities Total 1..9... 1%9...
Asse"s
A/o'n" 7s. %9... 2.9... $.9...
11%9... 5ong Term Assets %.9... Current assets 1.9... 1 %9... Total
1 %9...
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For/a" o. Ba&an!e S%ee" 97e-or" For/: Na/e o. "%e En"i") Ba&an!e S%ee" As A"------4ART*C:5ARS Amount Rs. ASS#TS 'i/es Assets 5ong Term Assets Current Assets To"a& 5*AB*5*T*#S Capital Add0 Het 4rofit 5ong Term 5ia"ilities Current 5ia"ilities To"a& 1..9... 1%9... 11%9... %.9... 1.9... 1JIF000
Amount Rs. %9... 2.9... $.9... 1JIF000
I&&'s"ra"ion G 1
T3e follo(ing is t3e Trial Balance e/tracted from t3e "oo)s of Haeem 6 Sons as on 3.;.&;2..2. 4repare a 4rofit 6 5oss account 6 Balance S3eet for t3e year ended Nune 3.9 2..2. Par"i!'&ars Sales 4urc3ases purc3ase return Salaries Rent !e"tors Creditors Capital 4lant 6 mac3inery ?rand Total 1r. 4%9... 129... %9... 2%9... 4..9... 4$ 9... Cr. 1..9... 39...
1&9... 3&$9... 4$ 9...
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So&'"ion
Naee/ C Sons Pro.i" C Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003 Rs. Sales 4%9... 39... 429... IKF000 1..9... 129... ?ross 4rofit %9... H1F000 IKF000
Cost of goods sold0 4urc3ases Less0 4urc3ase return ?ross 4rofit Salaries Rent Het 4rofit
Rs. 1..9...
1..9... %$9...
IKF000
T3is is a presentation of 4rofit 6 5oss Account in FTG account form. Ho( same illustration is presented in statement form. Naee/ C sons Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003 Par"i!'&ars In *ncome ; Sales ; Re8enue LessD Cost of ?oods Sold 4urc3ases 5ess0 4urc3ase Return A/o'n" 7s. 4%9... ,39...A/o'n" 7s. 1..9... 9H3F000:
Gross Pro.i" LessD Administrati8e e/penses Salaries Rent Ne" Pro.i"
IKF000 ,129...,%9...,1 9...H1F000
T3is is not a correct (ay to present 4rofit 6 5oss Account in statement form. *n actual practice only main 3eads of e/penses are presented in 4rofit 6 5oss Account along (it3 foot note num"er. !etail of t3at 3ead of e/pense is gi8en in t3e note.
32
'inancial Accounting = * > 7?T1.1 Correct presentation of 4rofit 6 5oss Account is 3ereunder0 Naee/ C Sons Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003 Par"i!'&ars In *ncome ; Sales ; Re8enue LessD Cost of ?oods Sold ,See Hote P 1Gross Pro.i" LessD Administrati8e e/penses ,See Hote P 2Ne" Pro.i" A/o'n" 7s. A/o'n" 7s. 1..9... ,429...IKF000 ,1 9...H1F000
VU
No"e G 1 Cos" o. goo*s so&* 4urc3ases 5ess0 4urc3ase Return Het 4urc3ases No"e G 3 A*/inis"ra"i#e e>-enses Salaries Rent Total Administrati8e e/penses HIF000 94F000: H3F000 129... %9... 1 9...
*t is recommended t3at 4rofit 6 5oss Account s3ould "e prepared in a"o8e mentioned format.
33
VU
Ba&an!e S%ee"
Naee/ C Sons Ba&an!e S%ee" As A" 5'ne 40F 3003 Liabi&i"ies Par"i!'&ars Capital Het 4rofit 3&$9... 419... A/o'n" 7s. 4.+9... Asse"s Par"i!'&ars Fi>e* Asse"s 4lant 6 7ac3inery A/o'n" 7s. 4..9...
C'rren" Liabi&i"ies Creditors To"a&
1&9... H3IF000
C'rren" Asse"s !e"tors To"a&
2%9... H3IF000
Balance S3eet in statement form is presented 3ereunder0

Naee/ C Sons Ba&an!e S%ee" As A" 5'ne 40F 3003 Par"i!'&ars Asse"s Fi>e* Asse"s 4lant 6 mac3inery C'rren" Asse"s !e"tors To"a& Liabi&i"ies Capital A**D Het 4rofit C'rren" Liabi&i"ies Creditors To"a& H3IF000 3&$9... 419... A/o'n" 7s. A/o'n" 7s.
4..9... 2%9... H3IF000
H0LF000 2%9... H3IF000
34
VU
I&&'s"ra"ion G 3
T3e follo(ing Trial Balance 3as "een e/tracted from t3e "oo)s of Saeed 6 Co. on 3.=.&=2..2. 'rom t3is9 prepare an *ncome Statement and Balance S3eet for t3e year ended 3.=.&=2..2. Par"i!'&ars Sales 4urc3ases purc3ase return Iffice salaries 'urniture 6 'i/ture Iffice #1uipment Rent Accounts 4aya"le,creditorsSales Salaries 'reig3t 6 custom duty on purc3ases Repair of office e1uipment Accounts Recei8a"le,de"tors'reig3t on sales Capital Cas3 in 3and 5oan from "an),for t3ree yearsBan) c3arges *nterest on loan To"a& 1r. ,Rs.1$.9... 29%.. 39%.. 1&9... 119... %9... 2$9... 39... &... 29... %29... 19... 419%.. 3 9... %.9... %.. %9... 433F000 Cr.,Rs.2..9...
433F000
So&'"ion
Saee* C Co. Pro.i" C Loss A!!o'n" .or "%e )ear en*e* 5'ne 40F 3003. Rs. Sales 4urc3ases 1$.9... 4urc3ase return 'reig3t9 custom duty on purc3ases &9... ?ross 4rofit 1&9%.. 303FI00 Salaries 39%.. ?ross 4rofit Rent %9... Repair of office e1uipment 29... Sales salaries 39... 'reig3t on sales 19... *nterest on loan %9... Ban) c3arges %.. Het loss To"a& 30F000
Rs. 2..9... 29%..
303FI00 1&9%..
39%.. 30F000
35
VU
Pro.i" C Loss A!!o'n" in s"a"e/en" .or/D

Par"i!'&ars In!o/e < Sa&es < 7e#en'e LessD Cos" o. Goo*s So&* ,See Hote P 1Gross Pro.i" LessD A*/inis"ra"i#e e>-enses ,See Hote P 2LessD Se&&ing e>-enses ,See Hote P 3LessD Finan!ia& E>-enses ,See Hote P 4Ne" Pro.i"<9Loss: A/o'n" 7s. 2..9... ,1$39%..1&9%.. ,1.9%..,49...,%9%..,39%..-
No"e G 1 Cos" o. Goo*s So&* 4urc3ases 5ess0 purc3ase return Add0 'reig3t9 custom duty on purc3ases To"a& No"e G 3 A*/inis"ra"i#e e>-enses Salaries Rent Repair of office e1uipment To"a& No"e G 4 Se&&ing e>-enses Sales salaries 'reig3t on sales To"a& No"e G H Finan!ia& e>-enses *nterest on loan Ban) c3arges To"a& 1$.9... ,29%..&9... 1K4FI00
39%.. %9... 29... 10FI00
39... 19... HF000
%9... %.. IFI00
36
VU
Ba&an!e S%ee"
Saee* C !o. Ba&an!e S%ee" As A" 5'ne 40F 3003 Liabi&i"ies Par"i!'&ars Capital A**D Het 4rofit A/o'n" 7s. H1FI00 94FI00: Asse"s Par"i!'&ars Fi>e* Asse"s 'urniture 6 'i/ture A/o'n" 7s. 1&9...
4KF000 Long Ter/ Liabi&i"ies 5oan from "an) C'rren" Liabi&i"ies Creditors To"a& %.9... 2$9... 11MF000 C'rren" Asse"s !e"tors Iffice e1uipment Cas3 To"a& %29... 119... 3 9... 11MF000
Ba&an!e S%ee" in s"a"e/en" .or/

Saee* C Co. Ba&an!e S%ee" As A" 5'ne 40F 3003 Par"i!'&ars Asse"s Fi>e* Asse"s 'urniture 6 'i/ture C'rren" Asse"s !e"tors Iffice #1uipment Cas3 To"a& Liabi&i"ies Capital 4rofit;,5ossLong Ter/ Liabi&i"ies 5oan from "an) C'rren" Liabi&i"ies Creditors To"a& H1FI00 94FI00: 4KFF000 %.9... 2$9... 11MF000 A/o'n" 7s. A/o'n" 7s.
1&9... %29... 119... 3 9... 11MF000
37
'inancial Accounting = * > 7?T1.1 ENE7CISES- 7ECO71ING OF T7ANSACTIONS Transa!"ions o. A&i Tra*ers .or "%e /on"% o. 5an'ar)D No. .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 13 14 1% 1a"e Nan .1 Nan .1 Nan .2 Nan .3 Nan .% Nan .& Nan .$ Nan 1. Nan 12 Nan 1$ Nan 21 Nan 2% Nan 31 Nan 31 Nan 31 Par"i!'&ars Started "usiness (it3 Rs. 2..9... in cas3. Ipened a "an) account and deposited Rs. 1+%9... in it. 4aid for furniture Rs. 1%9... t3roug3 c3e1ue. 4aid for 8e3icle Rs. %.9... t3roug3 c3e1ue. Boug3t goods on credit from 7r. A for Rs. %.9.... Sold goods for cas3 Rs. &.9.... 4urc3ased goods for cas3 Rs. 2.9.... Returned goods of Rs. 1.9... to 7r. A. Sold goods on credit to 7r. B for Rs. 4.9.... 7r. B returned goods of Rs. %9.... 4aid t3roug3 c3e1ue to 7r. A Rs. 2%9.... 7r. B 4aid t3roug3 c3e1ue Rs. 2.9.... 4aid Salaries t3roug3 c3e1ue Rs. %9.... Accrued e/penses for t3e mont3 Rs. 2.9.... !eposited in "an) Rs. 1.9....
VU Lesson-10
01 Started business with Rs. 200,000 in cash cash.

Cash Account Code 01 Date 01-01--No. Narration Dr. Rs. 200,000 Date No. Narration Cr. Rs. 01 Capital a/c
Capital Account Code 03 Date No. Narration Dr. Rs. Date 01-01--No. Narration Cr. Rs. 200,000 01 Cash a/c
38
VU
02 Deposited Rs. 195,000 in bank.

Bank Account Code 02 Date 01-01--No. Narration Dr. Rs. 195,000 Date No. Narration Cr. Rs. 02 Cash a/c
Cash Account Code 01 Date No. Narration Dr. Rs. Date 01-01--No. Narration Cr. Rs. 195,000 02 Bank a/c
03 aid !or !urniture Rs. 15,000 throu"h che#ue.

Bank Account Code 02 Date No. Narration Dr. Rs. Date 02-01--No. Narration 03 Furniture a/c Cr. Rs. 15,000
Furniture
Account Code 04 Dr. Rs. 15,000 Date No. Narration Cr. Rs.
Date No. Narration 02-01--- 03 Bank a/c
39
VU
0$ aid !or %ehic&e Rs. 50,000 throu"h che#ue.

Vehicle Date 03-01--No. Account Code 05 Narration Dr. Rs. 50,000 Date No. Narration Cr. Rs.
04 Bank a/c
Bank Account Code 02 Date No. Narration Dr. Rs. Date 03-01--No. Narration Cr. Rs. 50,000 04 Vehicle a/c
05 'ou"ht "oods on credit !ro( )r. * Rs. 50,000.

"urchases Date 05-01--No. 05 r! A Account Code 0# Narration Dr. Rs. 50,000 Date No. Narration Cr. Rs.
r! A $Creditor% Date No.
Account Code 0& Dr. Rs. Date No. Narration 05-01--- 05 "urchases a/c Cr. Rs. 50,000
Narration
Cre*i"or A person or organiKation to (3om money is paya"le "y t3e "usiness is called a creditor.
40
VU
0+ So&d "oods !or cash Rs. +0,000.

Cash Account Code 01 Date 0#-01--No. Narration Dr. Rs. #0,000 Date No. Narration Cr. Rs. 0# 'ales a/c
'ales Account Code 0( Date No. Narration Dr. Rs. Date 0#-01--No. Narration Cr. Rs. #0,000 0# Cash a/c
0, urchased "oods !or cash Rs. 20,000.

"urchases Date 0(-01--No. Account Code 0# Narration Dr. Rs. 20,000 Date No. Narration Cr. Rs.
0& Cash a/c
Cash Account Code 01 Date No. Narration Dr. Rs. Date 0(-01--No. Narration Cr. Rs. 20,000 0& "urchases a/c
41
VU
0- Returned "oods o! Rs. 10,000 to )r. *.

r! A $Creditor% Date 10-01--No. Account Code 0& Dr. Rs. 10,000 Date No. Narration Cr. Rs.
Narration
0( "urchase return
"urchases return Date No.
Account Code 0# Dr. Rs. Date 10-01--No. 0( Narration r!A Cr. Rs. 10,000
Narration
09 So&d "oods on credit to )r. ' !or Rs. $0,000.

'ales Account Code 0( Date No. Narration Dr. Rs. Date No. 12-01--- 09 Narration r! B Cr. Rs. 40,000
r! B $)e*tor% Account Code 09 Date 12-01--No. Narration Dr. Rs. 40,000 Date No. Narration Cr. Rs. 09 'ales a/c
1eb"or A person or organiKation from (3om money is recei8a"le "y t3e "usiness is called a de"tor.
42
VU
10 )r. ' returned "oods o! Rs. 5,000.

'ales return Account Code 0( Date 1(-01--No. 10 Narration r! B Dr. Rs. 5,000 Date No. Narration Cr. Rs.
r! B $)e*tor% Date No.
Account Code 09 Dr. Rs. Date 1(-01--No. Narration Cr. Rs. 5,000 10 'ales return
Narration
11 aid throu"h che#ue to )r. * Rs. 25,000.

r! A $Creditor% Date 21-01--No. 11 Bank a/c Account Code 0& Dr. Rs. 25,000 Date No. Narration Cr. Rs.
Narration
Bank Account Code 02 Date No. Narration Dr. Rs. Date 21-01--No. 11 Narration r! A Cr. Rs. 25,000
43
VU
12 )r. ' aid throu"h che#ue Rs. 20,000.

Bank Account Code 02 Date No. 25-01--- 12 Narration r! B Dr. Rs. 20,000 Date No. Narration Cr. Rs.
r! B $)e*tor% Account Code 09 Date No. Narration Dr. Rs. Date 25-01--No. Narration Cr. Rs. 20,000 12 Bank a/c
13
aid Sa&aries throu"h che#ue Rs. 5,000.

Code 10 Dr. Rs. 5,000 Date No. Narration Cr. Rs.
'alaries Account Date No. Narration 31-01--- 13 Bank a/c
Bank Account Date No. Narration Dr. Rs. Date 31-01--No. Narration 13 'alaries a/c
Code 02 Cr. Rs. 5,000
44
VU
1$ *ccrued e.penses !or the (onth Rs. 20,000.

,+penses Account Date 31-01--No. Narration Dr. Rs. 20,000 Date No. Narration 14 Accrued e+p a/c Code 11 Cr. Rs.
Accrued ,+penses / ,+penses "a-a*le Account Date No. Narration Dr. Rs. Date 31-01--No. Narration 14 ,+pense e+p ,+p!
Code 12 Cr. Rs. 20,000
15 Deposited in bank Rs. 10,000.

Bank Account Code 02 Date 31-01--No. Narration Dr. Rs. 10,000 Date No. Narration Cr. Rs. 15 Cash a/c
Cash Account Code 01 Date No. Narration Dr. Rs. Date 31-01--No. Narration Cr. Rs. 10,000 15 Bank a/c
45
VU
Ban6 A!!o'n"
Ban) 1a"e .1=.1=== 2%=.1=== 31=.1=== No. .2 12 1% Account Code .2 Narra"ion Cas3 a;c 7r. B Cas3 a;c 1r. 7s. 1+%9... 2.9... 1.9... 1a"e .2=.1=== .3=.1=== 21=.1=== 31=.1=== No. .3 .4 11 13 Narra"ion 'urniture a;c 2e3icle a;c 7r. A Salaries a;c Ba&an!e Cr. 7s. 1%9... %.9... 2%9... %9... 140F000
46
'inancial Accounting = * > 7?T1.1 ENE7CISES- 7ECO71ING OF T7ANSACTIONS 9Con"in'e*:
VU Lesson-11
Cash *ccount
Cash Account Code 01 Date No. Narration 01-01--- 01 Capital a/c 0#-01--0# 'ales a/c Dr. Rs. Date No. Narration 200,000 01-01--- 02 Cash a/c #0,000 0(-01--31-01--0& "urchases a/c 15 Cash a/c Balance 2+0,000
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On As on 5an'ar) 41F 30-Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account .1 3%9...
Cr. Rs. 195,000 20,000 10,000 225,000 35,000 2+0,000
Cr. 7s.
To"a&
'ank *ccount
Bank Account Code 02 Date 01-01--25-01--31-01--No. Narration Dr. Rs. Date No. Narration Cr. Rs. 15,000 50,000 25,000 5,000 95,000 130,000 225,000 02 Cash a/c 12 r! B 15 Cash a/c 195,000 02-01--20,000 03-01--10,000 21-01--31-01--03 Furniture a/c 04 Vehicle a/c 11 r! A 13 'alaries a/c Balance 225,000
47
'inancial Accounting = * > 7?T1.1 Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account Ban) Account .1 .2 3%9... 13.9...
VU
Cr. 7s.
To"a&
Capita& *ccount
Capital Account Code 03 Date No. Narration Dr. Rs. Date 01-01--No. Narration 01 Capital a/c Cr. Rs. 200,000
0 Balance 200,000 200,000

Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 3%9... 13.9... 2..9...
200,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account
Cr. 7s.
To"a&
48
VU
/urniture *ccount
Furniture Date 02-01--No. Account Code 04 Narration Dr. Rs. 15,000 Balance 15,000 Date No. Narration Cr. Rs.
03 Furniture a/c
15,000
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 1%9... 3%9... 13.9... 2..9...
15,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account
Cr. 7s.
To"a&
0ehic&e *ccount
Vehicle Date 03-01--No. Account Code 05 Narration Dr. Rs. 50,000 Balance 50,000 Date No. Narration Cr. Rs.
04 Furniture a/c
50,000
50,000
49
'inancial Accounting = * > 7?T1.1 Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% 1%9... %.9... 3%9... 13.9... 2..9...
VU
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account To"a&
Cr. 7s.
urchases *ccount
"urchases Date 05-01--0(-01--No. Account Code 0# Narration Dr. Rs. 20,000 Balance &0,000
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& 1%9... %.9... &.9... 3%9... 13.9... 2..9...
Date
No.
Narration
Cr. Rs. 10,000
05 "urchases a/c 0& "urchases a/c
50,000 10-01---
0( "urchase return
+0,000 &0,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account To"a&
Cr. 7s.
50
VU
)r. * 1Supp&ier2
r! A $Creditor% Date 10-01--21-01--No. Account Code 0& Dr. Rs. Date 10,000 05-01--No. Narration 05 "urchases a/c Cr. Rs. 50,000
Narration
0( "urchase return 11 Bank a/c Balance
25,000 15,000 50,000

Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& . 1%9... %.9... &.9... 1%9... 3%9... 13.9... 2..9...
50,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorTo"a&
Cr. 7s.
Sa&es
'ales Account Code 0( Date 1(-01--No. Narration Dr. Rs. Date 12-01--Balance 95,000 100,000
No.
Narration
Cr. Rs. #0,000 40,000
10 'ales return
5,000 0#-01---
0# Cash a/c r! sold B a/c 09 'a
100,000
51
VU
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& . .$ 1%9... %.9... &.9... 1%9... +%9... 3%9... 13.9... 2..9...
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorSales To"a&
Cr. 7s.
)r. ' 1Custo(er2

r! B $)e*tor% Account Code 09 Date 12-01--No. Narration Dr. Rs. Date 25-01--No. Narration Cr. Rs. 5,000 20,000 15,000 40,000 09 'ales a/c 40,000 1(-01--10 'ales return 12 Bank a/c Balance 40,000
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% 1%9... %.9... 3%9... 13.9... 2..9...
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account
Cr. 7s.
52
'inancial Accounting = * > 7?T1.1 4urc3ases Account 7r. A ,CreditorSales 7r. B ,!e"torTo"a& .& . .$ .+ 1%9... &.9... 1%9... +%9...
VU
Sa&aries
'alaries Account Code 10 Date No. Narration Dr. Rs. Date No. Narration Cr. Rs.
31-01---
13 Cash a/c
5,000 Balance 5,000
5,000
Na/e O. T%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& . .$ .+ 1. 1%9... %9... 1%9... %.9... &.9... 1%9... +%9... 3%9... 13.9... 2..9...
5,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorSales 7r. B ,!e"torSalaries
Cr. 7s.
To"a&
53
VU
3.penses
,+penses Date 31-01--No. Account Code 11 Narration Dr. Rs. 20,000 Date No. Narration Cr. Rs.
14 ,+p! accrued
Balance 20,000
Na/e O. T%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& . .$ .+ 1. 11 1%9... %9... 2.9... 1%9... %.9... &.9... 1%9... +%9... 3%9... 13.9... 2..9...
20,000 20,000
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorSales 7r. B ,!e"torSalaries #/penses To"a&
Cr. 7s.
54
VU
3.penses a4ab&e
,+penses "a-a*le Date No. Account Code 12 Dr. Rs. Date 31-01--No. Narration Cr. Rs. 20,000 14 ,+p! accrued
Narration
Balance
20,000 20,000 20,000
Na/e O. "%e Organi2a"ion 9A&i Tra*ers: Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 33.9... 1%9... %9... 2.9... 2.9... 33.9... 1%9... %.9... &.9... 1%9... +%9... 3%9... 13.9... 2..9...
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorSales 7r. B ,!e"torSalaries #/penses #/penses 4aya"le To"a&
Cr. 7s.
55
'inancial Accounting = * > 7?T1.1 Pro.i" C Loss A!!o'n" 9A!!o'n" For/: Na/e o. "%e En"i") 9A&i Tra*ers: Pro.i" an* Loss A!!o'n" For "%e Mon"% En*ing 5an'ar) 41F 30-Cre*i" Par"i!'&ars Cost of Sale ,4urc3ases?ross 4rofit ,income > Cost of SaleTotal A*/in E>-enses Salaries %9... #/penses 2.9... Het 4rofit ,gross 4rofit > e/pensesTotal 7s. &.9... 3%9... +%9... 2%9... Total ?ross 4rofit +%9... 3%9... Par"i!'&ars *ncome 7s. +%9...
VU
1ebi"
1.9... 3%9... Total 3%9...
Pro.i" C Loss A!!o'n" 97e-or" For/: Na/e o. "%e En"i") 9A&i Tra*ers: Pro.i" an* Loss A!!o'n" For "%e Mon"% En*ing 5an'ar) 41F 30-A/o'n" 7s.
Par"i!'&ars
A/o'n" 7s. +%9... ,&.9...3%9...
*ncome ; Sales ; Re8enue 5ess0 Cost of ?oods Sold ?ross 4rofit 5ess0 Administrati8e #/penses Ne" Pro.i" 7'&es o. 1ebi" C Cre*i" ,2%9...-
,2%9...10F000
Any account t3at o"tains a "enefit is !e"it. Anyt3ing t3at (ill pro8ide "enefit to t3e "usiness is Credit. Bot3 t3ese statements may loo) different "ut in fact if (e consider t3at (3ene8er an account "enefits as a result of a transaction it (ill 3a8e to return t3at "enefit to t3e "usiness t3en "ot3 t3e statements (ill loo) li)e different sides of t3e same picture.
Rules of de"it 6 credits can also "e e/plained li)e0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
56
'inancial Accounting = * > 7?T1.1 E>-en*i"'re o *ncrease in #/penditure is !e"it o !ecrease in #/penditure is Credit In!o/e o *ncrease in *ncome is Credit o !ecrease in *ncome is !e"it Asse"s o *ncrease in Asset is !e"it o !ecrease in Asset is Credit Liabi&i") o *ncrease in 5ia"ility is Credit o !ecrease in 5ia"ility is !e"it
VU
Ho( (e (ill e/plain t3ese rules (it3 t3e 3elp of t3e follo(ing illustration0 Sr. G .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 13 14 1% 1a"e Nan .1 Nan .3 Nan .% Nan . Nan .+ Nan 1. Nan 12 Nan 1% Nan 1& Nan 1$ Nan 1+ Nan 2% Nan 3. Nan 31 Nan 31 Par"i!'&ars 7r. RiK(an in8ests Rs. 1..9... to commence 3is "usiness. Ee opened an account (it3 "an) 6 deposited Rs. 3.9.... Ee "orro(s Rs. %.9... from 7r. Saleem at 12T per annum. Ee purc3ased furniture (ort3 Rs. 2.9... for cas3. Ee purc3ased goods ,for resale- (ort3 of Rs. 1.9... from 7r. AfKal on credit. Ee sold goods for cas3 Rs. %9... Ee sold goods for Rs. %9... to 7r. Haeem on credit "asis. Cas3 deposited in "an) Rs. %9... Ee purc3ased stationery for Rs. 39.... Ee purc3ased office e1uipment for Rs. 1.9... and paid "y c3e1ue. Ee returned defecti8e goods to 7r. AfKal (ort3 Rs. 19.... ?oods are returned "y 7r. Haeem Rs. %.. to t3e "usiness. Cas3 paid to 7r. AfKal Rs. +9... in full settlement of 3is claim. Cas3 recei8ed from 7r. Haeem Rs. 49%.. in full settlement of 3is account. Cas3 (it3dra(n from t3e "an) Rs. %...
57
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Ho( first document t3at (e prepare in accounting is t3e 8ouc3er. Je (ill record first entry in 8ouc3er9 i.e. Hame If Company Type If 2ouc3er !ate0 1=1=.2== !escription Cas3 a;c To Capital a;c Total0 Harration0 4repared By0 Same entry is presented in simpler form0 1a"e .1=.1=2..2 Cas3 A;c Capital A;c Capital *ntroduced in Cas3 "y 7r. RiK(an *n t3is case9 cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and Capital account is credited "ecause "usiness 3as o"tained "enefit "ecause of capital account. T3is statement can also "e interpreted li)e t3is0 As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. Capital is a lia"ility and increase in lia"ility is credit. *n t3is case capital is increased9 3ence it is credited. En"r) G 3 'irst9 (e (ill "oo) t3is entry in 8ouc3er. 4articulars Code P .1 .2 Amount,!r.Rs. 1..9... 1..9... Amount,Cr.Rs. Code P .1 .2 1..9... Capital *ntroduced in Cas3 "y 7r. RiK(an. C3ec)ed "y0 Ho0 .1 Credit Amount !e"it Amount 1..9... 1..9... 1..9...
58
'inancial Accounting = * > 7?T1.1 Hame If Company Type If 2ouc3er !ate0 3=1=.2== !escription Ban) a;c To Cas3 a;c Total0 Harration0 4repared By0 Again9 t3e same entry in simple form 1a"e .3=.1=2..2 Ban) A;c Cas3 A;c !eposited cas3 in "an). 4articulars Code P .3 .1 Amount,!r.Rs. 3.9... Amount,Cr.Rs. !eposited cas3 in "an). C3ec)ed "y0 Code P .3 .1 3.9... Ho0 .1 Credit Amount !e"it Amount 3.9... 3.9... 3.9...
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3.9...
Again9 "an) account is de"ited "ecause "an) account 3as o"tained "enefit and Cas3 account is credited "ecause "usiness 3as o"tained "enefit "ecause of cas3 account. T3is statement can also "e interpreted li)e t3is0 As "an) is an asset and it is increased in t3is case9 so "an) is de"ited. Cas3 is an asset and decrease in asset is credit. *n t3is case cas3 is decreased9 3ence it is credited 'rom no( on(ard9 (e (ill present entry in simple form En"r) G 4 1a"e .%=.1=2..2 Cas3 A;c 5oan A;c I"tained loan from 7r. Saleem. Cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and 5oan account is credited "ecause "usiness 3as o"tained "enefit "ecause of 5oan account. T3is statement can also "e interpreted li)e t3is0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan 4articulars Code P .1 .4 Amount ,!r.Rs. %.9... %.9... Amount ,Cr.Rs.
59
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As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. 5oan is a lia"ility and increase in lia"ility is credit. *n t3is case 5oan is increased9 3ence it is credited En"r) G H 1a"e . =.1=2..2 4articulars 'urniture A;c Cas3 A;c 4urc3ased furniture for cas3 Again9 furniture account is de"ited "ecause furniture account 3as o"tained "enefit and Cas3 account is credited "ecause "usiness 3as o"tained "enefit "ecause of cas3 account. T3is statement can also "e interpreted li)e t3is0 As furniture is an asset and it is increased in t3is case9 so furniture is de"ited. Cas3 is an asset and decrease in asset is credit. *n t3is case cas3 is decreased9 3ence it is credited. En"r) G I 1a"e .+=.1=2..2 4articulars 4urc3ases A;c 7r. AfKal,Creditors- A;c 4urc3ased goods from 7r. AfKal on credit 4urc3ase account is de"ited "ecause purc3ase account 3as o"tained "enefit and Creditors account is credited "ecause "usiness 3as o"tained "enefit "ecause of Creditors account. T3is statement can also "e interpreted li)e t3is0 As purc3ase is an e/pense and it is increased in t3is case9 so purc3ase is de"ited. Creditors are lia"ilities and increase in lia"ility is credit. *n t3is case Creditors are increased9 3ence it is credited. Cre*i"or is an) "%ir* -erson or organi2a"ionF "o ,%o/ b'siness %as "o -a) in .'"'re. En"r) G M 1a"e 1.=.1=2..2 Cas3 A;c Sale A;c Sold goods for cas3 4articulars Code P .1 .$ Amount,!r.Rs. %9... %9... Amount,Cr.Rs. Code P .& . Amount ,!r.Rs. 1.9... 1.9... Amount ,Cr.Rs. Code P .% .1 Amount ,!r.Rs. 2.9... 2.9... Amount ,Cr.Rs.
60
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Cas3 account is de"ited "ecause cas3 account 3as o"tained "enefit and Sale account is credited "ecause "usiness 3as o"tained "enefit "ecause of Sale account. T3is statement can also "e interpreted li)e t3is0 As cas3 is an asset and it is increased in t3is case9 so cas3 is de"ited. Sale is an income and increase in income is credit. *n t3is case income is increased9 3ence it is credited En"r) G J 1a"e 12=.1=2..2 4articulars 7r. Haeem ,!e"tors- A;c Sale A;c Sold goods to 7r. Haeem on credit !e"tors account is de"ited "ecause !e"tors account 3as o"tained "enefit and Sale account is credited "ecause "usiness 3as o"tained "enefit "ecause of Sale account. T3is statement can also "e interpreted li)e t3is0 As !e"tors is an asset and it is increased in t3is case9 so de"tors account is de"ited. Sale is an income and increase in income is credit. *n t3is case income is increased9 3ence it is credited 1eb"or is an) "%ir* -erson or organi2a"ionF .ro/ ,%o/ !as% is re!ei#ab&e b) "%e b'siness. En"r) G K 1a"e 1%=.1=2..2 Ban) A;c Cas3 A;c Cas3 deposited in "an) 4articulars Code P .3 .1 Amount,!r.Rs. %9... %9... Amount,Cr.Rs. Code P .+ .$ Amount,!r.Rs. %9... %9... Amount,Cr.Rs.
En"r) G L 1a"e 1&=.1=2..2 4articulars Stationery e/pense A;c Cas3 A;c Stationery purc3ased for cas3 Stationery account is de"ited "ecause stationery account 3as o"tained "enefit and Cas3 account is credited "ecause "usiness 3as o"tained "enefit "ecause of Cas3 account. T3is statement can also "e interpreted li)e t3is0 As stationery is an e/pense and it is increased in t3is case9 so stationery is de"ited. Cas3 is an asset and decrease in asset is credit. *n t3is case Cas3 is decreased9 3ence it is credited @ Copyrig3t 2irtual :ni8ersity of 4a)istan Code P 1. .1 Amount,!r.Rs. 39... 39... Amount,Cr.Rs.
61
'inancial Accounting = * > 7?T1.1 En"r) G 10 1a"e 1$=.1=2..2 4articulars Iffice #1uipment A;c Ban) A;c Iffice e1uipment purc3ased "y c3e1ue Code P 11 .3 Amount,!r.Rs. 1.9... Amount,Cr.Rs.
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1.9...
Iffice #1uipment account is de"ited "ecause Iffice #1uipment account 3as o"tained "enefit and Ban) account is credited "ecause "usiness 3as o"tained "enefit "ecause of Ban) account. T3is statement can also "e interpreted li)e t3is0 As Iffice #1uipment is an asset and it is increased in t3is case9 so Iffice #1uipment is de"ited. Ban) is an asset and decrease in asset is credit. *n t3is case "an) account is decreased9 3ence it is credited En"r) G 11 1a"e 1+=.1=2..2 4articulars 7r. AfKal ,Creditors- A;C 4urc3ase return A;C ?oods returned to 7r. AfKal ,creditorCreditors account is de"ited "ecause Creditors account 3as o"tained "enefit and 4urc3ase return account is credited "ecause "usiness 3as o"tained "enefit "ecause of 4urc3ase return account. T3is statement can also "e interpreted li)e t3is0 As Creditors is a lia"ility and it is decreased in t3is case9 so Creditors is de"ited. 4urc3ase return is an e/pense and decrease in e/pense is credit9 so it is credited. En"r) G 13 1a"e 2%=.1=2..2 4articulars Sales return A;C 7r. Haeem,!e"tors- A;C ?oods returned "y 7r. Haeem ,!e"torsSales return account is de"ited "ecause Sales return account 3as o"tained "enefit and !e"tors is credited "ecause "usiness 3as o"tained "enefit "ecause of !e"tors account. T3is statement can also "e interpreted li)e t3is0 As sales return is decrease in income and decrease in income is de"it9 so it is de"ited. !e"tors account is decreased and decrease in asset is credit9 so it is credited. @ Copyrig3t 2irtual :ni8ersity of 4a)istan Code P 13 .+ Amount,!r.Rs. %.. %.. Amount,Cr.Rs. Code P . 12 Amount,!r.Rs. 19... 19... Amount,Cr.Rs.
62
'inancial Accounting = * > 7?T1.1 En"r) G 14 1a"e 3.=.1=2..2 4articulars 7r. AfKal,Creditors- A;C Cas3 A;C Cas3 paid to 7r. AfKal,CreditorsCode P . .1 Amount,!r.Rs. +9... Amount,Cr.Rs.
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+9...
En"r) G 1H 1a"e 31=.1=2..2 Cas3 A;C 7r. Haeem,!e"tors- A;C Cas3 recei8ed from 7r. Haeem,!e"torsEn"r) G 1I 1a"e 31=.1=2..2 Cas3 A;C Ban) A;C Cas3 (it3dra(n from "an) 4articulars Code P .1 .3 Amount,!r.Rs. %.. %.. Amount,Cr.Rs. 4articulars Code P .1 .+ Amount,!r.Rs. 49%.. 49%.. Amount,Cr.Rs.
Cas% Boo6 an* Ban6 Boo6 5edger is a "oo) t3at )eeps separate record for eac3 accountL t3e Account or Eead of Account is a systematic record of transactions of one typeL and 5i)e ot3er t3ings9 a separate account is also re1uired to record t3e mo8ements in cas3 ,usually called cas3 in 3and- and "an) account ,usually called cas3 at "an)-. *f t3e 8olume of transactions is 3ig3 t3en (e can separate "oo)s for cas3 and "an) account. T3ese separate "oo)s for cas3 and "an) account are called cas3 "oo) and "an) "oo) respecti8ely. T3e Cas3 Boo) records all t3e mo8ements in t3e cas3 account. A Cas3 Boo) (ould loo) li)e one of t3e t(o samples s3o(n "elo(0 Cas3 Boo) Receipt Side !ate Ho. Harration ; 5edger 4articulars Code Account Code .1 4ayment Side Receipt !ate Ho. Harration ; 5edger 4ayment Amount 4articulars Code Amount
63
'inancial Accounting = * > 7?T1.1 O7 Cas3 Boo) !ate 2ouc3er Hum"er Harration ; 4articulars Account Code .1 5edger Code Receipt 4ayment Amount Amount Balance !r;,Cr-
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T%e Cas% Boo6 *n t3e first format ; presentation9 receipts ,!e"its- are (ritten on left 3and side of t3e page and payments ,Credits- on t3e rig3t 3and side. *n t3e second presentation9 instead of using t(o pages9 (e use t(o columns on t3e same page. Bot3 t3ese presentations are correct. *n t3e second format9 (e 3a8e an additional facility of )no(ing t3e "alance of t3e account after e8ery transaction. J3ereas in t3e first one9 (e 3a8e to add up t3e receipts and payments e8ery time (e need to )no( t3e "alance. 7oreo8er9 t3e second format utiliKes less space9 t3erefore9 ,e ,i&& 'se "%is .or/a" in o'r .'"'re *is!'ssions T%e Ban6 Boo6 T3e Ban) "oo) records all t3e mo8ements in t3e "an) account. T3e format of t3e "an) "oo) is t3e same as t3at of cas3 "oo) e/cept for an additional column for C3e1ue Hum"er. Again9 (e can use eit3er t(o pages IR t(o columns to present t3e "an) "oo). Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e 03 Vo'!%er C%;. Narra"ion < Le*ger 7e!ei-" Pa)/en" N'/ber No. Par"i!'&ars Co*e A/o'n" A/o'n"
1a"e
Ba&an!e 1r<9Cr:
As you can see t3at e/cept for a fe( minor differences9 t3e format of Cas3 and Ban) "oo) are almost similar to t3at of t3e ?eneral 5edger. T3e differences are e/plained 3ere0 T3e title of de"it and credit columns 3as "een c3anged to receipt and payment respecti8ely. *t is not necessary to ma)e t3is c3ange. But9 it is done to simplify t3ings as (e )no( t3at in case of cas3 and "an)9 de"it side (ould signify receipt and credit side (ould represent payment. T3ere is an additional column titled ledger code. *n t3is column9 (e (rite t3e code of t3e ot3er 3ead of account t3at is affected "y t3e transaction. T3is 3elps in understanding t3e complete transaction at a glance. T3ere may "e a column for c3e1ue num"er in t3e "an) "oo). *t may "e noted t3at in case t3e organiKation operates more t3an one "an) account9 separate ledger accounts (ill "e opened in "an) "oo) for eac3 account. Ho( (e (ill summariKe all cas3 transactions in "ot3 t(o page cas3 "oo) 6 one page cas3 "oo) for t3e con8enience of t3e reader. T(o page cas3 "oo) (ill "e presented as under0
64
'inancial Accounting = * > 7?T1.1 Cas3 Account Receipt Side !ate Nan=1 Nan=% Nan=1. Nan=31 Nan=31 Ho. Harration ; 4articulars Capital introduced 5oan recei8ed ?oods sold Recei8ed from de"tors Cas3 dra(n from "an) 5edger Receipt Code Amount .2 .4 .$ .+ .3 1..9... %.9... %9... 49%.. %.. !ate Nan=3 Nan= Nan=1% Nan=1& Nan=3. Ho. Account Code .1 4ayment Side Harration ; 4articulars !eposited "an) 'urniture purc3ased !eposited "an) Stationery purc3ased 4aid creditors in 5edger Code .3 .% in .3 1. to .
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4ayment Amount 3.9... 2.9... %9... 39... +9...
Same record (ill "e presented in t(o column cas3 "oo) no( 1a"e Nan=1 Nan=3 Nan=% Nan= Nan=1. Nan=1% Nan=1& Nan=3. Nan=31 Nan=31 Vo'!%er N'/ber Narra"ion < Par"i!'&ars Capital introduced !eposited in "an) 5oan recei8ed 'urniture purc3ased ?oods sold !eposited in "an) Stationery purc3ased 4aid to creditors Recei8ed from de"tors Cas3 dra(n from "an) Le*ger Co*e .2 .3 .4 .% .$ .3 1. . .+ .3 49%.. %.. 7e!ei-" A/o'n" 1..9... %.9... ,2.9...%9... ,%9...,39...,+9...Pa)/en" A/o'n" ,3.9...Ba&an!e 1r<9Cr: 1..9... .9... 12.9... 1..9... 1.%9... 1..9... + 9... $$9... +29%.. +39...
Ho(9 (e (ill present Ban) entries in "an) "oo). Ban6 Boo6 9Ban6 A!!o'n" G >>>: A!!o'n" Co*e 03 1a"e Nan=3 Nan=1% Nan=1$ Nan=31 Vo'!%er N'/ber C%;. No. Narra"ion < Par"i!'&ars Cas3 deposited Cas3 deposited Iff. #1uip. purc3ased Cas3 dra(n Le*ger Co*e .1 .1 11 .1 7e!ei-" A/o'n" 3.9... %9... ,1.9...,%..Pa)/en" A/o'n" Ba&an!e 1r<9Cr: 3.9... 3%9... 2%9... 249%..
65
'inancial Accounting = * > 7?T1.1 7e!o//en*e* rea*ingsD C3apter P 2 of Business Accounting "y 'ran) Joods C3apter P 29 3 of Accounting "y 7. Arif 6 So3ail AfKal I&&'s"ra"ion Ha(a" Sons started t3eir "usiness in t3e mont3 of 7arc39 2..2. 'ollo(ing are t3eir transactions for t3e mont3. 4ass Aournal entries9 prepare 5edger Accounts9 and ma)e t3eir profita"ility analyses. Sr. G .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 13 5o'rna& En"ries En"r) G 1 1a"e .3=.1=2..2 Cas3 A;c Capital A;c Started "usiness (it3 cas3. 4articulars Code P .1 .2 Amount,!r.Rs. 1%.9... Amount,Cr.Rs. 1a"e 7ar. .1 7ar. .% 7ar. . 7ar. 1. 7ar. 12 7ar. 13 7ar. 1% 7ar. 21 7ar. 21 7ar. 23 7ar. 2% 7ar. 2+ 7ar. 31 Par"i!'&ars Started "usiness (it3 Rs. 1%.9... 4urc3ased office furniture for cas3 Rs. 29... 4urc3ased goods for cas3 Rs. +9... 4aid carriage on purc3ases Rs. 2%. 4urc3ased goods from Saleem 6 co. Rs. 9... Sold goods for cas3 Rs. 129... Sold goods to :sman 6 Sons Rs. 2%9... Recei8ed cas3 'rom :sman 6 Sons Rs. 2%9... 4aid cas3 to Saleem 6 co Rs. 9... 4aid salaries for t3e mont3 Rs. 29%.. 4aid rent Rs. 39... 4urc3ased stationery Rs.29... :tility "ills are accrued Rs. %9...
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1%.9...
66
'inancial Accounting = * > 7?T1.1 En"r) G 3 1a"e .3=.%=2..2 4articulars Iffice 'urniture A;c Cas3 A;c 4urc3ased office furniture En"r) G 4 1a"e .3=. =2..2 4articulars 4urc3ases A;c Cas3 A;c 4urc3ased goods for cas3. Code P .4 .1 Amount,!r.Rs. +9... Amount,Cr.Rs. Code P .3 .1 Amount,!r.Rs. 29... Amount,Cr.Rs.
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29...
+9...
En"r) G H 1a"e .3=1.=2..2 4articulars Carriage on purc3ase A;c Cas3 A;c 4aid carriage on purc3ase. Code P .% .1 Amount,!r.Rs. 2%. 2%. Amount,Cr.Rs.
En"r) G I 1a"e .3=12=2..2 4articulars 4urc3ases A;c Salim 6 co.,Creditors4urc3ased goods on credit Code P .4 .& Amount,!r.Rs. 9... 9... Amount,Cr.Rs.
67
'inancial Accounting = * > 7?T1.1 En"r) G M 1a"e .3=13=2..2 Cas3 A;c Sale A;c ?oods sold for cas3. 4articulars Code P .1 . Amount,!r.Rs. 129... Amount,Cr.Rs.
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129...
En"r) G J 1a"e .3=1%=2..2 4articulars :sman 6 Sons ,!e"tors- A;c Sale A;c ?oods sold on credit. Code P .$ . Amount,!r.Rs. 2%9... 2%9... Amount,Cr.Rs.
En"r) G K 1a"e .3=21=2..2 Cas3 A;c :sman 6 Sons ,!e"tors A;c Cas3 recei8ed from :sman 6 Sons 4articulars Code P .1 .$ Amount ,!r.Rs. 2%9... 2%9... Amount ,Cr.Rs.
En"r) G L 1a"e .3=21=2..2 4articulars Salim 6 co.,Creditors- A;c Cas3 A;c 4aid cas3 to Salim 6 co. Code P .& .1 Amount,!r.Rs. 9... 9... Amount,Cr.Rs.
68
'inancial Accounting = * > 7?T1.1 En"r) G 10 1a"e .3=23=2..2 Salaries A;c Cas3 A;c Started "usiness (it3 cas3. 4articulars Code P .+ .1 Amount,!r.Rs. 29%.. Amount,Cr.Rs.
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29%..
En"r) G 11 1a"e .3=2%=2..2 Rent A;c Cas3 A;c 4aid rent. 4articulars Code P 1. .1 Amount,!r.Rs. 39... 39... Amount,Cr.Rs.
En"r) G 13 1a"e .3=2+=2..2 4articulars Stationery A;c Cas3 A;c Stationery purc3ased. Code P 11 .1 Amount,!r.Rs. 29... 29... Amount,Cr.Rs.
En"r) G 14 1a"e .3=31=2..2 4articulars :tility Bills A;c Accrued #/penses A;c Accrual of utility "ills for t3e mont3.. Code P 12 13 Amount,!r.Rs. %9... %9... Amount,Cr.Rs.
69
'inancial Accounting = * > 7?T1.1 Le*ger A!!o'n"s !ate 1=3=.2 13=3=.2 21=3=.2 4articulars Capital a;c ?oods sold Recei8ed from de"tors Cas% A!!o'n" 9A!!o'n" !o*e G 1: Code Amount !ate 4articulars P Rs. ,!r..2 1%.9... %=3=.2 Iffice furniture a;c . .$ 129... =3=.2 1.=3=.2 2%9... 21=3=.2 23=3=.2 2%=3=.2 2+=3=.2 4urc3ases a;c Carriage 4aid to creditors Salaries a;c Rent a;c Stationery a;c Ba&an!e Total 1$ 9... Total Code P .3 .4 .% .& .+ 1. 11
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Amount Rs. ,Cr.29... +9... 2%. 9... 29%.. 39... 29... 1&192%. 1$ 9...
Ca-i"a& A!!o'n" 9A!!o'n" !o*e G 3: !ate 4articulars Code P Amount Rs. ,!r.!ate 4articulars Code P 1 Amount Rs. ,Cr.1%.9...
1;3;2..2 Cas3 a;c Ba&an!e Total 1%.9... 1%.9... Total
1%.9...
O..i!e .'rni"'re A!!o'n" !ate 4articulars Code P Amount Rs. ,!r.-
9A!!o'n" !o*e G 4: !ate 4articulars Code P Amount Rs. ,Cr.-
Iffice furniture
29... Ba&an!e 29... Total 9A!!o'n" !o*e G H: !ate 4articulars 29...
Total
29... P'r!%ases A!!o'n" Code Amount P Rs. ,!r..1 +9... 9...
!ate =3=.2 12=3=.2
4articulars Cas3
Code P
Amount Rs. ,Cr.-
Slim 6 Co,A;4-
Ba&an!e Total 1&9... Total
1&9... 1&9...
70
'inancial Accounting = * > 7?T1.1 Carriage on -'r!%ase A!!o'n" 9A!!o'n" !o*e G I: 4articulars Code Amount !ate 4articulars P Rs. ,!r.Cas3 .1 2%.
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!ate 1.=3=.2
Code P
Amount Rs. ,Cr.-
Ba&an!e Total 2%. Total 9A!!o'n" !o*e G M: 4articulars 4urc3ases a;c
2%. 2%.
!ate 12=3=.2
Sa&i/ C !o.9Cre*i"ors: A!!o'n" 4articulars Code Amount !ate P Rs. ,!r.Cas3 a;c .4 9... 21=3=.2
Code P .1
Amount Rs. ,Cr.9...
Ba&an!e Total !ate 4articulars 9... Total Code P .1 .$
. 9... Amount Rs. ,Cr.129... 2%9... 3 9... Code P .1 Amount Rs. ,Cr.2%9...
Sa&e A!!o'n" 9A!!o'n" !o*e G J: Code Amount !ate 4articulars P Rs. ,!r.13=3=.2 1%=3=.2 Cas3 a;c :sman 6 Sons ,!e"tors- a;c Total 9A!!o'n" !o*e G K: 4articulars Cas3 a;c
Ba&an!e Total !ate 1%=3=.2
3 9... 3 9...
Us/an C sons91eb"ors: A!!o'n" 4articulars Code Amount !ate P Rs. ,!r.Sales a;c . 2%9... 21=3=.2
Ba&an!e Total 2%9... Total
. 2%9...
71
'inancial Accounting = * > 7?T1.1 Sa&aries A!!o'n" Code Amount P Rs. ,!r..1 29%.. 9A!!o'n" !o*e G L: !ate 4articulars
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!ate 23=3=.2
4articulars Cas3 a;c
Code P
Amount Rs. ,Cr.-
Ba&an!e Total !ate 2%=3=.2 4articulars Cas3 a;c 29%.. Total Code P
29%.. 29%.. Amount Rs. ,Cr.-
7en" A!!o'n" 9A!!o'n" !o*e G 10: Code Amount !ate 4articulars P Rs. ,!r..1 39...
Ba&an!e Total !ate 2+=3=.2 4articulars Cas3 a;c 39... S"a"ioner) A!!o'n" Code P Amount Rs. ,!r..1 29... Total 9A!!o'n" !o*e G 11: !ate 4articulars Code P
39... 39... Amount Rs. ,Cr.-
Ba&an!e Total !ate 31=3=.2 29... U"i&i") Bi&&s A!!o'n" 4articulars Code Amount P Rs. ,!r.A;4 13 %9... Total 9A!!o'n" !o*e G 13: !ate 4articulars
29... 29... Code P Amount Rs. ,Cr.-
Ba&an!e Total !ate 31=3=.2 %9... Total Code P 12
%9... %9... Amount Rs. ,Cr.%9...
A!!r'e* E>-enses A!!o'n" 9A!!o'n" !o*e G 14: 4articulars Code Amount !ate 4articulars P Rs. ,!r.A;4
Ba&an!e Total Tria& Ba&an!e
%9... %9... Total %9...
72
'inancial Accounting = * > 7?T1.1 Saee* C !o. Tria& Ba&an!e As On 5an'ar) 41F 3003 Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account .1 1&192%. Capital Account .2 'urniture Account .3 29... 4urc3ases Account .4 1&9... Carriage on purc3ase account .% 2%. Salim6 co. ,Creditor.& Sales :sman 6 co. ,!e"torSalaries Rent Stationery :tility "ills Accrued e/penses To"a& . .$ .+ 1. 11 12 13 . 29%.. 39... 29... %9... 1L3F000 %9... 1L3F000
VU
Cr. 7s. 1%.9...
. 3 9...
Saee* C Co. Pro.i" C Loss A!!o'n" .or "%e -erio* en*e* 5an'ar) 41F 3003 Par"i!'&ars *n *ncome ; Sales ; Re8enue 9See No"e G1: LessD Cost of ?oods Sold ,See Hote P 1A/o'n" 7s. A/o'n" 7s. 3 9... ,1&92%.2.9 %. ,129%..$92%.
Gross Pro.i" LessD Admin. #/penses 9See No"e G 3Ne" Pro.i"< 9Loss: No"e G 1 Cos" o. goo*s so&* 4urc3ases Add0 carriage on purc3ase Cost of goods sold No"e G 3 A*/in. E>-enses Salaries Rent Stationery :tility "ills Total Administrati8e #/penses 29%.. 39... 29... %9... 129%.. 1&9... 2%. 1&92%.
7e!o//en*e* rea*ingsD C3apter P 3 of "usiness accounting "y 'ran) Joods C3apter P % of accounting "y 7. Arif 6 So3ail AfKal.
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Lesson-12 T+E ACCOUNTING EOUATION 7eso'r!es in "%e b'siness ? 7eso'r!es s'--&ie* b) "%e o,ner *n accounting9 terms are used to descri"e t3ings. T3e amount of resources supplied "y t3e o(ner is called !a-i"a&. T3e actual resources (3ic3 are in t3e "usiness are called asse"s. T3is means t3at t3e accounting e1uation a"o8e9 (3en t3e o(ner 3as supplied all t3e resources9 can "e s3o(n as0 Asse"s ? Ca-i"a& :sually9 people9 ot3er t3an t3e o(ner 3as supplied some of t3e assets. Liabi&i"ies are t3e name gi8en to t3e amounts o(ing to t3ese people for t3ese assets. T3e e1uation 3as no( c3anged to0 Asse"s ? Ca-i"a& E Liabi&i"ies *t can "e seen t3at t(o sides of t3e e1uation (ill 3a8e t3e same totals. T3is is "ecause (e are dealing (it3 t3e same t3ing (it3 t(o different points of 8ie(. *t is0 7eso'r!es in "%e b'siness ? 7eso'r!esD ,%o s'--&ie* "%e/ Asse"s ? Ca-i"a& E Liabi&i"ies *t is a fact t3at total of eac3 side (ill al(ays e1ual one anot3er9 and t3is (ill al(ays "e true no matter 3o( many transactions t3ere may "e. T3e actual assets9 capital and lia"ilities may c3ange9 "ut t3e total of t3e assets (ill al(ays e1ual to t3e total of capital and lia"ilities. Assets consist of property of all )inds9 suc3 as "uildings9 mac3inery9 stoc)s of goods and motor 8e3icles. Also "enefits suc3 as de"ts o(ned "y customers and t3e amount of money in t3e "an) accounts are included. 5ia"ilities consist of money o(ing for goods supplied to t3e "usiness and for e/penses. Also loans made to t3e firm are included. Capital is often called t3e o(nerGs net (ort3. $or6ing !a-i"a& Jor)ing capital of t3e "usiness is t3e net 8alue of current assets 6 current lia"ilities. C'rren" asse"s are t3e resources of t3e "usiness t3at are e/pected to "e recei8ed (it3in 12 mont3s in an accounting period. C'rren" &iabi&i"ies are t3e amount o(ing to t3e "usiness t3at is e/pected to "e paid (it3in one year in a financial year. So9 (or)ing capital is t3e net of (3at is recei8a"le in an accounting year 6 (3at is paya"le in t3at year. $or6ing Ca-i"a& ? C'rren" Asse"s C'rren" Liabi&i"ies E>a/-&e0 current assets of t3e "usiness (ort3 Rs.1..9 ... 6 current lia"ilities of t3e "usiness 3as t3e 8alue of Rs. %9.... T3en (or)ing capital (ill "e Rs. 2%9... ,1..9...= %9...-. S"o!6 Stoc) is termed as B8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting purposes9 stoc) is of t(o types0 Ipening stoc) Closing stoc) O-ening s"o!6 is t3e 8alue of goods a8aila"le for sale in t3e "eginning of an accounting year. 'or purpose of financial reporting9 opening stoc) is added to t3e purc3ases for t3e year to "ecome a part of @ Copyrig3t 2irtual :ni8ersity of 4a)istan
74
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!os" o. goo*s so&*. As t3is is a8aila"le in t3e "eginning of t3e year9 it is assumed t3at it (ill "e consumed in t3e accounting year. T3at is (3yL it "ecomes a part of !os" o. goo*s so&*. Closing Stoc) of pre8ious year is t3e opening stoc) in present year ,current year-. C&osing s"o!6 is t3e 8alue of goods unsold at t3e end of accounting year. 'or purposes of ma)ing financial statements9 it is deducted from cost of goods sold 6 is s3o(n as an asset in t3e Ba&an!e S%ee". As t3is is t3e 8alue of goods t3at are yet to "e sold9 so it cannot "e included in cost of goods sold. T3at is (3y it is deducted from cost of good sold. In t3e ot3er 3and9 its "enefit (ill "e recei8ed in t3e ne/t accounting year9 so it is s3o(n as an asset in t3e "alance s3eet. T%e !on"en"s o. !os" o. goo*s so&* are0 Ipening stoc) 4lus0 purc3ases 4lus0 'reig3t; carriage paid on purc3ases 5ess0 closing stoc) E>a/-&eD opening stoc) of a "usiness (ort3 Rs. 1%9...9 "usiness purc3ased goods of Rs. 129... for t3e year 6 also paid Rs. 19%.. as carriage on purc3ases. T3e 8alue of closing stoc) at t3e end of t3e year is Rs. 1.9.... T3en9 8alue of closing stoc) (ill "e calculated as under0 Ipening stoc) Add0 purc3ases Add0 carriage on purc3ase 5ess0 closing stoc) Cost of goods sold 1%9... 129... 19%.. ,1.9...1$9%.. A&i Tra*ers Tria& Ba&an!e As On 5an'ar) 41F 30-Co*e 1r. 7s. .1 3%9... .2 13.9... .3 .4 1%9... .% %.9... .& &.9... . .$ .+ 1%9... 1. %9... 11 2.9... 12 33.9...
Ti"&e o. A!!o'n" Cas3 Account Ban) Account Capital Account 'urniture Account 2e3icle Account 4urc3ases Account 7r. A ,CreditorSales 7r. B ,!e"torSalaries #/penses #/penses 4aya"le Total According to t3e Accounting e1uation9
Cr. 7s.
2..9...
1%9... +%9...
2.9... 33.9...
Assets O Capital M 5ia"ilities Assets O 3%9...M13.9...M1%9...M%.9...M1%9...O 3HIF000 Capital O 300F000 5ia"ilities O 1%9... M 2.9... O 4IF000 Capital M 5ia"ilities O 34IF000
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Je 3a8e ignored t3e Het 4rofit Rs.1.... ,Het profit is a part of t3e capital and (ill "e added in capital accountJ3en (e added Het profit in capital t3enL Assets O Capital M 5ia"ilities 24%... O 21....M3%... 3HI000 ? 3HI000 A!!o'n" .or/ Ba&an!e S%ee"D Na/e o. "%e En"i") 9A&i Tra*ers: Ba&an!e S%ee" As a" 5an'ar) 41F 30-Liabi&i"ies C E;'i") Asse"s Par"i!'&ars A/o'n" Par"i!'&ars 7s. Capital 2..9... 'i/ed Assets 4rofit and 5oss Account 1.9... 'urniture 21.9... 2e3icle Current Assets Current 5ia"ilities 7r. A 1%9... 7r. B #/p. paya"le 2.9... 3%9... 1%9... Ban) 13.9... Cas3 3%9... Total 24%9... Total 7e-or" .or/ Ba&an!e S%ee"D A&i Tra*ers Ba&an!e S%ee" As A" 5an'ar) 41F 30-Amount Rs.
A/o'n" 7s.
1%9... %.9...
1$.9...
24%9...
4articulars Asse"s 'i/ed Assets Current Assets Total Liabi&i"ies Capital 4rofit and 5oss Account Current 5ia"ilities Total
Amount Rs. &%9... 1$.9... 24%9...
2..9... 1.9...
21.9... 3%9... 24%9...
Treatment of closing stoc)0 *f closing stoc) is Rs.19... t3en0
76
'inancial Accounting = * > 7?T1.1 Na/e o. "%e En"i") 9A&i Tra*ers: Pro.i" an* Loss A!!o'n" For "%e Mon"% En*ing 5an'ar) 41F 30-Par"i!'&ars A/o'n" 7s. *ncome ; Sales ; Re8enue 5ess0 Cost of ?oods Sold 9 M0F000 - 1F000 ,%+9...?ross 4rofit 5ess0 Administrati8e #/penses ,2%9...Ne" Pro.i" A&i Tra*ers Ba&an!e S%ee" As A" 5an'ar) 41F 30-Par"i!'&ars A/o'n" 7s. Asse"s 'i/ed Assets Current Assets 91K0F000 E 1F000: Total Liabi&i"ies Capital 4rofit and 5oss Account Current 5ia"ilities To"a& Trea"/en" 1e-re!ia"ionD
VU
A/o'n" 7s. +%9... ,%+9...3&9... ,2%9...11F000
A/o'n" 7s. &%9... 1$19... 24&9...
2..9... 119...
2119... 3%9... 3HMF000 o.
*n 4rofit and 5oss Account9 it is considered as e/pense and in Balance S3eet it is deducted from t3e concerned fi/ed asset. *f useful life of an asset is %. mont3 and considered t3at t3ere is no residual 8alue t3en9 By di8iding total cost "y life of t3e asset. Rs.&%9... ; %. mont3s O Rs.193.. mont3ly c3arge ,!epreciationNa/e o. "%e En"i") 9A&i Tra*ers: Pro.i" an* Loss A!!o'n" For "%e Mon"% En*ing 5an'ar) 41F 30-Par"i!'&ars A/o'n" 7s. *ncome ; Sales ; Re8enue 5ess0 Cost of ?oods Sold , &.9...=19... ?ross 4rofit 5ess0 Administrati8e #/penses !epreciation Ne" Pro.i" %+9... 2%9... 1F400
A/o'n" 7s. +%9... ,%+9...3&9... ,2&93..LFJ00
77
'inancial Accounting = * > 7?T1.1 A&i Tra*ers Ba&an!e S%ee" As A" 5an'ar) 41F 30-Par"i!'&ars A/o'n" 7s. Asse"s 'i/ed Assets 9MIF000 1F400: Current Assets ,1$.9... M 19...Total Liabi&i"ies Capital 4rofit and 5oss Account Current 5ia"ilities Total 1is"rib'"ion o. Pro.i"s < 1ra,ing A&i "ra*ers Ba&an!e S%ee" As A" 5an'ar) 41F 30-Par"i!'&ars A/o'n" 7s. Asse"s 'i/ed Assets ,&%9... > 13..Current Assets ,1K1F000 - IF000: Total Liabi&i"ies Capital 4rofit and 5oss Account !ra(ing Current 5ia"ilities To"a& I&&'s"ra"ionD Consider t3e Trial Balance gi8en 3ereunder0 Saee* C !o. Tria& Ba&an!e As on 5an'ar) 41F 3003 Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account Capital Account 'urniture Account 4urc3ases Account Carriage on purc3ase account Salim6 co. ,CreditorSales .1 .2 .3 .4 .% .& . @ Copyrig3t 2irtual :ni8ersity of 4a)istan 29... 1&9... 2%. . 3 9... 1&192%. 1%.9...
VU
A/o'n" 7s. &39 .. 1$19... 2449 ..
2..9... +9 ..
2.+9 .. 3%9... 2449 ..
A/o'n" 7s. &39 .. 1 &9... 23+9 ..
2..9... +9 .. 9IF000:
2.49 .. 3%9... 34LFJ00
Cr. 7s.
78
'inancial Accounting = * > 7?T1.1 :sman 6 co. ,!e"torSalaries Rent Stationery :tility "ills Accrued e/penses To"a& .$ .+ 1. 11 12 13 1L3F000 . 29%.. 39... 29... %9... %9... 1L3F000
VU
T3is Trial Balance is e/tracted from t3e sol8ed illustration9 in lecture 11. 5etGs say9 t3e 8alue of closing stoc) at t3e end of t3e period is Rs. 29.... T3en 4rofit 6 5oss Account (ill "ear t3e follo(ing c3ange. Saee* C Co. Pro.i" C Loss A!!o'n" For "%e -erio* en*e* 5an'ar) 41F 3003 Par"i!'&ars A/o'n" 7s. In *ncome ; Sales ; Re8enue 9See No"e G1: O1&92%. > LessD ,Cost of ?oods Sold = Closing 29... stoc)Gross Pro.i" LessD Admin. #/penses 9See Hote P 2Ne" Pro.i"< 9Loss: *ts effect in t3e Balance S3eet is as follo(s0 Saee* C Co. Ba&an!e S%ee" As A" 5an'ar) 41F 3003 Liabi&i"ies Par"i!'&ars Capital A**D Het 4rofit A/o'n" 7s. 1%.9... 1.92%. 1M0F3I0 C'rren" Liabi&i"ies Accrued #/penses To"a& %9... 1MIF3I0 C'rren" Asse"s Cas3 Closing Stoc) To"a& 1&192%. 29... 1MIF3I0 Asse"s Par"i!'&ars Fi>e* Asse"s 'urniture Account A/o'n" 7s. 29...
A/o'n" 7s. 3 9... ,1492%.-
229 %. ,129%..1.92%.
T3is is a practical demonstration of t3e treatment of closing stoc). But9 (e are not mentioning t3e Aournal entry of closing stoc) at t3is stage. *t (ill "e discussed in detail9 (3en (e (ill study t3e topic of fi/ed assets. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
79
'inancial Accounting = * > 7?T1.1 1e-re!ia"ion
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!epreciation is t3e met3od of c3arging cost of fi/ed assets to t3e profit 6 loss account as an e/pense. 'i/ed Assets are t3ose assets (3ic3 are0 If long life To "e used in t3e "usiness Hot "oug3t (it3 t3e main purpose of resale. J3en an e/pense is incurred9 it is c3arged to profit 6 loss account of t3e same accounting period in (3ic3 it 3as incurred. 'i/ed assets are used for longer period of time. Ho(9 t3e 1uestion is 3o( to c3arge a fi/ed asset to profit 6 loss account. 'or t3is purpose9 estimated life of t3e asset is determined. Es"i/a"e* &i.e is t3e num"er of years in (3ic3 a fi/ed asset is e/pected to "e used. T3en9 total cost of t3e asset is di8ided "y total num"er of estimated years. T3e 8alue9 so determined9 is called Fdepreciation for t3at yearG and is c3arged to profit 6 loss account. T3e same amount is deducted from total cost of fi/ed asset. T3e net amount ,after deducting depreciation- is called FFJritten do(n 2alueGG. E>a/-&eD An asset 3as a cost of Rs. 1%.9.... *t is e/pected to "e used for ten years. !epreciation to "e c3arged to profit 6 loss account is Rs. 1%9... ,Cost of asset;estimated life-. *n t3is case9 it (ill "e 1%.9...;1. O 1%9.... T3at is (3y depreciation is called an accounting estimate. To understand its accounting treatment9 consider t3e a"o8e mentioned illustration0 5etGs suppose t3e useful life of furniture is fi8e years. T3en9 depreciation for t3e year (ill "e ,29...;% O 4..-. Ho(9 t3e profit 6 loss account (ill s3o( t3e follo(ing picture0 Saee* C Co. Pro.i" C Loss A!!o'n" For "%e )ear en*e* 5an'ar) 41F 3003 Par"i!'&ars A/o'n" 7s. In *ncome ; Sales ; Re8enue 9See No"e G1: LessD Cost of ?oods Sold ,1&92%. > 29...Gross Pro.i" LessD Admin. #/penses M !epreciation Het 4rofit; ,5ossBalance s3eet (ill loo) li)e t3is0 Saee* C Sons Ba&an!e S%ee" As A" 5an'ar) 41F 3003 Asse"s A/o'n" 7s. 1%.9... +9$%. 1ILFKI0 C'rren" Liabi&i"ies Accrued #/penses To"a& %9... 1MHFKI0 C'rren" Asse"s Cas3 Closing Stoc) To"a& Par"i!'&ars Fi>e* Asse"s 'urniture Account 5ess0 depreciation A/o'n" 7s. 29... ,4..1FM00 1&192%. 29... 1MHFKI0 129%.. M 4..
A/o'n" 7s. 3 9.... ,1492%.229 %. ,129+..+9$%.
Liabi&i"ies Par"i!'&ars Capital Add0 Het 4rofit
80
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Treatment of depreciation is practically demonstrated at t3is point. *ts Aournal entry (ill "e discussed in detail9 (3en (e co8er t3e topic F'i/ed AssetsG. 1ra,ing Capital is t3e cas3 or )ind in8ested "y t3e o(ner of t3e "usiness. Sometimes9 t3e o(ner (ants to ta)e cas3 or goods out of t3e "usiness for personal use. T3is is )no(n as *ra,ing. An) /one) "a6en o'" as *ra,ings ,i&& re*'!e !a-i"a&. T3e capital account is 8ery important account. To stop it getting full of small details9 cas3 items of dra(ings are not entered in t3e capital account. *nstead9 a dra(ing account is opened9 and all transactions are entered t3ere. Sometimes goods are also ta)en "y t3e o(ner of t3e "usiness. T3ese are also )no(n as dra(ings. To understand t3e accounting treatment of dra(ings9 loo) into t3e follo(ing trial "alance0 Saee* C !o. Tria& Ba&an!e As on 5an'ar) 41F 3003 Co*e 1r. 7s. .1 .2 .3 .4 .% .& . .$ 1J4F3I0 . %9... 1J4F3I0 29... 1.9... $92%. . 1&192%. 1&.9...
Ti"&e o. A!!o'n" Cas3 Account Capital Account 'urniture Account !ra(ings 4rofit 6 loss account Salim6 co. ,Creditor:sman 6 co. ,!e"torAccrued e/penses To"a& Ba&an!e S%ee"
Cr. 7s.
Saee* C Sons Ba&an!e S%ee" As A" 5an'ar) 41F 3003 Liabi&i"ies Par"i!'&ars Capital A**D Het 4rofit LessD !ra(ings A/o'n" 7s. 1&.9... $92%. ,1.9...1IKF3I0 %9... 1M4F3I0 Par"i!'&ars Fi>e* Asse"s 'urniture Account Asse"s A/o'n" 7s. 29...
C'rren" Liabi&i"ies Accrued #/penses To"a&
C'rren" Asse"s Cas3 To"a&
1&192%. 1M4F3I0
81
'inancial Accounting = * > 7?T1.1 VOUC+E7S AN1 POSTING TO LE1GE7S ACCOUNTS Learning Ob e!"i#esD After studying t3is lecture9 you s3ould "e a"le to0 :nderstand different types of 8ouc3ers. Eo( to "oo) entry in 8ouc3erD Carrying for(ard t3e "alance of an account. Vo'!%er *n "oo) )eeping9 8ouc3er is t3e first document to record an entry. 2ouc3ers are t3e documentary e8idence of eac3 financial transaction. Hormally t3ree types of 8ouc3ers are used0 Receipt 8ouc3er 4ayment 8ouc3er Nournal 8ouc3er 7e!ei-" Vo'!%er Receipt 8ouc3er is used to record cas3 or "an) receipt. Receipt 8ouc3ers are of t(o types0 Cas3 receipt 8ouc3er Ban) receipt 8ouc3er Cas3 receipt 8ouc3er denotes receipt of cas3. Ban) receipt 8ouc3er indicates receipt of c3e1ue or demand draft. Standard format of cas3 receipt 8ouc3er is gi8en "elo(0 Hame of t3e IrganiKation Ban) Receipt ; Cas3 Receipt O7 Receipt 2ouc3er !ate0 Cas3 ; Ban) code0 !escription ; Title of Account Ho0 !escription ; Title0 Code P UUUUUUUU Cre*i" A/o'n"
VU Lesson-13
Total0 Harration0 4repared By0 Pa)/en" Vo'!%er 4ayment 8ouc3er is used to record a payment of cas3 or c3e1ue. 4ayment 8ouc3ers are of t(o types0 Cas3 4ayment 8ouc3er Ban) 4ayment 8ouc3er Cas3 4ayment 8ouc3er denotes 4ayment of cas3. Ban) 4ayment 8ouc3er indicates payment "y c3e1ue or demand draft. Standard format of cas3 4ayment 8ouc3er is gi8en "elo(0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan C3ec)ed By0
82
'inancial Accounting = * > 7?T1.1 Hame of t3e IrganiKation Ban) 4ayment ; Cas3 4ayment O7 4ayment 2ouc3er !ate0 Cas3 ; Ban) code0 !escription ; Title of Account Ho0 !escription ; Title0 Code P 1ebi" A/o'n"
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Total0 Haration 4repared By0 C3ec)ed By0
5o'rna& Vo'!%er Nournal 8ouc3er is used to record transactions t3at do not affect cas3 or "an). Standard format of Aournal 8ouc3er is gi8en 3ereunder0 Hame If IrganiKation Nournal 2ouc3er !ate0 !escription Code P Ho0 1ebi" Cre*i" A/o'n" A/o'n"
Total0 Harration0 4repared By0 +o, "o Carr) For,ar* a Ba&an!e( *t is already mentioned t3at in FTG account9 at t3e end of accounting period9 if one side is greater t3an t3e ot3er side9 "alancing figure (ill "e (ritten on t3e lesser side as "alance. 'or instance9 if amount on de"it side is greater t3an t3e amount on credit side9 t3e "alancing figure is (ritten on t3e credit side as "alance 6 it is )no(n as 1ebi" Ba&an!e. In t3e ot3er 3and9 if amount on t3e credit side is greater t3an t3at of amount on t3e de"it side9 t3e "alance is s3o(n on t3e de"it side. *t is called t3e Cre*i" Ba&an!e. @ Copyrig3t 2irtual :ni8ersity of 4a)istan C3ec)ed "y0
83
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At t3e start of ne/t accounting period9 t3ese "alances are carried for(ard. !e"it "alance is (ritten on t3e credit side9 "ut it is t3e e/cess of de"it side o8er t3e credit side9 (3en it is carried for(ard9 it is (ritten on t3e de"it side. 'or e/ample9 ledger account of cas3 is gi8en "elo(0 Cas% A!!o'n" A!!o'n" !o*e G 1 Par"i!'&ars Co*e 1r. 1a"e Par"i!'&ars G 97s.: Capital a;c .2 1%.9... %=3=.2 Iffice furniture Sales a;c Recei8ed from de"tors . .$ 129... =3=.2 1.=3=.2 2%9... 21=3=.2 23=3=.2 2%=3=.2 2+=3=.2 4urc3ases a;c Carriage a;c 4aid to creditors Salaries a;c Rent a;c Stationery a;c Ba&an!e Total 1$ 9... Total
1a"e 1=3=.2 13=3=.2 21=3=.2
Co*e G .3 .4 .% .& .+ 1. 11
Cr. 97s.: 29... +9... 2%. 9... 29%.. 39... 29... 1&192%. 1$ 9...
T3is cas3 account is s3o(ing t3e "alance of Rs. 1&192%. on t3e credit side. T3is "alance is e/cess of de"it side o8er t3e credit side and9 t3erefore9 is called t3e *ebi" ba&an!e. J3en it is !arrie* .or,ar* it is (ritten on t3e de"it side "ecause de"it side of t3e cas3 account is greater 6 Rs. 1&192%. is t3e "alancing amount of t3e de"it side of cas3 account. So9 it is an asset 6 it (ill "e used for furt3er e/penses in t3e fort3 coming period. 5etGs ta)e anot3er e/ample0 !ate 31=3=.2 A!!r'e* E>-enses A!!o'n" 4articulars Code Amount P Rs. ,!r.!ate A!!o'n" !o*e G 14 4articulars Code P Accrued "ills 12 Amount Rs. ,Cr.%9...
Ba&an!e Total
%9... %9... Total %9...
*n t3is account9 "alance is (ritten on t3e de"it side 6 it is called t3e credit "alance. As t3is "alance represents e/cess of credit side o8er de"it side9 (3en it is !arrie* .or,ar* it is again (ritten on t3e credit side. *t can also "e e/plained li)e t3is0 1ebi" ba&an!e ,%en !arrie* .or,ar*F is ,ri""en on "%e *ebi" si*e Cre*i" ba&an!e ,%en !arrie* .or,ar*F is ,ri""en on "%e !re*i" si*e T3is is furt3er e/plained (it3 t3e 3elp of t3e follo(ing sol8ed illustration0
84
'inancial Accounting = * > 7?T1.1 I&&'s"ra"ion 'ollo(ing is t3e Trial Balance of Saeed 6 Sons for t3e mont3 ended Nanuary 319 2..2 Saeed 6 Sons. Trial Balance As on Nanuary 319 2..2 Ti"&e o. A!!o'n" Cas3 Account Accrued e/pense Account Ban) Account 5oan Account 'urniture Account Iffice #1uipment To"a& Co*e .1 .2 .3 .4 .% .& 1r. 7s. %%9... 2%9... 1..9... 2.9... 1.9... 110F000 Cr. 7s. 1.9...
VU
110F000
*n t3e mont3 of 'e"ruary9 follo(ing transactions too) place0
No.
.1 .2 .3 .4 .% .& . .$
1a"e
'e" . 'e" 1. 'e" 12 'e" 1 'e" 2. 'e" 23 'e" 2% 'e" 2$
Par"i!'&ars
T3ey purc3ased stationery (ort3 of Rs. %9... T3ey paid t3eir first installment of loan Rs. 1.9... T3ey recei8ed a c3e1ue from a customer of Rs. %9... Accrued e/penses of Rs. %9... are paid. T3ey purc3ased furniture of Rs. 19... Iffice e1uipment of Rs. 29... is sold Staff salaries are paid "y c3e1ue Rs. 1.9... Sold goods for cas3 Rs.29...
So&'"ionD T3e ledger accounts of Saeed 6 Sons (ill "ear t3e follo(ing c3anges0 !ate 1=2=.2 23=2=.2 2$=2=.2 Cas% A!!o'n" A!!o'n" !o*e G 1 4articulars Code Amount !ate 4articulars P Rs. ,!r.Ba&an!e !<. %%9... =2=.2 Stationery Iffice .& 29... e1uipment. 1.=2=.2 5oan a;c .1 29... 1 =2=.2 Sales a;c Accrued e/penses 'urniture a;c Total %+9... Ba&an!e !<* Total Code P 1. .4 .2 .% Amount Rs. ,Cr.%9... 1.9... %9... 19... 3$9... %+9...
85
'inancial Accounting = * > 7?T1.1 A!!r'e* E>-enses A!!o'n" !o*e G 3 4articulars Code Amount !ate 4articulars P Rs. ,!r.Accrued e/penses .1 %9... 1=1=.2 Ba&an!e !<. Ba&an!e !<* Total !ate 1 =2=.2 12=2=.2 4articulars Ba&an!e !<. C3e1ue recei8ed %9... 1.9... Total Code P
VU
!ate 1 =2=.2
Code P
Amount Rs. ,Cr.1.9...
1.9... Amount Rs. ,Cr.1.9... 2.9... 3.9... Code P Amount Rs. ,Cr.1..9...
Ban6 A!!o'n" A!!o'n" !o*e G 4 Code Amount !ate 4articulars P Rs. ,!r..1 2%9... 2%=2=.2 Salaries a;c . %9... 3.9... Ba&an!e !<* Total A!!o'n" !o*e G H !ate 4articulars Ba&an!e !<.
Total !ate 1.=2=.2 4articulars
Loan A!!o'n" Code Amount P Rs. ,!r.*nstallment paid .1 1.9... Ba&an!e !<* Total +.9... 1..9...
Total A!!o'n" !o*e G I !ate 4articulars 23=2=.2 Ba&an!e !<* Code P
1..9... Amount Rs. ,Cr.-
!ate 1.=2=.2 2.=2=.2
F'rni"'re A!!o'n" 4articulars Code Amount P Rs. ,!r.Ba&an!e !<. 2.9... 'urniture a;c .1 19...
219...
Total
219...
Total A!!o'n" !o*e G M 4articulars Iffice #1uipment Ba&an!e !<*
219...
!ate 1.=2=.2
O..i!e E;'i-/en" A!!o'n" 4articulars Code Amount P Rs. ,!r.Ba&an!e !<. 1.9...
!ate
Code P .1
Amount Rs. ,Cr.29... $9... 1.9...
Total
1.9...
Total
Ba&an!e C<F is ba&an!e !arrie* .or,ar* C Ba&an!e C<1 is ba&an!e Carrie* *o,n. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
86
'inancial Accounting = * > 7?T1.1 POSTING TO LE1GE7S AN1 7ECO71ING OF STOC8
VU Lesson-14
Je 3a8e demonstrated t3e carrying for(ard of "alances in lecture=13. Anot3er sol8ed e/ample is gi8en "elo(0 I&&'s"ra"ion 'ollo(ing is t3e Trial Balance of Ra3il 6 Co. for t3e mont3 ended Nanuary 319 2..2. 7a%i& C Co.. Tria& Ba&an!e As on 5an'ar) 41F 3003 Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account .1 3.9... Accrued e/pense Account .2 Ban) Account .3 %.9... 5oan Account .4 'urniture Account .% 2.9... Iffice #1uipment .& 1.9... !e"tors account . 129... Creditors account .$ Sales account .+ 4urc3ase account 1. 1$9... To"a& 1H0F000 !uring t3e mont39 follo(ing entries too) place0 No. .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 1a"e 'e" . 'e" 1. 'e" 12 'e" 13 'e" 1% 'e" 1 'e" 2. 'e" 21 'e" 22 'e" 23 'e" 2% 'e" 2$ Par"i!'&ars T3ey purc3ased stationery (ort3 of Rs. 39... T3ey paid t3eir first installment of loan Rs. 129... T3ey recei8ed a c3e1ue from a customer of Rs. %9... T3ey paid a c3e1ue of Rs. $9... to a creditor 4urc3ased goods of Rs &9... 6 paid t3roug3 c3e1ue Accrued e/penses of Rs. %9... are paid. T3ey purc3ased furniture of Rs. 29... Sold goods for cas3 Rs.%9... 4urc3ased goods on credit Rs. %9... Iffice e1uipment of Rs. %9... is 4urc3ased Staff salaries are paid "y c3e1ue Rs. 1%9... :tility e/penses of Rs. 39... are accrued.
Cr. 7s. 1.9... 1..9...
1.9... 2.9... 1H0F000
5edger accounts of Ra3il 6 Co. during t3e mont3 (ill s3o( follo(ing picture0
87
'inancial Accounting = * > 7?T1.1 Cas% A!!o'n" Code P Amount Rs. ,!r..1 3.9... .+ %9... A!!o'n" !o*e G 1 !ate 4articulars =2=.2 1.=2=.2 1 =2=.2 Stationery a;c 5oan a;c Accrued e/penses 'urniture a;c 23=2=.2 Total !ate 1 =2=.2 3%9... Iffice e1uipment Ba&an!e !<* Total A!!o'n" !o*e G 3 4articulars Ba&an!e !<. #/penses accrued Total Code P .$ 1. 11 Code P
VU
!ate 1=2=.2 21=2=.2
4articulars Ba&an!e !<. Sold a;c
Code P 1. .4 .2 .% .&
Amount Rs. ,Cr.39... 129... %9... 29... %9... $9... 3%9... Amount Rs. ,Cr.1.9... 39... 139... Amount Rs. ,Cr.$9... &9... 1%9... 2&9... %%9...
A!!r'e* E>-enses A!!o'n" 4articulars Code Amount !ate P Rs. ,!r.Accrued e/penses .1 %9... 1=1=.2 Ba&an!e !<* Total $9... 139...
!ate 12=2=.2
4articulars Ba&an!e !<. C3e1ue recei8ed
Ban6 A!!o'n" A!!o'n" !o*e G 4 Code Amount !ate 4articulars P Rs. ,!r.%.9... 13=2=.2 4aid to creditors 1%=2=.2 4urc3ases . %9... 2%=2=.2 Salaries a;c Ba&an!e !<* %%9... Total
Total !ate 1.=2=.2 4articulars *nstallment paid Ba&an!e !<* Total !ate 1.=2=.2 2.=2=.2 4articulars Ba&an!e !<. 'urniture a;c Total
Loan A!!o'n" A!!o'n" !o*e G H Code Amount !ate 4articulars P Rs. ,!r..1 129... Ba&an!e !<. $$9... 1..9... F'rni"'re A!!o'n" Code Amount P Rs. ,!r.2.9... .1 29... 229... Total A!!o'n" !o*e G I !ate 4articulars 23=2=.2 Ba&an!e !<* Total
Code P
Amount Rs. ,Cr.1..9...
1..9... Code P Amount Rs. ,Cr.229... 229...
88
'inancial Accounting = * > 7?T1.1 O..i!e E;'i-/en" A!!o'n" A!!o'n" !o*e G M 4articulars Code Amount !ate 4articulars P Rs. ,!r.Ba&an!e !<. 1.9... Iffice .1 %9... #1uipment a;c Ba&an!e !<* Total !ate 4articulars Ba&an!e !<. 1%9... 1eb"ors A!!o'n" Code Amount P Rs. ,!r.129... Total A!!o'n" !o*e G J !ate 4articulars 12=2=.2 C3e1ue recei8ed Code P .3
VU
!ate 23=2=.2
Code P
Amount Rs. ,Cr.1%9... 1%9... Amount Rs. ,Cr.%9...
Ba&an!e !<* Total !ate 13=2=.2 4articulars 129... Total A!!o'n" !o*e G K !ate 4articulars 22=2=.2 Ba&an!e !<. 4urc3ases a;c Code P 1.
9... 129... Amount Rs. ,Cr.1.9... %9...
Cre*i"ors A!!o'n" Code Amount P Rs. ,!r.4aid to creditors .3 $9...
Ba&an!e !<* Total !ate 4articulars
9... 1%9... Total Code P .1 1%9... Amount Rs. ,Cr.2.9... %9...
Sa&es A!!o'n" A!!o'n" !o*e G L Code Amount !ate 4articulars P Rs. ,!r.Ba&an!e !<. 21=2=.2 Sales a;c 2%9... 2%9... P'r!%ases A!!o'n" Code Amount P Rs. ,!r.1$9... .3 &9... . %9... Ba&an!e !<* Total A!!o'n" !o*e G 10 !ate 4articulars
Ba&an!e !<* Total !ate 1%=2=.2 22=2=.2 4articulars Ba&an!e !<. 4urc3ases a;c 4urc3ases a;c
2%9... Code P Amount Rs. ,Cr.-
2+9... 2+9...
Total
2+9...
Total
89
'inancial Accounting = * > 7?T1.1 !ate 2%=2=.2 4articulars Salaries a;c Sa&aries A!!o'n" Code Amount P Rs. ,!r..3 1%9... A!!o'n" !o*e G 11 !ate 4articulars Code P
VU Amount Rs. ,Cr.1%9... 1%9... Code P Amount Rs. ,Cr.39... 39... Code P Amount Rs. ,Cr.-
Ba&an!e !<* Total !ate 2%=2=.2 4articulars Stationery a;c 1%9... S"a"ioner) A!!o'n" Code Amount P Rs. ,!r..1 39... Total A!!o'n" !o*e G 13 !ate 4articulars
Ba&an!e !<* Total !ate 2$=2=.2 4articulars 39... Total A!!o'n" !o*e G 14 !ate 4articulars
U"i&i") E>-enses A!!o'n" Code Amount P Rs. ,!r.Accrued utility .2 39... e/penses Total 39...
Ba&an!e !<* Total
39... 39...
T3e Trial Balance at t3e end of t3e mont3 is as follo(s0 7a%i& C Co. Tria& Ba&an!e As on 5an'ar) 41F 3003 Ti"&e o. A!!o'n" Co*e 1r. 7s. Cas3 Account Accrued e/pense Account Ban) Account 5oan Account 'urniture Account Iffice #1uipment !e"tors account Creditors account Sales account 4urc3ase account Salaries Account Stationery Account :tility #/penses Account To"a& .1 .2 .3 .4 .% .& . .$ .+ 1. 11 12 13 2+9... 1%9... 39... 39... 13KF000 13KF000 229... 1%9... 9... 9... 2%9... 2&9... $$9... $9... $9...
Cr. 7s.
90
VU
1i..eren!e be",een e>-enses C P'r!%ases *f "usiness purc3ases items for its o(n use ,items t3at are not meant to "e resold- suc3 items are c3arged to e/pense account. *f "usiness purc3ases items for resale purposes9 suc3 items are c3arged to purc3ases account. S"o!6D Stoc) is t3e 1uantity of unsold goods lying (it3 t3e organiKation. S"o!6 is termed as Bt3e 8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting purposes9 stoc) is of t(o types0 1. *n trading concern9 Stoc) consists of goods t3at are purc3ased for t3e purpose of resale9 "ut not sold in t3at accounting period. Trading concern is t3at organiKation9 (3ic3 purc3ases items for resale purposes. 2. *n manufacturing concern9 ,an organiKation t3at con8erts ra( material into finis3ed product "y putting it in a process- stoc) consists of0 o Ra( material o Jor) in process o 'inis3ed goods 7a, Ma"eria& Ra( material is t3e "asic part of an item9 (3ic3 is processed to ma)e a complete item. $or6 in Pro!ess *n manufacturing concern9 ra( material is put into process to con8ert it into finis3ed goods. At t3e end of t3e year9 some part of ra( material remains under process. *t is neit3er in s3ape of ra( material nor in s3ape of finis3ed goods. Suc3 items are ta)en in stoc) as (or) in process. Finis%e* Goo*s 'inis3ed goods contain items t3at are ready for sale9 "ut could not "e sold at t3e end of accounting period. 7e!or*ing o. S"o!6 A!!o'n" Stoc) Account is 1ebi"e* (it3 t3e Va&'e o. "%e Goo*s P'r!%ase* Stoc) account is !re*i"e* (it3 t3e P'r!%ase Pri!e o. "%e Goo*s So&* < Iss'e* .or Pro*'!"ion. Stoc) Account s3o(s t3e cost ; purc3ase 8alue of unsold goods.
In /an'.a!"'ring !on!ernF en"ries .or s"o!6 are0 For P'r!%ase o. S"o!6 1ebi"D Stoc) Account Cre*i"D Cas3;Supplier ;Creditors Account J3en t3e stoc) is purc3ased9 stoc) account gets t3e "enefit9 so it is de"ited 6 cas3 or supplier account pro8ides t3e "enefit9 so it is credited. For Pa)/en" "o Cre*i"ors 1ebi"D P Cre*i"D Supplier ; Creditors account Cas3 account
91
'inancial Accounting = * > 7?T1.1 For Cons'/-"ion o. goo*s 1ebi"D Cre*i"D Cos" o. goo*s so&* Cost of goods sold Stoc) Account
VU
Cost of goods sold is different in "ot3 forms of organiKations0 *n trading concern9 cost of goods sold is t3e 8alue of goods unsold ,goods stands for t3e items purc3ased for resale purpose *n manufacturing concern9 cost of goods sold is t3e 8alue of ra( material consumed plus any ot3er manufacturing cost. e.g.9 salaries of la"or cost of mac3inery etc. S"o!6 an* !os" o. goo*s so&* in /an'.a!"'ring !on!ern 7a, Ma"eria& S"o!6 O"%er Cos"s A!!o'n"s
$or6 in Pro!ess A!!o'n"
Finis%e* Goo*s A!!o'n"
Cos" o. Goo*s So&* A!!o'n" *n manufacturing concern9 Ra( material stoc) is put into process. 'or accounting purposes9 all 8alue of stoc) and ot3er manufacturing costs are c3arged to (or) in process account. J3en t3e process is completed and t3e goods are prepared9 all t3e 8alue of (or) in process is c3arged to finis3ed goods account. T3e "usiness sells finis3ed goods for t3e (3ole accounting year. At t3e end of t3e year9 goods t3at are unsold are deducted from cost of goods sold account.
92
'inancial Accounting = * > 7?T1.1 7ECO71ING OF STOC8 9Con"in'e*:
VU Lesson-15
Stoc) is termed as Bt3e 8alue of goods a8aila"le to t3e "usiness t3at are ready for saleC. 'or accounting purposes9 stoc) is of t(o types0 Ipening stoc) Closing stoc) O-ening s"o!6 is t3e 8alue of goods a8aila"le for sale in t3e "eginning of an accounting period. C&osing s"o!6 is t3e 8alue of goods unsold at t3e end of t3e accounting period. 5o'rna& En"ries "o 7e!or* S"o!6 In Case o. Tra*ing Con!ernD Nournal entries for t3ose goods (3ic3 are "oug3t for resale purposes are as follo(s0 4urc3ase of goods0 1ebi"D Cre*i"D Consumption of goods 1ebi"D Cre*i"D 4ayment in case of credit purc3ase 1ebi"D Cre*i"D In Case o. Man'.a!"'ring Con!ernD *n case of manufacturer t3ere are at least t(o types of Stoc) Accounts0 o Ra( 7aterial Stoc) Account o 'inis3ed ?oods Stoc) Account Creditors Account Cas3;Ban) Cost of goods sold Stoc) Stoc);7aterial Account Cas3;Ban);Creditor
7a, Ma"eria& Ra( material is t3e "asic part of an item9 (3ic3 is processed to ma)e a complete item Finis%e* Goo*s 'inis3ed goods contain t3e items t3at are ready for sale9 "ut could not "e sold in t3at accounting period. $or6 in Pro!ess *n manufacturing concern9 ra( material is put in a process to con8ert it into finis3ed goods. At t3e end of accounting period9 some part of ra( material remains under process. i.e. it is neit3er in s3ape of ra( material nor in s3ape of finis3ed goods. Suc3 items are ta)en in stoc) as (or) in process.
93
'inancial Accounting = * > 7?T1.1 F&o, o. Cos"s 7a, Ma"eria& S"o!6 O"%er Cos"s A!!o'n"s
VU
$or6 in Pro!ess A!!o'n"
Finis%e* Goo*s A!!o'n"
Cos" o. Goo*s So&* A!!o'n" *n manufacturing concern9 Ra( material stoc) is put into process. 'or accounting purposes9 all 8alue of stoc) and ot3er manufacturing costs are c3arged to (or) in process account. J3en t3e process is completed and t3e goods are prepared9 all t3e 8alue of (or) in process is c3arged to finis3ed goods account. T3e "usiness sells finis3ed goods for t3e (3ole accounting year. At t3e end of t3e year9 goods t3at are unsold are deducted from cost of goods sold account. 5o'rna& En"ries For Man'.a!"'ring Con!ern 4urc3ase of ra( material 1ebi"D Cre*i"D It3er direct costs incurred 1ebi"D Cre*i"D Rele8ant cost;#/pense Eead Cas3;Ban);4aya"les Stoc);7aterial Account Cas3;Ban);Creditors
Ra( material issued and ot3er costs allocated to production of units 1ebi"D Cre*i"D 1ebi"D Cre*i"D J3en production is completed 1ebi"D Cre*i"D 'inis3ed ?oods Stoc) Account Jor) in process account Jor) in process Stoc) 7aterial Account Jor) in process Rele8ant #/pense Eead Account
94
'inancial Accounting = * > 7?T1.1 #ntry for Cost of sale 1ebi"D Cre*i"D #ntry for sale of goods 1ebi"D Cre*i"D Return of material purc3ased T3ere are t(o options for recording purc3ase material return O-"ion 1 1ebi"D Cre*i"D ?oods Return Account Stoc) 7aterial Account AN1 1ebi"D Cre*i"D Cas3;Ban) Account ?oods Return Account O7 *f our supplier suppliers use some ot3er material in e/c3ange of material returned. T3en0 1ebi" Cre*i"D Ra( 7aterial Stoc) Account ?oods Return Account Cas3;Account recei8a"le Account Sales Account Cost of ?oods Sold Account 'inis3ed ?oods Stoc) Account
VU
*n t3e first case a"o8e9 cas3 is recei8ed in return of goods. *n t3e second case9 defecti8e goods are e/c3anged (it3 1uality goods. T3at is (3y9 (e de"ited our stoc) account. Bot3 entries are correct for return of purc3ased items. o O-"ion 3 1ebi"D Cre*i"D Cas3;Creditor Account Stoc) Account
E>a/-&e 1 Record t3e follo(ing transactions0 1. 4urc3ased goods for cas3 Rs. 1.9... 2. 4urc3ased goods on credit from ABC Co. Rs. 2%9... 3. Sold goods (3ic3 cost (as Rs. 2.9... 4. Returned goods to ABC Co. t3at originally cost Rs. %9... %. 4aid to ABC Co. Rs. 1%9... t3roug3 c3e1ue &. Sold goods (3ose cost (as Rs. %9... Re1uired0 1. Cost of goods sold 2. 2alue of closing stoc) 3. Amount paya"le to ABC Co.
95
'inancial Accounting = * > 7?T1.1 1 > 4urc3ased goods for cas3 Rs. 1.9... Cas3 Account !ate Ho. 1 Harration 4urc3ased goods for cas3 Code == Cr. Rs. 1.9... Bal. !r;,Cr,1.9...-
VU
!r. Rs.
Stoc) Account Code == !ate Ho. 1 Harration 4urc3ased goods for cas3 !r. Rs. 1.9... Cr. Rs. Bal. !r;,Cr1.9...
2 > 4urc3ased goods on credit from ABC Co. Rs. 2%9... ABC Co. !ate Ho. 2 Code == Harration 4urc3ased goods from ABC !r. Rs. Cr. Rs. 2%9... Bal. !r;,Cr,2%9...-
Stoc) Account Code == !ate Ho. 1 2 Harration 4urc3ased goods for cas3 4urc3ased goods from ABC !r. Rs. 1.9... 2%9... Cr. Rs. Bal. !r;,Cr1.9... 3%9...
3 > Sold goods (3ose cost (as Rs. 2.9... Cost of ?oods Sold !ate Ho. 3 ?oods sold Code == !r. Rs. 2.9... Cr. Rs. Bal. !r;,Cr2.9...
Harration
Stoc) Account Code == !ate Ho. 1 2 3 Harration 4urc3ased goods for cas3 4urc3ased goods from ABC ?oods sold !r. Rs. 1.9... 2%9... 2.9... Cr. Rs. Bal. !r;,Cr1.9... 3%9... 1%9...
4 > Returned goods to ABC Co. cost Rs. %9... ABC Co. !ate Ho. 2 4 Code == Harration 4urc3ased goods from ABC Returned goods to ABC %9... !r. Rs. Cr. Rs. 2%9... Bal. !r;,Cr,2%9...,2.9...-
96
'inancial Accounting = * > 7?T1.1 Stoc) Account Code == !ate Ho. 1 2 3 4 Harration 4urc3ased goods for cas3 4urc3ased goods from ABC ?oods sold Returned goods to ABC !r. Rs. 1.9... 2%9... 2.9... %9... Cr. Rs. Bal. !r;,Cr1.9... 3%9... 1%9... 1.9...
VU
% > 4aid to ABC Co. Rs. 1%9... t3roug3 c3e1ue ABC Co. !ate Ho. 2 4 % Code == Harration 4urc3ased goods from ABC Returned goods to ABC 4aid to ABC %9... 1%9... !r. Rs. Cr. Rs. 2%9... Bal. !r;,Cr,2%9...,2.9...,%9...-
Ban) Account Code == !ate Ho. % Harration 4aid to ABC !r. Rs. Cr. Rs. 1%9... Bal. !r;,Cr-
& > Sold goods (3ose cost (as Rs. %9... Cost of ?oods Sold !ate 3 & Ho. ?oods sold ?oods sold Code == !r. Rs. 2.9... %9... Cr. Rs. Bal. !r;,Cr2.9... 2%9...
Harration
Stoc) Account Code == !ate Ho. 1 2 3 4 & Harration 4urc3ased goods for cas3 4urc3ased goods from ABC ?oods sold Returned goods to ABC ?oods sold !r. Rs. 1.9... 2%9... 2.9... %9... %9... Cr. Rs. Bal. !r;,Cr1.9... 3%9... 1%9... 1.9... %9...
97
'inancial Accounting = * > 7?T1.1 Cos" o. Goo*s So&* Cost of ?oods Sold !ate Ho. 3 & Harration ?oods sold ?oods sold Code == !r. Rs. 2.9... %9... Cr. Rs. Bal. !r;,Cr2.9... 2%9...
VU
Va&'e o. C&osing S"o!6 Stoc) Account Code == !ate Ho. 1 2 3 4 & Harration 4urc3ased goods for cas3 4urc3ased goods from ABC ?oods sold Returned goods to ABC ?oods sold !r. Rs. 1.9... 2%9... 2.9... %9... %9... Cr. Rs. Bal. !r;,Cr1.9... 3%9... 1%9... 1.9... IF000
A/o'n" Pa)ab&e "o ABC Co. ABC Co. !ate Ho. 2 4 % #/ample 2 :sing t3e follo(ing data calculate t3e Cost of ?oods Sold of RQS Co. Stoc) le8els Ipening Rs. Closing Rs. Ra( material 1..9... $%9... Jor) in process +.9... +%9... 'inis3ed goods 1%.9... 14.9... 4urc3ase of ra( material during t3e period Rs. 2..9... 4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production. It3er production costs Rs. %.9... Code == !r. Rs. %9... 1%9... Cr. Rs. 2%9... Bal. !r;,Cr,2%9...,2.9...9IF000:
Harration 4urc3ased goods from ABC Returned goods to ABC 4aid to ABC
98
'inancial Accounting = * > 7?T1.1 Ra( 7aterial Account I;S 1..9... J*4 C;S Total 3..9... Total 21%9... $%9... 3..9... Total 1$.9... Total 1$.9... 4urc3ases 2..9... 5a"or Account Cost 1$.9... C3arge 1%.9...
VU
It3er Costs Account 4aid %.9... C3arge %.9...
Jor) in 4rocess Account I;B Ra( 7 5a"or I;E +.9... 21%9... 1%.9... %.9... %.%9... ';? C;B Total 41.9... +%9... %.%9...
Total
%.9...
Total
%.9...
Total Cost of goods sold
'inis3ed ?oods Stoc) Account I;S J*4 Total 1%.9... 41.9... %&.9... CIS C;S Total 42.9... 14.9... 4&.9...
';?
42....
I&&'s"ra"ion G 1 Record t3e follo(ing transactions 4urc3ased goods for cas3 Rs9 1.9... 4urc3ased goods from Ali Brot3ers. (ort3 of Rs. 2.9... Sold goods 3a8ing cost of Rs.1%9... Returned goods to Ali Brot3ers. (ort3 of Rs. 49... Sold goods 3a8ing cost of Rs. %9... 4aid to Ali Brot3ers. Rs. 1.9.... Also ascertain Cost of goods sold. 2alue of closing stoc). 4aya"le to Ali Brot3ers.
99
'inancial Accounting = * > 7?T1.1 So&'"ion 'irst9 (e (ill pass Aournal entries 4articulars Stoc) Account Cas3 Account ?oods purc3ased for cas3 4articulars Stoc) Account Ali Brot3ers. ?oods purc3ased from Ali Brot3ers. 4articulars Cost of goods sold Stoc) Account ?oods sold (3ose cost (as Rs. 1%9... 4articulars Ali Brot3ers. Stoc) Account ?oods returned to Ali Brot3ers. 4articulars Cost of goods sold Stoc) Account ?oods sold (3ose cost (as Rs. %9... 4articulars Amount,!r.- Rs. Amount,!r.- Rs. %9... Amount,Cr.- Rs. Amount,!r.- Rs. 49... Amount,Cr.- Rs. Amount,!r.- Rs. 1%9... 1%9... Amount,Cr.- Rs. Amount,!r.- Rs. 2.9... 2.9... Amount,Cr.- Rs. Amount,!r.- Rs. 1.9... 1.9... Amount,Cr.- Rs.
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49...
%9... Amount,Cr.- Rs.
Ali Brot3ers. Account Cas3 Account 4aid to Ali Brot3ers.
1.9... 1.9...
100
'inancial Accounting = * > 7?T1.1 Pa)ab&e "o A&i Bro"%ers !ate 4articulars ?oods returned 4aid cas3 Ba&an!e Code P A&i Bro"%ers A!!o'n" Amount !ate 4articulars Rs. ,!r.49... 4urc3ased goods 1.9... &9... 2.9... Total Code P
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Total Cos" o. Goo*s So&* !ate 4articulars ?oods sold ?oods sold
2.9...
Cos" o. goo*s so&* A!!o'n" Code Amount !ate 4articulars P Rs. ,!r.1%9... %9... Ba&an!e
Code P
Amount Rs. ,Cr.-
2.9... 2.9...
Total Va&'e o. C&osing S"o!6
2.9...
Total
!ate
4articulars 4urc3ased goods for cas3 4urc3ased goods from Ali Brot3ers. Total
Code P
S"o!6 A!!o'n" Amount !ate Rs. ,!r.1.9... 2.9...
4articulars ?oods sold Returned to Brot3ers ?oods sold Ba&an!e Ali
Code P
Amount Rs. ,Cr.1%9... 49... %9... &9... 3.9...
3.9...
Total
I&&'s"ra"ion G 3 :sing t3e follo(ing data calculate t3e Cost of ?oods Sold of RQS Co. S"o!6 &e#e&s O-ening 7s. C&osing 7s. Ra( material 1..9... $%9... Jor) in process +.9... +%9... 'inis3ed goods 1%.9... 14.9... o 4urc3ase of ra( material during t3e period Rs. 2..9... o 4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production. o It3er production costs Rs. %.9...
101
'inancial Accounting = * > 7?T1.1 So&'"ion 7a, Ma"eria& S"o!6 A!!o'n" 1ebi" I;S 4urc3ases 1..9... 2..9... J*4 C;S To"a& 400F000 To"a& 21%9... $%9... 400F000 To"a& 1K0F000 To"a& 1K0F000 Cre*i" Cost 1ebi" 1$.9... C3arged Labor A!!o'n" Cre*i" 1%.9...
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O"%er Cos"s A!!o'n" 1ebi" 4aid %.9... C3arge Cre*i" %.9... I;B Ra( 7 5a"or I;E To"a& I0F000 To"a& I0F000 To"a&
$or6 in Pro!ess A!!o'n" 1ebi" +.9... 21%9... 1%.9... ';? %.9... C;B I0IF000 To"a& 41.9... +%9... I0IF000 Cre*i"
Finis%e* Goo*s S"o!6 A!!o'n" 1ebi" I;S J*4 To"a& 1%.9... CIS 41.9... C;S IM0F000 To"a& Cre*i" 42.9... 14.9... IM0F000
Cos" o. Goo*s So&* A!!o'n" 1ebi" ';? 42.9... Cre*i"
*n Ra( 7aterial Account9 t3e de"it side contains0 o Ipening "alance 1..9... o 4urc3ases 2..9... In t3e credit side9 closing "alance of Rs. $%9... is s3o(n along (it3 t3e "alancing figure of Rs. 21%9... (3ic3 is c3arged to (or) in process IR J*4 account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Jor) in process IR J*4 Account Ra( 7aterial Account
102
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5a"or cost of Rs. 1$.9... is gi8en9 out of (3ic3 Rs. 1%.9... is c3arged to production. ,Remaining cost of Rs. 3.9... (ill "e e/plained in some later stage-. T3at means Rs. 1%.9... is c3arged to (or) in process IR J*4 account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Jor) in process IR J*4 Account 5a"or Cost Account
It3er costs of Rs. %.9... are also c3arged to (or) in process IR J*4 account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Jor) in process IR J*4 Account It3er Costs Account
Jor) in process account 3as t3e opening "alance of Rs. +.9... and closing "alance of Rs. +%9.... After c3arging all t3e a"o8e mentioned accounts to J*49 "alancing figure of (or) in process of Rs. 41.9... is c3arged to finis3ed goods account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D 'inis3ed ?oods Account Jor) in process Account
'inis3ed goods account 3as t3e opening "alance of Rs. 1%.9... and closing "alance of Rs. 14.9.... After c3arging J*4 account to finis3ed goods9 t3e "alancing figure of Rs. 42.9...9 is c3arged to cost of goods sold account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Cost of ?oods Sold Account 'inis3ed ?oods Account
103
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Lesson-16 COST OF GOO1S SOL1 STATEMENT AN1 VALUATION OF STOC8 *n manufacturing concern9 separate "oo)s are maintained to )eep t3e record of e8ery single (or) done in manufacturing process to ascertain cost incurred on production of goods. T3is record gi8es information a"out total cost incurred on manufacturing process and per unit cost of goods manufactured. J3en goods are produced9 t3ese are sold to t3e customers of t3e "usiness and goods unsold are ta)en into stoc). At t3e end of t3e financial year9 manufacturing concern prepares a statement (3ic3 gi8es t3e "rief summary of t3e (3ole process. T3is statement s3o(s t3e 8alue of ra( material consumed9 amount spent on la"or and ot3er factory e/penses9 finis3ed goods produced and goods unsold ,in stoc)-. Suc3 statement is called F!os" o. goo*s so&* s"a"e/en"0. 7anufacturing concerns9 (3ile presenting financial statements9 also present cost of goods sold statement. Standard format of cost of goods sold statement is gi8en "elo(0 Ra( 7aterial0 I;S Ra( 7aterial M 4urc3ases M Cost *ncurred to 4urc3ase R7 = C;S Ra( 7aterial Cos" o. Ma"eria& Cons'/e* M !irect 5a"or Cost M 'actory I8er3eads To"a& Fa!"or) Cos" M I;S of J*4 = C;S of J*4 Cos" o. Goo*s Man'.a!"'re* M I;S of 'inis3ed ?oods = C;S of 'inis3ed ?oods Cos" o. Goo* So&*
Con8ersion Cost0 Jor) in 4rocess 'inis3ed ?oods
Cos" o. /a"eria& !ons'/e* > is t3e cost of material used for consumption t3at 3as "een put in t3e production process. T3is 3ead s3o(s t3e ra( material left unused from t3e pre8ious year,opening stoc)-9 ra( material purc3ased in t3e current year9 e/penses incurred in "ringing t3e purc3ased material into t3e "usiness premises and ra( material t3at is not used in t3e current year ,closing stoc)-. O#er +ea*s Cos"s====are t3e ot3er costs incurred in relation of manufacturing of goods. #/amples are factory utilities9 super8isor salaries9 e1uipment repairs etc. To"a& .a!"or) !os" > is t3e cost of material consumed plus la"or and o8er 3eads. *n ot3er (ords it is t3e total cost incurred in t3e factory. Cos" o. goo*s /an'.a!"'re* > is total factory cost plus opening stoc) of (or) in process less closing stoc) of (or) in process. Cos" o. goo*s so&* > is t3e cost of goods manufactured plus opening stoc) of finis3ed goods less closing stoc) of finis3ed goods. Pri/e<Basi! Cos" O Cost of !irect 7aterial Consumed M !irect 5a"or cost Con#ersion !os" it is t3e cost incurred to con8ert ra( material to finis3ed goods.
Con#ersion !os" O 5a"or cost M factory o8er3ead
104
'inancial Accounting = * > 7?T1.1 E>a/-&e :sing t3e follo(ing data calculate t3e Cost of ?oods Sold of RQS Co. Stoc) le8els I;S Rs. C;S Rs. Ra( material 1..9... $%9... Jor) in process +.9... +%9... 'inis3ed goods 1%.9... 14.9... 4urc3ase of ra( material during t3e period Rs. 2..9... 4aid to la"or Rs. 1$.9... out of (3ic3 Rs. 1%.9... used on production. It3er production costs Rs. %.9... So&'"ion N=Q Co. Cos" o. Goo*s So&s S"a"e/en" For "%e -erio* en*e*------Ra( 7aterial0 Ipening Stoc) Ra( 7aterial M 4urc3ases M Cost *ncurred to 4urc3ase R7 = Closing Stoc) Ra( 7aterial Cost of 7aterial Consumed M 5a"or Cost M'actory o8er3ead 1..9... 2..9... . ,$%9...1%.9... %.9...
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21%9...
Con8ersion Cost
To"a& Fa!"or) Cos"s Jor) in process M I;S of J*4 = C;S of J*4
2..9... H1IF000 +.... ,+%...H10F000 1%.9... ,14.9...H30F000
Cos" o. Goo*s Man'.a!"'re* 'inis3ed ?oods M I;S of 'inis3ed ?oods = C;S of 'inis3ed ?oods
Cos" o. Goo*s So&* I&&'s"ra"ion
'ollo(ing information of A3mad 6 Company is gi8en. 4repare a cost of goods sold statement. S"o!6 &e#e&s O<S 7s. C<S 7s. Ra( material 1%.9... 11%9... Jor) in process %.9... %%9... 'inis3ed goods 12.9... 1..9... 4urc3ase of ra( material during t3e period Rs. 1..9... Transportation c3arges of items purc3ased Rs. %9... 4aid to la"or Rs. 1..9.... It3er production costs,'IE- Rs. $.9... So&'"ion 7a, Ma"eria&D Ipening Stoc) Ra( 7aterial M 4urc3ases M Cost *ncurred to 4urc3ase R7 = Closing Stoc) Ra( 7aterial @ Copyrig3t 2irtual :ni8ersity of 4a)istan 1%.9... 1..9... %9... ,11%9...-
105
'inancial Accounting = * > 7?T1.1 Con#ersion Cos"D $or6 in Pro!essD Finis%e* Goo*sD Cos" o. Ma"eria& Cons'/e* M 5a"or M 'actory I8er3eads To"a& Fa!"or) Cos" M I;S of J*4 = C;S of J*4 Cos" o. Goo*s Man'.a!"'re* M I;S of 'inis3ed ?oods = C;S of 'inis3ed ?oods Cos" o. Goo* So&* 1H0F000 1..9... $.9... 430F000 %.9... ,%%9...41IF000 12.9... ,1..9...44IF000
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S"o!6 Car* Stoc) card is used to )eep t3e record of (3at 3as come in stoc) and (3at 3as gone out of it. Standard format of stoc) card is gi8en "elo(0 S"o!6 A!!o'n" I"e/ 01 !ate Receipts <ty Rate Amount !ate *ssues <ty Rate Amount
Stoc) card 3as t(o parts0 Receipt side *ssue side Bot3 sides 3a8e similar columns t3at include0 Hature of item to "e )ept in stoc) <uantity of items Rate at (3ic3 it (as purc3ased Total 8alue of items Receipt side is used to record data of items coming in t3e stoc) and issue side is used to record information of goods issued for manufacturing process. Va&'a"ion o. S"o!6 Any manufacturing organiKation purc3ases different material t3roug3 out t3e year. T3e prices of purc3ases may "e different due to inflationary conditions of t3e economy. T3e 1uestion is9 (3at item s3ould "e issued first 6 (3at item s3ould "e issued later for manufacturing. 'or t3is purpose9 t3e organiKation 3as to ma)e a policy for issue of stoc). All t3e issues for manufacturing and 8aluation of stoc) are recorded according to t3e policy of t3e organiKation. 7ostly t3ese t3ree met3ods are used for t3e 8aluation of stoc)0 Me"%o*s o. S"o!6 #a&'a"ion 'irst in first out ,'*'I 5ast in first out ,5*'I Jeig3ted a8erage Firs" in .irs" o'" 9FIFO: T3e '*'I met3od is "ased on t3e assumption t3at t3e first merc3andise purc3ased is t3e first merc3andised issued. T3e '*'I uses actual purc3ase cost. T3us9 if merc3andise 3as "een purc3ased at se8eral different costs9 t3e in8entory ,stoc)- (ill 3a8e se8eral different cost prices. T3e cost of goods sold for a gi8en sales transaction may in8ol8e se8eral different cost prices.
106
'inancial Accounting = * > 7?T1.1 C%ara!"eris"i!s
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T3is is (idely used met3od for determining 8alues of cost of goods sold and closing stoc). *n t3e '*'I met3od9 oldest a8aila"le purc3ase costs are transferred to cost of goods sold. T3at means t3e cost if goods sold 3as a lo(er 8alue and t3e profita"ility of t3e organiKation "ecomes 3ig3er. As t3e current stoc) is 8alued at recent most prices9 t3e current assets of t3e company 3a8e t3e latest assessed 8alues.
Las" in .irs" o'" 9LIFO: As t3e name suggests9 t3e 5*'I met3od is "ased on t3e assumption t3at t3e recently purc3ased merc3andise is issued first. T3e 5*'I uses actual purc3ase cost. T3us9 if merc3andise 3as "een purc3ased at se8eral different costs9 t3e in8entory ,stoc)- (ill 3a8e se8eral different cost prices. T3e cost of goods sold for a gi8en sales transaction may in8ol8e se8eral different cost prices. C%ara!"eris"i!s T3is is alternati8ely used met3od for determining 8alues of cost of goods sold and closing stoc). *n t3e 5*'I met3od recent a8aila"le purc3ase costs are transferred to cost of goods sold. T3at means t3e cost of goods sold 3as a 3ig3er 8alue and t3e profita"ility of t3e organiKation "ecomes lo(er. As t3e current stoc) is 8alued at oldest prices9 t3e current assets of t3e company 3a8e t3e oldest assessed 8alues.
$eig%"e* a#erage /e"%o* J3en (eig3ted a8erage met3od is in use9 t3e a8erage cost of all units in in8entory9 is computed after e8ery purc3ase. T3is a8erage cost is computed "y di8iding t3e total cost of goods a8aila"le for sale "y t3e num"er of units in in8entory. :nder t3e a8erage cost assumption9 all items in in8entory are assigned t3e same per unit cost. Eence9 it does not matter (3ic3 units are soldL t3e cost of goods sold is al(ays "ased on current a8erage unit cost. C%ara!"eris"i!s :nder t3e a8erage cost assumption9 all items in in8entory are assigned same per unit cost ,t3e a8erage cost-. Eence it does not matter (3ic3 units are sold first. T3e cost of goods sold is al(ays on t3e current a8erage unit cost. Since all in8entories are assigned same cost9 t3is met3od does not ma)e any effect on t3e profita"ility and does not increase;decrease any asset in t3e financial statements. T3is is t3e alternati8ely used met3od for determining 8alues of cost of goods sold and closing stoc). E>a/-&e Receipts0 .1 Nan 2.==9 1. units V Rs. 1%. per unit .2 Nan 2.==9 1% units V Rs. 2.. per unit 1. Nan 2.==9 2. units V Rs. 21. per unit *ssues0 .% Nan 2.==9 .% units .& Nan 2.==9 1. units 1% Nan 2.==9 1% units
107
'inancial Accounting = * > 7?T1.1 FIFO Me"%o* o. S"o!6 Va&'a"ion 1a"e .1=.1=2.== .2=.1=2.== .%=.1=2.== .&=.1=2.== 1.=.1=2.== 1%=.1=2.== 2. V Rs. 21.O42.. 1. V 2.. O 2... % V 21. O 1.%. 3.%. 7e!ei-"s 1. V Rs. 1%. O19%.. 1% V Rs. 2.. O 39... Iss'es Va&'e o. S"o!6 1. / 1%. O 1%.. 1. / 1%. O 1%.. 1% / 2.. O 3... 4%.. % / 1%. O %. 1% / 2.. O 3... 3 %. . / 1%. O . 1. / 2.. O 2... 2... 1. / 2.. O 2... 2. / 21. O 42.. &2.. . / 2.. O . 1% / 21. O 31%. 31%.
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% V 1%. O %.
%.
% V 1%. O %. % V 2.. O 1... 1 %.
$eig%"e* A#erage Me"%o* o. S"o!6 Va&'a"ion 1a"e .1=.1=2.== .2=.1=2.== .%=.1=2.== .&=.1=2.== 1.=.1=2.== 1%=.1=2.== E..e!"s o. #a&'a"ion /e"%o* on -ro.i" '*'I 7et3od Cost of Sales ?ross 4rofit O %. M 1 %. M 3.%. O %.. > %%%. O %9%%. O 19+%. O %9 .. O 193.. 7e!ei-"s 1./1%. O 1%.. 1%/2.. O 3... %/1$. O +.. 1./1$. O 1$.. 2./21. O 42.. 1%/2.. O 3... Iss'es Va&'e o. S"o!6 1%.. 1%.. M 3... O 4%.. 4%.. > +.. O 3&.. 3&.. > 1$.. O 1$.. 1$.. M 42.. O &... &... > 3... O 3... A#erage Cos" 1%..;1.O1%. 4%..;2%O1$. 3&..;2.O1$. 1$..;1.O1$. &...;3.O2.. 3...;1%O2..
Jeig3ted A8erage 7et3od Cost of Sales O +.. M 1$.. M 3... ?ross 4rofit O %.. > % .. NOTED Rs. 9%.. is assumed 8alue. I&&'s"ra"ion
Eamid 6 company is a manufacturing concern. 'ollo(ing is t3e receipts 6 issues record for t3e mont3 of 7ay9 2..2 1a"e 7ay 7ay + 7ay 13 7ay 1$ 7ay 22 7ay 24 7ay 2 7e!ei-"s 2.. units V Rs. %.;unit 1%. units V Rs. %;unit 1.. units V Rs. &.;unit 1.. units V Rs. %.;unit @ Copyrig3t 2irtual :ni8ersity of 4a)istan Iss'es &. units 1%. units 1.. units
108
'inancial Accounting = * > 7?T1.1 7ay 3. Calculate t3e 8alue of closing stoc) "y '*'I 7et3od A8erage 7et3od So&'"ion Va&'a"ion o. S"o!6 b) FIFO Me"%o* 1a"e 7ay 7ay + 7ay 13 7ay 1$ 7ay 22 1%. units V Rs. %;unit 1.. units V Rs. &.;unit 14. units V Rs. %.;unit 1. units V Rs. %;unit 1.. units V Rs. %;unit 1.. units V Rs. %.;unit 4. units V Rs. %;unit 1.. units V Rs. &.;unit &. units V Rs. %.;unit 7e!ei-"s 2.. units V Rs. %.;unit &. units V Rs. %.;unit Iss'es Va&'e o. S"o!6 2.. / %. O 1.9... &. / %. O 39... % / 1%. O 1192%. &. / 1.. O &9... %. / 14. O 9... 1. / % O %. % / 1.. O 9%.. %. / 1.. O %9... % / 4. O 39... &. / 1.. O &9... %. / &. O 39... To"a& A/o'n" 1.9... ,39...1192%. &9... , 9 %.7e/aining No. o. 'ni"s 2.. 14. 2+. 3+. 24. 2.. units
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Ne" Ba&an!e 1.9... 9... 1$92%. 2492%. 1&9%..
7ay 24 7ay 2 7ay 3.
, 9%..%9... ,129...-
14. 24. 4.
+9... 149... 29...
109
'inancial Accounting = * > 7?T1.1 Va&'a"ion o. S"o!6 b) $eig%"e* A#erage Me"%o*D 1a"e 7ay 7ay + 7ay 13 7ay 1$ 7ay 22 7e!ei-"s Iss'es Va&'e o. To"a& To"a& A#erage S"o!6 A/o'n"97s.: Uni"s Cos"97s.:<'ni" 2.. units 2.. / %. 1.9... 2.. %. V Rs. O %.;unit 1.9... &. &. / %. ,39...14. units O 39... 1%. / % 9...M112%. 14.M1%. 1%. units 1$2%.;2+. V Rs. O O O O %;unit 1192%. 1$2%. 2+. &2.+ 1.. units 242%.;3+. 1.. / &. 1$2%.M&... 2+.M1.. V Rs. O O O O &.;unit &9... 242%. 3+. &2.2 1%. 1%. / &2.2 ,+933.- 3+.=1%. units O O +33. 24. 1.. units 1.. units V Rs. %.;unit 2.. units 1.. / &2.2 O &22. 1.. / %. O %9... 2.. / % .1 O 11942. ,&922.$9 ..M%9... O 139 .. ,11942.24.=1.. O 14. 14.M1.. O 24. 24.=2.. O 4.
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Ne" Ba&an!e 97s.: 1.9... 9... 1$92%. 2492%. 149+2.
7ay 24 7ay 2 7ay 3.
$9 .. 13 ..;24. O % .1 139 .. 292$.
110
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Lesson-17 FINE1 ASSETS C 1EP7ECIATION !epreciation is a systematic allocation of t3e cost of a deprecia"le asset to e/pense o8er its useful life. *t is a process of c3arging t3e cost of fi/ed asset to profit 6 loss account. Fi>e* Asse"s are t3ose assets (3ic3 are0 If long life To "e used in t3e "usiness to generate re8enue Hot "oug3t (it3 t3e main purpose of resale. 'i/ed assets are also called B!eprecia"le AssetsC J3en an e/pense is incurred9 it is c3arged to profit 6 loss account of t3e same accounting period in (3ic3 it 3as incurred. 'i/ed assets are used for longer period of time. Ho(9 t3e 1uestion is 3o( to c3arge a fi/ed asset to profit 6 loss account. 'or t3is purpose9 estimated life of t3e asset is determined. #stimated useful life is t3e num"er of years in (3ic3 a fi/ed asset is e/pected to "e used efficiently. *t is t3e life for (3ic3 a mac3ine is estimated to pro8ide more "enefit t3an t3e cost to run it. T3en9 total cost of t3e asset is di8ided "y total num"er of estimated years. T3e 8alue9 so determined9 is called Fdepreciation for t3e yearG and is c3arged to profit 6 loss account. T3e same amount is deducted from total cost of fi/ed asset in t3e financial year in (3ic3 depreciation is c3arged. T3e net amount ,after deducting depreciation- is called FJritten do(n 2alueG. J!2 O Iriginal cost of fi/ed asset > Accumulated !epreciation Accumulated !epreciation is t3e depreciation t3at 3as "een c3arged on a particular asset from t3e time of purc3ase of t3e asset to t3e present time. T3is is t3e amount t3at 3as "een c3arged to profit and loss account from t3e year of purc3ase to t3e present year. !epreciation accumulated o8er t3e years is called a!!'/'&a"e* *e-re!ia"ion. Use.'& Li.e :seful 5ife or #conomic 5ife is t3e time period for mac3ine is e/pected to operate efficiently. *t is t3e life for (3ic3 a mac3ine is estimated to pro8ide more "enefit t3an t3e cost to run it. Gro'-ing o. Fi>e* Asse"s 7aAor groups of 'i/ed Assets0 5and Building 4lant and 7ac3inery 'urniture and 'i/tures Iffice #1uipment 2e3icles Ho depreciation is c3arged for F5andG. *n case of F5eased Asset;5ease Eold 5andG t3e amount paid for it is c3arged o8er t3e life of t3e lease and is called A/or"i2a"ion. 5o'rna& en"ries .or re!or*ing 1e-re!ia"ion 4urc3ase of fi/ed asset0 1ebi"D Rele8ant asset account Cre*i"D Cas39 Ban) or 4aya"le Account 'or recording of depreciation9 follo(ing t(o 3eads of accounts are used0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
111
'inancial Accounting = * > 7?T1.1 !epreciation #/pense Account Accumulated !epreciation Account
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!epreciation e/pense account contains t3e depreciation of t3e current year. Accumulated depreciation contains t3e depreciation of t3e asset from t3e financial year in (3ic3 it (as "oug3t up to t3e present financial year. . !epreciation of t3e follo(ing years in (3ic3 asset (as used is added up in t3is account. *n ot3er (ords9 t3is 3ead of account s3o(s t3e cost of usage of t3e asset up to t3e current year. !epreciation account is c3arged to profit 6 loss account under t3e 3eading of Administrati8e #/penses. *n t3e "alance s3eet9 fi/ed assets are presented at (ritten do(n 8alue i.e. J!2 O Actual cost of fi/ed asset > Accumulated !epreciation. Nournal entry for t3e depreciation is gi8en "elo(0 1ebi"D !epreciation #/penses Account Cre*i"D Accumulated !epreciation Account Presen"a"ion o. 1e-re!ia"ion C3arging depreciation to any 3ead in profit 6 loss account depends upon t3e nature of (or) performed "y t3e asset. Consider an organiKation 3as purc3ased computers. *f computers are "eing used "y t3e management9 t3is means t3at administrati8e (or) is done "y computers. So9 depreciation of computers (ill "e c3arged to Administrati8e #/penses. In t3e ot3er 3and9 if mac3ines (or)ing in t3e factory are computeriKed. T3e 8alue of depreciation of t3e computers attac3ed (it3 t3e mac3ines (ill "e c3arged to cost of goods sold. T3e reason "eing9 t3e computers are t3e part of manufacturing process 6 depreciation of computers (ill "e c3arged to t3e cost of production. Again consider t3e selling department of t3e "usiness is 8ery large. !epreciation of computers used in selling department (ill "e c3arged to selling e/penses. Qou can see t3at computer is a single asset and its depreciation is c3arged in t3ree different 3eads depending upon t3e nature of (or) done "y t3e computer. !epreciation for t3e year is c3arged to0 i. Cost of ?oods Sold ii. Administrati8e #/penses iii. Selling #/penses *n "alance s3eet 'i/ed Assets are s3o(n at Cost less Accumulated !epreciation i.e. (ritten !o(n 2alue ,J!2-. Me"%o*s o. !a&!'&a"ing 1e-re!ia"ion T%ere are se8eral met3ods for calculating depreciation. At t3is stage9 (e (ill discuss only t(o of t3em namely0 Straig3t line met3od or Iriginal cost met3od or 'i/ed installment met3od Reducing "alance met3od or !iminis3ing "alance met3od or (ritten do(n met3od. S"raig%" Line Me"%o* :nder t3is met3od9 a fi/ed amount is calculated "y a formula. T3at fi/ed amount is c3arged e8ery year irrespecti8e of t3e (ritten do(n 8alue of t3e asset. T3e formula for calculating t3e depreciation is gi8en "elo(0 !epreciation O ,cost > Residual 8alue- ; #/pected useful life of t3e asset 7esi*'a& #a&'e is t3e cost of t3e asset after t3e e/piry of its useful life. :nder t3is met3od9 at t3e e/piry of assetGs useful life9 its (ritten do(n 8alue (ill "ecome Kero. Consider t3e follo(ing e/ample0 Cost of t3e Asset 5ife of t3e Asset Annual !epreciation O Rs.1..9... O % years O 2. T of cost or Rs.2.9...
112
'inancial Accounting = * > 7?T1.1 $ri""en *o,n #a&'e /e"%o* Cost of t3e Asset Annual !epreciation Qear 1 !epreciation Qear 1 J!2 Qear 2 !epreciation Qear 2 J!2 I&&'s"ra"ionD Cost of an asset0 Rs. 12.9... Residual 8alue0 Rs. 2.9... #/pected life0 Rs. % years So&'"ion S"raig%" &ine /e"%o* !epreciation O ,12.9... > 2.9...- ; % O Rs. 2.9... Par"i!'&ars !eprecia"le cost !ep. If t3e 1st year !ep. If t3e 2nd year !ep. If t3e 3rd year !ep. If t3e 4t3 year !ep. If t3e %t3 year 7e*'!ing Ba&an!e Me"%o* 1e-re!ia"ion 97s: ,2.9...,2.9...,2.9...,2.9...,2.9...$ri""en 1o,n Va&'e 97s.: 1..9... $.9... &.9... 4.9... 2.9... . O Rs. 1..9... O 2.T O 2. T of 1..9... O 1..9... > 2.9... O 2. T of $.9... O $.9... > 1&9...
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O 2.9... O $.9... O 1&9... O &49...
Calculate depreciation and t3e (ritten do(n 8alue of t3e asset for fi8e years.
:nder t3is met3od9 depreciation is calculated on (ritten do(n 8alue. *n t3e first year9 depreciation is calculated on cost. After(ards (ritten do(n 8alue is calculated "y deducting accumulated depreciation from t3e cost of t3at asset,cost > accumulated depreciation- and depreciation is c3arged on t3at 8alue. *n t3is met3od9 t3e 8alue of asset ne8er "ecomes Kero. Consider t3e follo(ing e/ample0 Cost of an asset Rs. 1..9... #/pected life Rs. % years !epreciation rate 2.T So&'"ion Par"i!'&ars !eprecia"le cost !ep. If t3e 1st year 1..9... / 2.T !ep. If t3e 2nd year $.9... / 2.T !ep. If t3e 3rd year &49... / 2.T !ep. If t3e 4t3 year %192.. / 2.T !ep. If t3e %t3 year 4.9+&. / 2.T 1e-re!ia"ion 97s: A!!'/'&a"e* 1e-re!ia"ion 97s.: 2.9... 3&9... 4$9$.. %+9.4. & 9232 $ri""en 1o,n Va&'e 97s.: 1..9... 2.9... 1&9... 129$.. 1.924. $91+2 $.9... &49... %192.. 4.9+&. 329 &$
113
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Qou see9 at t3e end of fi8e years9 J!2 of t3e asset is Rs. 329 &$9 not Kero. But in case of straig3t line met3od9 t3e J!29 after fi8e years (as Kero. So9 in t3e opinion of some people9 reducing "alance met3od is "etter t3an t3at of straig3t line met3od9 "ut "ot3 met3ods are effecti8e. *t is t3e management t3at 3as to decide9 (3ic3 met3od is "est suited to t3eir "usiness. Ince an asset 3as "een fully depreciated9 no more depreciation s3ould "e recorded on it9 e8en t3oug3 t3e property may "e in good condition and may "e in use. T3e o"Aecti8e of depreciation is to spread t3e cost of an asset o8er t3e periods of its usefulnessL in no case can depreciation "e greater t3an t3e amount paid for t3e asset. J3en a fully depreciated asset is in use "eyond t3e original estimate of useful life9 t3e asset account and t3e accumulated depreciation account s3ould remain in t3e accounting records (it3out furt3er entries until t3e asset is retired.
114
'inancial Accounting = * > 7?T1.1 MET+O1S OF C+A7GING 1EP7ECIATION 9Con"in'e*: I" is a s)s"e/a"i! a&&o!a"ion o. "%e !os" o. a *e-re!iab&e asse" "o e>-ense o#er i"s 'se.'& &i.eA. Gro'-ing o. Fi>e* Asse"s
VU Lesson-18
7aAor groups of 'i/ed Assets0 5and Building 4lant and 7ac3inery 'urniture and 'i/tures Iffice #1uipment 2e3icles Ho depreciation is c3arged for F5andG. *n case of F5eased Asset;5ease Eold 5andG t3e amount paid for it is c3arged o8er t3e life of t3e lease and is called A/or"i2a"ion. 7e!or*ing o. 5o'rna& En"ries 4urc3ase of fi/ed asset0 1ebi"D Cre*i"D Rele8ant asset account Cas39 Ban) or 4aya"le Account
'or recording of depreciation9 follo(ing t(o 3eads of accounts are used0 !epreciation #/pense Account Accumulated !epreciation Account !epreciation e/pense account contains t3e depreciation of t3e current year. Accumulated depreciation contains t3e depreciation of t3e asset from t3e financial year in (3ic3 it (as "oug3t. !epreciation of t3e follo(ing years in (3ic3 asset (as used is added up in t3is account. *n ot3er (ords9 t3is 3ead of account s3o(s t3e cost of usage of t3e asset up to t3e current year. !epreciation account is c3arged to profit 6 loss account under t3e 3eading of Administrati8e #/penses. *n t3e "alance s3eet9 fi/ed assets are presented at (ritten do(n 8alue i.e. J!2 O Actual cost of fi/ed asset > Accumulated !epreciation. Nournal entry for t3e depreciation is gi8en "elo(0 1ebi"D Cre*i"D !epreciation Account Accumulated !epreciation Account
Me"%o*s o. Ca&!'&a"ing 1e-re!ia"ion T%ere are se8eral met3ods of calculating depreciation. At t3is stage9 (e (ill discuss only t(o of t3em namely0 Straig3t line met3od Reducing "alance met3od S"raig%" Line Me"%o* *n t3is met3od9 a fi/ed amount is calculated "y a formula. T3at fi/ed amount is c3arged e8ery year irrespecti8e of t3e (ritten do(n 8alue of t3e asset. T3e formula for calculating t3e depreciation is gi8en "elo(0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
115
'inancial Accounting = * > 7?T1.1 !epreciation O ,cost > Residual 8alue- ; #/pected useful life of t3e asset 7esi*'a& #a&'e is t3e cost of t3e asset after t3e e/piry of its useful life. 7e*'!ing Ba&an!e Me"%o*
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*n t3is met3od9 depreciation is calculated on (ritten do(n 8alue. *n t3e first year9 depreciation is calculated on cost. After(ards (ritten do(n 8alue is calculated "y deducting accumulated depreciation from t3e cost of t3at asset ,cost > accumulated depreciation- and depreciation is c3arged on t3at 8alue. Cos" o. Asse" Pri!e a" ,%i!% "%e asse" ,as ini"ia&&) re!or*e* $ri""en 1o,n Va&'e < Boo6 Va&'e Cos" /in's A!!'/'&a"e* 1e-re!ia"ion. *n re*'!ing ba&an!e /e"%o*9 a formula is used for calculation t3e depreciation rate i.e. Rate O 1 > n R2 ; C
J3ere0 BR2C O Residual 2alue BCC O Cost BnC O 5ife of Asset Ca&!'&a"e "%e ra"e i.D Cost Residual 2alue ,R25ife Rate O 1>3 2....;1..... O 1..9... O 2.9... O 3 years
O H3R =ear 1 Cost !epreciation 1..9... / 42T J!2 ,Closing Balance=ear 3 J!2 ,Ipening Balance%$9... !epreciation %$9... / 42T J!2 ,Closing Balance=ear 4 J!2 ,Ipening Balance!epreciation 339&4. / 42T J!2 ,Closing Balance1is-osa& o. Asse" Cost of Asset 5ife of t3e Asset !epreciation 7et3od Residual 2alue Sale 4rice after 'i8e Qears !epreciation per year O ,1.....=1....- ; % O Rs. 1$9... per year
1..9... ,429...%$9...
,2493&.339&4. 339&4. ,14912$1+9%11
O 1..9... O % Qears O Straig3t 5ine O Rs.1.... O Rs.1%...
116
'inancial Accounting = * > 7?T1.1 Total !epreciation in 'i8e Qears Boo) 2alue after 'i8e Qears 4rofit on !isposal Recording of !isposal !e"it Credit !e"it Credit !e"it Credit O 1$9... / % O +.9... O 1..9...= +.9... O 1.9... O 1%9... > 1.9... O Rs.%... 'i/ed Asset !isposal A;c 'i/ed Asset Cost A;c ,Jit3 t3e cost of assetAccumulated !ep. A;c 'i/ed Asset !isposal A;c ,Jit3 t3e depreciation accumulated to date1..9... 1..9...
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+.9...
+.9...
Cas3 ; Ban) ; Recei8a"le A;c 'i/ed Asset !isposal A;c ,Jit3 t3e price at (3ic3 asset is soldWHote0 one group to appear at a timeX 1is-osa& o. Asse" A!!o'n" Fi>e* Asse" 1is-osa& A!!o'n" !e"it Credit Cost Account 1..9... Acc. !ep. Account Cas3 ; Ban) 4 6 5 Account , Balancing 'igureTotal %... 1.%... Total
1%9...
1%9...
+.9... 1%9...
1.%...
Po&i!) .or 1e-re!ia"ion T3e management of t3e "usiness selects t3e policy for c3arging depreciation. T3ere is no la( "inding on t3e management. T3e management is free to c3oose met3od of depreciation and policy of c3arging depreciation. Hormally t(o policies are commonly used0 !epreciation on t3e "asis of use *n t3e year of purc3ase9 full yearGs depreciation is c3argedL (3ere as9 in t3e year of sale no depreciation is c3arged. Ho( it is up to t3e management to decide9 (3at met3od and (3at policy is "etter and effecti8e for t3eir "usiness. 1is-osa& o. Fi>e* Asse" J3en deprecia"le asset is disposed off at any time during t3e financial year9 an entry s3ould "e made to gi8e effect of t3e disposal. Since9 t3e residual 8alue of asset is only estimatedL it is common for asset to "e sold at price t3at differs from its "oo) 8alue at t3e date of disposal. J3en asset is sold9 any profit or loss is computed "y comparing "oo) 8alue (it3 t3e amount recei8ed from sale. As you )no(9 "oo) 8alue is o"tained "y deducting accumulated depreciation from original cost of t3e asset. A sale price in e/cess of t3e "oo) 8alue produces profitL a sale price "elo( t3e "oo) 8alue produces loss. T3is profit or loss s3ould "e s3o(n in t3e profit 6 loss account. En"ries .or 7e!or*ing 1is-osa& 1ebi" 'i/ed Asset !isposal A;c Cre*i" 'i/ed Asset Cost A;c ,Jit3 t3e cost of asset: @ Copyrig3t 2irtual :ni8ersity of 4a)istan
117
'inancial Accounting = * > 7?T1.1 1ebi" Cre*i" 1ebi" Cre*i" E>a/-&e An asset is purc3ased for Rs. %..9... on Ho8. .19 2..1. !epreciation rate is 1.T p.a. T3e Asset is sold on Apr. 3.9 2..4. 'inancial Qear is Nuly 1 to Nune 3. Accumulated !ep. A;c 'i/ed Asset !isposal A;c ,Jit3 t3e depreciation accumulated to dateCas3 ; Ban) ; Recei8a"le A;c 'i/ed Asset !isposal A;c ,Jit3 t3e price at (3ic3 asset is sold-
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7e;'ire*D Calculate t3e J!2 'or "ot3 policies 1e-re!ia"ion is !%arge* on "%e Basis o. Use =ear 1=11=2..1 2..1=2..2 3.=&=2..2 2..2=2..3 3.=&=2..3 2..3=2..4 3.=4=2..4 Cost !ep. %..9... / 1.T / $ ; 12 J!2 !ep. 4&&9&&& / 1.T J!2 !ep. 42.9... / 1.T / 1. ; 12 J!2 On "%e Basis o. Use 7s. %..9... ,3393334&&9&& ,4&9&& 42.9... ,3%9...3$%9...
F'&& 1e-re!ia"ion in "%e =ear o. P'r!%ase =ear 1=11=2..1 2..1=2..2 3.=&=2..2 2..2=2..3 3.=&=2..3 2..3=2..4 3.=&=2..4 F'&& 1e-. in )ear o. P'r!%ase Cost !ep. %..9... / 1.T J!2 !ep. 4%.9... / 1.T J!2 !ep. .. in t3e year of sale J!2 7s. %..9... ,%.9...4%.9... ,4%9...4.%9... .. 4.%9...
Con"en"s o. Fi>e* Asse"s 7egis"er !ifferent record for eac3 class of assets !ate of purc3ase !etailed particulars of asset 5ocation of asset Record of depreciation @ Copyrig3t 2irtual :ni8ersity of 4a)istan
118
'inancial Accounting = * > 7?T1.1 I&&'s"ra"ion Cost of asset 5ife of t3e asset !epreciation met3od Residual 8alue Sale price after % years
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Rs. 2..9... % years Straig3t line Rs. 2.9... Rs.3.9...
Calculate profit;5oss on t3e sale of t3e assetD So&'"ion Jritten do(n 8alue O 2..9... > 2.9... O 1$.9... !epreciation;year O 1$.9...;% O 3&9... ,Straig3t line met3od4articulars Cost !ep. If t3e 1st year !ep. If t3e 2nd year !ep. If t3e 3rd year !ep. If t3e 4t3 year !ep. If t3e %t3 year !epreciation ,Rs,3&9...,3&9...,3&9...,3&9...,3&9...Jritten !o(n 2alue ,Rs.2..9... 1&49... 12$9... +29... %&9... 2.9...
Boo) 8alue after fi8e years Sale price 4rofit on sale
Rs. 2.9... Rs. 3.9... Rs. 1.9... ,3.9... > 2.9...-
Sa/e i&&'s"ra"ion is so&#e* b) re*'!ing ba&an!e /e"%o* Cost of asset Residual 8alue #stimated useful life Ca&!'&a"ion o. *e-re!ia"ion ra"e UUUUUUUUUUUUU O 1 = %Y2.9...;2..9... O3 T Allocation of depreciation is gi8en "elo(0 !epreciation Rate O 1 >
nYR8;c
Rs. 2..9... Rs. 2.9... % years SSSS
119
'inancial Accounting = * > 7?T1.1 Par"i!'&ars Cost !ep. If t3e 1st year 2..9... / 3 T !ep. If t3e 2nd year 12&9... / 3 T !ep. If t3e 3rd year +93$. / 3 T !ep. If t3e 4t3 year %.9..+ / 3 T !ep. If t3e %t3 year 319%.& / 3 T Boo) 8alue after fi8e years Sale price 4rofit on sale 1e-re!ia"ion 97s: A!!'/'&a"e* 1e-re!ia"ion 97s.: 49... 12.9&2. 14+9++1 1&$94+4 1$.91%1 Rs. 1+9$4+ Rs. 3.9... Rs. 1.91%1 ,3.9... > 1+9$4+$ri""en 1o,n Va&'e 97s.:
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2..9... 49... 4&9&2. 2+93 1 1$9%.3 119&% 12&9... +93$. %.9..+ 319%.& 1+9$4+
120
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Lesson-19 MET+O1S OF C+A7GING 1EP7ECIATION 9Con"in'e*: *f an asset is not completed at t3at time (3en "alance s3eet is prepared9 all costs incurred on t3at asset up to t3e "alance s3eet date are transferred to an account called Ca-i"a& $or6 in Progress A!!o'n". T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed asset. Capital (or) in progress account contains all e/penses incurred on t3e asset until it is con8erted into (or)ing condition. All t3ese e/penses (ill "ecome part of t3e cost of t3at asset. J3en an asset is completed and it is ready to (or)9 all costs in t3e capital (or) in progress account (ill transfer to t3e rele8ant asset account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D I&&'s"ra"ion G 1 A mac3ine is purc3ased for Rs. 4..9.... *ts useful life is estimated to "e fi8e years. *ts residual 8alue is Rs. 2%9.... After four years9 it (as sold for Rs. 4.9.... 'or t3e purpose of J!29 its depreciation rate is 4.T. Qou are re1uired to s3o( calculation of depreciation for four years. Also calculate profit or loss on disposal. So&'"ion Ca&!'&a"ion o. *e-re!ia"ion an* -ro.i" C &oss on "%e basis o. s"raig%" &ine /e"%o*0 !epreciation;year O ,4..9... > 2%9...-;% O %9... ,Straig3t line met3odAs9 mac3ine (as sold after four years "ut its useful life (as estimated for fi8e years9 (3en (e calculate depreciation of t3e asset under straig3t line met3od9 (e (ill di8ide its J!2 o8er fi8e years9 not on four years. 4articulars !epreciation ,RsJritten !o(n 2alue ,Rs.!eprecia"le cost 4..9... !ep. If t3e 1st year , %9...32%9... , %9...2%.9... !ep. If t3e 2nd year , %9...1 %9... !ep. If t3e 3rd year !ep. If t3e 4t3 year , %9...1..9... Boo) 8alue after four years Sale price 4rofit;,loss- on sale Rs. 1..9... Rs. 4.9... Rs. ,&.9...- i=e.,4.9... >1..9...Rele8ant asset account Capital (or) in progress account
121
'inancial Accounting = * > 7?T1.1 Ca&!'&a"ion o. *e-re!ia"ion an* -ro.i" C &oss on "%e basis o. re*'!ing ba&an!e /e"%o*D !epreciation rate O 4.T 4articulars !eprecia"le cost !ep. If t3e 1st year 4..9... / 4.T !ep. If t3e 2nd year 24.9... / 4.T !ep. If t3e 3rd year 1449... / 4.T !ep. If t3e 4t3 year $&94.. / 4.T Boo) 8alue after four years Sale price 4rofit; ,loss- on sale I&&'s"ra"ion G 3 'ollo(ing information of mac3inery account is a8aila"le in Qear 2..40 7ac3ine P 1 is purc3ased on Septem"er 19 2... for Rs. 1..9... 7ac3ine P 2 is purc3ased on Nanuary 319 2..2 for Rs. 2..9... 7ac3ine P 3 is purc3ased on Nuly 19 2..3 for Rs. %.9... 7ac3ine P 1 is disposed on 7arc3 319 2..4 !epreciation is c3arged V 2%T reducing "alance met3od. 'inancial year is closed on Nune 3. e8ery year. !epreciation ,RsAccumulated !epreciation ,Rs.1&.9... 2%&9... 3139&.. 34$91&. Jritten !o(n 2alue ,Rs.4..9... 24.9... 1449... $&94.. %19$4.
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1&.9... +&9... % 9&.. 349%&.
Rs. %19$4. Rs. 4.9... Rs. ,119$4.- i=e. ,4.9... > %19$4.-
S3o( t3e calculation of depreciation on mac3inery for four years using t3e follo(ing policies0 !epreciation is c3arged on t3e "asis of use 'ull depreciation is c3arged in t3e year of purc3ase and no depreciation is c3arged in t3e year of disposal.
122
'inancial Accounting = * > 7?T1.1 So&'"ion 1e-re!ia"ion on "%e basis o. 'se 1a"e P'r!%ase o. /a!%ine 97s.: 1e-re!ia"ion 97s.: A!!'/'&a"e * *e-re!ia"io n 97s.: To"a& A!!'/. 1e-. $ri""en 1o,n Va&'e 97s.: To"a& $ri""en 1o,n Va&'e 97s.: +91&
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.1=.+=2... 2..1=2..2 31=.1=2..2
1..9... 7ac3ine P 1 7ac3ine P 1 1..9... / 2%T 2.9$33 /1.;12O30FK44 7ac3ine P 1 7ac3ine P 1 +91& /2%T 4.9&2% 2..9... O 1LFJL3 7ac3ine P 2 7ac3ine P 2 2..9.../2%T/%;1 2.9$33 2O30FK44 7ac3ine P 1 %+93 %/2%T O 1HFKHH 7ac3ine P 2 1 +91& /2%T OHHFJL3 7ac3ine P 1 449%31/2%T/ +;12O KF4I0 7ac3ine P 2 13493 %/2%T O 44FILH %.9... 7ac3ine P 3 %.9.../2%T O 13FI00 7ac3ine P 1 %%94&+ 7ac3ine P 2 &%9&2% 7ac3ine P 1 &39$1+ 7ac3ine P 2 ++921+ 7ac3ine P 3 129%..
2.9$33 7ac3ine P 1 +91& &194%$ 7ac3ine P 1 %+93 % 7ac3ine P 2 1 +91& 1219.+4 7ac3ine P 1 449%31 7ac3ine P 2 13493 % 1 %9%3$ 7ac3ine P 1 94MF1K1: 9so&*: 7ac3ine P 2 1..9 $1 7ac3ine P 3 3 9%..
23$9%42
2..2=2..3
1 $9+.&
2..3=2..4
13$92$1
.1=. =2..3
123
'inancial Accounting = * > 7?T1.1 F'&& )ear *e-re!ia"ion in "%e )ear o. -'r!%ase an* no *e-re!ia"ion in "%e )ear o. sa&eD 1a"e P'r!%ase o. /a!%ine 97s.: 1e-re!ia"ion 97s.: A!!'/'&a"e* *e-re!ia"ion 97s.: To"a& A!!'/. 1e-. $ri""en 1o,n Va&'e 97s.:
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.1=.+= 2... 2..1= 2..2 31=.1= 2..2 2..2= 2..3
1..9... 7ac3ine P 1 7ac3ine P 1 1..9... / 2%T 2%9... O3IF000 7ac3ine P 1 7ac3ine P 1 %9.../2%T 439 %. O 1KFJI0 2..9... 7ac3ine P 2 7ac3ine P 2 2..9.../2%T %.9... OI0F000 7ac3ine P 1 %&92%./2%T O 1HF0M4 7ac3ine P 2 1%.9.../2%T O4JFI00 7ac3ine P 1 7ac3ine sold 7ac3ine P 2 1129%../2%T O 3KF13I %.9... 7ac3ine P 3 %.9.../2%T O 13FI00 7ac3ine P 1 % 9$13 7ac3ine P 2 $ 9%.. . 7ac3ine P 1 % 9$13 ,sold7ac3ine P 2 11%9&2% 7ac3ine P 3 129%..
2%9... 7ac3ine P 1 %9... +39 %. 7ac3ine P 1 %&92%. 7ac3ine P 2 1%.9... 14%9313 7ac3ine P 1 4291$ 7ac3ine P 2 1129%.. 1$%9+3% 7ac3ine P 1 4291$ ,sold7ac3ine P 2 $493 % 7ac3ine P 3 3 9%..
To"a& $ri""en 1o,n Va&'e 97s.: %9... 2.&92%.
1%49&$
2..3= 2..4
1219$ %
.1=. = 2..3
124
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Lesson-20 1EP7ECIATION ON PU7C+ASE AN1 1ISPOSAL OF FINE1 ASSETS *f an asset is not completed at t3at time (3en "alance s3eet is prepared9 all costs incurred on t3at asset up to t3e "alance s3eet date are transferred to an account called Ca-i"a& $or6 in Progress A!!o'n". T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed asset. Capital (or) in progress account contains all e/penses incurred on t3e asset until it is con8erted into (or)ing condition. All t3ese e/penses (ill "ecome part of t3e cost of t3at asset. J3en any e/pense is incurred or paid9 it is included in t3e Capital Jor) in 4rogress Account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Jor) in 4rogress Account Cas3;Ban);4aya"le Account
J3en an asset is completed and it is ready to (or)9 all costs (ill transfer to t3e rele8ant asset account t3roug3 t3e follo(ing entry0 1ebi"D Cre*i"D Presen"a"ion *t is already mentioned t3at Jor) in 4rogress Account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed asset. i=e. Hame of t3e #ntity Balance S3eet As At. Amount Rs. Rele8ant asset account Capital (or) in progress account
4articulars
Amount Rs. /yK /yK /yK /yK
Asse"s 'i/ed Assets Capital Jor) in 4rogress It3er 5ong Term Assets Current Assets Total Liabi&i"ies Capital 4rofit 5ong Term 5ia"ilities Current 5ia"ilities Total /yK /yK
/yK /yK /yK
125
'inancial Accounting = * > 7?T1.1 Consider t3e sol8ed illustration in t3e pre8ious lecture0 1e-re!ia"ion on "%e basis o. 'se 1a"e P'r!%ase 1e-re!ia"ion o. 97s.: /a!%ine 97s.: .1=.+=2... 2..1=2..2 31=.1=2..2 A!!'/'&a"e* *e-re!ia"ion 97s.: To"a& A!!'/. 1e-. $ri""en 1o,n Va&'e 97s.:
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1..9... 7ac3ine P 1 7ac3ine P 1 1..9... / 2%T 2.9$33 /1.;12O30FK44 7ac3ine P 1 7ac3ine P 1 +91& /2%T 4.9&2% O 1LFJL3 2..9... 7ac3ine P 2 7ac3ine P 2 2..9.../2%T/%; 2.9$33 12O30FK44 7ac3ine P 1 %+93 %/2%T O 1HFKHH 7ac3ine P 2 1 +91& /2%T OHHFJL3 7ac3ine P 1 449%31/2%T/ +;12O KF4I0 7ac3ine P 2 13493 %/2%T O 44FILH %.9... 7ac3ine P 3 %.9.../2%T O 13FI00 7ac3ine P 1 %%94&+ 7ac3ine P 2 &%9&2% 7ac3ine P 1 &39$1+ 7ac3ine P 2 ++921+ 7ac3ine P 3 129%..
2.9$33 7ac3ine P 1 +91& &194%$ 7ac3ine P 1 %+93 % 7ac3ine P 2 1 +91& 1219.+4 7ac3ine P 1 449%31 7ac3ine P 2 13493 % 1 %9%3$ 7ac3ine P 1 ,3&91$1,sold7ac3ine P 2 1..9 $1 7ac3ine P 3 3 9%..
To"a& $ri""en 1o,n Va&'e 97s.: +91& 23$9%42
2..2=2..3
1 $9+.&
2..3=2..4
13$92$1
.1=. =2..3
Presen"a"ion in Ba&an!e S%ee" =ear 2...=2..1 2..1=2..2 2..2=2..3 Cos" o. Ma!%iner) A!!'/'&a"e* $ri""en 1o,n 7s. 1e-re!ia"ion 7s. Va&'e 7s. 1..9... 2.9$33 +91& 3..9... &194%$ 23$9%42 3..9... 1219.+4 1 $9+.&
Jritten do(n 2alue of t3e year 2..3=2..4 Ipening Jritten !o(n 2alueD Add0 Cost of mac3ine purc3ased0 5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 5ess0 !epreciation of ot3er assets0 5ess0 Jritten !o(n 2alue of mac3ine disposed0 Closing Jritten !o(n 2alueD 1 $9+.& %.9... ,$93%.,4&9.+4,3&91$113$92$1
126
'inancial Accounting = * > 7?T1.1 F'&& )ear *e-re!ia"ion in "%e )ear o. -'r!%ase an* no *e-re!ia"ion in "%e )ear o. sa&eD 1a"e P'r!%ase o. /a!%ine 97s.: 1e-re!ia"ion 97s.: A!!'/'&a"e* *e-re!ia"ion 97s.: 7ac3ine P 1 2%9... 7ac3ine P 1 439 %. 7ac3ine P 2 %.9... 7ac3ine P 1 % 9$13 7ac3ine P 2 $ 9%.. 7ac3ine P 1 % 9$13 ,sold7ac3ine P 2 11%9&2% 7ac3ine P 3 129%.. To"a& A!!'/. 1e-. $ri""en 1o,n Va&'e 97s.:
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.1=.+=2... 2..1=2..2 31=.1=2..2 2..2=2..3
2..3=2..4
.1=. =2..3
1..9... 7ac3ine P 1 1..9... / 2%T O3IF000 7ac3ine P 1 %9.../2%T O 1KFJI0 2..9... 7ac3ine P 2 2..9.../2%T OI0F000 7ac3ine P 1 %&92%./2%T O 1HF0M4 7ac3ine P 2 1%.9.../2%T O4JFI00 7ac3ine P 1 . 7ac3ine sold 7ac3ine P 2 1129%../2%T O 3KF13I %.9... 7ac3ine P 3 %.9.../2%T O 13FI00
2%9... 7ac3ine P 1 %9... +39 %. 7ac3ine P 1 %&92%. 7ac3ine P 2 1%.9... 14%9313 7ac3ine P 1 4291$ 7ac3ine P 2 1129%.. 1$%9+3% 7ac3ine P 1 4291$ ,sold7ac3ine P 2 $493 % 7ac3ine P 3 3 9%..
To"a& $ri""en 1o,n Va&'e 97s.: %9... 2.&92%.
1%49&$
1219$ %
Presen"a"ion in "%e Ba&an!e S%ee" =ear 2...=2..1 2..1=2..2 2..2=2..3 Cos" o. Ma!%iner) A!!'/'&a"e* $ri""en 1o,n 7s. 1e-re!ia"ion 7s. Va&'e 7s. 1..9... 2%9... %9... 3..9... +39 %. 2.&92%. 3..9... 14%9313 1%49&$
Jritten do(n 2alue of t3e year 2..3=2..4 Ipening Jritten !o(n 2alueD Add0 Cost of mac3ine purc3ased0 5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 5ess0 !epreciation of ot3er assets0 5ess0 Jritten !o(n 2alue of mac3ine disposed0 Closing Jritten !o(n 2alueD Rs. 1%49&$ Rs. %.9... . ,4.9&2%,4291$ Rs. 1219$ %
127
'inancial Accounting = * > 7?T1.1 I&&'s"ra"ion G 3 'ollo(ing information of mac3inery account is a8aila"le in Qear 2..40 7ac3ine P 1 is purc3ased on August 19 2... for Rs. %.9... 7ac3ine P 2 is purc3ased on April 19 2..2 for Rs. 1..9... 7ac3ine P 3 is purc3ased on 7arc3 19 2..4 for Rs. 1%.9... 7ac3ine P 1 is disposed on 7ay 319 2..4 !epreciation is c3arged V 2.T reducing "alance met3od. 'inancial year is closed on Nune 3. e8ery year.
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S3o( t3e calculation of depreciation on mac3inery for four years using t3e follo(ing policies0 !epreciation is c3arged on t3e "asis of use 'ull depreciation is c3arged in t3e year of purc3ase and no depreciation is c3arged in t3e year of disposal9 So&'"ion 1e-re!ia"ion on "%e basis o. 'se 1a"e P'r!%ase o. /a!%ine 97s.: 1e-re!ia"ion 97s.: A!!'/'&a"e* *e-re!ia"ion 97s.: To"a& A!!'/. 1e-. +91& $ri""en 1o,n Va&'e 97s.: 7ac3ine P 1 +91& To"a& $ri""en 1o,n Va&'e 97s.: 4.9$33 12 9&&&
.1=.$=2... 2..1=2..2 .1=.4=2..2
%.9... 7ac3ine P 1 7ac3ine P 1 %.9... / 2.T +91& /11;12OLF1MJ 7ac3ine P 1 7ac3ine P 1 4.9$33/2.T 1 9334 O KF1MJ 7ac3ine P 2 1..9... 7ac3ine P 2 %9... 1..9.../2.T/3; 12OIF000 7ac3ine P 1 329&&&/2.T O MFI44 7ac3ine P 2 +%9.../2.T O1LF000 7ac3ine P 1 2&9133/2.T/ 11;12O HFJL1 7ac3ine P 2 &9.../2.T O 1IF300 1%.9... 7ac3ine P 3 1%.9.../2.T/ 4;12O 10F000 7ac3ine P 1 239$& 7ac3ine P 2 249... 7ac3ine P 1 2$9&%$ 7ac3ine P 2 3+92.. 7ac3ine P 3 1.9...
229334 7ac3ine P 1 329&&& 7ac3ine P 2 +%9... 4 9$& 7ac3ine P 1 2&9133 7ac3ine P 2 &9... 9$%$ 7ac3ine P 1 ,219342,sold7ac3ine P 2 &.9$.. 7ac3ine P 3 14.9...
2..2=2..3
1.29133
2..3=2..4
2..9$..
.1=.3=2..4
128
'inancial Accounting = * > 7?T1.1 Presen"a"ion in "%e Ba&an!e S%ee" =ear 2...=2..1 2..1=2..2 2..2=2..3 Cos" o. Ma!%iner) 7s. %.9... 1%.9... 1%.9... A!!'/'&a"e* 1e-re!ia"ion 7s. +91& 229334 4 9$& $ri""en 1o,n Va&'e 7s. 4.9$33 12 9&&& 1.29133
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Jritten !o(n 2alue of t3e year 2..3=2..4 Ipening Jritten !o(n 2alueD Add0 Cost of mac3ine purc3ased0 5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 5ess0 !epreciation of ot3er assets0 5ess0 Jritten !o(n 2alue of mac3ine disposed0 Closing Jritten !o(n 2alueD Rs. 1.29133 Rs. 1%.9... ,49 +1,2%92..,219342Rs. 2..9$..
F'&& )ear *e-re!ia"ion in "%e )ear o. -'r!%ase an* no *e-re!ia"ion in "%e )ear o. sa&eD 1a"e P'r!%ase o. /a!%ine 97s.: 1e-re!ia"ion 97s.: A!!'/'&a"e* *e-re!ia"ion 97s.: 7ac3ine P 1 1.9... 7ac3ine P 1 1$9... 7ac3ine P 2 2.9... 7ac3ine P 1 2494.. 7ac3ine P 2 3&9... 7ac3ine P 1 2494.. ,sold7ac3ine P 2 4$9$.. 7ac3ine P 3 3.9... To"a& A!!'/. 1e-. $ri""en 1o,n Va&'e 97s.: To"a& $ri""en 1o,n Va&'e 97s.: 4.9... 1129...
.1=.$=2...
%.9... 7ac3ine P 1 %.9... / 2.T O10F000 2..1=2..2 7ac3ine P 1 4.9.../2.T O KF000 .1=.4=2..2 1..9... 7ac3ine P 2 1..9.../2.T O30F000 2..2=2..3 7ac3ine P 1 329.../2.T O MFH00 7ac3ine P 2 $.9.../2.T O1MF000 2..3=2..4 7ac3ine P 1 . 7ac3ine sold 7ac3ine P 2 &49.../2.T O 13FK00 .1=.3=2..4 1%.9... 7ac3ine P 3 1%.9.../2.T O 40F000 Presen"a"ion in "%e Ba&an!e S%ee" =ear 2...=2..1 2..1=2..2 2..2=2..3
1.9... 7ac3ine P 1 4.9... 3$9... 7ac3ine P 1 329... 7ac3ine P 2 $.9... &.94.. 7ac3ine P 1 2%9&.. 7ac3ine P 2 &49... 1.392.. 7ac3ine P 1 ,2%9&..,sold7ac3ine P 2 %192.. 7ac3ine P 3 12.9...
$+9&..
1 192..
Cos" o. Ma!%iner) 7s. %.9... 1%.9... 1%.9...
A!!'/'&a"e* 1e-re!ia"ion 7s. 1.9... 3$9... &.94..
$ri""en 1o,n Va&'e 7s. 4.9... 1129... $+9&..
129
'inancial Accounting = * > 7?T1.1 Jritten !o(n 2alue of t3e year 2..3=2..4 Ipening Jritten !o(n 2alueD Add0 Cost of mac3ine purc3ased0 5ess0 !epreciation of 7ac3ine P 1 in 2..3=2..40 5ess0 !epreciation of ot3er assets0 5ess0 Jritten !o(n 2alue of mac3ine disposed0 Closing Jritten !o(n 2alueD 7e#a&'a"ion o. Fi>e* Asse"s Rs. $+9&.. Rs. 1%.9... . ,429$..,2%9&..Rs. 1 192..
VU
'i/ed assets are purc3ased to "e used for longer period. *n t3e su"se1uent years9 t3e 8alue of asset could "e 3ig3er or lo(er t3an its present "oo) 8alue due to inflationary condition of t3e economy. Assets are 8alued at Eistorical Cost in t3e "oo)s of accounts. Eistorical Cost is t3e original cost of t3e asset at (3ic3 it (as purc3ased plus additional costs incurred on t3e asset to "ring it in (or)ing condition. Sometimes9 t3e management of t3e "usiness9 if it t3in)s fit9 re8alues t3e asset to present it on current mar)et 8alue. Ince t3e asset is re8alued to its mar)et 8alue9 t3en its 8alue 3as to "e constantly monitored to reflect t3e c3anges in t3e mar)et 8alue. *f an asset is re8alued at 3ig3er cost t3an its original cost9 t3e e/cess amount (ill "e treated as profit on re8aluation of fi/ed assets and it is credited to Re8aluation Reser8e Account. In t3e ot3er 3and9 if an asset is re8alued at lo(er cost t3an its original cost9 t3e "alance amount (ill "e treated as loss on re8aluation of fi/ed assets and it is s3o(n in t3e profit 6 loss account of t3at year in (3ic3 asset (as re8alued.
130
'inancial Accounting = * > 7?T1.1 7EVALUATION OF FINE1 ASSETS
VU Lesson-21
'i/ed assets are purc3ased to "e used for longer period. *n t3e su"se1uent years9 t3e 8alue of asset could "e 3ig3er or lo(er t3an its present "oo) 8alue due to inflationary condition of t3e economy. Assets are 8alued at Eistorical Cost in t3e "oo)s of accounts. +is"ori!a& Cos" Eistorical cost is t3e original cost of t3e asset at (3ic3 it (as purc3ased plus additional costs incurred on t3e asset to "ring it in (or)ing condition. Sometimes9 t3e management of t3e "usiness9 if it t3in)s fit9 re8alues t3e asset to present it at current mar)et 8alue. Ince t3e asset is re8alued to its mar)et 8alue9 t3en its 8alue 3as to "e constantly monitored to reflect t3e c3anges in t3e mar)et 8alue. 7e!or*ing "%e e..e!"s o. 7e#a&'a"ion o. an Asse"s *f an asset is re8alued at 3ig3er cost t3an its original cost9 t3e e/cess amount (ill "e treated as profit on re8aluation of fi/ed assets and it is credited to Re8aluation Reser8e Account. In t3e ot3er 3and9 if an asset is re8alued at lo(er cost t3an its original 8alue9 t3e "alance amount (ill "e treated as loss on re8aluation of fi/ed assets and it is s3o(n in t3e profit 6 loss account of t3at year in (3ic3 asset (as re8alued. Fair Va&'e *t is t3e 8alue9 at (3ic3 an asset (ould "ring to t3e management9 (3en sold to a )no(ledgea"le party in a fair deal. 7'&es .or 7e#a&'a"ion Re8aluation 3as to "e carried out at regular inter8als T3e c3ange in t3e 8alue s3ould "e permanent J3ole class of asset 3as to "e re8alued I&&'s"ra"ion An asset is purc3ased at t3e cost of Rs. 3..9.... *t (as decided "y t3e management t3at depreciation (ould "e c3arged V 2. T on t3e "asis of straig3t line met3od. At t3e end of t3ird year9 follo(ing information is gi8en0 Accumulated !epreciation Jritten !o(n 2alue Rs. 1$.9... Rs. 12.9...
T3e management 3as decided to re8alue it to t3e current mar)et 8alue. T3e current mar)et 8alue of t3e asset is 1$.9.... Qou are re1uired to ma)e t3e necessary adAustments. So&'"ion T3ere are t(o options for ma)ing adAustments for t3e a"o8e mentioned c3anges0 1. C3arge t3e accumulated depreciation to t3e cost of asset and increase t3e 8alue of asset (it3 t3e difference of current mar)et 8alue and J!2. 2. Calculate t3e proportion of increase and increase t3e cost of asset and accumulated depreciation (it3 t3at proportion.
131
'inancial Accounting = * > 7?T1.1 O-"ion G 1 T3e accumulated depreciation is c3arged off against t3e cost of asset (it3 t3e 3elp of follo(ing entry0
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1ebi"D Accumulated !epreciation 1$.9... Cre*i"D Cost of asset A;c 1$.9... Cost of asset is increased to current mar)et 8alue9 i=e.9 Rs.1$.9.... T3e difference "et(een current mar)et 8alue and J!2 is Rs. &.9... ,1$.9... > 12.9...-. T3e credit is gi8en to Re8aluation Reser8e Account. 1ebi"D Cre*i"D O-"ion G 3 Bot3 Cost and Accumulated !epreciation are increased in a proportionate manner so t3at t3e resulting Boo) 2alue is e1ual to t3e re8alued amount. !esired increase in J!20 1$.9... > 12.9... O &.9... Rs.&.9... is %.T of 12.9.... T3erefore desired increase in Cost and Accumulated !epreciation is %.T. Cost is increased "y %.T "y follo(ing entry0 1ebi"D Cre*i"D Cost of asset A;c Re8aluation Reser8e A;c 1%.9... 1%.9... Cost of asset A;c Re8aluation Reser8e A;c &.9... &.9...
Accumulated depreciation is increased "y %.T (it3 t3e 3elp of t3e follo(ing entry0 1ebi"D Cre*i"D Ca-i"a& an* 7e#en'e E>-enses Ca-i"a& E>-enses are t3ose e/penses for (3ic3 "enefit is enAoyed for more t3an one accounting period. 'or e/ample9 t3e "usiness 3as "oug3t a car. Ho(9 car (ill "e used for many years. So9 it is a capital e/pense. Capital #/penditure generally adds 'i/ed Asset :nits or increases economic life9 capacity or efficiency of e/isting fi/ed assets. T3e term used for Capital e/penditures is FCapitaliKedG. Capital #/penditures are incurred in t(o (ays0 J3en an asset is ac1uired9 and J3en an impro8ement is made in an e/isting asset. All t3e e/penditure incurred up to t3e point of "ringing t3e asset to its intended use is capitaliKed as t3e initial cost of asset. An e/penditure t3at impro8es t3e performance of an asset from its originally assessed performance is termed as capital e/penditure. Eo(e8er9 t3e e/penditure incurred on t3e maintenance of an asset is treated as Re8enue #/pense. 7e#en'e E>-enses are t3ose e/penses for (3ic39 t3e "enefit is enAoyed (it3in one accounting period. 'or e/ample9 t3e "usiness 3as purc3ased stationery for office use. Ho(9 t3e stationery is used (it3in one year in t3e office. So9 t3is (ill "e a re8enue e/pense. T3e term used for Re8enue #/penditures is FC3arged IffG. Re8enue #/penses are t3ose e/penses t3at are0 *ncurred in day to day running of t3e "usiness. *ncurred to maintain fi/ed assets in t3eir original ; usea"le condition. @ Copyrig3t 2irtual :ni8ersity of 4a)istan Re8aluation Reser8e A;c +.9... Accumulated !epreciation A;c +.9...
132
'inancial Accounting = * > 7?T1.1 All Capital #/penses are grouped in "alance s3eet 6 all Re8enue e/penses are grouped in 4rofit 6 5oss account. 1is"in!"ion be",een Ca-i"a& E>-en*i"'re C 7e#en'e E>-en*i"'re Ca-i"a& E>-en*i"'re *ts effect is long term9 i=e. *t is not e/3austed (it3in t3e current accounting period. *ts "enefit is recei8ed for a num"er of years in future. #/penditure is said to "e capital e/penditure (3en an asset is ac1uired or performance of an e/isting asset is increased. *t does not occur again and again. *t is non= recurring and irregular. T3is e/penditure impro8es t3e financial position of t3e "usiness. A portion of t3is e/penditure ,!epreciation on asset- is s3o(n in t3e profit 6 loss account and t3e "alance is s3o(n in t3e "alance s3eet on asset side. *t appears in t3e "alance s3eet until its "enefit is fully e/3austed. *t does not reduce t3e profit of t3e concern. 1e..ere* E>-en*i"'re
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7e#en'e E>-en*i"'re *ts effect is s3ort term9 i=e. T3e "enefit is recei8ed (it3in one accounting period. Heit3er an asset is ac1uired nor is t3e performance of any asset increased. *t is recurring and regular and it occurs repeatedly. T3is e/penditure 3elps to maintain t3e "usiness. T3e (3ole amount of t3is e/penditure is s3o(n in t3e profit 6 loss account or income statement. *t does not appear in t3e "alance s3eet. *t reduces t3e profit of t3e concern.
T3e re8enue e/penditure t3at pro8ides "enefit for more t3an one year is called deferred e/penditure. *t is initially s3o(n in "alance s3eet. Su"se1uently9 it is c3arged to profit and loss account o8er t3e period in (3ic3 "enefit is deri8ed from it. Pre-ai* E>-enses are amounts t3at are paid in ad8ance to a 8ender or creditor for goods and ser8ices. Typically9 insurance premiums are paid in ad8ance of t3e co8erage contained in t3e policy. 4repaid #/penses is a Current Asset for our "usiness. T3is is "ecause (e 3a8e paid for somet3ing and someone o(es us t3e ser8ice or t3e goods for (3ic3 (e prepaid. T%e Genera& 7'&e T3e general rule for distinguis3ing "et(een capital and re8enue e/penditure is as follo(s0 T3e e/pense (3ose "enefit lasts for a period longer t3an an accounting period is called capital e/penditure9 and T3e e/pense (3ose "enefit is o"tained (it3in an accounting period is termed as a re8enue e/pense. E>!e-"ions !epending upon t3e siKe of e/penditure and policy of t3e organiKation9 follo(ing e/penditures can "e BC3arged to 4rofit and 5ossC instead of BCapitaliKingC. Lega& C%arges > are as per rule c3arged to 4 6 5 "ut (3en t3ese are incurred to ac1uire an asset t3ese s3ould "e capitaliKed (it3 t3e asset. 7e-airs > are also c3arged to 465 "ut (3en it is of suc3 nature t3at it en3ances t3e performance of an asset from its original performance t3an it s3ould "e capitaliKed. $ages > are normally re8enue e/pense "ut (3en t3ese are paid to men employed to create an asset t3ese s3ould "e capitaliKed as t3e cost of asset.
133
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Freig%" an* Carriage > normally a re8enue e/pense9 "ut (3en paid to "ring an asset to its intended use t3en it is treated as capital. In"eres" on Loan > is normally re8enue e/penditure "ut (3en t3e loan is ta)en to purc3ase an asset its interest is treated as Capital and is added to cost of t3e asset. Ca-i"a& an* 7e#en'e 7e!ei-"s Ca-i"a& 7e!ei-"s Receipts (3ic3 are non=recurring and (3ose "enefits are enAoyed o8er a long period are called FCapital ReceiptsG. 'or instance9 Capital in8ested9 5oan from "an)9 Sale proceed of fi/ed assets etc. Capital receipts are s3o(n on t3e lia"ility side of t3e "alance s3eet. 7e#en'e 7e!ei-"s Receipts (3ic3 are recurring "y nature and (3ic3 are a8aila"le for meeting all day to day e/penses of a "usiness concern are )no(n as FRe8enue ReceiptsG. 'or e/ample9 sale proceeds of goods9 interest recei8ed9 rent recei8ed etc.
134
'inancial Accounting = * > 7?T1.1 BAN8 7ECONCILIATION STATEMENTS After reading t3is lecture9 you (ill "e a"le to understand t3at0 J3at are Ban)ing transactions9 and Eo( a Ban) reconciliation statement is madeD Ban6 Boo6 an* Ban6 S"a"e/en"
VU Lesson-22
Ban) statement is t3e detail of transactions in oneGs account pro8ided "y t3e "an). Je s3ould understand one t3ing t3at our money lying in t3e "an) is an asset for us. But for "an)9 it is a lia"ility as t3e "an) 3as a responsi"ility to return t3at money to us. T3erefore9 (3en (e see a "an) statement9 it loo)s li)e a mirror image of our "an) "oo). T3at is9 (3en (e ,customer- in8est money into "an) account9 our asset ,Ban) account- increases. So (e !e"it our account. J3ereas "an)Gs lia"ility increases. As t3e customer account is t3e lia"ility for t3e "an) "ecause it 3as to pay t3e in8ested money "ac) to t3e customer. So our account is credited in its "oo)s. Standard format of Ban) "oo) is gi8en 3ereunder0 N=Q Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e -!ate 2r. C31. Harration;4articulars 5edger Receipt 4ayment Balance 2.== P Ho. Code Amount Amount !r;,CrNul .1 Nul .2 Nul .3 Nul .3 1234% 1234& Ipening Balance 4aid to 7r. :mer Cas3 !eposit in Ban) 4aid to 7r. Ali %9... 129... %.9... 1.9... %.9... 4.9... 4%9... 339...
Standard format of Ban) Statement is gi8en 3ereunder0 ABC Ban6 !ate 2.== Nul .1 Nul .2 Nul .3 Nul .3 Ban6 S"a"e/en" A!!o'n" No. >>>>> Harration ; Jit3dra(als !eposits Amount 4articulars Amount %.9... 1.9... %9... 129...
Balance !r;,Cr,%.9...,4.9...,4%9...,339...-
Ipening Balance as on Nul .1 C31 P 1234% Cas3 paid in C31 P 1234&
At times9 "an)s s3o( t3e amount in "alance column against our ?eneral Rule ,a credit "alance is s3o(n in "rac)ets-9 Aust to facilitate t3e customers. T3e rule t3en "ecomes0 1. A "alance fa8ora"le to t3e customer is s3o(n (it3out "rac)ets 2. A "alance fa8ora"le to "an) is s3o(n (it3in "rac)ets
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'inancial Accounting = * > 7?T1.1 Iur "an) statement of pre8ious e/ample (ill loo) li)e as follo(s. ABC Ban6 !ate 2.== Nul .1 Nul .2 Nul .3 Nul .3 Ban6 S"a"e/en" A!!o'n" No. >>>>> Jit3dra(als Amount 1.9... %9... 129... !eposits Amount %.9... Balance %.9... 4.9... 4%9... 339...
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Harration ; 4articulars Ipening Balance as on Nul .1 C31 P 1234% Cas3 paid in C31 P 1234&
At times9 "an)s record transactions in our account (it3out our )no(ledge. e.g. "an) c3arges9 profit9 ta/. Sometimes9 someone deposits money directly in our account t3at escapes recording in our "oo)s. T3is pro"lem is sol8ed "y tracing figures from "an) "oo) to "an) statement on periodic "asis in order to update our record. E>a/-&e G 1 T3e Ban) "oo) of Ali Traders s3o(s t3e follo(ing picture for t3e mont3 of Nuly9 2..20 Ali Traders !ate 2r. C31. 2.== P Ho. Nul .1 Nul .% Nul 1. Nul 1% Nul 2. ...1 ...2 ...3 Ban) Boo) ,Ban) Account Hum"erAccount Code == Harration ;4articulars 5edger Receipt 4ayment Balance Code Amount Amount !r;,CrIpening Balance 4aid to RQS Cas3 !eposit in Ban) 4aid to ABC 4aid to creditors 1%.9... 2.9... %9... 2%9... %.9... 1%.9... 13.9... 13%9... 11.9... &.9...
Balance as per "an) "oo) on Nuly 319 is Rs. &.9.... T3e Ban) Statement of Ali Traders s3o(s t3e follo(ing record for t3e mont3 of Nuly9 2..20 ABC Ban) Ban) Statement Account Ho. ///// 'or t3e period ofUUUUUUUUUUUUUUU Harration ; Jit3dra(als !eposits 4articulars Amount Amount Ipening Balance C31 P ...1 Cas3 !eposit in Ban) C31 P ...1 C31 P ...1 Ban) c3arges 4rofit 2%9... %.9... %.. .. 1%.9... 2.9... %9...
!ate 2.== Nul .1 Nul .% Nul 1. Nul 1% Nul 2. Nul 31 Nul 31
Balance 1%.9... 13.9... 13%9... 11.9... &.9... %+9%.. &.92..
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'inancial Accounting = * > 7?T1.1 Balance as per "an) statement on Nul 319 is Rs. &.92..
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J3en (e trace t3e figures9 (e come to )no( t3at t3ere are t(o transactions t3at 3a8e not "een recorded in our "oo)s. i=e. Transactions of FBan) c3argesG and F4rofitG After recording t3ese t(o transactions9 t3e "an) "oo) of Ali Traders loo)s li)e as follo(s0 A&i Tra*ers !ate 2r. 2.== P Nul .1 Nul .% Nul 1. Nul 1% Nul 2. Nul 31 Nul 31 ...2 ...3 Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e -C31. Harration ; 5edger Receipt 4ayment Balance Ho. 4articulars Code Amount Amount !r;,Cr...1 Ipening Balance 4aid to RQS Cas3 !eposit in Ban) 4aid to ABC 4aid to creditors Ban) c3arges 4rofit 1%.9... 2.9... %9... 2%9... %.9... %.. .. 1%.9... 13.9... 13%9... 11.9... &.9... %+9%.. &.92..
After recording t3e missing transactions9 Balance as per "an) "oo) on Nul 319 is Rs. &.92..9 (3ic3 is t3e same as "an) statement "alance. *n t3e a"o8e e/ample9 dates of payments in "an) "oo) and "an) statement are ta)en to "e t3e same. *n actual life9 t3is is not al(ays t3e case. Je (rite out c3e1ue to our creditor today9 3e (ill deposit in 3is "an) tomorro(. T3e c3e1ue (ill "e presented in our "an) "y t3e creditor on t3e day after tomorro(. Je 3a8e recorded t3e transaction today "ut t3e payment in our statement (ill appear at least 2 days later. T3is period can e8en "e greater. Similarly9 (e recei8e a c3e1ue from our de"tor today and record it in our "oo)s. T3e c3e1ue (ill "e deposited in "an) tomorro( and it (ill ta)e a fe( days to clear. Again9 t3ere (ill "e a difference in date of our receipt and t3at of our "an). Ban6 7e!on!i&ia"ion S"a"e/en" *n t3e a"o8e e/ample9 it is assumed t3at a payment of Rs. 1.9... is made on 31 Nul9 and it appears in t3e "an) on Aug9 .2. J3en figures (ill "e traced from "an) "oo) to "an) statement9 t3is amount (ill remain un=tic)ed in t3e "an) "oo) in t3e mont3 of Nuly. Ho recording (ill "e made in t3e "oo)s as t3ey are already correct. :nder suc3 circumstances9 a statement called Ban6 7e!on!i&ia"ion S"a"e/en" is made. T3is reconciles t3ose differences in Ban) Boo) and Ban) Statement t3at cannot "e adAusted "y an accounting entry at t3at date on (3ic3 "alances are "eing reconciled. Un-resen"e* C%e;'es T3e e8ents discussed in a"o8e e/ample9 (3ere a c3e1ue is issued "ut it 3as not "een presented in t3e account9 suc3 )ind of c3e1ues are called Un--resen"e* C%e;'es. J3en t3is c3e1ue is recorded9 t3e "an) "oo) is credited (it3 Rs. 1.9.... T3erefore9 t3e "alance as per Ban) Boo) is Rs. %.92.. ,&.92.. = 1.9...-9 (3ereas9 t3e "an) is still s3o(ing a "alance of Rs. &.92... So9 if (e (ant to reconcile t3ese "alances9 (e (ill remo8e t3e effect of t3is entry ,not in actual "oo)s "ut in t3e statement only-. So t3e Statement Jould0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 Balance As 4er Ban) Boo) :n=presented C3e1ues Balance as 4er Ban) Statement !r. !r. Cr. %.92.. 1.9... &.92..
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Hote t3e follo(ing t3ings in t3e a"o8e statement0 Je 3a8e started (it3 t3e "alance of Ban) Boo) To re8erse t3e effect of Cr. entry in "an) "oo)9 (e 3a8e (ritten !r. (it3 t3e figure. Since "ot3 figures ,%.92.. and 1.9...- are !r. t3erefore9 t3ey are added. Je also )no( t3at "alances in "an) "oo) and "an) statement are e/actly opposite to eac3 ot3er9 t3erefore9 Cr. 3as "een (ritten (it3 t3e resulting figure ,&.92..Un-Cre*i"e* C%e;'es T3e ot3er e8ent discussed (as of a receipt of a c3e1ue t3at 3as not "een cleared in t3e "an) account as yet. To record a receipt9 "an) "oo) s3ould 3a8e "een de"ited. T3erefore9 to re8erse t3e effect of Credit (ill "e (ritten (it3 t3e figure in t3e statement. Assume t3at t3e a"o8e Rs. 1.9... (as a receipt rat3er t3an a payment. T3en9 t3e "alance in t3e "an) "oo) (ould "e Rs. .92.. ,&.92.. M 1.9...-. T3e "an) reconciliation (ill "e as follo(s0 Balance As 4er Ban) Boo) :n=credited C3e1ues Balance As 4er Ban) Statement E>a/-&e G 3 T3e Ban) "oo) of :sman Traders gi8es t3e follo(ing record for t3e mont3 of !ecem"er9 2..20 Us/an Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e -!ate 2r. C31. Harration ; 5edger Receipt 4ayment Balance 2.== P Ho. 4articulars Code Amount Amount !r;,Cr!ec .1 !ec . !ec .$ !ec 1% !ec 22 !ec 2$ !ec 31 !ec 31 !ec 31 % ... % ..1 % ..2 Ipening Balance Recei8ed form An(er 4aid to Tari1 4aid to S3a""ir Recei8ed from Na8ed 4aid to Salim Recei8ed from Na8ed Recei8ed form Ras3id 1%.9... 1.9... 1+9%.. 49... +9 .. +91.. 2.9... 1 9$.. 1%.9... 1&.9... 14.9%.. 13&9%.. 14&92.. 13 91.. 1% 91.. 1 49+.. !r. Cr. Cr. .92.. ,1.9...&.92..
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'inancial Accounting = * > 7?T1.1 T3e Ban) Statement of :sman Traders s3o(s t3e follo(ing picture0 ABC Ban) Ban) Statement Account Ho. ///// !ate Harration ; !eposits Balance 2.== 4articulars Jit3dra(als Amount Amount !ec 1 Balance B;f 1%.9... !ec deposits 1.9... 1&.9... !ec 11 % ... 1+9%.. 14.9%.. !ec 2. % ..1 49... 13&9%.. !ec 22 deposits +9 .. 14&92.. !ec 31 C3arges 292.. 1449... Qou are re1uired to reconcile Ban) "oo) (it3 Ban) Statement and prepare Ban) Reconciliation Statement.
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So&'"ion J3ile tracing figures from "an) "oo) to "an) reconciliation statement9 it is noticed t3at "an) c3arges deducted "y "an) are not "oo)ed in "an) "oo). So9 "an) c3arges (ill "e "oo)ed t3roug3 t3e follo(ing adAusting entry0 1ebi"D Ban) c3arges 292.. Cre*i"D Ban) A;c 292.. T3e corrected "an) "oo) is 3ereunder0 Us/an Tra*ers Ban6 Boo6 9Ban6 A!!o'n" N'/ber: A!!o'n" Co*e -!ate 2r. C31. Harration ; 5edger Receipt 4ayment Balance 2.== P Ho. 4articulars Code Amount Amount !r;,Cr!ec .1 Ipening Balance 1%.9... 1%.9... !ec . Recei8ed form An(er 1.9... 1&.9... !ec .$ % ... 4aid to Tari1 1+9%.. 14.9%.. !ec 1% % ..1 4aid to S3a""ir 49... 13&9%.. !ec 22 Recei8ed from Na8ed +9 .. 14&92.. !ec 2$ % ..2 4aid to Salim +91.. 13 91.. !ec 31 Recei8ed from Na8ed 2.9... 1% 91.. !ec 31 Recei8ed form Ras3id 1 9$.. 1 49+.. !ec 31 Ban) c3arges 292.. 1 29 .. *t (as also noticed t3at a c3e1ues of Rs. +91.. gi8en to Salim on !ecem"er 2$ (as not paid "y "an) as yet. So9 it is an un=presented c3e1ue. C3e1ues recei8ed from Na8ed and Ras3id (ort3 of Rs. 2.9... and 1 9$.. respecti8ely are not credited "y "an) till !ecem"er 319 2..2. T3ese are un=credited c3e1ues of :sman Traders. Ban) Reconciliation Statement of :sman Traders s3o(s t3e follo(ing picture0 Us/an Tra*ers Ban6 7e!on!i&ia"ion S"a"e/en" As a" 1e!. 41F 3003 ,Rs.Balance as per "an) "oo) !r.1 29 .. :n=presented c3e1ues !r. +91.. :n=credit c3e1ues ,2.9...,1 9$..Cr.,3 9$..Balance as per "an) statement Cr. 1449... @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 BAN8 7ECONCILIATION STATEMENTS 9Con"*.:
VU Lesson-23
*n t3e last lecture9 (e studied (3at is Ban) Statement and 3o( does it differ from our Ban) Boo). Je told you t3at money lying in our "an) account is our asset. T3erefore9 it usually 3as a !#B*T BA5AHC#. Also9 (3en (e deposit cas3 in our Ban)9 (e !#B*T t3e Ban) Boo) ; Ban) Account. J3ereas9 for Ban)9 t3e money lying in our Ban) Account is a lia"ility t3at "an) 3as to return to us. T3erefore9 in Ban) Statement (3ic3 is a ledger account for "an) normally 3as a CR#!*T BA5AHC#. J3en (e deposit cas3 in our "an) account t3e lia"ility of t3e "an) to pay us increases. T3erefore9 our account in t3e Boo)s of Ban) is CR#!*T#!. Ban) Statement is9 t3erefore9 a 7*RRIR *7A?# of our "an) "oo). T3en9 (e studied a"out t3e reasons t3at create differences "et(een our "an) "oo) and "an) statement. Suc3 as0 Ban) C3arges de"ited to our "an) account "y t3e "an) (it3out our )no(ledge 4rofit credited to our "an) account 4ayments made on our "e3alf "y t3e "an)9 t3roug3 our standing instructions9 t3at (e did not record in our "oo)s 7oney paid in our account "y our customers9 dealers9 agents9 etc. (it3out our )no(ledge :n=presented c3e1ues :n=cleared c3e1ues T3e last t(o reasons arise "ecause (e record payments or receipts in our "oo)s (3en (e recei8e ; issue a c3e1ue. But t3e "an) records t3e transaction in our account at t3e time of actual receipts or payments. T3ese differences are included in t3e "an) reconciliation statement. T3e first four items are eit3er adAusted in t3e "an) "oo) or s3o(n in t3e reconciliation statement9 depending upon (3et3er (e 3a8e closed our "oo)s for t3e period or not. *f (e 3a8e closed our "oo)s of accounts9 t3ese differences (ill "e presented in t3e "an) reconciliation statement. *f our "oo)s of accounts are not closed as yet9 (e (ill adAust our "an) "oo) and gi8e effect of all t3ese adAustments in t3e "an) "oo). T3e main idea "e3ind "an) reconciliation is t3at (e adAust our "an) "oo) for t3e transactions9 t3at remain untraced9 eit3er t3roug3 a 2ouc3er ,c3arges9 profit9 standing instruction- or t3roug3 a Reconciliation Statement ,un=presented9 un=credited c3e1ues-. E>a/-&e G 1 'rom t3e follo(ing particulars9 prepare Ban) reconciliation statement of 7r. Ha8eed as on Nune 3.9 2..2. Balance as per "an) "oo) !r. C3e1ues deposited "ut not yet collected "y "an) C3e1ues issued "ut not yet paid "y "an) !i8idend credited "y "an) on Nune 3.9 "ut t3e intimation (as recei8ed later *nterest credited "y "an) Ban) c3arges de"ited "y "an) 329... 2.92.. 139... 29... 2%. %.
*t is assumed t3at "oo)s of accounts are not closed yet.
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So&'"ion As "oo)s of accounts are not closed9 (e (ill find out t3e adAusted "alance first0 Balance as per "an) "oo) Add;!e"it !i8idend credited "y "an) Add;!e"it *nterest credited "y "an) 5ess;Credit Ban) c3arges AdAusted "alance as per "an) "oo) !r. !r. !r. Cr. !r. Rs. 329... 29... 2%. ,%.3492..
T3ese adAustments in t3e ledger account of "an) (ill loo) li)e as follo(s0 7r. Ha8eed !ate 2.== Nun3. Nun3. Nun3. Nun3. 2r. P C31. Ho. Ban) Boo) ,Ban) Account Hum"erHarration ; 4articulars Balance B;f !i8idend recei8ed *nterest recei8ed Ban) c3arges Account Code == 4ayment Balance Amount !r;,Cr329... 349... %. 3492%. 3492..
5edger Receipt Code Amount 329... 29... 2%.
Ban6 7e!on!i&ia"ion S"a"e/en" Balance as per "an) "oo) Add0 :n=presented c3e1ues 5ess0 :n=credited c3e1ues Balance as per "an) statement !r. !r. ,Cr.Cr. 7s. 3492.. 139... ,2.92..2 9...
*n t3is e/ample9 "oo)s of accounts are not closed9 all ot3er transactions e/cept un=presented c3e1ues and un=credited c3e1ues9 (ill "e recorded in t3e "an) "oo) "y passing Aournal entries and adAusted "alance of "an) "oo) (ill "e presented in t3e "an) reconciliation statement. To t3is point9 (e 3a8e considered a fa8oura"le "alance i.e. !e"it in "an) "oo) and Credit in "an) statement. But t3ere is a possi"ility t3at (e may 3a8e an unfa8oura"le "alance. T3is can 3appen if (e 3a8e ta)en a loan from our "an).Je can also call it an o#er*ra." i.e. (e 3a8e dra(n more money from our "an) t3an (e 3ad deposited in it. T3e reconciliation procedure (ould "e t3e same as "efore. T3e solution of a"o8e e/ample (ill s3o( t3e follo(ing picture0 So&'"ion As "oo)s of accounts are not closed9 (e (ill find out t3e adAusted "alance first0 Balance as per "an) "oo) Add;!e"it !i8idend credited "y "an) Add;!e"it *nterest credited "y "an) 5ess;Credit Ban) c3arges AdAusted "alance as per "an) "oo) @ Copyrig3t 2irtual :ni8ersity of 4a)istan Cr. !r. !r. Cr. !r.
Rs.
,329...29... 2%. ,%.,3492..-
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T3ese adAustments in t3e ledger account of "an) (ill loo) li)e as follo(s0 Mr. Na#ee* !ate 2.== Nun3. Nun3. Nun3. Nun3. 2r. P Ban6 Boo6 9Ban6 A!!o'n" N'/ber: C31. Ho. Harration ; 4articulars Balance B;f !i8idend recei8ed *nterest recei8ed Ban) c3arges 5edger Code Receipt Amount 29... 2%. %. A!!o'n" Co*e -4ayment Amount 329... Balance !r;,Cr,329...,349...,3492%.,3492..-
Ban6 7e!on!i&ia"ion S"a"e/en" Balance as per "an) "oo) Add0 :n=presented c3e1ues 5ess0 :n=credited c3e1ues Balance as per "an) statement Cr. !r. ,Cr.!r. 7s. ,3492..139... ,2.92..,4194..-
*n t3is case t3e "alance of "an) statement is de"it "ecause t3is amount is recei8a"le "y "an)L it is an asset of t3e "an). In t3e ot3er 3and9 t3is "alance is a credit "alance in "an) "oo)9 it is paya"le to "an) "y t3e "usiness. So9 it is a lia"ility of t3e "usiness. Balance of "an) statement in t3e first case does not matc3 (it3 t3e "alance calculated a"o8e. T3e reason "eing9 t3e "alance in t3e first solution (as de"it9 i=e. Balance (as our asset and dra(ing more money from "an) reduced our asset. In t3e ot3er 3and9 "alance in t3is case is credit9 i=e. Je 3a8e already dra(n more t3an (3at (e 3a8e deposited in t3e "an). So9 it is our lia"ility. T3is "alance is s3o(n (it3 negati8e sign. So9 (3en (e add;de"it any amount9 it (ill reduce our lia"ility and (3en (e less;credit any amount from "an)9 it (ill en3ance our lia"ility. T3is difference in treatment (ill result in a different "alance of "an) statement. E>a/-&e G 3 'rom t3e follo(ing data ascertain t3e "alance as per "an) statement of Ras3id 6 Co on 7arc3 319 2.== Balance as per "an) "oo) Rs. +9... C3e1ues issued "ut not presented for payment Rs. 249.... C3e1ues deposited "ut not cleared Rs. 3%9... *nterest on deposit (as credited "y "an) "ut not de"ited in "an) "oo) Rs. 19.... A customer paid into "an) directly Rs. 139... "ut t3e same (as not recorded in "an) "oo). It3er receipts in "an) t3at (ere not recorded in "an) "oo) Rs. 2.9.... So&'"ion *n suc3 an e/ample9 (3ere "an) reconciliation statement is not re1uired t3e ans(er (ill s3o( only (3at is re1uired i.e. t3e "alance t3at s3ould appear in Ban) Statement. J3ereas9 t3e reconciliation statement is prepared in Jor)ing ; Roug3 Jor)
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5etGs see t3e solution no(0
Ras3id 6 Co. Balance as per Ban) Statement As on 7arc3 219 2.UUUUUUUU +9... 249... ,3%9...19... 139... 2.9... 103F000
$or6ing Balance as per Ban) Boo) Add :n presented c3e1ues 5ess :n credited c3e1ues Add *nterest recei8ed Add amount deposited "y customer Add ot3er receipts in "an) Ba&an!e as -er ban6 s"a"e/en"
As t3is is a (or)ing9 t3erefore9 (e 3a8e put all t3e items in t3e statement. *f t3e 1uestion 3ad re1uired t3e adAusted "an) "oo) "alance9 t3en9 (e (ould 3a8e adAusted items 39 4 and % first and t3en prepared t3e reconciliation statement. Similarly9 t3e 1uestion could 3a8e gi8en us t3e "alance as per "an) statement and re1uired us to calculate "an) "oo) "alance. 5etGs see 3o( (e (ill (or) out t3e "alance of "an) "oo)0 Ras3id 6 Co. Balance as per Ban) Statement As on 7arc3 219 2.UUUUUUUU Balance as per Ban) Statement 5ess :n presented c3e1ues Add :n credited c3e1ues 5ess *nterest recei8ed 5ess amount deposited "y customer 5ess ot3er receipts in "an) Ba&an!e as -er ban6 boo6 7e!"i.i!a"ion o. Error *n t3e "eginning of t3is lecture9 (e also said t3at one reason for a difference "et(een "alance of "an) "oo) and "an) statement could "e a mista)e made "y us in recording transactions. Suc3 differences are remo8ed "y ma)ing an adAusting entry t3roug3 Nournal 2ouc3er9 (3ic3 is also called re!"i.i!a"ion o. error. Any ot3er error (3en rectified ; corrected (ould also "e termed as Rectification of #rror. 'or #/ample9 assume t3at (e recei8ed cas3 Rs. %.9... from a de"tor and instead of !e"iting t3e Cas3 Boo) ; Cas3 Account9 (e de"ited t3e Ban) Boo)9 (3ereas t3e credit (as gi8en to t3e correct account. Ho( (e 3a8e o8erstated "an) "oo) "y Rs. %.9... and understated t3e cas3 "oo) "y t3e same amount. To correct t3is9 (e (ill 3a8e to reduce credit "an) and increase de"it cas3 "y Rs. %.9.... So t3e entry (ill "e0 !e"it Credit Cas3 Account Ban) Account %.9... %.9... 1.29... ,249...3%9... ,19...,139...,2.9...JLF000
After posting t3is transaction9 our "an) "oo) (ill "e reconciled if all ot3er items 3a8e "een ta)en into account. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 Je can prepare a general procedure for rectification of errors. Step 1 Hote do(n t3e correct entry !e"it0 Cas3 Credit0 Creditors Hote do(n t3e incorrect entry !e"it0 Ban) Credit0 Creditors %.9...
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%.9...
Step 2
%.9...
%.9...
Step 3
See t3at Credit effect is correct. *n case of !e"it9 effect 3as "een gi8en to Ban)9 instead of cas3. T3erefore9 (e (ill gi8e t3e due effect to Cas3 "y de"iting it and Remo8e t3e incorrect effect from "an) "y crediting it. !e"it0 Cas3 Account %.9... Credit0 Ban) Account %.9...
T3is is one type of error (3ere entry 3as "een posted in incorrect account "ut (it3 t3e correct amount. It3er errors t3at may occur (3ile recording are as follo(s0 A transaction is completely omitted. 'or e/ample9 in our a"o8e e/amples9 (e 3ad not recorded t3e "an) c3arges or t3e payment made "y our customers directly in our "an). T3is type of errors is simple to rectify. T3e entry t3at (as re1uired at t3e time (3en e8ent is recorded and comes to our )no(ledge. T3e entry is recorded in correct account "ut (it3 incorrect amount. 'or e/ample9 #lectricity "ill of Rs. 19... paid in cas3 is recorded as Rs. 1.. in correct 3ead. *n t3is case9 rectification (ill "e done "y follo(ing entry0 !e"it Credit #lectricity Cas3 +.. +..
,T3is (ill increase t3e e/pense to Rs. 19... and decrease t3e cas3 to t3e correct amount. In t3e ot3er 3and9 if t3e entry (as recorded at 1.9.... T3en a re8ersal entry (ill "e posted to correct t3e effect. !e"it0 Cas3 +9... Credit0 #lectricity +9... Anot3er type of error could "e Jrong Eead of Account (it3 (rong amount. 'or e/ample9 4urc3ase of 8e3icle (ort3 Rs. %..9... t3roug3 c3e1ue is recorded as 8e3icle repair Rs. %.9.... T3e Correct #ntry (ould 3a8e "een0 !e"it0 2e3icle Credit0 Ban) T3e (rong entry t3at (e posted is0 !e"it0 2e3icle repair Credit0 Ban) Rectification (ill "e as follo(s0 !e"it0 2e3icle Credit0 Ban) Credit0 2e3icle Repair Je can9 t3erefore9 use t3is met3od to rectify any mista)e. @ Copyrig3t 2irtual :ni8ersity of 4a)istan %..9...
%..9...
%.9...
%.9...
%..9...
4%.9... %.9...
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Lesson- 24 1EBTO7SF C7E1ITO7SF ACC7UALS AN1 P7OVISION FO7 BA1 1EBTS Cre*i"ors Creditors are t3e t3ird persons;parties9 (3o o(e money from t3e "usiness. T3ese are paya"les of t3e "usiness against purc3ase of goods for resale purposes. *t is lia"ility of t3e "usiness and is s3o(n in "alance s3eet under t3e 3eading of Fcurrent lia"ilitiesG. J3ile studying FAccounting for Stoc)sG9 (e studied a"out t3e accounting for Creditors and studied follo(ing transactions0 4urc3ase of ?oods on credit !e"it0 Credit0 ?oods Returned !e"it0 Credit0 At t3e time of 4ayment !e"it0 Credit0 1is!o'n" 7e!ei#e* At times9 (e recei8e discounts from our creditors. T3is discount is eit3er treated as income of t3e "usiness or as a reduction in t3e cost of stoc). !e"it0 Creditors Credit0 !iscount Recei8ed IR Stoc) A!!r'e* E>-enses J3en an e/pense or ot3er paya"le is accrued9 it also creates a current lia"ility "ut it is not recorded as Creditors. *t is s3o(n separately as accrued e/penses or e/penses paya"le. T3e recording of t3ese is as follo(s0 At t3e time of recording Accrual !e"it0 Rele8ant #/pense Account Credit0 Accrued #/penses ; #/penses 4aya"le *n case of any su"se1uent reduction in t3e e/pense !e"it0 Accrued #/penses ; #/penses 4aya"le Credit0 Rele8ant #/pense Account At t3e time of ma)ing payment !e"it0 Accrued #/penses ; #/penses 4aya"le Credit0 Cas3 ; Ban) 1i..eren!e Be",een A!!r'a& C Pro#ision Bot3 t3ese terms are used to record an e/pense "ut (it3 a minor difference0 Accrual is recorded9 (3en e/act amount of e/pense is )no(n at t3e time of recording. 'or e/ample9 (3en salaries are accrued at t3e end of mont39 a definite amount is )no(n. *t is9 t3erefore9 treated as Accrual. 4ro8ision is made9 (3en it is )no(n t3at an e/pense (ill arise "ut t3e e/act amount is not )no(n. 'or e/ample9 at t3e end of t3e mont39 (3en (e record t3e e/pense of utilities9 t3e e/act amount is not )no(n. T3erefore9 a pro8ision for t3ese e/penses is made. Stoc)s Account Creditors Account Creditors Account Stoc)s Account Creditors Account Cas3 ; Ban) Account
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'inancial Accounting = * > 7?T1.1 A!!o'n"ing Trea"/en" o. Pro#ision Recording of 4ro8isions is done Aust li)e Accruals. At t3e time of recording 4ro8ision0 !e"it0 Rele8ant #/pense Account Credit0 4ro8isions
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At t3e time (3en e/act amount is )no(n9 t3e pro8ision is adAusted "y !e"iting or Crediting9 to "ring it to t3e e/act amount of e/pense. It3er effect is gi8en to t3e account t3at (as originally de"ited in a"o8e transaction. At t3e time of ma)ing payment !e"it0 4ro8isions Credit0 Cas3 ; Ban) Creditors9 Accruals and pro8isions are s3o(n under current lia"ilities in t3e "alance s3eet. 1eb"ors !e"tors are t3e t3ird persons;parties9 from (3om "usiness o(es money. T3ese are recei8a"les of t3e "usiness against sale of goods. *t is an asset of t3e "usiness and is s3o(n in t3e "alance s3eet under t3e 3eading of Fcurrent assetsG. A!!o'n"ing Trea"/en" Je studied at t3e time of sale of ?oods t3at Cost of goods sold is de"ited and 'inis3ed ?oods Stoc) is credited. T3e ot3er entry t3at is "oo)ed is as follo(s0 !e"it0 Cas3 ; Ban) ; !e"tors Credit0 Sales ; Re8enue At t3e time of receipt !e"it0 Cas3 ; Ban) Credit0 !e"tors J3en goods sold to de"tors are returned follo(ing entries are "oo)ed0 !e"it0 Sales Credit0 !e"tors ,Jit3 t3e sale 8alue of goods returned!e"it0 'inis3ed ?oods Stoc) Credit0 Cost of ?oods Sold ,Jit3 t3e cost of goods returnedT3is essentially re8erses t3e effect of transactions recorded at t3e time of sale of goods Ba* 1eb"s J3en goods are sold on credit t3e "usiness ta)es t3e ris) t3at some of t3e customers may ne8er pay for t3e goods sold to t3em. J3en a de"tor does not pay t3e amount due to 3im9 it is said to "e a "ad de"t. T3is is a loss sustained as a result of a ris) ta)en in t3e normal course of "usiness. *t is c3arged to 4rofit and 5oss Account in t3e period in (3ic3 it is sustained. 7e!or*ing o. Ba* 1eb"s *n case of sales return9 t3ere (ere t(o entries to record9 one to record a reduction of de"tors and t3e ot3er to record receipt of stoc). *n case of "ad de"ts9 de"tors are reduced "ut no stoc) is returned.
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T3erefore9 only one entry is passed9 (3ere"y !e"tors are reduced and an e/pense is created titled BBad !e"tsC !e"it0 Bad !e"ts Credit0 !e"tors a;c At t3e time of preparing financial statements (e 3a8e follo(ing o"Aecti8es0 To c3arge all t3e e/penses for t3e period against t3e income. To s3o( t3e figures in t3e "alance s3eet t3at present a true picture of financial position of t3e "usiness as at t3at date. T3erefore9 if it "ecomes o"8ious t3at some of t3e de"tors may not pay t3e amount due to t3em9 (e need to c3arge t3at recei8a"le to profit and loss. 5i)e (e said earlier9 an accrual or e/pense is recorded (3en t3e definite amount is )no(n9 ot3er(ise9 a pro8ision is made. Same is t3e case (it3 de"tors. J3en t3ere is an indication t3at some de"tors may not pay9 a pro8ision is created. 7e!or*ing o. Pro#ision !e"it0 4ro8ision for Bad !e"ts ,465Credit0 4ro8ision for Bad !e"ts T3e de"it account is c3arged against current years profit and t3e credit 3ead is s3o(n as a deduction from de"tors in t3e "alance s3eet. Presen"a"ion o. Pro#ision .or Ba* 1eb"s E>"ra!" o. P C L "o s%o, "%e Pro#ision 4rofit and 5oss Account for t3e year ended Nune 3.9 2.Z ?ross 4rofit 5ess0 Admin #/penses 4ro8ision for "ad de"ts E>"ra!" o. Ba&an!e S%ee" "o s%o, "%e Pro#ision C'rren" Asse"s !e"tors 4ro8ision for Bad !e"ts Ba* 1eb"s C Pro#ision For Ba* 1eb"s J3en t3e "ad de"t for (3ic3 pro8ision is already made is confirmed9 follo(ing entry is passed0 !e"it0 Credit0 4ro8ision for Bad !e"ts !e"tors ,%9...1..9... +%9... ///// ,%9...-
As e/pense 3as already "een c3arged9 t3erefore9 no effect is gi8en to 465 at t3is point. Reducing t3e pro8ision !e"it0 4ro8ision for Bad !e"ts ,Balance S3eetCredit0 4ro8ision for Bad !e"ts ,465*ncreasing t3e pro8ision
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'inancial Accounting = * > 7?T1.1 !e"it0 Credit0 E>a/-&e G 1 4ro8ision for Bad !e"ts ,4654ro8ision for Bad !e"ts
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'ollo(ing information is a8aila"le for A""as 5td. for t3e year ended Nune 3.9 2..2. Bad !e"ts !uring t3e year Ho8em"er 1.. Nanuary $. April 3%. At t3e year end total de"tors amounted to Rs. 3%9... out (3ic3 Rs. 19$.. is considered to "e "ad. S3o( t3e "ad rele8ant accounts and e/tracts from 465 and Balance S3eet. So&'"ion Abbas L"*. Ba* 1eb"s A!!o'n" !ate 2r. Harration ; 4articulars 5edger 2..2 P Code Ho8 Nan Apr Bad !e"ts Bad !e"ts Bad !e"ts A!!o'n" Co*e -!R. CR. Balance Amount Amount !r;,Cr1.. $. 3%. 1.. $$. 1923.
Abbas L"*. Pro#ision .or Ba* 1eb"s A!!o'n" 9B<S: A!!o'n" Co*e -!ate 2r. Harration ; 4articulars 5edger !R. CR. Balance 2..2 P Code Amount Amount !r;,CrNune 4ro8ision for Bad !e"ts 19$.. ,19$..-
A""as 5td. 4ro8ision for Bad !e"ts Account ,465- Account Code == !ate 2r. Harration ; 4articulars 5edger !R. CR. Balance 2.== P Code Amount Amount !r;,CrNun 4ro8ision for Bad !e"ts 19$.. 19$..
Presen"a"ion in Pro.i" C Loss A!!o'n" Abbas L"*. Pro.i" an* Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003. ?ross 4rofit 5ess0 Admin #/penses Bad !e"ts 4ro8ision for "ad de"ts ///// ,1923.,19$..-
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'inancial Accounting = * > 7?T1.1 Presen"a"ion in Ba&an!e S%ee" Abbas L"*. Ba&an!e S%ee" As On 5'ne 40F 3003 C'rren" Asse"s !e"tors 4ro8ision for Bad !e"ts E>a/-&e G 3 A "usiness creates a pro8ision for "ad de"ts V %T of its de"tors on "alance s3eet date. In Nuly .19 2..1 t3e "alance of 4ro8ision (as 394... !uring t3e year de"ts (ritten off amounted to Rs. %9.... In Nune 3.9 2..29 de"tors totaled Rs. %9.... S3o( Bad de"ts Account and pro8ision for "ad de"ts account. So&'"ion 3%9... ,19$..44F300
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T3e re1uired closing "alance of 4ro8ision is Rs. 39 %. , %... / %T-. T3erefore a furt3er pro8ision of Rs. 3%. ,39 %. > 394..- (ill 3a8e to "e created. Ba* 1eb"s A!!o'n" 2r. Harration ; 4articulars P Bad !e"ts A!!o'n" Co*e -!R. CR. Balance Amount Amount !r;,Cr%9... %9...
!ate 2..2 Nune 3.
5edger Code
!ate Nuly.19 2..1 Nune3.9 2..2
Pro#ision .or Ba* 1eb"s A!!o'n" 9B<S: A!!o'n" Co*e -2r. Harration ; 5edger !R. CR. Balance P 4articulars Code Amount Amount !r;,CrI;B 4ro8ision for "ad de"ts 394.. 3%. ,394..,39 %.-
Pro#ision .or Ba* 1eb"s A!!o'n" 9PCL: !ate 2r. Harration ; 5edger 2..2 P 4articulars Code Nune3. 4ro8ision for Bad !e"ts
A!!o'n" Co*e -!R. CR. Balance Amount Amount !r;,Cr3%. 3%.
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'inancial Accounting = * > 7?T1.1 P7OVISION FO7 BA1 1EBTS AN1 CONT7OL ACCOUNTS !e"it0 Credit0 4ro8ision for Bad !e"ts ,4654ro8ision for Bad !e"ts
VU Lesson-25
T3e de"it account is c3arged against current years profit and t3e credit 3ead is s3o(n as a deduction from de"tors in t3e "alance s3eet. Presen"a"ion o. Pro#ision .or Ba* 1eb"s E>"ra!" o. P C L "o s%o, "%e Pro#isionD 4rofit and 5oss Account 'or t3e year ended Nune 3.9 2.Z ?ross 4rofit 5ess0 Admin #/penses 4ro8ision for "ad de"ts E>"ra!" o. Ba&an!e S%ee" "o s%o, "%e Pro#ision C'rren" Asse"sD !e"tors 4ro8ision for Bad !e"ts 7e!or*ing O. Ba* 1eb"s C Pro#ision .or Ba* 1eb"s J3en t3e "ad de"t for (3ic3 pro8ision is already made is confirmed9 follo(ing entry is passed0 !e"it0 Credit0 4ro8ision for Bad !e"ts !e"tors a;c 1..9... ,%9...+%9... ///// ,%9...-
As e/pense 3as already "een c3arged9 t3erefore9 no affect is gi8en to 465 account at t3is point. 7e*'!ing "%e -ro#ision !e"it0 Credit0 4ro8ision for Bad !e"ts ,Balance S3eet4ro8ision for Bad !e"ts ,465-
In!reasing "%e -ro#ision !e"it0 Credit0 E>a/-&e G 1 'ollo(ing information is a8aila"le for A 5td. 'or t3e year ended Nune 3.9 2..2. Bad !e"ts !uring t3e year0 Ho8em"er 191.. Nanuary &4. April 12. 4ro8ision for Bad !e"ts ,4654ro8ision for "ad de"ts
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At t3e year end total de"tors amounted to Rs. &$9... out (3ic3 Rs. 292.. is considered to "e dou"tful ; "ad. S3o( t3e rele8ant accounts and e/tracts from 4rofit and 5oss and Balance S3eet. So&'"ion A L"*. !ate 2..2 Ho8 .1 Nan Apr Nune 3. Ba* 1eb"s A!!o'n" A!!o'n" Co*e -2r. Harration ; 5edger !R. CR. Balance P 4articulars Code Amount Amount !r;,CrBad !e"ts Bad !e"ts Bad !e"ts Transfer 465 to 191.. &4. 12. 19$&. 191.. 19 4. 19$&. .
A 5td.4ro8ision for Bad and !ou"tful !e"ts,4 6 5-Account Code == !ate 2r. Harration ; 5edger !R. CR. Balance 2..2 P 4articulars Code Amount Amount !r;,CrNun 3. Nun 3. 4ro8ision for t3e Qear Transfer to 465 292.. 292.. Account Code == CR. Balance Amount !r;,Cr292.. ,292..292.. .
A 5td. 4ro8ision for Bad and !ou"tful !e"ts ,B;S!ate 2..2 Nun 3. 2r. Harration ; P 4articulars 4ro8ision for t3e Qear A L"*. Pro.i" an* Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003 5edger !R. Code Amount
Presen"a"ion in Pro.i" C Loss a!!o'n"D
?ross 4rofit
======= ,19$&.,292..-
5ess0 Administration #/penses0 Bad !e"ts 4ro8ision for "ad de"ts Presen"a"ion in Ba&an!e s%ee"D A L"*. Ba&an!e S%ee" As On 5'ne 40F 3003 Current Assets0 !e"tors 4ro8ision for Bad !e"ts E>a/-&e G 3 A "usiness creates a pro8ision for "ad de"ts V %T of its de"tors on "alance s3eet date. In Nan .19 2..2 t3e "alance of 4ro8ision (as &9&... !uring t3e year de"ts (ritten off amounted to Rs. %94... @ Copyrig3t 2irtual :ni8ersity of 4a)istan &$9... ,292..-
&%9$..
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'inancial Accounting = * > 7?T1.1 In !ecem"er 319 2..29 de"tors totaled Rs. &29.... S3o( Bad de"ts Account and pro8ision for "ad de"ts account. So&'"ion Re1uired closing "alance of 4ro8ision O&2... / %T O 391.. 4ro8ision for Bad and !ou"tful !e"ts Account ,B;S- Account Code == !ate 2r. Harration ; 5edger !R. CR. Balance 2..2 P 4articulars Code Amount Amount !r;,CrNan .1 !ec 31 Ipening Balance Bad !e"ts 4ro8ision for "ad de"ts N=QF Ba&an!e S%ee"F As on SSSSSSSSS Current Assets0 !e"tors 4ro8ision for Bad !e"ts Con"ro& A!!o'n"s &29... ,391..%94.. 19+.. &9&.. ,&9&..,192..,391..-
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Presen"a"ion in ba&an!e s%ee"D
%$9+..
Je 3a8e studied a"out 4urc3ases9 Sales9 !e"tors and Creditors in our pre8ious lectures. Je 3a8e also studied t3at trial "alance (or)s as a c3ec) of mat3ematical accuracy of t3e "oo) )eeping. *f t3e trial "alance is not "alanced9 t3en it indicates an error in recording of transactions. To detect t3is error one 3as to go t3roug3 all t3e transactions during t3e year to detect t3e error. Ho(9 if t3e siKe of t3e "usiness is small9 it (ould "e easier to detect t3e difference. But if t3e "usiness is large9 t3en it "ecomes difficult to detect t3e difference. To sol8e t3is pro"lem9 a system of c3ec)s is de8ised so t3at t3e ledger accounts are distri"uted in smaller groups and a trial is prepared for e8ery group. :sually (it3 t3e gro(t3 of "usiness9 t3e num"er of suppliers ,creditors- and customers ,de"tors- gro(. So9 if (e open a separate ledger account for e8ery creditor and de"tor9 t3en t3e general ledger and trial "alance (ould "ecome too 8oluminous to manage. T3erefore9 in order to simplify t3ings9 one ledger eac3 is maintained for !e"tors and Creditors. T3e !e"tors 5edger is called Total !e"tors 5edger or Sa&es Le*ger Con"ro& A!!o'n" ,as Credit sales are recorded in t3is account-. T3e Creditors 5edger is called Total Creditors 5edger or P'r!%ase Le*ger Con"ro& A!!o'n" ,as Credit purc3ases are recorded in t3is ledger-. *n ?eneral 5edger one account is )ept for all t3e !e"tors9 called 1eb"ors Con"ro& A!!o'n"9 and one for Creditors9 called Cre*i"ors Con"ro& A!!o'n". T3e principle on (3ic3 control accounts are "ased is simple and as follo(s0 *f t3e opening "alance of an account is )no(n9 toget3er (it3 t3e total of deductions and additions entered in t3e account9 t3e closing "alance can "e calculated. T3e same met3od is applied to t3e (3ole ledger9 t3e total of opening "alances toget3er (it3 t3e additions and deductions during t3e period s3ould gi8e t3e total of closing "alances. T3erefore9 indi8idual creditorGs and de"torGs accounts are opened in t3e total creditorsG ledger and total de"tors ledger and t3eir summariKed figures are posted in t3e respecti8e Control Accounts in t3e ?eneral 5edger. T3e principle descri"ed a"o8e can "e illustrated as follo(s0
152
'inancial Accounting = * > 7?T1.1 Ta)e t3e e/ample of Total !e"tors Account0 Total of Ipening Balances !r. Add. Total of !e"it entries Rs. Rs.
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2..9... &%.9... $%.9... 5ess Total of Credit entries Rs. ,3..9...MI0F000 T3e "alance of !e"tors control account in t3e general ledger s3ould "e Rs. &%.9.... *f t3is is not so9 t3en t3ere is an error in t3e procedure of recording9 (3ic3 s3ould "e traced out. In.or/a"ion .or Con"ro& A!!o'n"s 1eb"ors *n t3e a"o8e illustration9 (e used some information. Ho( (e (ill study t3e sources from (3ic3 t3e information is o"tained. T)-e o. In.or/a"ion Ipening "alance of de"tors Credit Sales Sales Return C3e1ues;Cas3 Recei8ed Closing Balance Consider t3e follo(ing data0 !ate Nan9 2.== Nan9 2.== Nan9 2.== Sa&es 5o'rna& *n8oice P Hame A B C Total Amount 1.9... 129%.. 1%9... 3 9%.. So'r!e o. In.or/a"ion 5ist of de"tors "alances dra(n up to t3e end of pre8ious period. A separate "oo) is maintained to record indi8idual transactions. Totals are dra(n from t3is "oo) A separate "oo) is maintained to record indi8idual transactions. Totals are dra(n from t3is "oo) 5ist of receipts is e/tracted from cas3 and "an) "oo). T3is is t3e "alancing figure t3at can also "e c3ec)ed from t3e list of indi8idual "alance of de"tors.
Total of sales Aournal (ill "e recorded in t3e !e"tors Control Account t3roug3 t3e follo(ing entry0 !e"it0 Credit0 !e"tors Control Account Sales Account 3 9%.. 3 9%..
Hote t3at cas3 sales are not included in t3is (3ole process. T3ey are directly recorded in t3e general ledger. In.or/a"ion .or Con"ro& A!!o'n"s Cre*i"ors T3e information flo( in case of creditors is similar to de"tors9 (3ic3 is listed 3ere0
153
'inancial Accounting = * > 7?T1.1 Ipening "alance of de"tors 5ist of creditors "alances dra(n up to t3e end of pre8ious period. Credit 4urc3ases A separate "oo) is ,purc3ase Aournal- is maintained to record indi8idual transaction. Totals are dra(n from t3is "oo) 4urc3ase Return A separate "oo) is ,purc3ase return Aournal- is maintained to record indi8idual transaction. Totals are dra(n from t3is "oo) C3e1ues;Cas3 4aid 5ist of payments is e/tracted from cas3 and "an) "oo). Ir a separate column is maintained in cas3 and "an) "oo)s for t3is purpose. Closing Balance T3is is t3e "alancing figure t3at can also "e c3ec)ed from t3e list of indi8idual "alance of de"tors. Consider t3e follo(ing data0 P'r!%ase 5o'rna& !ate Nan9 2.== Nan9 2.== Nan9 2.== *n8oice P Hame R Q S Total Amount %9%.. +9... $9%.. 239...
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Total of purc3ase Aournal (ill "e recorded in t3e Creditors Control Account t3roug3 t3e follo(ing entry0 !e"it0 Credit0 4urc3ases Account Creditors Control Account 239%.. 239%..
Hote t3at cas3 purc3ases are not included in t3is (3ole process. T3ey are directly recorded in t3e general ledger. E>a/-&e G 1 4repare a Creditors Control Account from t3e follo(ing data and (or) out t3e closing "alance on April 3.9 of creditors. Apr. 1 Ipening Balance 449%.. To"a&s .or "%e /on"% o. Ma)D Total Credit 4urc3ases 4urc3ase Return C3e1ues and Cas3 paid !iscounts recei8ed 329... &92.. 2$9$.. 29%..
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'inancial Accounting = * > 7?T1.1 So&'"ion Cre*i"ors Con"ro& A!!o'n" !e"it Side !ate April 3. April 3. April 3. Ho. Harration 4urc3ase return 4ayments !iscounts recei8ed Ba&an!e C<F To"a& !r. Rs. Credit Side !ate Ho. Harration Ba&an!e B<F Total 4urc3ases Cr. Rs. 449%.. [329... &92.. April .1 2$9$.. April 3. 29%.. A!!o'n" Co*e --
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3+9... JMFI00 To"a& JMFI00
E>a/-&e G 3 4repare a !e"tors control Account from t3e follo(ing data and (or) out t3e closing "alance on 7ay 319 of de"tors. 7ay 1 Ipening Balance .9... To"a&s .or Ma)D Total Credit Sales ,Sales NournalReturns *n(ard ,Sales *n(ard NournalC3e1ues and Cas3 recei8ed !iscounts allo(ed 1eb"ors Con"ro& A!!o'n" !e"it Side 1a"e 7ay1 7ay31 No. Narra"ion Ba& B<F Total sales 1r. 7s. 1a"e No. .9... 7ay31 2&9... 7ay31 7ay31 7ay31 To"a& LMF000 2&9... 394.. 4&9... 39 .. A!!o'n" Co*e -Credit Side Narra"ion Returns Receipts !iscounts Cr. 7s. 394.. 4&9... 39 .. 429+.. LMF000
So&'"ion
Ba& C<F To"a&
155
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Lesson-26 CONT7OL ACCOUNTS 9Con"in'e*: A num"er of "oo)s are opened in connection (it3 control accounts to reduce t3e 8olume of general ledger. T3ese "oo)s are called FSu"sidiary Boo)sG. *t is important to note t3at only credit sales;purc3ases "ecome part of control accounts. Cas3 sales;purc3ases are not included in t3e control accounts. S'bsi*iar) Boo6s .or Sa&es<1eb"ors T3ree su"sidiary "oo)s are maintained in case of sales ; de"tors. Sales Nournal ; Sales !ay Boo) > indi8idual in8oice (ise sales are recorded in t3is Nournal. T3is "oo) ser8es as source for all t3e recording of Credit sales. Sales Return ; Return *n(ard Nournal if 8olume of returns is also 3ig3 t3en9 t3ese are also recorded in a separate register. !e"tors 5edger > t3is ledger maintains record of indi8idual de"tor. T3e information flo(s to t3e de"tors control account in t3e general ledger as follo(s0 Ipening "alance of de"tors 5ist of de"tors "alances dra(n up to t3e end of pre8ious period. T3is also confirms (it3 t3e aggregate "alance of t3e de"tors ledger. Credit Sales *ndi8idual credit sale is recorded in t3e sales Aournal. 4eriodical total of t3is Aournal is posted into t3e de"tors control account. Sales Return *n case9 t3e transaction 8olume of sales return is 3ig39 t3en t3ese are recorded in t3e sales return Aournal. T3e total is posted in t3e de"tors control account periodically. C3e1ues ; Cas3 Recei8ed 5ist of receipts is e/tracted from cas3 and "an) "oo). Ir a separate column is maintained in cas3 and "an) "oo)s for t3is purpose. Closing Balance T3is is t3e "alancing figure. *t can also "e c3ec)ed (it3 t3e total of "alances in de"torsG ledger. E>a/-&e G 1 5etGs suppose t3at t3e sales Aournal pro8ides t3e follo(ing record for t3e mont3 of 7arc39 2..20 Sa&es 5o'rna& !ate 7ar .19 2..2 7ar 1%9 2..2 7ar 319 2..2 *n8oice P .1 .2 .3 Total Hame ; !e"tor A B C Amount 1.9... 1%9... 2.9... 4%9...
T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of A9 B 6 C ,!e"tors ledger account- in t3e follo(ing manner0 !ate .1;.3 4articulars A0s A!!o'n" Code Amount P Rs. ,!r.1.9... A!!o'n" !o*e---!ate 4articulars Code P Amount Rs. ,Cr.1.9... 1.9...
Total
1.9...
Ba&an!e b<* Total
156
'inancial Accounting = * > 7?T1.1 !ate 1%;.3 4articulars B0s A!!o'n" Code Amount P Rs. ,!r.1%9... A!!o'n" !o*e---!ate 4articulars Code P Amount Rs. ,Cr.-
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Ba&an!e b<* Total 1%9... C0s A!!o'n" Code Amount P Rs. ,!r.2.9... Total A!!o'n" !o*e---!ate 4articulars
1%9... 1%9...
!ate 31;.3
4articulars
Code P
Amount Rs. ,Cr.-
Ba&an!e b<* Total 2.9... Total
2.9... 2.9...
*n t3e general ledger9 t3e amount of total sales (ill "e "oo)ed in t3e follo(ing manner0 !ate Sa&es A!!o'n" 4articulars Code Amount P Rs. ,!r.!ate 31;.3 A!!o'n" !o*e---4articulars Total sales for t3e mont3 of marc39 2..2 Code P Amount Rs. ,Cr.4%9...
Ba&an!e b<* Total !ate 31;.3
4%9... 4%9... !ate Total A!!o'n" !o*e---4articulars Code P 4%9... Amount Rs. ,Cr.-
1eb"ors Con"ro& A!!o'n" 4articulars Code Amount P Rs. ,!r.Total sales for 4%9... t3e mont3 of marc39 2..2
Ba&an!e b<* Total 4%9... Total
4%9... 4%9...
Ho( if (e total t3e "alance of t3ree accounts of t3e de"torsG ledger on 7ar 319 2..20 A B C To"a& 1.9... 1%9... 2.9... HIF000
157
'inancial Accounting = * > 7?T1.1 *t (ill "e t3e same as t3e "alance in t3e de"tors control account of t3e general ledger. 7e!or*ing o. Sa&es 7e"'rn 5etGs say t3at sales return Aournal for t3e mont3 of 7arc39 2..2 gi8e t3e follo(ing record0 Sales Nournal !ate Nan 1%9 2.== Nan 2.9 2.== Nan 2%9 2.== Hame ; !e"tor A B C Total Amount 19... 29... 39... &9...
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T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of A9 B 6 C ,!e"tors ledger account- in t3e follo(ing manner0 !ate .1;.3 A0s A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.1.9... 1%;.3 Code P Amount Rs. ,Cr.19...
Ba&an!e b<* Total !ate 1%;.3 1.9... Total Code P
+9... 1.9... Amount Rs. ,Cr.29...
B0s A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.1%9... 2.;.3
Ba&an!e b<* Total !ate 31;.3 1%9... Total Code P
139... 1%9... Amount Rs. ,Cr.39...
C0s A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.2.9... 2%;.3
1 9... 2.9...
158
'inancial Accounting = * > 7?T1.1 *n t3e general ledger9 t3e amount of total sales return (ill "e "oo)ed in t3e follo(ing manner0 !ate Sa&es A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.Total sales &9... 31;.3 Total sales for t3e return for t3e mont3 of marc39 mont3 of 2..2 marc39 2..2 Ba&an!e b<* Total !ate 31;.3 3+9... 4%9... Code P
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Amount Rs. ,Cr.4%9...
Total Code P
4%9... Amount Rs. ,Cr.&9...
1eb"ors Con"ro& A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.Total sales for 4%9... Total sales return t3e mont3 of for t3e mont3 of marc39 2..2 marc39 2..2 Ba&an!e b<* Total 4%9... Total
3+9... 4%9...
Again if (e total t3e "alance of t3ree accounts of t3e de"torsG ledger on 7ar 319 2..20 A +9... B 139... C 1 9... To"a& 4LF000 *t (ill "e t3e same as t3e "alance in t3e de"tors control account of t3e general ledger. 7e!ei-"s Fro/ 1eb"ors Eere9 (e need a total figure of receipts from de"tors. T3erefore9 (3en control accounts are used9 (e maintain cas3 and "an) "oo)s (it3 separate pages for receipts and payments i.e. t(o column cas3;"an) "oo)s are not used. In t3e receipts side of t3e cas3 and "an) "oo)9 a column is added in (3ic3 receipts from de"tors are separately noted. T3is type of cas3 ; "an) "oo) is also called multi column cas3 ; "an) "oo). A sample of t3e receipt side of cas3 ; "an) "oo) is gi8en 3ereunder0 Cas3 ; Ban) Boo) Receipt Side 1a"e No Narra"ion < Par"i!'&ars Le*ger Co*e 7e!ei-" A/o'n" 1.9... %.. Recei8ed from A @ Copyrig3t 2irtual :ni8ersity of 4a)istan %9... %9... 7e!ei-" .ro/ 1eb"ors
159
'inancial Accounting = * > 7?T1.1 3.. Recei8ed from B Recei8ed from A Recei8ed from C 29%.. 19... 19%.. +%. 19... Total S'bsi*iar) Boo6s .or P'r!%ases<Cre*i"ors 229 %. +9... 29%.. 19... 19%..
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Recording of creditors is similar to de"tors. T3e su"sidiary "oo)s maintained in case of purc3ases ; creditors are0 4urc3ase Nournal ; 4urc3ase !ay Boo) > indi8idual purc3ases are recorded in t3is Nournal. 4urc3ase Return ; Return out(ard Nournal > *f t3e 8olume of returns is also 3ig39 t3en t3ese are also recorded in a separate register. Creditors 5edger > t3is ledger maintains record of indi8idual creditors. T3e information flo(s to t3e creditor control account in t3e general ledger as follo(s0 Ipening "alance of creditors Credit 4urc3ases 4urc3ase Return C3e1ues ; Cas3 4aid Closing Balance E>a/-&e G 3 5etGs consider t3e follo(ing data for t3e mont3 of 7arc39 2..20 4urc3ase Nournal !ate 7ar .19 2..2 7ar 1.9 2..2 7ar 2%9 2..2 Hame ; !e"tor R Q S Total Amount %9... 1.9... 1%9... 3.9... 5ist of creditor "alances dra(n up to t3e end of pre8ious period. T3is also confirms (it3 t3e aggregate "alance of t3e creditors ledger. *ndi8idual credit purc3ase is recorded in t3e purc3ase Aournal. Total of t3is Aournal is posted into t3e creditors control account periodically. *n case t3e transaction 8olume of purc3ase return is 3ig39 t3en9 t3ese are recorded in t3e purc3ase return Aournal. 4eriodically9 t3e total is posted in t3e creditors control a;c. 5ist of payments is e/tracted from cas3 and "an) "oo). Ir a separate column is maintained in cas3 and "an) "oo)s for t3is purpose. T3is is t3e "alancing figure. *t can also "e c3ec)ed (it3 t3e total of "alances in creditorsG ledger.
T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of R9 Q 6 S ,Creditors ledger account- in t3e follo(ing manner0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
160
'inancial Accounting = * > 7?T1.1 N0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r..1;.3
VU
!ate
4articulars
Code P
Amount Rs. ,Cr.%9...
Ba&an!e b<* Total !ate 4articulars
%9... %9... Total Code P %9... Amount Rs. ,Cr.1.9...
=0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.1.;.3
Ba&an!e b<* Total
1.9... 1.9... Total 1.9...
!ate
4articulars
Q0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.-
Code P
Amount Rs. ,Cr.-
2%;.3
1%9...
Ba&an!e b<* Total
1%9... 1%9... Total 1%9...
*n t3e general ledger9 t3e amount of total purc3ases (ill "e "oo)ed in t3e follo(ing manner0 P'r!%ases A!!o'n" 4articulars Code Amount P Rs. ,!r.Total purc3ases 3.9... for t3e mont3 of marc39 2..2 A!!o'n" !o*e---!ate 4articulars
!ate 31;.3
Code P
Amount Rs. ,Cr.-
3.9... 3.9...
161
'inancial Accounting = * > 7?T1.1 Cre*i"ors Con"ro& A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.Total purc3ases for t3e mont3 of marc39 2..2 Ba&an!e b<* Total 3.9... 3.9... Total
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!ate 31;.3
Code P
3.9...
Ho(9 if (e total t3e "alance of t3ree accounts of t3e creditorGs ledger on 7ar 319 2..20 R %9... Q 1.9... S 1%9... To"a& 40F000 *t (ill "e t3e same as t3e "alance in t3e creditors control account of t3e general ledger.
7e!or*ing o. P'r!%ase 7e"'rn 5etGs say t3at t3e purc3ase return Aournal s3o( t3e follo(ing picture for t3e mont3 of 7arc39 2..20 !ate 7ar .19 2..2 7ar 1.9 2..2 7ar 2%9 2..2 Hame ; !e"tor R Q S Total Amount %.. 19... 19%.. 39...
T3e a"o8e mentioned record (ill "e posted in t3e personal ledger accounts of R9 Q 6 S ,Creditors ledger account- in t3e follo(ing manner0 !ate .1;.3 4articulars N0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.%.. .1;.3 Code P Amount Rs. ,Cr.%9...
Ba&an!e b<* Total !ate 1.;.3 Ba&an!e b<* Total 4articulars
49%.. %9...
Total Code P
%9... Amount Rs. ,Cr.1.9...
=0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.19... 1.;.3 +9... 1.9... Total
1.9...
162
'inancial Accounting = * > 7?T1.1 !ate 4articulars Q0s A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.Code P
VU Amount Rs. ,Cr.-
2%;.3
19%.. 2%;.3
1%9...
Ba&an!e b<* Total
139%.. 1%9... Total 1%9...
*n t3e general ledger9 t3e amount of total purc3ases (ill "e "oo)ed in t3e follo(ing manner0
!ate 31;.3
P'r!%ases A!!o'n" A!!o'n" !o*e---Code Amount !ate 4articulars P Rs. ,!r.Total purc3ases 3.9... 31;.3 Total purc3ases for t3e mont3 return for t3e of marc39 2..2 mont3 of marc39 2..2 4articulars Ba&an!e b<* Total 3.9... Total
Code P
Amount Rs. ,Cr.39...
2 9... 3.9...
!ate 31;.3
Cre*i"ors Con"ro& A!!o'n" A!!o'n" !o*e---4articulars Code Amount !ate 4articulars P Rs. ,!r.Total purc3ases 39... 31;.3 Total purc3ases for return for t3e t3e mont3 of mont3 of marc39 2..2 marc39 2..2 Ba&an!e b<* 2 9... Total 3.9... Total
Code P
3.9...
Ho(9 if (e total t3e "alance of t3ree accounts of t3e creditorGs ledger on 7ar 319 2..20 R Q S To"a& 49%.. +9... 139%.. 3JF000
*t (ill "e t3e same as t3e "alance in t3e creditors control account of t3e general ledger.
163
'inancial Accounting = * > 7?T1.1 Pa)/en" "o Cre*i"ors
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Eere9 (e need a total figure of payment to creditors. T3erefore9 (3en control accounts are used9 (e maintain cas3 and "an) "oo)s (it3 separate pages for receipts and payments i.e. t(o column cas3;"an) "oo)s are not used. In t3e payment side of t3e cas3 and "an) "oo)9 a column is added in (3ic3 payments to creditors are separately noted. T3is type of cas3 ; "an) "oo) is also called multi column cas3 ; "an) "oo). A sample of t3e payment side of cas3 ; "an) "oo) is gi8en 3ereunder0 Cas% < Ban6 Boo6 Pa)/en" Si*e 1a"e No Narra"ion < Par"i!'&ars Le*ger Co*e Pa)/en" A/o'n" %.. %9... Recei8ed from A Recei8ed from B Recei8ed from C 29%.. 39... 19%.. 19... 19%.. 19+%. 19%.. Total 1$94%. %9%.. 19%.. 19%.. 29%.. Pa)/en" "o Cre*i"ors
164
'inancial Accounting = * > 7?T1.1 CONT7OL ACCOUNT 9Con"in'e*: A -erson is bo"% *eb"or an* !re*i"orD
VU Lesson-27
T3is 3appens so many times in "usiness t3at a person is "ot3 your de"tor and creditor. T3is means t3at you are purc3asing one t3ing from 3im. So9 you 3a8e to pay 3im against t3at purc3ase and at t3e same time you are selling 3im anot3er t3ing for (3ic3 3e 3as to pay you. 'or e/ample9 you purc3ase item R from 7r. A for Rs. %.9... and sell 3im item Q for Rs. 2%9.... Ho(9 one (ay of settling t3e paya"le and recei8a"le is t3at you can pay 7r. R %.9... and as) 3im to pay you Rs. 2%9.... T3e ot3er and may "e t3e (iser met3od is t3at you pay 3im Rs. 2%9... and "ot3 transactions are settled. T3is is 3o( suc3 transactions are 3andled in real life. 5o'rna& En"ries Hormally (3ere no control accounts are maintained9 follo(ing entries (ill "e recorded0 !e"it0 A ,paya"le;creditor- account Credit0 A ,recei8a"le;de"tor- account o 2%9... 2%9...
T3is (ill "ring do(n t3e "alance of A ,recei8a"le;de"tor- account to . and t3at of A ,paya"le;creditor- account to 2%9.... T3e ot3er entry (ill "e0 !e"it0 A ,paya"le;creditor- account Credit0 Cas3 ; Ban) 2%9... 2%9...
T3is (ill settle t3e paya"le account fully.
J3ere control accounts are "eing maintained t3e a"o8e t(o entries are still recorded "ut (it3 slig3t modification0 !e"it0 Creditors Control account 2%9... Credit0 !e"tors Control account 2%9... At t3e same time AGs account in CreditorGs ledger is de"ited (it3 2%9... and Credited in !e"torsG ledger (it3 t3e same amount. !e"it0 A ,paya"le;creditor- account Credit0 Cas3 ; Ban) 2%9... 2%9...
T3is entry comes from t3e creditorGs column of cas3 ; "an) "oo) payment side as usual. Ba* 1eb"s 4ro8ision does not affect de"tors account in simple "oo)s. *t (ill9 t3erefore9 3a8e no effect eit3er on de"tor control account or de"tors ledger. At t3e time of actual "ad de"t9 t3e Aournal entry !e"it 4ro8ision ; Bad !e"ts Credit *ndi8idual !e"tors Account *f control account system is in operation9 t3e de"it entry (ill "e same "ut t3e credit effect (ill go to !e"tors control account (it3 a credit effect to *ndi8idual !e"tors Account in !e"tors 5edger. Similar treatment is gi8en to discounts recei8ed and allo(ed.
165
'inancial Accounting = * > 7?T1.1 7e!or*ing O. Ba* 1eb"s in Con"ro& A!!o'n"s To record "ad de"ts in control accounts9 follo(ing entries are recorded0 *n case no pro8ision (as created for dou"tful de"ts0 !e"it0 Bad !e"ts Credit0 !e"tors Control Account *n case pro8ision (as created for dou"tful de"ts0 !e"it0 4ro8ision for !ou"tful !e"ts Credit0 !e"tors Control Account
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Recording is also made in t3e respecti8e accounts of t3e de"tor in su"sidiary ledger. 7e!or*ing o. 1is!o'n"s 7e!ei#e* In Con"ro& A!!o'n"s To record discount recei8ed in control accounts9 follo(ing entry is recorded0 !e"it0 Creditors Control Account Credit0 !iscount Recei8ed Account Recording is also made in respecti8e accounts of t3e creditors in su"sidiary ledger. 7e!or*ing o. 1is!o'n"s A&&o,e* In Con"ro& A!!o'n"s To record discount allo(ed in control accounts9 follo(ing entry is recorded0 !e"it0 Credit0 !iscount Allo(ed Account !e"tors Control Account
Recording is also made in t3e respecti8e account of t3e de"tors in su"sidiary ledger. I&&'s"ra"ion G 1 'ollo(ing information is gi8en from t3e "oo)s of 7r. A,!e"tor- for t3e mont3 of Nune9 2..2. Qou are re1uired to prepare !e"tors Control Account and (or) out t3e closing "alance of de"tors control account of 7r. A. Ipening Balance !r. Transactions during t3e mont30 Sales for t3e mont3 Sales return for t3e mont3 4ayments recei8ed !iscount allo(ed Bad de"ts (ritten off $%9%.. +.9... 29%.. 14.9... %9... 49...
166
'inancial Accounting = * > 7?T1.1 So&'"ion 1eb"ors Con"ro& A!!o'n" 1a"e Nun .1 Nun No. 1ebi" Si*e Narra"ion Bal B;' Sales 1r. 7s. 1a"e $%9%.. Nun +.9... Nun Nun Nun 31 To"a& I&&'s"ra"ion G 3 1JIFI00 No. Cre*i" Si*e Narra"ion Cr. 7s. Returns 29%.. Receipts 14.9... !iscount allo(ed %9... Bad !e"ts 49... Bal C;' To"a& 249... 1JIFI00
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'ollo(ing information is gi8en from t3e "oo)s of 7r. B,Creditor- for t3e mont3 of Nune9 2..2. Qou are re1uired to prepare Creditors Control Account and (or) out t3e closing "alance of Creditors control account of 7r. B. Ipening Balance Transactions during t3e mont30 4urc3ases for t3e mont3 4urc3ases return for t3e mont3 4ayments made !iscount recei8ed So&'"ion 1ebi" Si*e Narra"ion Returns 4ayments !iscounts recei8ed Bal C;' To"a& Cr. .9... %9... +.9... &%9...
39...
Cre*i"ors Con"ro& A!!o'n" 1a"e Nun Nun Nun Nun 31 No. 1r. 7s. 1a"e %9... Nun .1 +.9... Nun 39... 3 9... 14IF000 No. Cre*i" Si*e Narra"ion Bal B;' Total purc3ases Cr. 7s. &%9... .9...
To"a&
14IF000
I&&'s"ra"ion G 4 T3e financial year of Atif Brot3ers is closed on Nune 3.9 2..2. Qou are re1uired to prepare !e"tors control account and Creditor control account from t3e data gi8en "elo(0 O-ening ba&an!es !e"tors Creditors Sa&es Cas3 Credit P'r!%ases Cas3 Credit Total receipts Total payments !iscount allo(ed 1%.9... 2%.9... Hote 1 Hote 1 Hote 2 Hote 2 @ Copyrig3t 2irtual :ni8ersity of 4a)istan 1$.9... 2&.9... 12.9... 2..9... 3%.9... 2%.9... 1%9...
167
'inancial Accounting = * > 7?T1.1 !iscount recei8ed Bad de"ts (ritten off *ncrease in pro8ision for dou"tful de"ts So&'"ion 1eb"ors Con"ro& A!!o'n" 1a"e Nun .1 Nun No. 1ebi" Si*e Narra"ion Bal B;' Sales,H11r. 7s. 1a"e 1%.9... Nun 2&.9... Nun Nun 31 To"a& H10F000 Cre*i"ors Con"ro& A!!o'n" 1a"e Nun Nun Nun 31 No. 1ebi" Si*e Narra"ion 4ayments !iscounts recei8ed Bal C;' To"a& 1r. 7s. 1a"e 13.9... Nun .1 1.9... Nun 31.9... HI0F000 No. Cre*i" Si*e Narra"ion Bal B;' Total purc3ases Cr. 7s. 2%.9... 2..9... No. Cre*i" Si*e Narra"ion Cr. 7s. Receipts,H21 .9... !iscount allo(ed 1%9... Bad !e"ts 2%9... Bal C;' To"a& 2..9... H10F000 1.9... 2%9... %9...
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Hote 3
To"a&
HI0F000
No"es "o "%e a!!o'n"sD 1. *n control accounts9 only cas3 sales;purc3ases are dealt (it3. Credit sales;purc3ases are not included in control accounts9 3. Receipts;4ayments include "ot3 cas3 and credit receipts;payments. So9 (e enter t3e figures in control accounts9 after deducting cas3 sales;purc3ases from total receipts;payments. i. e. Receipts O 3%.9... > 1$.9... O 1 .9... 4ayments O 2%.9... > 12.9... O 13.9... 3. 4ro8ision for dou"tful de"ts 3as no effect on control accounts. So9 any c3ange in pro8ision (ill not affect actual "ad de"ts. Bene.i"s o. S'bsi*iar) Le*gers Su"sidiary ledgers contain t3e record of all indi8iduals !e"tors and Creditors. Su"sidiary ledgers gi8e information a"out t3e main clients and slo( mo8ing clients (3ic3 is 3elpful for t3e management in decision ma)ing. *f t3e "usiness 3as distri"utors in different areas9 su"sidiary ledger gi8es information a"out sale of different distri"utors in different areas (3ic3 are 3elpful for t3e management in decision ma)ing.
168
'inancial Accounting = * > 7?T1.1 7ECTIFICATION OF E77O7
VU Lesson-28
*n financial accounting9 e8ery single e8ent occurring in monetary terms is recorded. Sometimes9 it Aust so 3appens t3at some e8ents are eit3er not recorded or it is recorded in t3e (rong 3ead of account or (rong figure is recorded in t3e correct 3ead of account. J3ate8er t3e reason may "e9 t3ere is al(ays a c3ance of error in t3e "oo)s of accounts. T3ese errors in accounting re1uire rectification. T3e procedure adopted to rectify errors in financial accounting is called B7e!"i.i!a"ion o. errorC. +o, "o re!"i.) "%ese errors( Ine (ay of rectification is t3at (e can simply erase or o8er(rite t3e incorrect entry and replace it (it3 t3e correct one. But t3is practice is not allo(ed in accounting. Je 3a8e to Rectify ; correct t3e mista)e "y recording anot3er entry. T)-es o. Errors Before going to t3e rectification process9 letGs first see t3e different )inds of errors t3at can appear in our "oo)s of accounts0 Error o. O/ission Ine of t3e most common errors is t3at an e8ent escapes recording. T3is means t3at an e8ent occurred "ut (e did not record it. 'or e/ample9 (e discussed a"out "an) c3arges "eing deducted "y "an)s (it3out our )no(ledge or our payments made "y "an)s on our standing orders etc. T3ere can "e ot3er reasons as (ell. Suc3 errors are called #RRIRS I' I7*SS*IH. Error o. Co//ission T3en9 t3ere is a c3ance t3at t3e e8ent is classified and recorded correctly "ut (it3in (rong classification of account. 'or e/ample9 a payment to 7r. A9 (3o is a de"tor9 is recorded in t3e account of 7r. B9 (3o is also a de"tor. Ho( t3e classification is correct "ut entry is posted in t3e (rong account. Suc3 errors are called #RRIRS I' CI77*SS*IH. Error o. Prin!i-&e T3en t3ere are errors in (3ic3 an entry is recorded in t3e (rong class of account. 'or e/ample a purc3ase of fi/ed asset9 say9 a 8e3icle is recorded in an e/pense account. T3ese errors are called #RRIRS I' 4R*HC*45#. Error o. Origina& En"r) T3e errors in (3ic3 recording is in correct account "ut t3e figure is incorrect are called #RRIRS I' IR*?*HA5 #HTRQ. 'or e/ample9 a receipt of Rs. %.9... from a de"tor is recorded as Rs. %9... in 3is account. 7e#ersa& o. En"r) T3en9 t3ere are errors in (3ic3 t3e entry is re8ersed "y mista)e. T3is means t3at t3e account t3at s3ould 3a8e "een de"ited is credited and 8ice 8ersa. T3ese errors are called R#2#RSA5 I' #HTRQ.
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'inancial Accounting = * > 7?T1.1 7e!"i.)ing "%e Errors Ho(9 (e (ill rectify all t3ese types of entries0 Error o. O/ission
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T3is is t3e easiest error to rectify. Qou 3a8e to record t3e entry t3at (as omitted "y mista)e. *t is important to note 3ere t3at t3e rectifying entry (ill "e posted on t3e date on (3ic3 t3e error (as disco8ered. But (e (ill gi8e a note in t3e narration of t3e 8ouc3er t3at t3e e8ent too) place on suc3 date. E>a/-&eD A purc3ase of Rs. %9... from ABC on April 1% (as omitted "y mista)e. Rectifying #ntry on t3e date of disco8ery0 !e"it0 Credit0 Harration0 4urc3ase Account ABC Account 1%9... 1%9...
Rectification of omission of recording purc3ase to ABC on April 1%.
Errors o. Co//ission < Error o. Prin!i-&e *n "ot3 t3ese cases9 t3e effect gi8en to incorrect account is re8ersed and effect is gi8en to t3e correct account. E>a/-&eD 4urc3ase of an asset for Rs. %.9... is recorded in t3e e/pense account. Rectification0 !e"it0 Credit0 Asset Account Rele8ant #/pense Account %.9...
%.9...
Harration0 Rectification of purc3ase of asset incorrectly recorded as e/pense. Error o. Origina& En"r) *f t3e entry recorded is of lesser amount t3an t3e re1uired amount9 t3en an entry of t3e "alance amount is passed. In t3e ot3er 3and9 if t3e entry recorded is of a greater amount t3an t3e re1uired amount9 a re8erse entry is passed of t3e "alance amount t3at cancels t3e effect of t3e error. E>a/-&e 1A receipt of cas3 Rs. %9... from B is recorded as Rs. %.. 2A receipt of cas3 Rs. %9... from B is recorded as Rs. %.9... 7e!"i.i!a"ion *n t3e first instance9 t3e recorded figure is less "y Rs. 49%... T3e rectification entry (ill9 t3erefore9 "e0 !e"it0 Cas3 Account 49%.. Credit0 B Account 49%.. *n t3e second instance9 t3e recorded figure e/ceeds "y Rs. 4%9... from t3e desired figure. T3e rectification (ill9 t3erefore9 "e a re8erse entry of Rs. 4%9...0 !e"it0 B Account 4%9... Credit0 Cas3 Account 4%9...
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'inancial Accounting = * > 7?T1.1 7e#ersa& o. En"r)
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*f a re8erse entry is recorded "y mista)e9 t3en t(o entries are re1uired to rectify it9 one to re8erse t3e effect of mista)e and t3e ot3er to record correct entry or (e can pass one entry (it3 dou"le amount t3at ser8es t3e purpose of "ot3 t3e entries. E>a/-&eD A payment of Rs. 1.9... made to 7r. ! is recorded on t3e receipt side of t3e cas3 "oo) and credit is gi8en to !Gs account. 7e!"i.i!a"ion Je can correct t3is mista)e "y t(o entries0 !e"it0 7r. ! Account Credit0 Cas3 Account T3is (ill re8erse t3e effect of mista)e0 !e"it0 7r. ! Account Credit0 Cas3 Account And t3is (ill record t3e transaction correctly0 Ir Je can record it t3roug3 one entry0 !e"it0 7r. ! Account Credit0 Cas3 Account 2.9...
1.9...
1.9...
1.9...
1.9...
2.9...
Based on our a"o8e discussion9 (e can de8ise a general procedure for rectification of errors. Ta)e anot3er e/ample9 assume t3at (e recei8ed cas3 Rs. of %.9... from a de"tor and instead of !e"iting t3e Cas3 Boo) ; Cas3 Account9 (e de"ited t3e Ban) Boo) (3ereas t3e credit (as gi8en to t3e correct account. S"e- 10 Hote do(n t3e correct entry !e"it Cas3 Credit S"e- 30 Hote do(n t3e incorrect entry !e"it Ban) Credit %.9...
Creditors
%.9...
Creditors
%.9...
%.9...
S"e- 40 See t3at Credit affect is correct. *n case of !e"it9 affect 3as "een gi8en to Ban) instead of cas3. T3erefore (e (ill gi8e t3e due affect to Cas3 "y de"iting it and Remo8e t3e incorrect affect from "an) "y crediting it. !e"it Cas3 Account %.9... Credit Ban) Account %.9... I&&'s"ra"ion Rectify t3e follo(ing errors0 1. A c3e1ue issued of Rs. %.9... to 7r. A ,Creditor-9 "ut t3e credit (as gi8en to cas3 account. 2. 4urc3ase of goods from 7r. B (ort3 of Rs. %9%.. (as recorded at Rs. 49%... 3. Cas3 sale to 7r. C (ort3 of Rs. 1.9... (as de"ited to sale account and credited to cas3 account. 4. Repair of 8e3icle (ort3 of Rs. %9... (as c3arged to asset account. %. A c3e1ue of Rs. 1%9... recei8ed and deposited in "an) from 7r. !9 "ut no entry (as passed. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 So&'"ion En"r) G 1 Correct #ntry !e"it0 Credit0 7r. A ,Creditor- A;C Ban) A;C %.9...
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%.9...
*ncorrect #ntry passed !e"it0 7r. A ,Creditor- A;C Credit0 Cas3 A;C Rectifying #ntry !e"it0 Credit0 En"r) G 3 Correct #ntry !e"it0 Credit0 4urc3ase A;C 7r. BGs A;C Cas3 A;C Ban) A;C
%.9...
%.9...
%.9...
%.9...
%9%..
%9%..
*ncorrect #ntry passed !e"it0 4urc3ase A;C Credit0 7r. BGs A;C Rectifying #ntry !e"it0 Credit0 En"r) G 4 Correct #ntry !e"it0 Credit0 Cas3 4urc3ase A;C 7r. BGs A;C
49%..
49%..
19...
19...
Sale A;C
1.9...
1.9...
*ncorrect #ntry passed !e"it0 Sale A;C Credit0 Cas3 Rectifying #ntry !e"it0 Credit0 En"r) G H Correct #ntry !e"it0 Credit0 Repair A;C Cas3 A;C Cas3
1.9...
1.9...
Sale A;C
2.9...
2.9...
%9...
%9...
*ncorrect #ntry passed !e"it0 Asset ,8e3icle- A;C Credit0 Cas3 A;C
%9...
%9...
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Rectifying #ntry !e"it0 Credit0 En"r) G I Correct #ntry !e"it0 Credit0 *ncorrect #ntry passed
Repair A;C Asset ,8e3icle- A;C
%9...
%9...
Ban) A;C 7r. !Gs A;C
1%9...
1%9...
Ho entry (as passed Rectifying #ntry !e"it0 Credit0 Ban) A;C 7r. !Gs A;C 1%9...
1%9...
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'inancial Accounting = * > 7?T1.1 P7ESENTATION OF FINANCIAL STATEMENTS Pro.i" C Loss A!!o'n" Standard format of profit 6 loss account is s3o(n as follo(s0 Par"i!'&ars Sales 5ess0 Cost of ?oods Sold Gross Pro.i" 5ess0 Administrati8e #/penses Selling #/penses Iperating 4rofit 5ess0 'inancial #/penses Add 0 It3er income 4rofit Before Ta/ 5ess0 Ta/ Ne" Pro.i" A."er Ta> .or "%e =ear It3er income A/o'n" 7s. A/o'n" 7s. R ,/N ,/R ,/R ,/N
VU Lesson-29
R R
Sa&es Sales as (e )no( are t3e re8enue against t3e sale of t3e product in (3ic3 t3e organiKation deals. *n case of a ser8ice organiKation9 t3ere (ill "e *ncome against Ser8ices Rendered instead of Sales and t3ere (ill "e no Cost of Sales or ?ross 4rofit. Cos" o. Goo*s So&*<Gross Pro.i" Cost of goods sold is t3e cost incurred in purc3asing or manufacturing t3e product9 (3ic3 an organiKation is selling plus any ot3er e/pense incurred in "ringing t3e product in sala"le condition. Cost of goods sold contains t3e follo(ing 3eads of accounts0 o 4urc3ase of ra( material;goods o Jages paid to employees for manufacturing of goods o Any ta/;freig3t is paid on purc3ases o Any e/pense incurred on carriage;transportation of purc3ased items. ?ross 4rofit O Sales > Cost of goods sold O"%er In!o/e It3er income includes re8enue from indirect source of income9 suc3 as return on in8estment9 profit on 45S account etc. A*/inis"ra"i#e E>-enses Administrati8e e/penses are t3e e/penses incurred in running a "usiness effecti8ely. 7ain components of t3is group are0 o 4ayment of utility "ills o 4ayment of rent o Salaries of employees o ?eneral office e/penses o Repair 6 maintenance of office e1uipment 6 8e3icles. *t is important to distri"ute e/penses properly among t3e t3ree classifications i.e. Cost of ?oods Sold9 Administrati8e #/penses and Selling #/penses to present t3e financial statements fairly. Ta)e t3e e/ample of follo(ing costs0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 o
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Sa&aries an* $ages Alt3oug3 "ot3 t3ese terms mean remuneration paid to la"or and employee against ser8ices. Jages usually denotes remuneration paid to daily (ages la"or. J3ereas salary denotes payments to permanent employees. Salaries can "e classified in any of t3e classifications mentioned "elo(. Salaries ; (ages paid to la"or and super8isors;officers (or)ing for t3e manufacturing of goods "ecome a part of Cost of ?oods Sold. Salaries and "enefits of general administrati8e staff "ecomes part of Administrati8e #/penses Salaries and "enefits of sales and mar)eting staff "ecome part of selling e/penses. It3er e/penses li)e !epreciation9 :tilities and 7aintenance can also "e classified in all t3ree9 depending upon t3e e/act nature of t3e e/penditure. Se&&ing E>-enses Selling e/penses are t3e e/penses incurred directly in connection (it3 t3e sale of goods. T3is 3ead contains0 o Transportation;carriage of goods sold o Ta/;freig3t paid on sale *f t3e e/pense 3ead FsalariesG includes salaries of sales staff9 it (ill "e e/cluded from salaries 6 appear under t3e 3eading of Fselling e/pensesG. Finan!ia& E>-enses 'inancial e/penses are t3e interest paid on "an) loan 6 c3arges deducted "y "an) on entityGs "an) accounts. T3ese are s3o(n separately in t3e 4rofit and 5oss Account. T3ese include0 o *nterest on loan o Ban) c3arges T3ere is9 3o(e8er9 one e/ception and t3at is t3e interest paid on loan ta)en to "uild an asset is capitaliKed as cost of t3e asset up to t3e time t3at asset is completed. In!o/e Ta> !ifferent types of entities 3a8e to pay income ta/ at different rates. At t3e time of preparing annual financial statements9 an estimate of e/pected ta/ lia"ility is made. A pro8ision is t3en9 created e1ual to t3at estimate. Qou s3ould remem"er t3e treatment of 4ro8ision for !ou"tful de"ts. Same is t3e case (it3 income ta/ i.e. pro8ision is made at t3e time of preparing accounts (3ic3 is t3en adAusted accordingly at t3e time (3en actual ta/ e/pense is )no(n.
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'inancial Accounting = * > 7?T1.1 Ba&an!e S%ee" 9Asse" Si*e: Standard format of t3e "alance s3eet is gi8en as follo(s0 4articulars Asse"s Non C'rren" Asse"s 'i/ed Assets Capital Jor) *n 4rogress !eferred Costs 5ong Term *n8estments C'rren" Asse"s Stoc)s Trade de"tors and It3er Recei8a"les 4repayments S3ort Term *n8estments Cas3 and Ban) Total Fi>e* Asse"s R R R R R R Amount Rs. Amount Rs.
VU
R R R R
'i/ed assets are t3e assets of permanent nature t3at a "usiness ac1uires9 suc3 as plant9 mac3inery9 "uilding9 furniture9 8e3icles etc. 'i/ed assets are presented at cost less accumulated depreciation IR re8alued amount.
Ca-i"a& $or6 In Progress *f an asset is not completed at t3at time (3en "alance s3eet is prepared9 all costs incurred on t3at asset up to t3e "alance s3eet date are transferred to an account called Ca-i"a& $or6 in Progress A!!o'n". T3is account is s3o(n separately in t3e "alance s3eet "elo( t3e fi/ed assets. Capital (or) in progress account contains all e/penses incurred on t3e asset until it is con8erted into (or)ing condition. All t3ese e/penses (ill "ecome part of t3e cost of t3at asset. J3en an asset is completed and it is ready to (or)9 all costs (ill transfer to t3e rele8ant asset account. 1e.erre* Cos"s An e/pense t3at 3as a future "enefit in e/cess of one year and recorded in a capital asset account Long Ter/ an* S%or" Ter/ In#es"/en"s J3ere a "usiness 3as surplus funds9 it is "etter to in8est t3ose funds (3ere t3ese can generate a return greater t3an 45S accounts. T3ese in8estments can "e of different types e.g. s3ares of ot3er companies9 fi/ed deposits (it3 "an)s9 go8ernment securities9 national sa8ings etc. or presentation purposes9 t3ese *n8estments are classified in t(o categories9 long term and s3ort term in8estments. *n8estments made (it3 t3e intention t3at t3ey (ill "e 3eld for a period longer t3an t(el8e mont3s are classified as long term and t3ose made for a period e1ual to or s3orter t3an 12 mont3s are classified as s3ort term. 'ollo(ing t3ings are important to note 3ere0 Classification is to "e made e8ery time a "alance s3eet is prepared and t3e period is to "e calculated from t3e date of "alance s3eet. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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T3is means t3at an in8estment made for 2 years on 7ay 2... (ill "e classified as long term in8estment in accounts prepared on Nun 3.9 2... and t3e same in8estment (ill "e classified as current in8estment in t3e accounts prepared on Nune 3.9 2..1. An in8estment may initially "e made as current in8estment. Su"se1uently9 if it is decided to 3old it for a longer period9 t3en its classification (ill 3a8e to "e c3anged accordingly and 8ice 8ersa. T3erefore9 in8estments are c3ec)ed for classification e8ery time a "alance s3eet is prepared and presented accordingly.
C'rren" Asse"s C'rren" Asse"s are t3e recei8a"les t3at are e/pected to "e recei8ed (it3in one year of t3e "alance s3eet date. !e"tors9 closing stoc) 6 all accrued incomes are t3e e/amples of Current Assets "ecause t3ese are e/pected to "e recei8ed (it3in one accounting period from t3e "alance s3eet date. *t is important to note t3at assets and lia"ilities are presented in t3e "alance s3eet in t3e order of t3eir maturity i.e. assets ; lia"ilities 3a8ing longer life are presented first and assets ; lia"ilities 3a8ing s3orter life are presented later.
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'inancial Accounting = * > 7?T1.1 P7ESENTATION OF FINANCIAL STATEMENTS 9Con"in'e*: S"an*ar* For/a" o. Ba&an!e S%ee" 9Liabi&i") Si*e: Par"i!'&ars Liabi&i"ies Ca-i"a& an* 7eser#es Capital Reser8es 4rofit and 5oss Account Non C'rren" < Long Ter/ Liabi&i"ies 5ong term loans It3er long term lia"ilities C'rren" Liabi&i"ies Trade creditors and ot3er paya"les S3ort term "orro(ings Current portion of long term "orro(ings To"a& Ca-i"a& A/o'n" 7s. R R R A/o'n" 7s.
VU Lesson-30
R R R R R
R N
Capital is t3e first item s3o(n on t3e lia"ility side of t3e "alance s3eet of an organiKation. Ca-i"al is t3e 7oney in8ested in t3e "usiness "y t3e o(ners. Capital is a lia"ility for t3e "usiness as t3e "usiness 3as to pay return against t3is money and in case t3e "usiness is closed9 t3en it 3as to return t3e amount. Capital is also termed as BS3are CapitalC. 7e!or*ing o. Ca-i"a& Recording of Capital is Simple. At t3e time of receipt !e"it Cas3 ; Ban) Credit Capital *f t3e o(ner contri"utes an asset instead of cas39 t3en !e"it Asset Account Credit Capital J3en t3e capital is repaid ,t3is does not 3appen in normal course of "usiness9 "ut Aust in case!e"it Capital Credit Cas3 ; Ban) 7eser#es T3e portion of profit (3ic3 is not paid to proprietor9 "ut is )ept apart for meeting some )no(n or un)no(n losses is called Reser8e9 e.g. Reser8e fund9 contingencies reser8e etc. . T3ere are t(o maAor types of reser8es0 7e#en'e 7eser#es 'rom t3e 8ie( point of its creation re8enue reser8e may again "e classified into0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
178
'inancial Accounting = * > 7?T1.1 a. Genera& reser#e Reser8e (3ic3 is not created for any specific purpose9 "ut for strengt3ening t3e financial position of t3e "usiness is )no(n as ?eneral Reser8e9 e.g. Reser8e fund9 contingencies reser8e etc. b. S-e!i.i! 7eser#e Reser8e created for any special purpose is )no(n as Specific Reser8e. e.g.9 !i8idend #1ualiKation fund9 !e"enture sin)ing fund etc. Ca-i"a& 7eser#es
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Capital reser8es9 in most of t3e cases9 are created due to legal re1uirements. 4rofit may arise from sources9 ot3er t3an normal "usiness acti8ity. 'or e/ample9 profit on sale of fi/ed assets or profit on re8aluation of fi/ed assets. J3en a reser8e is created out of t3ese profits9 it is termed as capital reser8e. Ine capital reser8e a"out (3ic3 (e already )no( is B'i/ed Assets Re8aluation Reser8eC. Capital reser8es can "e used for specific purposes only. 1i..eren!e be",een 7eser#e An* Pro#ision Bot3 reser8es and pro8isions are created out of re8enues of t3e "usiness9 "ut t3ey differ from eac3 ot3er. Creating a pro8ision is necessary to s3o( a true profit for t3e period9 (3ereas t3e reser8e is created on t3e discretion of t3e o(ner9 out of profits. 4ro8ision is to "e made9 e8en9 if t3ere is a lossL Reser8es are created out of profits only. Reser8e is s3o(n as lia"ility in t3e "alance s3eet9 4ro8ision is s3o(n as a reduction from t3e asset against (3ic3 it is created. 4ro8ision is used specifically for t3e purpose for (3ic3 it is made9 Reser8es are usually general and can "e used for any purpose. Pro.i" An* Loss A!!o'n" 4rofit and 5oss Account or Accumulated 4rofit and 5oss Account s3o(s t3e "alance of un=distri"uted profit accumulated o8er t3e periods. *n t3e first year of "usiness9 t3is account s3o(s follo(ing figure0 4rofits for t3e year 5ess0 Transferred to Reser8e 5ess0 4rofit distri"uted Balance carried to Balance S3eet R ,R,RR
*n Su"se1uent years9 "alance "roug3t for(ard from pre8ious years and profit for t3e year is added and distri"uted as a"o8e and t3e "alance is carried to ne/t year. T3is is (3yL it is termed as Accumulated 4rofit and 5oss Account. Long Ter/ Loans T3e o(ners of t3e "usiness may feel t3at t3eir "usiness can flouris39 if t3ere are more funds. T3ese funds can "e arranged from t3eir o(n resources9 if possi"le9 or t3ey can as) a "an) or financial institution for funds. T3is loan9 if e/tended "y "an) for a period of more t3an one year is termed as a long term loan. T3ere can "e ot3er sources of long term loans as (ell9 e.g. Term 'inance Certificates and !e"entures9 (3ere money is "orro(ed from general pu"lic under certain legal restrictions. O"%er Long Ter/ Liabi&i"ies T3ese include all ot3er lia"ilities t3at are paya"le after a period of one year of "alance s3eet date. 'or e/ample9 staff gratuity and ot3er "enefits9 ta/es and lia"ilities t3at "ecome paya"le after a period of one year. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 C'rren" Liabi&i"ies
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Current 5ia"ilities are t3e o"ligations of t3e "usiness t3at are paya"le (it3in t(el8e mont3s of t3e "alance s3eet date. Creditors9 all accrued e/penses are t3e e/amples of current lia"ilities of t3e "usiness "ecause "usiness is e/pected to pay t3ese "ac) (it3in one accounting period. C'rren" Por"ion o. Long Ter/ Liabi&i"ies 5ong term loans are usually paya"le in installments. T3erefore9 at t3e end of e8ery year9 some portion of t3e loan "ecomes paya"le (it3in one year of t3e "alance s3eet date. T3e portion t3at "ecomes paya"le (it3in t3e ne/t accounting period is transferred to current lia"ilities and classified under current portion of long term lia"ilities. 'ormat of current lia"ilities s3o(n in t3e "alance s3eet is as follo(s0 C'rren" Liabi&i"ies Trade Creditors S3ort Term Borro(ings It3er S3ort Term 5ia"ilities Salaries 4aya"le Accrued #/penses Bills paya"le Ad8ances from Customers
180
'inancial Accounting = * > 7?T1.1 T=PE OF BUSINESS ENTITIES
VU Lesson-31
T3ere are t(o types of entities0 Commercial organiKations Hon=commercial organiKations Co//er!ia& Organi2a"ion
Commercial organiKation is t3e entity t3at is (or)ing to earn profit. At t3e end of t3e financial year9 t3e profit is distri"uted among t3e o(ners of t3e "usiness. Hormally9 commercial organiKations include0 Sole proprietors3ip 4artners3ip9 and 5imited Company Non Co//er!ia& Organi2a"ion Hon Commercial organiKation is t3e entity t3at is not (or)ing to earn profit. At t3e end of t3e financial year9 t3e profit is not distri"uted among t3e o(ners9 "ut is used for t3e o"Aecti8e of t3e organiKation. Hormally9 commercial organiKations include0 Co=Iperati8e institutions H?IGs Trusts T)-es o. Co//er!ia& Organi2a"ion So&e -ro-rie"ors%i- b'siness *t is a "usiness t3at is o(ned "y an indi8idual. Ee may 3a8e employed any num"er of persons to (or) for 3im9 "ut 3e is t3e sole o(ner of t3e "usiness. Par"ners%i4artners3ip is t3e type of "usiness (3ere more t3an one person ,called partners- enters into a legal agreement to run a "usiness on a profit and loss s3aring "asis. Li/i"e* Co/-an) 5imited company is a legal entity9 separate from its o(ners ,called s3are3olders-. T3e "asic difference "et(een a partners3ip and a limited company is t3e concept of limited lia"ility. *f a partners3ip "usiness runs into losses and is una"le to pay its lia"ilities9 its partners (ill 3a8e to pay t3e lia"ilities from t3eir o(n (ealt3. J3ereas9 in case of limited company9 t3e s3are3olders donGt lose anyt3ing more t3an t3e amount of capital t3ey 3a8e contri"uted in t3e company. i.e.9 t3eir personal (ealt3 is not at sta)e and t3eir lia"ility is limited to t3e amount of s3are capital t3ey 3a8e contri"uted. T3e concept of limited company is to mo"iliKe t3e resources of a large num"er of people for a proAect9 (3ic3 t3ey (ould not "e a"le to afford independently and t3en9 get it managed "y e/perts. A!!o'n"ing 7e;'ire/en"s So&e Pro-rie"ors%i*n case of sole proprietor9 o(ner is t3e sole o(ner of t3e "usiness. So9 t3ere is no restriction on 3im for dra(ing money for 3is personal use. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
181
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'or accounting purposes9 an account titled 4roprietorGs !ra(ings is opened in t3e ?eneral 5edger and all payments and receipts9 if any9 from t3e proprietor are recorded in t3is account. A!!o'n"ing En"ries Cas3 !ra(n "y 4roprietor0 !e"it 4roprietorGs dra(ing Credit Cas3 Amount paid in "y proprietor t3roug3 c3e1ue0 !e"it Ban) Credit 4roprietorGs dra(ing T3e "alance in dra(ings account is transferred to Capital Account at t3e year end. T3e sample of general ledger of Capital account9 in case of profit earned "y t3e "usiness9 is as follo(s0 Ca-i"a& A!!o'n" 1ebi" Si*e 1a"e Nun 3. No Narra"ion !ra(ings a;c 1r. 7s. 4%9... 1a"e Nul .1 Nun 3. Cre*i" Si*e No Narra"ion Balance B;' 4 6 Account 5 Cr. 7s. 1..9... %.9...
Nun 3.
Balance C;' To"a&
1.%9... 1I0F000 To"a& 1I0F000
T3e sample of general ledger of Capital account9 in case of loss sustained "y t3e "usiness9 is as follo(s0 Ca-i"a& A!!o'n" 1ebi" Si*e 1a"e Nun 3. Nun 3. No Narra"ion 4 6 5 Account !ra(ings 1r. 7s. 1.9... 4%9... 1a"e Nul .1 No Cre*i" Si*e Narra"ion Balance B;' Cr. 7s. 1..9...
Nun 3.
Balance C;' To"a&
4%9... 100F000 To"a& 100F000
182
'inancial Accounting = * > 7?T1.1 T3e "alance s3eet of sole proprietor is as follo(s0 Na/e o. B'siness Ba&an!e S%ee" As A" ---A/o'n" 7s.
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Par"i!'&ars Asse"s 'i/ed Assets 5ong Term Assets Current Assets To"a&
A/o'n" 7s. R R R N
Liabi&i"ies Capital Add0 4rofit ; 5oss 'or T3e Qear 5ess0 !ra(ings 5ong Term 5ia"ilities Current 5ia"ilities To"a& Par"ners%iT3ere are t(o types of capital accounts in partners3ip0 'i/ed capital 'luctuating capital Fi>e* Ca-i"a&
R R ,R-
R R R N
*n t3is case9 capital account s3o(s mo8ement in capital account only i.e. actual increase or decrease in capital9 "y partners and all ot3er transactions9 suc3 as !ra(ings and 4rofit etc. are not recorded in capital account. F&'!"'a"ing !a-i"a& *n fluctuating capital account9 all transactions relating to partners9 suc3 as dra(ings9 salaries etc. are recorded in capital account9 in addition to entries relating to capital account. C'rren" A!!o'n" *n case of fi/ed capital accounts9 ot3er transactions suc3 as !ra(ings and 4rofit etc. are recorded in a separate account called Current Account. 5o'rna& En"ries Capital *ntroduced "y 4artner0 !e"it Credit Cas3 ; Ban) 4artnerGs Capital Account
Separate capital account is opened in general ledger for eac3 partner. !ra(ing "y 4artner0 !e"it Credit *ndi8idual 4artnerGs Current Account Cas3 ; Ban)
#/cess !ra(n Amount Returned "y 4artner0 !e"it Ban) ; cas3 Credit *ndi8idual 4artnerGs Current Account 4rofit !istri"ution0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
183
'inancial Accounting = * > 7?T1.1 !e"it Credit Credit Credit 4rofit and 5oss Appropriation Account 4artner AGs Current Account 4artner BGs Current Account 4artner CGs Current Account
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Ba&an!e S%ee" o. Par"ners%i- A!!o'n"s Na/e o. B'siness Ba&an!e S%ee" As A" ---A/o'n" 7s.
Par"i!'&ars ASS#TS 'i/ed Assets 5ong Term Assets Current Assets To"a& Liabi&i"ies Capital Current Account
A/o'n" 7s. R R R N
A B C A B C
R R R R R R
R R R R N
Long Ter/ Liabi&i"ies C'rren" Liabi&i"ies To"a& Li/i"e* Co/-anies T3ere are t(o types of companies0 4u"lic 5imited Companies 4ri8ate 5imited Companies P'b&i! Li/i"e* Co/-anies
*n pu"lic limited companies9 t3ere is no restriction on num"er of persons to "e its mem"ers. T3ere is one restriction. i.e.9 t3ere s3ould "e a minimum o. "%ree mem"ers to form a pu"lic limited company. Pri#a"e Li/i"e* Co/-anies T(o to fifty persons can form a pri8ate limited company. 7inimum t(o mem"ers are elected to form a "oard of directors. T3is "oard is gi8en t3e responsi"ility to run day to day "usiness of t3e company. S%are Ca-i"a& Capital of t3e company is di8ided into small units ; denominations. T3ese units ; denominations are called s3ares and t3e capital is called s3are capital. I(ners purc3ase t3ese s3ares and are9 t3erefore9 called s3are3olders. As9 t3ere are so many s3are3olders in a company9 profit is distri"uted among t3e mem"ers;s3are3olders of t3e company on t3e "asis of num"er of s3ares 3eld "y eac3 s3are3older. T3e profit distri"uted among s3are3olders is called 1IVI1EN1.
184
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF SOLE P7OP7IETO7S+IP I&&'s"ra"ion G 1
VU Lesson-32
4repare profit 6 loss account and "alance s3eet for t3e year ending Nune 3.9 2..2 from t3e follo(ing trial "alance of Haseem Trading Company. Par"i!'&ars Ipening Stoc) Cas3 in 3and Cas3 at "an) 4urc3ases Returns in(ard ,Sales returnJages 'uel 6 po(er Carriage on sales Carriage on purc3ases Building 5and 7ac3inery Salaries ?eneral e/penses !ra(ings *nsurance Sundry !e"tors Sales Returns out(ards ,4urc3ase returnsCapital Sundry Creditors Rent recei8ed Total 1ebi" 7s. 11%92.. 1.9$.. %29&.. $139%.. 139&.. 1&+9&.. +49&.. &49... 4.9$.. &4.9... 2..9... 4..9... 3..9... &.9... 129... 1.49+.. 2+.9... Cre*i" 7s.
4F4K1FM00
19+ %9&.. 1.9... 19.+.9... 12&9... 1$.9... 4F4K1FM00
'ollo(ing additional information is supplied to you0 Closing stoc) is 8alued at Rs. 13&9... 7ac3inery 6 Building are to "e depreciated V 1.T Salaries for t3e mont3 of Nune9 2..2 amounting to Rs. 3.9... are unpaid *nsurance is paid in ad8ance to t3e e/tent of Rs. 139... Rent recei8a"le is Rs. 2.9... So&'"ion J3en additional information is gi8en at t3e end of t3e 1uestion9 (3ic3 means t3ese entries are still to "e recorded in t3e "oo)s of accounts. So9 (e s3all pass t3e entries first0 En"r) G 1 Par"i!'&ars Closing stoc) account 4rofit 6 5oss account Closing stoc) is recorded @ Copyrig3t 2irtual :ni8ersity of 4a)istan Co*e G A/o'n"91r.: 7s. 13&9... 13&9... A/o'n"9Cr.: 7s.
185
VU
Closing stoc) is presented in t3e profit 6 loss account9 credited in t3e cost of goods sold and is s3o(n in t3e "alance s3eet under t3e 3eading of Current Assets. T3e ledger account of closing stoc) (ill "e as follo(s0 S"o!6 A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.Closing Stoc) 13&9... Balance ";d To"a& En"r) G 3 Par"i!'&ars !epreciation account 7ac3inery account !epreciation on mac3inery is c3arged. !epreciation of mac3inery (ill "e s3o(n in t3e profit 6 loss account under t3e 3eading of Administrati8e #/penses and (ill "e deducted from t3e 8alue of mac3inery account in t3e "alance s3eet. En"r) G 3 Par"i!'&ars !epreciation account Building account !epreciation on "uilding is c3arged. !epreciation of "uilding (ill "e s3o(n in t3e profit 6 loss account under t3e 3eading of Administrati8e #/penses and (ill "e deducted from t3e 8alue of "uilding account in t3e "alance s3eet. T3e ledger account of depreciation (ill "e as follo(s0 1e-re!ia"ion A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.!ep. of 7ac3inery 4.9... !ep. of "uilding &49... To"a& Balance ";d 1.49... To"a& @ Copyrig3t 2irtual :ni8ersity of 4a)istan Co*e G A/o'n"91r.: 7s. &49... &49... A/o'n"9Cr.: 7s. Co*e G A/o'n"91r.: 7s. 4.9... 4.9... A/o'n"9Cr.: 7s. 13&9... To"a&
Amount Cr. ,Rs.-
13&9... 13&9...
Amount Cr. ,Rs.-
1.49... 1.49...
186
'inancial Accounting = * > 7?T1.1 En"r) G 4 Par"i!'&ars Salaries account Salaries paya"le account Salaries for t3e mont3 of Nune are unpaid. Salaries account (ill "e presented in t3e profit 6 loss account under t3e 3eading of Administrati8e #/penses and salaries paya"le (ill "e presented in t3e "alance s3eet under t3e 3eading of Current 5ia"ilities. T3e ledger account of salaries (ill "e as follo(s0 Sa&aries A!!o'n" 4articulars Amount !r. ,Rs.Balance c;d 3..9... Salaries paya"le 3.9... A!!o'n" Co*e -------4articulars Amount Cr. ,Rs.Co*e G A/o'n"91r.: 7s. 3.9... 3.9... A/o'n"9Cr.: 7s.
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Balance ";d To"a& En"r) G H Par"i!'&ars Ad8ance *nsurance *nsurance Account *nsurance is paid in ad8ance Co*e G A/o'n"91r.: 7s. 139... 33.9... To"a&
33.9... 33.9...
A/o'n"9Cr.: 7s.
139...
Ad8ance insurance is our asset and it (ill "e s3o(n in t3e "alance s3eet under t3e 3eading of current assets and ad8ance insurance (ill "e deducted from t3e insurance e/penses. T3e ledger account of insurance (ill "e as follo(s0 Ins'ran!e A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Balance c;d 1.49+.. Ad8ance insurance Balance ";d To"a& 1.49+.. To"a&
139... +19+.. 1.49+..
187
'inancial Accounting = * > 7?T1.1 En"r) G I Par"i!'&ars Rent Recei8a"les Rental *ncome Rental *ncome recei8a"le Rent recei8a"les is our income and it (ill "e s3o(n in t3e "alance s3eet under t3e 3eading of current assets and rent (ill "e s3o(n as income in t3e profit 6 loss account T3e ledger account of rent (ill "e as follo(s0 Co*e G A/o'n"91r.: 7s. 2.9... 2.9... A/o'n"9Cr.: 7s.
VU
7en" A!!o'n"
4articulars Amount !r. ,Rs.-
A!!o'n" Co*e -------4articulars Balance c;d Recei8a"le Amount Cr. (Rs.) 180,000 20,000
Balance ";d
2..9... 200,000 To"a& 200,000
To"a&
Pro.i" C Loss A!!o'n"
Nasee/ Tra*ing Co/-an) Pro.i" C Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003 Par"i!'&ars A/o'n" 7s. In In!o/e < Sa&es < 7e#en'e 19+ %9&.. 5ess0 Sales Return ,139&..LessD Cos" o. Goo*s So&* ,See note P 1-
A/o'n" 7s. 19+&29... 19.$ 9 ..
Gross Pro.i" LessD A*/inis"ra"i#e e>-enses ,See note P 2LessD Se&&ing E>-enses Carriage on sales O-era"ing -ro.i" Add0 It3er *ncome ,Rent recei8edNe" In!o/e @ Copyrig3t 2irtual :ni8ersity of 4a)istan
KJHF400
%$%9+.. &49... 33HH00 2..9... H3HFH00
188
'inancial Accounting = * > 7?T1.1 No"e G 1 Cos" o. Goo*s So&* Rs. 11%92.. $139%.. ,1.9...4.9$.. 1&+9&.. +4&.. ,13&9...1F0KJFJ00
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Ipening stoc) Add0 4urc3ases 5ess0 purc3ase return Add0 Carriage on purc3ases Add0 Jages Add0 'uel and po(er 5ess0 Closing stoc) Cos" o. goo*s so&* No"e G 3 A*/inis"ra"i#e E>-enses
?eneral e/penses *nsurance !epreciation on 7ac3inery !epreciation on Building Salaries To"a& A*/inis"ra"i#e E>-enses Ba&an!e S%ee"
&.9... +19+.. 4.9... &49... 33.9... IKIFL00
Nasee/ Tra*ing Co/-an) Ba&an!e S%ee" As A" 5'ne 40F 3003 Liabi&i"ies Par"i!'&ars Capital A**0 4rofit and 5oss Account LessD !ra(ings A/o'n" 7s. 19.+.9... 42494.. ,129...Par"i!'&ars Fi>e* Asse"s land 7ac3inery 4..9... 5ess0 !ep. Building 5ess0 !ep. C'rren" Asse"s !e"tors Cas3 in 3and Cas3 at "an) Closing stoc) Rant recei8a"le Ad8ance insurance To"a& Asse"s A/o'n" 7s. 2..9... 3&.9... ,4.9...&4.9... ,&49...% &9... 1F14MF000 2+.9... 1.9$.. %29&.. 13&9... 2.9... 139... 1FMIKFH00
1FI03FH00 C'rren" Liabi&i"ies Creditors Salaries paya"le 12&9... 3.9...
To"a&
1FMIKFH00
189
'inancial Accounting = * > 7?T1.1 I&&'s"ra"ion G 3 'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Arif Traders on Nune 3.9 2..2 Ari. Tra*ers Tria& ba&an!e As on 5'ne 40F 3003 4articulars Sales Stoc) on Nune 3.92..2 7aterial Consumed Cas3 in Eand Cas3 at Ban) Capital Account Nuly .19 2..1 !ra(ings 'urniture Rent 4aid Jages 4aid !iscounts Allo(ed !iscounts Recei8ed !e"tors Creditors 4ro8ision for !ou"tful !e"ts Nul. .1 2..1 2e3icles 2e3icle Running Costs Bad !e"ts Jritten off
VU
Amount !r. ,Rs.1 %9%.. %3 9... 1.9%.. % 9... 1429%.. 29... %19... 12+9... 349%.. 24&9... 12.9... 229%.. 4.9%..
Amount Cr. ,Rs.+$ 9...
4+%9...
1$9... 1249%.. 139%..
To"a& 1FM4KF000 F'r"%er in.or/a"ion a#ai&ab&eD Jages and salaries paya"le on Nune 3.9 2..2 Rs. 49%.. Rent prepaid on Nune 3.9 2..2 Rs. 9... 2e3icle running costs paya"le on Nune 3. Rs. 39... *ncrease in pro8ision for dou"tful de"ts Rs. 39... !epreciation rate is 12.%T for furniture and 2.T for 8e3icle.
1FM4KF000
Qou are re1uired to prepare 4rofit and 5oss Account for t3e year and Balance S3eet as on Nune 3.9 2..2
190
'inancial Accounting = * > 7?T1.1 So&'"ion Ari. Tra*ersF Pro.i" an* Loss A!!o'n"F For "%e =ear En*ing 5'ne 40F 3003 Par"i!'&ars Sales LessD Cost of ?oods Sold ,material consumedGross Pro.i" LessD E>-enses Jages and Salaries Rent !iscount Allo(ed 2e3icle Running Cost 4ro8ision for !ou"tful !e"t !epreciation Iperating profit A**D It3er income, !iscount recei8eNe" In!o/e 1IHF000 Hote 1 Hote 2 Hote 3 Hote 4 Hote % ,1339%..,449...,349%..,2%9%..,439%..,339...-
VU
7s.
7s. +$ 9... ,%3 9...HI0F000
941HF000: 14M000 1$9...
*n t3e profit 6 loss account prepared a"o8e9 t3e amount of "ad de"ts (ritten off are grouped (it3 t3e pro8ision for dou"tful de"ts ,see note P 4*n t3e follo(ing presentation9 "ad de"ts are s3o(n separately and (or)ing of pro8ision of "ad de"ts is s3o(n in Hote P 4,a-. Ari. Tra*ersF Pro.i" an* Loss A!!o'n"F For "%e =ear En*ing 5'ne 40F 3003. Par"i!'&ars 7s. Sales 5ess0 Cost of ?oods Sold Gross Pro.i" LessD E>-enses Jages and Salaries Rent !iscount Allo(ed 2e3icle Running Cost Bad !e"ts 4ro8ision for !ou"tful !e"t !epreciation Hote 1 Hote 2 Hote 3 Hote 4,aHote % ,1339%..,449...,349%..,2%9%..,4.9%..,39...,339...-
7s. +$ 9... ,%3 9...HI0F000
,3149...-
Iperating 4rofit A**D It3er income, !iscount recei8e: Ne" In!o/e
14M000 1$... 1IH000
191
'inancial Accounting = * > 7?T1.1 Ari. Tra*ers Ba&an!e S%ee" As A" 5'ne 40F 3003 Amount Rs.
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4articulars Asse"s Fi>e* Asse"s Hote % C'rren" Asse"s Stoc)s !e"tors Hote & 4repaid #/penses Cas3 at Ban) Cas3 in Eand Total Liabi&i"ies Capital 4rofit 5ess0 !ra(ings C'rren" Liabi&i"ies Creditors #/penses 4aya"le Hote Total No"e G 1 Sa&aries C $ages a!!o'n"
Amount Rs. 1ILF000
1 %9%.. 22+9%.. 9... % 9... 1.9%.. 4+%9... 1%49... ,1429%..1249%.. 9%..
HJLFI00 M4KFI00
I0MFI00 143F000 M4KFI00
Sa&aries C $ages A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.Salaries 6 Jages 4aid 12+9... Salaries 6 Jages 4aya"le 49%.. Transfer to 4rofit 6 5oss Account To"a& 1339%.. To"a& No"e G 3 7en" a!!o'n"
Amount Cr. ,Rs.-
1339%.. 1339%..
Sa&aries C $ages A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.Rent 4aid %19... Rent 4aya"le Transfer to 4rofit 6 5oss Account %19... To"a& Ve%i!&e r'nning !os" a!!o'n"
Amount Cr. ,Rs.9... 449... %19...
To"a& No"e G 4
Ve%i!&e 7'nning !os" A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.Cost 4aid 229%.. Cost 4aya"le 39... Transfer to 4rofit 6 5oss Account To"a& 2%9%.. To"a& @ Copyrig3t 2irtual :ni8ersity of 4a)istan
Amount Cr. ,Rs.-
2%9%.. 1339%..
192
'inancial Accounting = * > 7?T1.1 No"e G H Pro#isions .or *o'b".'& *eb"s a!!o'n" A!!o'n" Co*e -------Amount 4articulars !r. ,Rs.4.9%.. Balance B;' Transfer to 4rofit 6 5oss 1&9%.. Account % 9... To"a& Pro#ision .or *o'b".'& *eb"s a!!o'n" Pro#ision .or *o'b".'& *eb"s A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.Balance B;' Balance C;' To"a& No"e G I 'urniture 2e3icle No"e G M Transfer to 4rofit 6 5oss 1&9%.. Account 1&9%.. To"a& Fi>e* Asse"s a" $1V Cos" 7a"e 29... 12.%T 12.9... 1eb"ors a!!o'n" 24&9... ,1&9%..33LFI00 A!!o'n" Co*e -------4articulars Amount Cr. ,Rs.Salaries 49%.. 2e3icle running cost 39... 2.T Amount Cr. ,Rs.139%.. 39... 1&9%.. Amount Cr. ,Rs.139%.. 439%.. % 9...
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Pro#ision .or *o'b".'& *eb"s 4articulars Bad !e"ts Balance C;' To"a& No"e G H 9a:
1e-. +9... 249... 339...
$1V &39... +&9... 1%+9...
!e"tors 5ess0 4ro8ision for !ou"tful !e"ts ,note 4No"e G J E>-enses Pa)ab&e E>-enses Pa)ab&e 4articulars Amount !r. ,Rs.-
Balance C;' To"a&
9%.. 9%.. To"a& 9%..
193
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF MANUFACTU7ING CONCE7N *n t3is lecture9 (e (ill discuss financial statements of manufacturing concern. *n manufacturing concern9 cost of goods sold statement is also prepared. I&&'s"ra"ion G1
VU Lesson-33
'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Eassan 7anufacturing Concern on Nune 3.9 2..2. +assan Man'.a!"'ring Con!ern Tria& ba&an!e As on 5'ne 40F 3003 Par"i!'&ars Ra( 7aterial stoc) Nul. .19 2..1 Jor) in process Nul. .19 2..1 'inis3ed goods stoc) Nul. .19 2..1 Ra( material purc3ased Jages 'reig3t in(ard 4lant and mac3inery Iffice e1uipment 2e3icles Acc. depreciation 4lant Acc. depreciation Iffice e1uipment Acc. depreciation 2e3icles 'actory o8er3eads #lectricity Salaries Salesman commission Rent *nsurance ?eneral #/pense Ban) C3arges !iscounts Allo(ed Carriage out(ard Sales Trade !e"tors Trade Creditors Ban) Cas3 !ra(ings Capital Nuly .19 2..1 To"a& No"esD Stoc) on Nune 3.9 2..2. o Ra( 7aterial o Jor) in 4rocess o 'inis3ed ?oods
A/o'n" 1r. 97s.: 3%9%.. 429... $%9... 2%.9... 1$.9... 129... 4..9... 4%9... 2..9...
A/o'n" Cr. 97s.:
12%9... $.9... 14.9... 12.9... 2..9... 1%.9... &.9... $9%.. 2.9... 3%9... 2%.9... 1&%9... 11.9... 1 %9... 3FKKKF000
1+%92.. 1291+% + 9&..
19%..9... 22.9...
$&39..% 3FKKKF000
429... %&9%.. &.9...
194
'inancial Accounting = * > 7?T1.1 %.T of electricity9 insurance and salaries are c3arged to factory and "alance to office. !epreciation to "e c3arged on 4lant 6 7ac3inery at 2.T9 Iffice #1uipment at 1.T and 2e3icles at 2.Ton J!2. Jrite off "ad de"ts Rs. 3.9.... All t3e (ages are direct e/pense.
VU
7e;'ire*D Qou are re1uired to prepare profit and loss account for t3e year and "alance s3eet as on Aune3.9 2..2. So&'"ion Pro.i" C Loss A!!o'n" +assan Man'.a!"'rer Con!ern Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 3003 4articulars Hote Sales 5ess0 Cost of ?oods Sold Gross Pro.i" 5ess0 Administrati8e #/penses 5ess0 Selling #/penses O-era"ing Pro.i" 5ess0 Ban) C3arges Ne" Pro.i" Be.ore Ta> Ba&an!e S%ee" +assan Man'.a!"'rer Con!ern Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 3003 Hote 4 % & 1 2 3
Amount Rs. 19%..9... +&9+&. J04F0H0 %1$9 &1 1%%9... 3LF3JL $9%.. 30FJJL
4articulars Fi>e* Asse"s a" $1V Current Assets Current 5ia"ilities $or6ing Ca-i"a& To"a& Asse"s E/-&o)e* Finan!e* b)D Capital Add0 4rofit for t3e year 5ess0 !ra(ings To"a& Liabi&i"ies No"es "o "%e A!!o'n"s No"e G 1 Cos" o. Goo*s So&*
Amount Rs. 3JIF3KH &%39%.. ,22.9...H44FI00 J0KFJKH $&39..% 2.9 + ,1 %9...J0KFJKH
Stoc) of Ra( 7aterial Nul .19 2..1 Add. 4urc3ases Add. 'reig3t *n(ard 5ess0 Closing Stoc) of Ra( 7aterial 7a, Ma"eria& Cons'/e* !irect la"or 'actory I8er3eads 'actory I8er3eads #lectricity ,%.T of $.9...-
3%9%.. 2%.9... 129... 2+ 9%.. ,429...3IIFI00 1$.9... 12%9... 4.9...
195
'inancial Accounting = * > 7?T1.1 Salaries ,%.T of 14.9...*nsurance ,%.T of 1%.9...4lant !epreciation ,Hote %To"a& Fa!"or) Cos" Add0 Jor) in 4rocess Nul .19 2..1 5ess0 Jor) in 4rocess Nun 3.9 2..2 Cos" o. Goo*s Man'.a!"'re* Add0 'inis3ed ?oods Stoc) Nul .19 2..1 5ess0 'inis3ed ?oods Stoc) Nun 3.9 2..2 Cos" o. Goo*s So&* No"e G 3 A*/inis"ra"i#e E>-enses Salaries ,%.T of 14.9...?eneral #/penses Rent *nsurance ,%.T of 1%.9...!iscount Allo(ed Bad !e"ts Iffice #lectricity ,%.T of $.9...!epreciation 2e3icles ,Hote %!epreciation Iffice #1uip. ,Hote%A*/inis"ra"i#e E>-enses No"e G 4 Se&&ing E>-enses Salesman Commission Carriage Iut(ard Se&&ing E>-enses No"e G H Fi>e* Asse"s a" $1V Cost 4lant 6 7ac3. 2e3icles Iffice #1uipment 4..9... 2..9... 4%9... Rate 2.T 2.T 1.T A!!. 1e-re!ia"ion Ipening 'or t3e year Closing 1+%92.. + 9&.. 1291+% 4.9+&. 2.94$. 392$1 MHFJ31 23&91&. 11$9.$. 1%94 & J!2 1&39$4. $19+2. 2+9%24 3JIF3KH 12.9... 3%9... 1IIF000 .9... &.9... 2..9... %9... 2.9... 3.9... 4.9... 2.94$. 392$1 I1KFJM1 .9... %9... 4.9+&.
VU
3%.9+&. JKMFHM0 429... ,%&9%..JJ1FLM0 $%9... ,&.9...JLMFLM0
No"e G I C'rren" Asse"s Stoc) Ra( 7aterial Jor) in 4rocess 'inis3ed ?oods !e"tors 5ess0 Bad !e"ts Ban) Cas3 C'rren" Asse"s No"e G M C'rren" Liabi&i"ies Trade Creditors
429... %&9%.. &.9...
1%$9%.. 2%.9... ,3.9...1&%9... 11.9... MI4FI00
22.9...
196
'inancial Accounting = * > 7?T1.1 I&&'s"ra"ion G 3 'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Na8ed 'urniture 7anufacturers on Nune 3.9 2..2. 5a#e* F'rni"'re Man'.a!"'rers Tria& ba&an!e As on 5'ne 40F 3003 4articulars Ra( 7aterial stoc) Nul. .19 2..1 Jor) in process Nul. .19 2..1 'inis3ed goods stoc) Nul. .19 2..1 Ra( material purc3ased Jages 'reig3t in(ard 4lant and mac3inery Iffice e1uipment Acc. depreciation 4lant Acc. depreciation Iffice e1uipment ?eneral factory o8er3eads Iffice electricity 'actory po(er Salaries administrati8e staff Salaries sales staff Salesman commission Rent *nsurance ?eneral Admin. #/pense Ban) C3arges !iscounts Allo(ed Carriage out(ard Sales Trade !e"tors Trade Creditors Ban) Cas3 !ra(ings Capital Nuly .19 2..1 To"a&
VU
Amount !r. ,Rs.%29%.. + 92%. 339 %. +2%9... $129%.. $9 %. ..9... %.9... 9%.. 1$9 %. 3492%. 11.9... %9... 2$9 %. 3.9... 1.9%.. 339%.. %9 %. 129... 149 %. 3%%9 %. 1429... 2192%. %.9... 4FMLLFI00
Amount Cr. ,Rs.-
12%9... 2.9...
29%..9... 3129%..
429... 4FMLLFI00
No"esD Stoc)s on Nune 3.9 2..2 o Ra( 7aterial Rs. &.9... o 'inis3ed ?oods Rs. 1..9... o Jor) in 4rocess Rs. 3 9%... Iut of total (ages Rs. 4%.9... is direct and "alance indirect. $.T of Rent and *nsurance are to "e apportioned to factory and "alance to administrati8e office. !epreciation to "e c3arged on 7ac3inery at 2.T and Iffice #1uipment at 1.T on cost. Qou are re1uired to prepare profit and loss account for t3e year and "alance s3eet as on Aune3.9 2..2.
197
'inancial Accounting = * > 7?T1.1 So&'"ion 5a#e* F'rni"'re Man'.a!"'rer Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 3003 Par"i!'&ars No"e Sales 5ess0 Cost of ?oods Sold ?ross 4rofit 5ess0 Administrati8e #/penses 5ess0 Selling #/penses Iperating 4rofit 5ess0 'inancial C3arges Ne" Pro.i" Be.ore Ta> 1 2 3 4
VU
A/o'n" 7s. 29%..9... 29.1&94.. 4$39&.. 1 %93%. 11$9%.. 1$+9 %. 1 9 %. 1J3F000
Par"i!'&ars Fi>e* Asse"s a" $1V Current Assets Current 5ia"ilities $or6ing Ca-i"a& To"a& Asse"s E/-&o)e* Finan!e* b)D Capital Add0 4rofit for t3e year 5ess0 !ra(ings To"a& Liabi&i"ies
5a#e* F'rni"'re Man'.a!"'rers Ba&an!e s%ee" For "%e =ear En*ing 5'ne 40F 3003 No"e % &
A/o'n" 7s. HM0F000 1&9%.. ,3129%..H0HF000 KMHF000 429... 1 29... ,%.9...KMHF000
$or6ing 1 Cos" o. Goo*s So&* Stoc) of Ra( 7aterial Nul .19 2..1 Add. 4urc3ases Add. Carriage *n(ard 5ess0 Closing Stoc) of Ra( 7aterial Ra( 7aterial Consumed !irect la"or 'actory I8er3eads ?eneral 'actory I8er3eads 4o(er Rent ,$.T of 3.9...*nsurance ,$.T of 1.9%..4lant dep. In cost ,Hote %*ndirect 5a"or Total 'actory Cost Add0 Jor) in 4rocess Nul .19 2..1 5ess0 Jor) in 4rocess Nun 3.9 2..2 Cost of ?oods 7anufactured Add0 'inis3ed ?oods Stoc) Nul .19 2..1 5ess0 'inis3ed ?oods Stoc) Nun 3.9 2..2 Cos" o. Goo*s So&* @ Copyrig3t 2irtual :ni8ersity of 4a)istan %29%.. +2%9... $9 %. +$&92%. ,&.9...+2&92%. 4%.9... 9%.. 3492%. 249... $94.. 14.9... 3&29%..
&4&9&%. 29.229+.. + 92%. ,3 9%..29.$29&%. 339 %. ,1..9...3F01MFH00
198
'inancial Accounting = * > 7?T1.1 $or6ing 3 A*/inis"ra"i#e E>-enses Administrati8e Salaries Rent ,2.T of 3.9...*nsurance ,2.T of 1.9%..?eneral Admin #/penses Iffice #lectricity !epreciation Iffice #1uip. ,Hote%A*/inis"ra"i#e E>-enses $or6ing 4 Se&&ing E>-enses SalesmanGs Salary Commission on Sales Carriage Iut(ard Se&&ing E>-enses $or6ing H Finan!ia& E>-enses Ban) C3arges !iscount Allo(ed Finan!ia& E>-enses $or6ing I Fi>e* Asse"s a" $1V Cost 4lant and 7ac3. Iffice e1uipment. Rate A!!. 1e-re!ia"ion Ipening 'or t3e year closing 2&%9... 2%9... J!2 43%9... 2%9... HM0F000 %9 %. 129... 1JFJI0 %9... 2$9 %. 149 %. 11KFI00 11.9... &9... 291.. 339%.. 1$9 %. %9... 1JIF4I0
VU
..9... 2.T 12%9... 14.9... %.9... 1.T 2.9... %9... 1HIF000
$or6ing M C'rren" Asse"s Stoc) Ra( 7aterial Jor) in 4rocess 'inis3ed ?oods &.9... 3 9%.. 1..9...
!e"tors Ban) Cas3 C'rren" Asse"s
3%%9 %. 1429... 2192%. J1MFI00
$or6ing J C'rren" Liabi&i"ies Creditors 3129%..
199
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF PA7TNE7S+IP E>a/-&e G 1 T3e follo(ing trial "alance (as e/tracted from A9 B 6 Co. "oo)s on Nune 3.9 2..2. A B C !o/-an) Tria& ba&an!e As on 5'ne 40F 3003 4articulars Building Cost 'urniture and 'i/tures Cost Accumulated !ep. Building Accumulated !ep. 'urniture !e"tors Creditors Cas3 at Ban) Stoc) on Nun 3.9 2..2 Sales Cost of goods Sold Carriage out(ard !iscounts Allo(ed 7ar)up on Ban) 5oan Iffice #/penses Salaries and Jages Bad !e"ts 4ro8ision for Bad !e"ts Ban) 5oan ,5ong TermCapital > A B Current Account > A B !ra(ings > A B To"a& No"esD
VU Lesson-34
Amount !r. ,Rs.%.9... 11.9... 1&2943. &9 . %&394.. 1.9%%. 129$$. 191%. 4.9... 2491&. 1$+91 . %9.3.
Amount Cr. ,Rs.-
2%.9... 339... 1119%.. 1923&9%..
&49... %&9%.. 3FMLMF0H0
49... 4..9... 3%.9... 2+%9... 139.&. 29+$.
3FMLMF0H0
#/penses to "e accrued9 Iffice #/penses Rs. +&.9 Jages Rs.29.... !epreciate 'i/tures 1.T and Building %T on straig3t line. Reduce pro8ision for dou"tful de"ts to Rs. 392.. 4artners3ip salary of A Rs. $9... is to "e accrued. A and B s3are profit and loss e1ually.
Qou are re1uired to prepare profit 6 loss account and t3e "alance s3eet as at Nune 3.9 2..2. .
200
'inancial Accounting = * > 7?T1.1 So&'"ion Pro.i" C Loss A!!o'n" AF BF C Co Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 30-SSSSS Par"i!'&ars No"e A/o'n" 7s. Sales 5ess0 Cost of ?oods Sold ,material consumedGross Pro.i" 5ess0 #/penses Jages and Salaries Iffice #/penses Carriage Iut !iscount Allo(ed 7ar)up on 5oan 4ro8ision for !ou"tful !e"t !epreciation
VU
A/o'n" 7s 1923&9%.. , 1.9%%.I3IFLI0
3 4
1+191 . 2%912. 129$$. 191%. 4.9... 4923. 4$9%..
,3239.%.303FL00
Ne" Pro.i"
*n a"o8e solution9 "ad de"ts are grouped (it3 pro8ision for dou"tful de"ts. *n t3e follo(ing solution9 "ad de"ts and pro8ision for dou"tful de"ts are s3o(n separately. AF BF C Co Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 30-SSSSSSS Par"i!'&ars No"e A/o'n" 7s. Sales 5ess0 Cost of ?oods Sold ,material consumed?ross 4rofit 5ess0 #/penses Jages and Salaries Iffice #/penses Carriage Iut !iscount Allo(ed 7ar)up on 5oan .Bad !e"ts 4ro8ision for !ou"tful !e"ts not re1uired !epreciation
A/o'n" 7s. 1923&9%.. , 1.9%%.%2%9+%.
1 2
3,a4
1+191 . 2%912. 129$$. 191%. 4.9... %9.3. ,$..4$9%..
,3239.%.303FL00
Ne" Pro.i"
201
'inancial Accounting = * > 7?T1.1 Pro.i" C Loss A--ro-ria"ion A!!o'n" AF BF C Co Pro.i" 1is"rib'"ion A!!o'n" Par"i!'&ars Het 4rofit 5ess0 4artnerGs Salary > A !istri"uta"le 4rofit 5ess0 4artnerGs S3are in 4rofit A ,%.T of 1+49+..B ,%.T of 1+49+..No"e A/o'n" 7s. A/o'n" 7s. 2.29+.. ,$9...1+49+.. + 94%. + 94%. ,1+49+..0
VU
Ba&an!e S%ee" AF BF C Co Ba&an!e S%ee" As A" 5'ne 40F 3003 No"e 4 % &
Par"i!'&ars 'i/ed Assets at J!2 Current Assets Current 5ia"ilities Jor)ing Capital To"a& 'inanced By0 Capital > A B Current Account > A B 5ong Term 5oan To"a& No"es "o "%e A!!o'n"sD No"e G 1 Sa&aries a!!o'n"
A/o'n" 7s.
A/o'n" 7s. %2$9%.. 2+94.. ,11494&.&149+4. 1F1H4FHH0 &4%9... +$944. 4..9... 1F1H4FHH0
3%.9... 2+%9... %49%1. 439+3.
4articulars Salaries paid Salaries paya"le
Sa&aries A!!o'n" Amount !r. ,Rs.1$+91 . 29...
A!!o'n" Co*e -------4articulars Amount Cr. ,Rs.-
Balance ";d To"a& 1L1F1J0 To"a&
1+191 . 1L1F1J0
202
'inancial Accounting = * > 7?T1.1 No"e G 3 O..i!e E>-enses A!!o'n" Co*e -------4articulars Amount Cr. ,Rs.-
VU
O..i!e E>-enses A!!o'n" 4articulars Amount !r. ,Rs.Iffice #/penses paid 2491&. Iffice #/penses paya"le +&. To"a& No"e G 4
Balance ";d 3IF130 To"a& Pro#isions .or 1o'b".'& 1eb"s
2%912. 3IF130
Pro#ision .or 1o'b".'& 1eb"s A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Bad !e"ts %9.3. Ipening Balance Balance c;d 392.. Transfer to 4rofit 6 5oss Account To"a& No"e G 49a: KF340 To"a& Pro#ision .or 1o'b".'& 1eb"s
49... 4923. KF340
Pro#ision .or 1o'b".'& 1eb"s A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.4ro8ision not re1uired $.. Ipening Balance Balance c;d 392.. To"a& No"e G H Building 'urniture No"e G I HF000 To"a& Fi>es Asse"s a" $1V Cost Rate %.9... %T 11.9... 1.T C'rren" Asse"s 1&2943. 392.. %&394.. 1%+923. &9 . J3LFH00 A!!. 1e-. Ipening 'or t3e Qr. Closing 2%.9... 3 9%.. 2$ 9%.. 449... 339... 119... HKFI00 J!2 4&29%.. &&9... I3KFI00
49...
HF000
Stoc)s !e"tors 5ess0 4ro8ision ,note3Ban) To"a& No"e G M Creditors #/p. 4aya"le0 Salaries Iff. #/p To"a& C'rren" Liabi&i"ies
1119%.. 29... 29+&. 11HFHM0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
203
'inancial Accounting = * > 7?T1.1 No"e G J A0s C'rren" A!!o'n"
VU
A0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings &49... Ipening Balance 4rofit for t3e year Salary Balance c;d %49%1. To"a& No"e G K 11KFI10 To"a& B0s C'rren" A!!o'n"
139.&. + 94%. $9... 11KFI10
B0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings %&9%.. Ipening Balance 4rofit for t3e year Balance c;d To"a& 439+3. 100FH40 To"a&
29+$. + 94%.
100FH40
204
'inancial Accounting = * > 7?T1.1 E>a/-&e G 3 Atif9 Amir and Ba"ar are partners in a firm. T3ey s3are profit and losses in t3e ratio %0 30 2 respecti8ely. T3eir trial "alance as on Nune 3.9 2..2 is as follo(s0 A"i.F A/irF Babar C !o/-an) Tria& ba&an!e As on 5'ne 40F 3003 4articulars Sales Returns in(ard 4urc3ases Carriage in(ard Ipening stoc) !iscount allo(ed Salaries and Jages Bad de"ts 4ro8ision for "ad de"ts ?eneral e/penses Rent and rates 4ostages 7otor e/penses 7otor 8an at cost Iffice e1uipment at cost Accumulated depreciation 7otor 8an Accumulated depreciation Iffice e1uipment Creditors !e"tors Cas3 at "an) !ra(ings0 Atif Amir Ba"ar Current accounts0 Atif Amir Ba"ar Capital accounts0 Atif Amir Ba"ar To"a& T3e follo(ing notes are rele8ant to Nune 3.9 2..2 Stoc) on Nune 3.92..2 is Rs. %19.&.. Rent in ad8ance Rs. 12.. *ncrease pro8ision for "ad de"ts to Rs. $ .. Salaries0 Amir Rs.192..9 Ba"ar Rs. ... *nterest on capital V 1.T. !epreciate 7otor 8an Rs. 29%.. and office e1uipment Rs. 19&$..
VU
Amount !r. ,Rs.&9$.. 13 91+. 19%.. 429$%. 11. 1$92+& 19234 +4% 29%&% 294%. 39+4. 129%.. $94..
Amount Cr. ,Rs.21.9%..
$..
3 91 $ &&& 129&1. $941 &921& 1%3
492.. 29 .. 2493%&
193+. 29. 4 3.9... 1&9... 129... 40HF030
40HF030
Qou are re1uired to dra( up a set of final accounts as on Nune 3.9 2..2.
205
'inancial Accounting = * > 7?T1.1 So&'"ion Pro.i" C Loss A!!o'n" A"i.F A/irF Babar C !o/-an) Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 30-3 Par"i!'&ars No"e A/o'n" 7s. Sales 5ess0 Cost of ?oods Sold ?ross 4rofit 5ess0 #/penses Jages and Salaries ?eneral #/penses Rent and Rates 4ostages 7otor #/penses !iscount Allo(ed 4ro8ision for !ou"tful !e"t !epreciation Ne" Pro.i" Pro.i" C Loss A--ro-ria"e A!!o'n" A"i.F A/irF Babar C !o/-an) Pro.i" 1is"rib'"ion A!!o'n" Par"i!'&ars No"e A/o'n" 7s. A/o'n" 7s. 3+9%%. ,192.., ..,39...,19&..,192..319$%. 2 1
VU
A/o'n" 7s 2.39 .. ,13.94$.3922.
4 %
1$92+& +4% 2944% 294%. 39+4. 11. 193.4 491$.
,339& .4LFII0
Het 4rofit 5ess0 4artnerGs Salary > Amir Ba"ar 5ess0 *nterest on capital > Atif ,1.T of 3.9...Amir ,1.T of 1&9...Ba"ar ,1.T of 129...!istri"uta"le 4rofit 5ess0 4artnerGs S3are in 4rofit Atif ,%;1. of 319$%.Amir ,3;1. of 319$%.Ba"ar ,2;1. of 319$%.-
1%9+2% +9%%% &93 .
,319$%.0
206
'inancial Accounting = * > 7?T1.1 Ba&an!e S%ee" A"i.F A/irF Babar C !o/-an) Ba&an!e S%ee" As A" 5'ne 40F 3003 No"e A/o'n" 7s. % &
VU
Par"i!'&ars 'i/ed Assets at J!2 Current Assets Current 5ia"ilities Jor)ing Capital To"a& 'inanced By0 Capital > Atif Amir Ba"ar Current Account > Atif Amir Ba"ar To"a& No"es "o "%e A!!o'n"s No"e G 1 Sa&es
A/o'n" 7s. +9$2. $$91%4 ,2493%&&39 +$ J4FM1K
+ 1.
3.9... 1&9... 129... 9 .% 39 $% 4912$
%$9... 1%9&1$ J4FM1K
Sales 5ess0 Return in(ard Het Sales No"e G 3 Cos" o. goo*s so&*
7s. 21.9%.. ,&9$..2.39 ..
Ipening Stoc) Add0 4urc3ases Add0 Carriage in(ard 5ess0 Closing Stoc) No"e G 4 7en" an* 7a"es
429$%. 13 91+. 19%.. ,%19.&.13.94$.
7en" an* 7a"es A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Iffice #/penses paid 29%&% Ad8ance Rent Balance ";d To"a& 3FIMI To"a&
12. 2944% 3FIMI
207
'inancial Accounting = * > 7?T1.1 No"e G H Pro#isions .or 1o'b".'& 1eb"s
VU
Pro#ision .or 1o'b".'& 1eb"s A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Bad !e"ts 19234 Ipening Balance Balance c;d $ . Transfer to 4rofit 6 5oss Account To"a& No"e G I 3F10H To"a& Fi>e* Asse"s a" $1V Cost 129%.. $94.. A!! *e-. Ipening 'or t3e Qr. Closing 492.. 29%.. &9 .. 29 .. 19&$. 493$. HF1K0 J!2 %9$.. 49.2. LFK30
$.. 193.4 3F10H
7otor 2an Iffice #1uipment
No"e G M
C'rren" Asse"s %19.&. 3 91 $ ,$ .&&& 12. $$91%4
Stoc) !e"tors 5ess0 4ro8ision for dou"tful de"ts Cas3 at "an) Ad8ance rent No"e G J C'rren" Liabi&i"ies
Creditors No"e G K A"i.0s C'rren" A!!o'n"
2493%&
A"i.0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings 129&1. Ipening Balance *nterest on Capital 4rofit for t3e year Balance c;d 9 .% To"a& 30F41I To"a&
193+. 39... 1%9+2% 30F41I
208
'inancial Accounting = * > 7?T1.1 No"e G L A/ir0s C'rren" A!!o'n"
VU
A/ir0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Ipening Balance 1%3 Salary !ra(ings $941 *nterest on Capital 4rofit for t3e year Balance c;d To"a& NOTE G 10 39 $% 13F4II To"a& Babar0s C'rren" A!!o'n"
192.. 19&.. +9%%% 13F4II
Babar0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings &921& Ipening Balance Salary *nterest on Capital 4rofit for t3e year Balance c;d To"a& 4912$ 10F4HH To"a&
29. 4 .. 192.. &93 . 10F4HH
209
'inancial Accounting = * > 7?T1.1 MA78 UP ON CAPITAL AN1 17A$INGS
VU Lesson-35
T3e partners3ip agreement may include one or "ot3 of t3e follo(ing clauses0 o 4artners are c3arged interest on dra(ings ,t3is may "e on t3e total amount of t3e current account "alance or on t3e amount e/ceeding a specific limit9 depending upon t3e terms of agreement-. o 4artners are gi8en interest on t3eir capital ,again t3is can "e on t3e total amount of t3e capital or t3e amount e/ceeding a specific figure-. 7easons .or In"eres" On Ca-i"a& T3e profit;loss s3aring ratio may not "e e1ual despite of t3e fact t3at partners 3a8e contri"uted e1ual amount of capital9 depending upon t3e partners3ip agreement. Ta)e t3e follo(ing e/ample0 T(o partners start a "usiness and contri"ute e1ual capital and decide to s3are e1ual profits. But t3ey also realiKe t3at in future t3e "usiness may need furt3er capital and at t3at time "ot3 partners may not "e a"le to contri"ute e1ually. So9 instead of re8ising t3e contract e8ery time9 t3ey include a clause in t3e agreement9 (3ere"y9 t3e partners are allo(ed an interest on t3e capital contri"uted. T3is interest can "e on t3e (3ole amount of "ot3 partners or only of one partner on t3e amount contri"uted in e/cess of t3e ot3er partner. T3is (ay a partner9 (3o pro8ides capital in e/cess of 3is profit s3aring ratio9 can "e compensated. Ine may say t3at t3e same results can "e ac3ie8ed "y saying t3at profit and loss s3aring (ill "e proportionate to t3e amount of capital in8ested. But9 as (e 3a8e said t3at in partners3ip e8eryt3ing depends on t3e 4artners3ip Agreement. 7easons .or In"eres" On 1ra,ings !ra(ings are opposite to capital in8ested i.e. t3ese are t3e funds dra(n "y partners from t3e "usiness. T3erefore9 in order to )eep t3e distri"ution of profit fair9 a clause may "e inserted in t3e agreement9 (3ere an interest is c3arged on t3e dra(ings of t3e partners. Again9 t3is can "e on t3e total amount or on an amount e/ceeding a specific limit. Bot3 of t3e a"o8e t3ings depend upon t3e agreement "et(een partners. A!!o'n"ing Trea"/en" Ine may t3in) t3at as *nterest on Capital is paid to t3e partners9 so it s3ould "e treated as "usiness e/pense and *nterest on !ra(ings is c3arged from t3e partners9 t3erefore9 it s3ould "e treated as income. But t3is is not t3e case. Nust li)e partners salaries9 "ot3 t3ese items (ill "e included in t3e 4rofit and 5oss Appropriation Account. 4artnersG salaries9 interests etc. are ne8er treated as e/pense or income of t3e "usiness. T3ey are a part of !*STR*B:T*IH I' 4RI'*T. E>!e-"ions Rent paid to partner for use of 3is premises9 purc3ase of stoc)s9 assets or ot3er items for use in "usiness9 7ar)up on loan from partner are t3e e/ceptions. All t3ese e/penses are c3arged to profit 6 loss account of t3e partners3ip firm. A!!o'n"ing En"ries o In"eres" on Ca-i"a& !e"it0 Credit0 Credit0 Credit0 4rofit and 5oss Appropriation Account 4artner AGs Current Account 4artner BGs Current Account 4artner CGs Current Account @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 o In"eres" on 1ra,ings !e"it0 !e"it0 !e"it0 Credit0 E>a/-&e G 1 4artner AGs Current Account 4artner BGs Current Account 4artner CGs Current Account 4rofit and 5oss Appropriation Account
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7r. A"id is a partner in a partners3ip firm. Eis capital on Nuly 19 2..1 (as Rs. 2..9.... Ee in8ested furt3er capital of Rs. 1..9... on 7arc3 19 2..2. Qou are re1uired to calculate 3is mar) up. 7ar) up rate is %T. T3e financial year is from Nuly to Nune. So&'"ion Rs. 2..9... (as in8ested in t3e "eginning of t3e year and e/tra capital (as in8ested on 1st 7arc3. So9 from 7arc3 on(ard9 t3e capital is Rs. 3..9... ,2..9... M 1..9...-. Je (ill calculate mar) up on Rs. 2..9... for 12 mont3s9 i.e.9 from Nuly to Nune. 7ar) up on 1..9... (ill "e for 4 mont3s9 i.e.9 from 7arc3 to Nune. 7ar) up is calculated as follo(s0 2..9... / %T O 1.9... O 1..9... / %T O 1%9... / 4;12 O Total 7ar) :p E>a/-&e G 3 7r. Haeem is a partner in a partners3ip firm. Ee dre( follo(ing amount during t3e financial year0 Rs. Septem"er 1 39... Ho8em"er 1 %9... Nanuary 1 49... 7arc3 1 %9... Nune 1 29... Qou are re1uired to calculate 7ar) up on 3is dra(ings9 if t3e rate of mar) up is %T. T3e financial year is from Nuly to Nune9 So&'"ion 39... / %T O 1%. / 1.;12 O 12%... %9... / %T O 2%. / $;12 O 1&&.& 49... / %T O 2.. / &;12 O 1..... %9... / %T O 2%. / 4;12 O $3.33 29... / %T O 1.. / 1;12 O $.33 To"a& Mar6 UHK4.44 1.9...... 1&&&.& 119&&&.&
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E>a/-&e G 4 Atif9 Ba"ar and !a(ar are t3ree partners s3aring profits e1ually. Qou are re1uired to prepare profit and loss appropriation account and e/tract from "alance s3eet9 s3o(ing partners capital and current accounts from t3e follo(ing information0 Het profit for t3e year Rs. %%$9... Ipening "alance of Capital accounts Atif Rs. %..9...9 Ba"ar Rs. &..9...9 !a(ar Rs. 4..9... Ipening "alance of Current Account Atif Rs. %%9$..9 Ba"ar Rs. &39$2.9 !a(ar Rs. 2.9%%%. Salaries to "e paid to Ba"ar Rs. 1.9...9 !a(ar Rs. 129.... !ra(ings during t3e year Atif Rs. 1$.9...9 Ba"ar Rs. 22.9... !a(ar Rs. 1%19... 7ar) up on Capital V %T and 7ar) up on dra(ings are0 Atif Rs. +9...9 Ba"ar Rs. 119... and !a(ar Rs. 9%%..
So&'"ion Pro.i" C Loss A--ro-ria"ion A!!o'n" A"i.F BabarF 1a,ar C Co Pro.i" 1is"rib'"ion A!!o'n" Par"i!'&ars Het 4rofit 5ess0 4artnerGs Salary > Ba"ar !a(ar 5ess0 *nterest on capital > Atif ,%T of %..9...Ba"ar ,%T of &..9...!a(ar,%T of 4..9...Add0 *nterest on !ra(ings > Atif Ba"ar !a(ar 1is"rib'"ab&e Pro.i" 5ess0 4artnerGs S3are in 4rofit Atif ,1;3of 4$$9%%.Amir ,1;3 of 4$$9%%.Ba"ar ,1;3 of 4$$9%%.No"e A/o'n" 7s. 1.9... 129... 2%9... 3.9... 2.9... +9... 119... 9%%. 1&29$%. 1&29$%. 1&29$%. A/o'n" 7s. %%$9... ,229...-
, %9...-
2 9%%. HKKFII0
,4$$9%%.0
A"i.0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars !r. ,Rs.!ra(ings 1$.9... Ipening Balance *nterest on !ra(ings +9... *nterest on Capital 4rofit for t3e year Balance c;d To"a& %49&%. 3H4FMI0 To"a& @ Copyrig3t 2irtual :ni8ersity of 4a)istan
Amount Cr. ,Rs.%%9$.. 2%9... 1&29$%. 3H4FMI0
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Babar0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings 22.9... Ipening Balance *nterest on !ra(ings 119... Salary *nterest on Capital 4rofit for t3e year Balance c;d To"a& 3%9& . 3MMFMJ0 To"a&
&39$2. 1.9... 3.9... 1&29$%. 3MMFMJ0
1a,ar0s C'rren" A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.!ra(ings 1%19... Ipening Balance *nterest on !ra(ings 9%%. Salary *nterest on Capital 4rofit for t3e year Balance c;d To"a& A*/ission o. A Par"ner %&9$%% 31IFH0I To"a&
2.9%%% 129... 2.9... 1&29$%.
31IFH0I
J3en a ne( partner Aoin t3e "usiness9 old agreement of partners3ip is modified or a ne( agreement is prepared. T3is ne( agreement contains ne( ratios in (3ic3 partners s3are profit and loss in ne( set up. At t3e admission of a ne( partner9 all t3e assets and lia"ilities of t3e old "usiness are re8alued in order to )no( t3e e/act (ort3 of t3e "usiness. ?ood(ill of t3e "usiness is also re8alued. T3e 8alue ,in monetary terms- of t3e reputation of t3e "usiness is called ?II!J*55. *t is an intangi"le asset. 1isso&'"ion o. A Fir/ J3en a partners3ip is dissol8ed9 all t3e lia"ilities of t3e firm are paid9 out of t3e assets of t3e firm9 a8aila"le at t3e time of dissolution. T3e remaining amount after paying all t3e lia"ilities9 if a8aila"le9 (ill "e distri"uted among t3e partners in t3eir profit loss s3aring ratios. *f assets of t3e firm are not sufficient to pay all t3e lia"ilities of t3e firm9 t3e partners (ill contri"ute t3e "alance amount in t3eir profit;loss s3aring ratios to meet t3e lia"ilities of t3e firm.
213
'inancial Accounting = * > 7?T1.1 INT7O1UCTION TO COMPANIES 1isa*#an"ages o. Par"ners%i- Fir/
VU Lesson-36
T3e 5ocal 5a( restricts t3e num"er of partners in a partners3ip firm to t(enty. *f t3e firm needs more capital for its "usiness9 t3e partners may not "e in a position to in8est more money in t3e "usiness. Secondly9 if t3e "usiness of t3e partners3ip firm is 8ery large and t(enty persons can not manage it9 t3ey cannot admit ne( partners in t3e "usiness. Eo(e8er9 t3ere is one e/ception. T3e partners3ip firm of professionals can 3a8e more t3an t(enty partners. At t3is point9 need for forming a CI74AHQ arises. A*#an"ages o. Li/i"e* Co/-an) A 5imited company enAoys t3e follo(ing "enefits0 *t can 3a8e more t3an t(enty partners9 so pro"lem of e/tra capital is reduced to minimum. T3e lia"ilities of t3e mem"ers of a company is limited to t3e e/tent of capital in8ested "y t3em in t3e company T3ere are certain ta/ "enefits to t3e company9 (3ic3 a partners3ip firm can not enAoy. *n 4a)istan9 affairs of limited companies are controlled "y CI74AH*#S IR!*HAHC# issued in 1+$4. T3e formation of a company and ot3er matters related to companies are go8erned "y S#C:R*T*#S AH! #RCEAH?# CI77*SS*IH I' 4AK*STAH ,S#C4-. T)-es o. Co/-anies T3ere are t(o maAor types of t3e companies0 4ri8ate limited companies 4u"lic limited companies Pri#a"e Li/i"e* Co/-anies 'ollo(ing are t3e main c3aracteristics of pri8ate limited companies0 Hum"er of mem"ers in a pri8ate limited company ranges from t(o to fifty. Jords and parent3eses B,4ri8ate- 5imitedC are added at t3e end of t3e name of a pri8ate limited company. #/ample0 ABC ,4ri8ate- 5imited. 4ri8ate limited company can not offer its s3ares to general pu"lic at large. *n case a s3are3older decides to sell 3is s3ares9 3is s3ares are first offered to e/isting s3are3olders. *f all e/isting s3are3olders decide not to purc3ase t3ese s3ares9 only t3en9 an outsider can "uy t3em. T3e s3are3olders of t3e pri8ate limited company elect t(o mem"ers of t3e company as !irectors. T3ese directors form a "oard of directors to run t3e affairs of t3e company. T3e 3ead of "oard of directors is called Bc3ief e/ecuti8eC. P'b&i! Li/i"e* Co/-an) 'ollo(ing are t3e main c3aracteristics of pu"lic limited companies0 7inimum num"er of mem"ers in a pu"lic limited company is se#en T3ere is no restriction on t3e ma/imum num"er of mem"ers in a pu"lic limited company. Jord B5imitedC is added at t3e end of t3e name of a pu"lic limited company. #/ample0 ABC 5imited. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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4u"lic limited company can offer its s3ares to general pu"lic at large. T3e s3are3olders of t3e pu"lic limited company elect se8en mem"ers of t3e company as !irectors. T3ese directors form a "oard of directors to run t3e affairs of t3e company. T3e 3ead of "oard of directors is called Bc3ief e/ecuti8eC.
T3ere are t(o types of pu"lic limited company0 5isted Company Hon 5isted Company Lis"e* Co/-an) 5isted company is t3at company (3ose s3ares are 1uoted on stoc) e/c3ange. i.e. (3ose s3ares are traded in stoc) e/c3ange. *t is also called 1uoted company. Non Lis"e* Co/-an) Hon listed company is t3at company (3ose s3ares are not 1uoted on stoc) e/c3ange. i.e. (3ose s3ares are not traded in stoc) e/c3ange. For/a"ion o. Co/-an) *n case of pri8ate limited company9 any t(o mem"ers and in case of pu"lic limited company9 any se8en mem"ers can su"scri"e t3eir names in 7emorandum and Articles of association along (it3 ot3er re1uirements of t3e Companies Irdinance 1+$4L can apply to Security and #/c3ange Commission for registration of t3e company. Me/oran*'/ o. asso!ia"ionD 7emorandum of association contains t3e follo(ing clauses0 Hame of t3e company (it3 t3e (ord B5imitedC as t3e last (ord of t3e name9 in case of pu"lic limited and t3e parent3esis and t3e (ord B,4ri8ate 5imited-C as t3e last (ord of t3e name9 in case of pri8ate limited company. 4lace of registered office of t3e company. I"Aecti8e of t3e company. Amount of s3are capital (it3 (3ic3 company proposes to "e registered and di8ision in to num"er of s3ares. Ho su"scri"er of t3e company s3all ta)e less t3an one s3are. #ac3 su"scri"er of t3e memorandum s3all (rite opposite to 3is name9 t3e num"er of s3ares 3eld "y 3im. Ar"i!&es o. Asso!ia"ion Article of association is a document t3at contains all t3e policies and ot3er matters (3ic3 are necessary to run t3e "usiness of t3e company. T3is is also signed "y all t3e mem"ers of t3e company.
J3en Security and #/c3ange Commission is satisfied t3at all t3e re1uirements of t3e Companies Irdinance 3a8e "een complied (it39 it issued certificate of incorporation to t3e company. T3is certificate is e8idence t3at a separate legal entity 3as come in to e/istence.
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'inancial Accounting = * > 7?T1.1 A'"%ori2e* S%are Ca-i"a&
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T3e ma/imum amount (it3 (3ic3 a company gets registration;incorporation is called aut3oriKed s3are capital of t3at company. T3is capital can "e increased (it3 t3e prior appro8al of security and e/c3ange commission. T3is capital is furt3er di8ided in to smaller denominations called s3ares. #ac3 s3are usually 3as a face 8alue e1ual to Rs. 1.. According to Companies Irdinance9 t3is face 8alue can "e increased "ut can not "e decreased. T3e 8alue of s3are (ritten on its face is called face 8alue or par 8alue or nominal 8alue Iss'e* S%are Ca-i"a& J3en a company issues its s3ares to general pu"lic at large9 t3e amount raised "y t3e company (it3 suc3 an issue is called issued s3are capital. T3is is also called 4aid up S3are Capital., total amount recei8ed "y t3e company-. Accounting entry is recorded for issued s3are capitalL no suc3 entry is recorded for aut3oriKed s3are capital. Pre&i/inar) E>-enses All e/penses incurred up to t3e stage of incorporation of t3e company are called 4reliminary #/penses. All t3ese e/penses are incurred "y su"scri"ers of t3e company.
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'inancial Accounting = * > 7?T1.1 COMPONENTS OF FINANCIAL STATEMENTS
VU Lesson-37
T3e ma/imum amount (it3 (3ic3 a company gets registration;incorporation is called aut3oriKed s3are capital of t3at company. T3is capital can "e increased (it3 t3e prior appro8al of security and e/c3ange commission. T3is capital is furt3er di8ided in to smaller denominations called s%ares. #ac3 s3are usually 3as a face 8alue e1ual to Rs. 1.. According to Companies Irdinance9 t3is face 8alue can "e increased "ut can not "e decreased. T3e 8alue of s3are (ritten on its face is called .a!e #a&'e. S3ares are issued for cas3 as (ell as for any asset. 'or e/ample9 if any mem"er of t3e company sell 3is;3er land to t3e company. *n return9 company issue 3im;3er fully paid s3ares instead of paying cas3. T3ose s3ares are also part of paid up capital "ecause company 3as recei8ed t3e "enefit of t3at amount. S%are Cer"i.i!a"e S3are Certificate is t3e e8idence of o(ners3ip of t3e num"er of s3ares 3eld "y a mem"er of t3e company. J3en a company issue more t3an one s3are to its mem"er9 it does not issue t3at num"er of s3ares to 3im;3er. *nstead9 it issues a certificate under t3e stamp of t3e company t3at a particular num"er of s3ares are issued to mem"ers of t3e company. S%ares Iss'e* A" Pre/i'/ J3en a company 3as a good reputation and earns 3uge profits9 t3e demand of its s3ares increases in t3e mar)et. *n t3at case9 t3e company is allo(ed "y t3e Companies Irdinance 1+$49 to issue s3ares at a 3ig3er price t3an t3eir face 8alue. Suc3 an issue is called S3ares *ssued at 4remium. T3e amount recei8ed in e/cess of t3e face 8alue of t3e s3ares is transferred to an account called BS3are 4remium AccountC. T3is account is used to0 Jrite off 4reliminary #/penses of t3e company. Jrite off t3e "alance amount9 in issuing s3ares on discount. *ssue fully paid Bonus S3ares. S%ares Iss'e* On 1is!o'n" J3en a company is not ma)ing 3uge profits9 rat3er it is sustaining loss9 t3e demand of its s3ares decreases in t3e mar)et. *f t3e company needs e/tra funds9 t3en it is allo(ed "y t3e Companies Irdinance 1+$49 to issue s3ares at lesser price t3an t3eir face 8alue. Suc3 an issue is called S3ares *ssued on discount. T3e difference of face 8alue and t3e amount recei8ed is met "y s3are premium account9 if a8aila"le. *f t3ere is no s3are premium account a8aila"le9 t3is difference is s3o(n in t3e profit and loss account of t3at period9 in (3ic3 s3ares are issued as loss on issue of s3ares at discount. Cer"i.i!a"e o. In!or-ora"ion<7egis"ra"ion J3en Security and #/c3ange Commission of 4a)istan recei8es application for registration of a company9 t3e registrar of S#C4 ma)es in8estigation in respect of compliance (it3 legal re1uirements. J3en 3e is satisfied t3at all legal re1uirements are complied (it3. Ee issues a Certificate of *ncorporation;registration to t3e company. T3is certificate is e8idence t3at a separate legal entity 3as formed. T3e company9 after incorporation;Registration 3as t3e rig3t to sue and to "e sued in its o(n name. 1i#i*en* 4rofit distri"uted to t3e s3are 3olders for t3eir in8estment in t3e company is called !i8idend. !i8idend is appro8ed "y t3e s3are 3olders in t3e annual general meeting at t3e recommendation of t3e directors. !i8idend is paid out of profits. *f9 in any year9 company could not ma)e any profit. Ho di8idend (ill "e @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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paid to s3are 3olders. !i8idend is paid to registered s3are 3olders of t3e company. Registered s3are 3olders are t3ose mem"ers of t3e company9 (3o are enlisted in t3e register of s3are 3olders of t3e company. S'bs!ribers < S-onsors o. "%e Co/-an) Su"scri"ers ; Sponsors are t3e persons (3o sign articles and memorandum of t3e company and contri"ute in t3e initial s3are capital of t3e company. Iss'an!e o. F'r"%er Ca-i"a& J3ere a company (ants to issue furt3er capital ,called raising t3e capital-9 s3ares are first offered to current s3are3olders. T3e issuance of furt3er capital to 4resent S3are3olders is called 7ig%" Iss'e. T3is issue is in proportion to current s3ares 3eld "y t3e s3are3olders. T3e s3are3olders can accept or reAect t3e offer. *f s3are3olders refuse to accept t3ese s3ares t3en t3ese are offered to ot3er people. 5o'rna& En"ries S3ares issued against cas3 !e"it0 Cas3 ; Ban) Account Credit0 S3are Capital Account S3ares issued against transfer of asset0 !e"it0 Asset Account Credit0 S3are Capital Account T3is is called issuance of asset in )ind. Bon's S%ares T3is is anot3er (ay of distri"uting di8idend. J3en a company decides9 not to gi8e cas3 to t3e s3are 3olders as di8idend9 it issued s3ares called "onus s3ares9 to t3e s3are 3olders for (3ic3 it recei8es no cas3. T3ese are fully paid s3ares. Finan!ia& S"a"e/en"s o. Li/i"e* Co/-anies *n 4a)istan9 'inancial Statements of limited companies are prepared in accordance (it30 *nternational accounting standards adopted in 4a)istan. Companies Irdinance 1+$4. *n case of conflict t3e re1uirements of Companies Irdinance (ould pre8ail o8er Accounting Standards. Co/-onen"s o. Finan!ia& S"a"e/en"s Components of companiesG financial statements are as follo(s0 Balance S3eet 4rofit and 5oss Account Cas3 'lo( Statement Statement of C3anges in #1uity Hotes to t3e Accounts Comparati8e figures of 4re8ious 4eriod E;'i") #1uity is t3e total of capital9 reser8es and undistri"uted profit. T3at means t3e amount contri"uted "y s3are 3olders plus accumulated profits of t3e company. #1uity9 t3erefore9 represents t3e total of s3are3olders fund in t3e company. @ Copyrig3t 2irtual :ni8ersity of 4a)istan
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'inancial Accounting = * > 7?T1.1 S"a"e/en" o. C%anges in E;'i")
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T3e statement of c3anges in e1uity s3o(s t3e mo8ement in t3e s3are3olders e1uity ,capital and reser8esduring t3e year. Je can say t3at it replaces profit and loss appropriation account of partners3ip "usiness. For/a" o. S"a"e/en" o. C%anges in E;'i") Na/e o. "%e Co/-an) S"a"e/en" o. C%anges in E;'i") For =ear En*e* 5'ne 40F 3003 S%are S%are 7eser#es Ca-i"a& Pre/i' / A!!o'n" Balance In Nun 3.9 2... R R R 7o8ements !uring t3e Qear Balance In Nun 3.9 2..1 R R R 7o8ements !uring t3e Qear Balance In Nune 3.9 2..2 R R R
Pro.i" C Loss A<! R R R R R
To"a&
R R R R R
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'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF LIMITE1 COMPANIES S"a"e/en" o. C%anges in E;'i") Statement of c3anges in e1uity s3o(s t3e mo8ement in0 o S3are Capital ,issued s3are capitalo S3are 4remium o Hature of Reser8es created o :n=appropriated 4rofit ; 5oss o !i8idend !istri"uted S%are Pre/i'/
VU Lesson-38
S3are 4remium is t3e amount recei8ed in e/cess of t3e face 8alue of t3e s3are. #/ample0 if a Rs. 1. s3are is sold for Rs9 12 t3en Rs. 2 is s3are premium. S3are 4remium can not "e distri"uted among t3e s3are 3olders. *t can "e utiliKed0 o To issue Bonus S3ares o To (rite off 4reliminary #/penses o To meet t3e difference of face 8alue and cas3 recei8ed in case of s3ares issued at discount o To meet t3e e/penses of issue of s3ares o 'or payment of premium on redemption of de"entures. 7eser#es Capital Reser8e and 'i/ed Asset Replacement Reser8e are used for specific purpose. T3ese are not distri"uted among s3are 3olders. ?eneral Reser8e and undistri"uted profit[ can "e distri"uted among s3are 3olders. Re8aluation Reser8e is created (3en an asset is re=8alued from cost to mar)et 8alue. Re8aluation Reser8e can not "e distri"uted among t3e s3are 3olders. *t can "e utiliKed for0 o Setting off any loss on re8aluation o At t3e time of disposal of asset9 t3e reser8e relating to t3at asset is transferred to profit 6 loss account. Cas% F&o, S"a"e/en" Cas3 'lo( Statement s3o(s t3e mo8ement of cas3 resources during t3e year. *t gi8es information a"out sources of income and account 3eads on (3ic3 t3is amount is spent. *t is an integral part of financial statements. No"es "o "%e A!!o'n"s Hotes to t3e accounts are t3e e/planatory notes of all t3e items s3o(n in t3e profit and loss account and t3e "alance s3eet. *t is t3e re1uirement of t3e Companies Irdinance and t3e *nternational Accounting Standards. 'ollo(ing are e/plained in Hotes to t3e accounts0 o Hature of "usiness of t3e company o Accounting 4olicies of t3e company o !etails and e/planation of items gi8en in t3e 4rofit and 5oss Account and Balance S3eet. 1eben"'res !e"entures are ac)no(ledgement of de"t9 o(ed "y t3e company to t3e pu"lic at large for a defined period of time9 and 3as a mar) up ,profit- rate attac3ed to it. !e"entures are issued under t3e common @ Copyrig3t 2irtual :ni8ersity of 4a)istan
220
VU
seal ,Stamp- of t3e company. !e"enture is an instrument for o"taining loan from general pu"lic. 7ar) up is paid on !e"entures (3ic3 is generally e1ual to t3e mar)et rate. Ter/ Finan!e Cer"i.i!a"e Term 'inance Certificates are issued for a defined period. T3ese are also issued to o"tain loan from pu"lic at large. Bot3 !e"entures and Term 'inance Certificates are usually issued "y 4u"lic Companies. I&&'s"ra"ion ABC Li/i"e* Tria& ba&an!e As on 5'ne 40F 3003 Par"i!'&ars Aut3oriKed S3are Capital ,'ace 8alue Rs. 1. eac34aid up Capital S3are 4remium ?eneral Reser8e Accumulated profit "roug3t for(ard Ipening Stoc) Sales 4urc3ases Return out(ard Return in(ard Carriage in(ard Carriage out(ard Jages Salesmen Salaries Admin. Jages 6 salaries 4lant And 7ac3inery 7otor 8e3icle 3ire 4ro8ision for !epreciation0 4lant 6 7ac3inery ?eneral Selling #/penses ?eneral admin. e/penses !irectorsG Remuneration Rent recei8ed Trade !e"tors Cas3 and Ban) "alances Trade Creditors Bills 4aya"le To"a& A**i"iona& In.or/a"ion Closing stoc) is 8alued at Rs. 4129 $.. Accrue AuditorsG remuneration Rs. 19.... !i8idend is proposed V3 .%T for t3e year. !epreciate plant 6 mac3inery V2.T on cost. If t3e motor 3ire9 Rs. %%9... is for selling purposes. !irectorsG remuneration 3as "een as follo(s0 o C3airman 4&9&4. o 7anaging !irector %19%.. o 'inance !irector 4&9... o 7ar)eting !irector %19... 1LIF1H0 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
A/o'n" 1r. 97s.:
A/o'n" Cr. 97s.: 19%..9... 19...9... 12.9... 4$9... 13+9 %. 49 1%93 . 121922.
33&9 2. 294 %9+1. 13&92.. &934. 439 +. 41.924. 3.%911. 2 91+. &1.9... $49 . 2 913. 4 9++. 1+%914. 19&239% . 1 +92%.
21&92+.
3 91%. 3.49% . % 9... MFJILF4I0
MFJILF4I0
221
VU
Qou are re1uired to prepare profit 6 loss account as on Nune 3.9 2..2 and "alance s3eet for t3e reported period. So&'"ion J3ile presenting t3e financial Statements of t3e company9 "alance s3eet is presented first and profit 6 loss account is presented later9 "ut (e cannot prepare "alance s3eet (it3out preparing profit and loss account. So (e (ill prepare profit and loss account first. Ba&an!e S%ee" ABC Li/i"e* Ba&an!e S%ee" As A" 5'ne 40F 3003 4articulars 'i/ed Assets at J!2 C'rren" Asse"s !e"tors Stoc) in Trade Cas3 6 Ban) Balance C'rren" Liabi&i"ies Creditors Bills 4aya"le Auditors Remuneration 4aya"le 4roposed !i8idend Jor)ing Capital Ne" Asse"s E/-&o)e* 'inanced By0 Aut3oriKed Capital %.9... S3ares of Rs. 1. eac3 4aid :p Capital 3.9... S3ares of Rs. 1. eac3 S3are 4remium ?eneral Reser8e Accumulated 4rofit and 5oss Account To"a& 3=a Hote 2 19 1. 19&239% . 4129 $. 1 +92%. 2921%9&.. 3.49% . % 9... 19... 3 %9... $. 9% . 19 $39.3. 1FMJLFJH0
19%..9... 19...9... 12.9... 4$9... %119 4. 1FMJLFJH0
222
VU
Pro.i" C Loss A!!o'n" ABC Li/i"e* Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 30-3 Par"i!'&ars No"e A/o'n" 7s. Sales 5ess0 Cost of ?oods Sold ?ross 4rofit Add0 ot3er income ,rent recei8ed5ess0 Administrati8e #/penses 5ess0 Selling #/penses 4rofit "efore ta/ 5ess0 Ta/ for t3e year 4rofit after ta/ Add0 Accumulated 4rofit ";f 5ess0 4roposed !i8idend V 3 .%T Ne" Pro.i" Carrie* For,ar* No"es "o "%e A!!o'n"s No"e G 1 Sa&e a!!o'n" 49 1%93 . ,13&92..HFIJLF1J0 1 2
A/o'n" 7s 49% +91 . ,29&+%921.19$$39+&. 3 91%. ,191 4912.4&9++. . 4&9++. 13+9 %. $$&9 4. 3 %9... I11FJH0
3 4
&+29.+. 4$29.3.
Sales 5ess0 Return in Ne" Sa&es No"e G 3 Cos" o. goo*s so&*
Ipening Stoc) Add0 4urc3ases Jages 5ess0 Returns out Add0 Carriage in 5ess0 Closing Stoc) To"a& No"e G 4 A*/inis"ra"i#e E>-enses 2 91+. 2+9 . 4 9++.
33&9 2. 294 %9+1. 41.924. ,121922.&934. ,4129 $.3FMLIF310
Jages 6 salaries 7otor Eire ?eneral #/penses !irectors Remuneration0 C3airman 4&9&4. 7anaging !irector %19%.. !irector 'inance 4&9... Auditors Remuneration !epreciation 4lant 6 7ac3inery ,Hote P 3=aTo"a&
144914. 19... 1229... ML3F0L0
223
VU
No"e G 4-Fi>e* Asse"s Cost 4lant 6 7ac3inery No"e G H Rate A!!. 1e-. Ipening 'or t3e Qr. Closing 21&92+. 1229... 33$92+. J!2 2 19 1.
&1.9... 2.T
Se&&ing E>-enses 3.%911. 439 +. 2 913. %%9... %19... HK3F040
Salesmen salaries Carriage out ?eneral #/penses 7otor Eire 7ar)eting !irectorGs Remuneration To"a& No"e G I Pro-ose* 1i#i*en*s
3 .%T of 19...9... ,issued capital-
3 %9...
224
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF LIMITE1 COMPANIES 9Con"in'e*: O'es"ion G 1 KKB ,4ri8ate- 5imited is a manufacturing company. 'ollo(ing list of "alances 3as "een e/tracted from its "oo)s as on Nune 3.9 2..2.
VU Lesson-39
88B 9Pri#a"e: Li/i"e* Tria& Ba&an!e As A" 5'ne 40F 3003 4articulars Aut3oriKed S3are Capital 4aid up Capital !e"entures Accumulated 4rofit and 5oss Account ?eneral Reser8e Creditors Accumulated !epreciation 7otor 2e3icles Building 'urniture and 'i/tures 4roposed !i8idend 5and Building 7otor 2e3icles 'urniture and 'i/ture Stoc) in Trade !e"tors Ban) Balance TOTAL No"eD All items of profit and loss 3a8e "een accounted for in calculating t3e "alance of accumulated profit and loss account9 e/cept for !epreciation (3ic3 is to "e c3arged at 1.T on J!2 on all deprecia"le assets. Rs. Rs. %..9... 3..9... 24.9... 4+94$+ $9... 2 93&. 4&9.%. &&9... 1192%. 1%9... 12.9... 31%9... 1$ 9%.. 349%.. 4$9&3. 429%2% 149++4 &3914+
&3914+
7e;'ire* 4repare t3e "alance s3eet of Beta ,4ri8ate- 5imited As on Nune 3.9 2..2.
225
'inancial Accounting = * > 7?T1.1 So&'"ion Ba&an!e S%ee" 88B 9Pri#a"e: Li/i"e* Ba&an!e S%ee" As A" 5'ne 40F 3003 Hote 1
VU
4articulars 'i/ed Assets at J!2 Current Assets !e"tors Stoc) in Trade Ban) Balance Current 5ia"ilities Creditors 4roposed !i8idend Jor)ing Capital Ne" Asse"s E/-&o)e*
Amount Rs. 4+2933. 429%2% 4$9&3. 149++4 1.&914+ 2 93&. 1%9... 4293&. &39 $+ IIMF11L
'inanced By0 Aut3oriKed Capital %.9... S3ares of Rs. 1. eac3 4aid :p Capital 3.9... S3ares of Rs. 1. eac3 ?eneral Reser8e Accumulated 4rofit and 5oss Account S3are Eolders #1uity !e"entures To"a& No"e 1 Fi>e* Asse"s a" $1V Par"i!'&ars As At 1= =.1 5and Building 'urniture 6 'i/tures 2e3icles TITA5 12.9... 31%9... 349%.. 1$ 9%.. &% 9... Cos" Addition; !eletion . . . . . As At 3.=&=.2 12.9... 31%9... 349%.. 1$ 9%.. &% 9...
%..9... 3..9... $9... $911+ 31&911+ 24.9... IIMF11L
7a"e
A!!'/'&a"e* 1e-re!ia"ion As At 1= =.1 'or T3e Qear . 249+.. 2932% 14914% 4193 . As At 3.=&=.2 . +.9+.. 139% % &.91+% 1&49& .
$1V As At 3.=&=.2 12.9... 22491.. 2.9+2% 12 93.% 4+2933.
. 1. 1. 1.
. &&9... 1192%. 4&9.%. 12393..
No"e 3 A!!'/'&a"e* Pro.i" an* Loss A!!o'n" Balance As 4er Trial Balance 5ess0 !epreciation for t3e Qear ,note 14+94$+ ,4193 .$911+
226
'inancial Accounting = * > 7?T1.1 As depreciation is c3arged in profit 6 loss account and (e did not prepare profit 6 loss account9 in t3is case9 so depreciation (ill "e deducted from accumulated profit 6 loss account. O'es"ion G 3 ABC Li/i"e* Tria& ba&an!e As on 5'ne 40F 3003 4articulars A'"%ori2e* S%are Ca-i"a& 9Fa!e #a&'e 7s. 10 ea!%: 4aid up Capital S3are 4remium ?eneral Reser8e Accumulated profit "roug3t for(ard Ipening Stoc) Sales 4urc3ases 7otor #/penses Bad de"ts Carriage in(ard !e"enture 7ar) :p 7ar) up on "an) o8erdraft Jages !irectorsG Remuneration ?eneral #/penses 5ong Term *n8estments *ncome from s3ares in related companies !iscount allo(ed 6 recei8ed 4rofit on property sale Building at cost 4lant And 7ac3inery at cost 7otor 2e3icles at cost 4ro8ision for !epreciation0 Building 4lant 6 7ac3inery 7otor 2e3icles ?ood(ill 4atents 6 Trade 7ar)s Trade !e"tors 6 Creditors Ban) I8erdraft !e"enture 1.T To"a&
VU
Amount ,Rs.-
Amount ,Rs.1FI00F000 192..9... %9... 1%.9... 21%9... 49% %9...
+.29... 291+&9... 1&49... 319... 3$9... 4.9... 1+9... $329... 21.9... 1%49... 34.9... %%9... 192..9... 33.9... 4$.9...
3&9... 3+9... 1..9...
4.9... 3$9... $&49...
3 %9... 1+%9... 1&.9... 3+29... 219... 4..9... JFL44F000
JFL44F000 No"esD Closing stoc) is 8alued at Rs. 1.39.... !epreciate "uilding V 1.T9 4lant 6 7ac3inery V 2.T and 2e3icles V 2%T. 4ro8ision for ta/ to "e created Rs. 23&9.... Qou are re1uired to prepare 'inancial Statements of ABC 5imited as on Nune 3.9 2..2.
227
'inancial Accounting = * > 7?T1.1 So&'"ion ABC Li/i"e* Ba&an!e S%ee" As A" 5'ne 40F 3003 4articulars 'i/ed Assets at J!2 5ong Term *n8estments C'rren" Asse"s !e"tors Stoc) in Trade ?ood(ill 4atents 6 Trade 7ar)s C'rren" Liabi&i"ies Creditors 4ro8ision 'or Ta/ Ban) I8erdraft Jor)ing Capital Ne" Asse"s E/-&o)e* 'inanced By0 Aut3oriKed Capital %.9... S3ares of Rs. 1. eac3 4aid :p Capital 3.9... S3ares of Rs. 1. eac3 S3are 4remium ?eneral Reser8e Accumulated 4rofit and 5oss Account !e"entures To"a& Pro.i" an* Loss A!!o'n" ABC Li/i"e* Pro.i" an* Loss A!!o'n" For "%e =ear En*ing 5'ne 40F 3003 Par"i!'&ars No"e A/o'n" 7s. Sales 5ess0 Cost of ?oods Sold ?ross 4rofit Add0 ot3er income 5ess0 Administrati8e #/penses 5ess0 'inancial #/penses 4rofit "efore ta/ 5ess0 4ro8ision for Ta/ 4rofit after ta/ Add0 Accumulated 4rofit ";f Ne" Pro.i" Carrie* For,ar* @ Copyrig3t 2irtual :ni8ersity of 4a)istan 1 2 3 4 Hote 3=a 19.+.9%.. 34.9... 1943.9%.. $&49... 1.39... 4.9... 3$9... 19.4%9... 3+29... 23&9... 219... &4+9... 3+&9... 1FK3MFI00
VU
19%..9... 192..9... %9... 1%.9... 19%.. 4..9... 1FK3MFI00
A/o'n" 7s 49% %9... ,39$&%9...1.9... 1 %9... ,$&29%..229%.. ,23&9...,2139%..21%9... 1FI00
$.39%.. %+9...
228
'inancial Accounting = * > 7?T1.1 No"es No"e G 1 Cos" o. goo*s so&* Ipening Stoc) Add0 4urc3ases Jages Add0 Carriage in 5ess0 Closing Stoc) To"a& No"e G 3 O"%er In!o/es *ncome from s3ares in related companies !iscount recei8ed 4rofit on property sale To"a& No"e G 4 A*/inis"ra"i#e E>-enses 7otor #/penses Bad !e"ts !irectorsG Remuneration ?eneral #/penses !epreciation ,Hote P 3=a!iscount allo(ed To"a& No"e G H Fi>e* Asse"s a" $1V A!!. 1e-eri!ia"ion J!2 Ipening 'or t3e Qr. Closing 3 %9... $29%.. 4% 9%.. 1+%9... 2 9... 222 ... 24.9... 1&.9... $.9... 1KLFI00 1&49... 319... 21.9... 1%49... 1$+9%.. %%9... K04FI00 3&9... 3+9... 1..9... 1JIF000 +.29... 291+&9... $329... 3$9... ,1.39...4FKMIF000
VU
Building 4lant 6 7ac3inery 7otor 2e3icles
Cost 192..9... 33.9... 4$.9...
Rate 1.T 2.T 2%T
429%.. 1.$9... 24.9... 1F0L0FI00
No"e G I Finan!ia& E>-enses !e"enture 7ar) up 7ar) up on Ban) I8erdraft To"a& 4.9... 1+9... ILF000
229
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF LIMITE1 COMPANIES 9Con"in'e*: O'es"ion 'ollo(ing trial "alance 3as "een e/tracted from t3e "oo)s of Alp3a 5td. as on Nune 3.9 2..2. Qou are re1uired to prepare t3e profit and loss account for t3e year and t3e Balance S3eet as at Nune 3.9 2..2. A&-%a Li/i"e* Tria& Ba&an!e As a" 5'ne 40F 3003 Ti"&e o. A!!o'n" 4aid up capital 1. T !e"entures Building at Cost #1uipment at Cost 2e3icles at Cost Accumulated !ep. > Building #1uipment 2e3icles Stoc) Ipening Balance Sales 4urc3ases Carriage *n(ard Salaries and Jages !irectors Remuneration 2e3icle Running #/penses *nsurance 7iscellaneous #/penses 7ar)up on !e"entures !e"tors Creditors Ban) ?eneral Reser8e S3are 4remium Account *nterim !i8idend 4aid Accumulated 4rofit and 5oss account TOTAL
VU Lesson-40
1r. 7s. 23 9%.. 2.9... 439...
Cr. 7s. 1 %9... %9...
1192%. &9... 129+.. %&9 2% 24%9%.. 1349 % 49.%. 2391.. 1%9 %. 2.93.. 932% 194.. 39 %. 4&9%2% 2$942% 2.9+ % 129%.. 3%9... $9 %. MH4FL3I 4293%. MH4FL3I
A**i"iona& In.or/a"ion0 Closing stoc) Rs. &$9.%.. !epreciation Building %9...9 2e3icles Rs 9%..9 #1uipment 39.... Si/ mont3s !e"enture mar)up is to "e accrued. 1.T final di8idend is to "e paid in addition to interim di8idend. Transfer Rs. %9... to general reser8e. Aut3oriKed s3are capital is Rs. 2%.9... di8ided in to 2%9... s3ares of Rs. 1. eac3. 4ro8ision for *ncome Ta/ to "e made Rs. 129%...
230
'inancial Accounting = * > 7?T1.1 So&'"ionD Ba&an!e S%ee" A&-%a L"*. Ba&an!e S%ee" As A" 5'ne 40F 3003 No"e 1
VU
Par"i!'&ars 'i/ed Assets at J!2 C'rren" Asse"s !e"tors Stoc) in Trade Ban) Balance C'rren" Liabi&i"ies Creditors 4roposed !i8idend !e"enture 7ar)up 4aya"le 4ro8ision for Ta/ Jor)ing Capital Ne" Asse"s E/-&o)e*
A/o'n" 7s. 2%49$%. 4&9%2% &$9.%. 2.9+ % 13%9%%. 2$942% 1 9%.. 39 %. 129%.. &291 % 393 % 43KF33I
Finan!e* B)D Aut3oriKed Capital 2%9... S3ares of Rs. 1. eac3 4aid :p Capital 1 9%.. s3ares of Rs. 1. eac3 S3are 4remium ?eneral Reser8e ,129%.. M %9... transferred from 4 6 5Accumulated 4rofit and 5oss Account S3are EoldersG #1uity !e"entures To"a&
2%.9... 1 %9... 3%9... 1 9%.. 2%9 2% 2%3922% %9... 43KF33I
231
'inancial Accounting = * > 7?T1.1 Pro.i" C Loss A!!o'n" A&-%a L"* Pro.i" an* Loss A!!o'n" For "%e =ear En*e* 5'ne 40 3003 Par"i!'&ars Sales 5ess0 Cost of ?oods Sold Gross Pro.i" 5ess0 Administrati8e #/penses !irectors Remuneration Salaries and Jages 2e3icle Running #/penses *nsurance !epreciation 7iscellaneous #/penses 2 No"e 7s. 24%9%.. 12 9%.. 11KF000 1%9 %. 2391.. 2.93.. 932% 1%9%.. 194.. $393 % 349&2% 9%.. 2 912% 129%.. 149&2% 4293%. %&9+ % %9... $9 %. 1 9%.. 3192%. 3IFJ3I
VU
Iperating 4rofit 5ess0 !e"enture 7ar)up 3 Het 4rofit Before Ta/ 5ess0 4ro8ision for Ta/ Het 4rofit after ta/ Add0 Accumulated 4rofit Broug3t 'or(ard 5ess0 Appropriation ?eneral Reser8e *nterim di8idend 4roposed 'inal !i8idend ,1.T of 1 %9...A!!'/'&a"e* Pro.i" Carrie* For,ar*
232
'inancial Accounting = * > 7?T1.1 No"e G 1 Fi>e* Asse" a" $1V Par"i!'&ars As At 1= =.1 Building #1uipment 2e3icles TOTAL 23 9%.. 2.9... 439... 400FI00 Cos" Addition; !eletion . . . 0 As At 3.=&=.2 23 9%.. 2.9... 439... 400FI00 7 A T E A!!. 1e-. As At 1= =.1 1192%. &9... 129+.. 40F1I0 'or T3e Qear %9... 39... 9%.. 1IFI00 As At 3.=&=.2 1&92%. +9... 2.94.. HIFMI0 $1V
VU
As At 3.=&=.2 22192%. 119... 229&.. 3IHFKI0
No"e G 3 Cos" o. Goo*s So&* Ipening Stoc) Add0 4urc3ases Add0 Carriage in(ard 5ess0 Closing Stoc) No"e G 4 Mar6 '- on 1eben"'res 7ar) up gi8en in trial Add0 Accrued 7ar) up for si/ mont3s To"a& Mar6 US"a"e/en" o. C%anges in E;'i") Statement of c3anges in e1uity s3o(s mo8ement in s3are 3oldersG e1uity during t3e reported period. S3are 3olders e1uity includes0 o S3are Capital o S3are 4remium Reser8e o ?eneral Reser8e o Accumulated 4rofit 6 5oss Account T)-es o. 7eser#es Reser8es are of t(o types0 !istri"uta"le Reser8e Hon !istri"uta"le Reser8e 1is"rib'"ab&e 7eser#e !istri"uta"le reser8es are t3ose reser8es (3ic3 are distri"uta"le among t3e s3are 3olders of t3e company9 for #/ample9 ?eneral Reser8e9 Accumulated 4rofit 6 loss etc. Non 1is"rib'"ab&e 7eser#e Hon !istri"uta"le reser8es are t3ose reser8es (3ic3 are created for a specific purpose. T3ese can not "e distri"uted among s3are 3olders. T3ese can "e utiliKed for t3at particular purpose9 for (3ic39 t3ese are created. 'or e/ample9 S3are 4remium Reser8e9 Re8aluation Reser8e. , %9... / 1.T / &;1239 %. 39 %. JFI00 %&9 2% 1349 % 49.%. ,&$9.%.13JFI00
233
'inancial Accounting = * > 7?T1.1 Pro!e*'re .or Pre-aring S"a"e/en" o. C%ange in E;'i")
VU
All t3e opening "alances of s3are 3oldersG e1uity are listed do(n first. 7o8ement during t3e year in s3are 3oldersG e1uity is recorded. After adding;reducing t3e s3are 3oldersG e1uity9 closing "alances are calculated. All information regarding s3are 3oldersG e1uity is collected from "alance s3eet of t3e company. According to *nternational Accounting Standards9 fi/ed assets re8aluation reser8e is included in t3e statement of c3anges in e1uity. But T3e Companies Irdinance does not allo( re8aluation reser8e to "ecome a part of statement of c3anges in e1uity. As Companies Irdinance pre8ails o8er *nternational Accounting Standards9 so (e do not s3o( Re8aluation reser8e in t3e statement of c3anges in e1uity. S"a"e/en" o. C%ange in E;'i") A&-%a L"* S"a"e/en" o. C%anges in E;'i") For =ear En*e* 5'ne 40F 3003 S%are S%are Genera& Ca-i"a Pre/i' 7eser# & / e A!!o'n" 1 %9... 3%9... 129%..
Pro.i" C Loss A<! 4293%. 149&2%
To"a&
Balance In Nun 3.9 2..1 Het 4rofit for t3e 4eriod Transfer to ?eneral Reser8e !i8idend Ba&an!e On 5'ne 40F 3003 No"es "o "%e A!!o'n"s
2&49$%. 149&2% . ,2&92%.3I4F33I
%9...
,%9...,2&92%.-
1JIF000
4IF000
1JFI00
3IFJ3I
Hotes to t3e accounts are e/planatory notes on financial statements of t3e company. T3ese include all t3e information9 from formation of company to t3e calculation of figures9 arri8ed at9 during t3e preparation of financial statements. No"es o. A&-%a L"*. are as .o&&o,sD Co/-an) an* I"s o-era"ions o Company (as formed in t3e year ======== o T3e company trades in electronic consumer items. Signi.i!an" A!!o'n"ing Po&i!iesD Eistorical Cost Con8ention o T3ese accounts 3a8e "een prepared under t3e 3istorical cost con8ention. Re8enue Recognition o Sales are recorded on dispatc3 of goods to customers. 'i/ed Assets o 'i/ed Assets are recorded at cost less accumulated depreciation. Stoc) 2aluation o 7et3od of stoc) 8aluation is ======== Ta/ation o 4ro8ision for Ta/ation is calculated on t3e "asis of =======
234
'inancial Accounting = * > 7?T1.1 CAS+ FLO$ STATEMENT
VU Lesson-41
Cas3 flo( statement s3o(s9 3o( cas3 (as generated and 3o( it (as used during t3e period. T3ese days9 it is re1uired "y la( to include t3is statement in financial statements9 especially in case of financial statements of limited companies. Nee* For Cas% F&o, S"a"e/en" 'or any "usiness9 it is important to ensure t3at0 Sufficient profits are made to compensate o(ners for t3e in8estment made9 efforts put in and t3e ris) ta)en for t3e "usiness9 Sufficient funds are a8aila"le to meet t3e o"ligations of t3e "usiness as and (3en re1uired. T3e information as to profita"ility is pro8ided "y t3e 4rofit and 5oss Account. T3e information as to a8aila"ility of funds or financial 3ealt3 is pro8ided "y t3e "alance s3eet. But t3e "alance s3eet is prepared on a specific date and can pro8ide information of financial position as on t3at date only. Cas3 flo(9 on t3e ot3er 3and pro8ides more detailed information a"out t3e mo8ement of funds during t3e period. Jit3 t3e 3elp of cas3 flo(9 (e can determine t3e amount of cas3 generated form different sources and t3e areas on (3ic3 it is utiliKed. 1i..eren!e be",een Pro.i"abi&i") an* Li;'i*i") Li;'i*i") *t is t3e a"ility of a "usiness to pay its de"ts in time. By 3a8ing good li1uidity9 (e mean t3at a "usiness 3as sufficient li1uid funds ,cas3 and cas3 e1ui8alents- so t3at it can repay lia"ilities. Cas% Cas3 includes cas3 in 3and and demand deposits. Cas% E;'i#a&en"s Cas3 e1ui8alents are t3ose s3ort term in8estments t3at can "e con8erted into a )no(n amount of cas3 at any time. :sually9 in8estments up to t3ree mont3s maturity are included in cas3 e1ui8alents. 4eople generally mi/ up profita"ility (it3 li1uidity. Ine mig3t t3in) t3at if a "usiness 3as earned9 say9 Ine 7illion Rupees of profit t3an it s3ould 3a8e appro/imately t3e same amount of cas3 in it. But mostly t3is is not t3e case. Consider t3e follo(ing e/ample0 A person starts a small "usiness (it3 Rs. 1.9.... Ee purc3ases goods (ort3 Rs. 2.9.... Rs. 1.9... is paid in cas3 and remaining is paya"le at t3e end of t3e mont3. T3e same day9 all t3e goods are sold on credit of t(o mont3s for Rs. 3.9.... Ho( if (e dra( a profit and loss account at t3e end of t3e mont39 t3e "usiness 3as earned a profit of Rs. 1.9...9 considering no e/penses. But at t3e same time9 it is time to pay to t3e Creditors9 (3ereas payment from de"tor is not due yet. T3is means t3at alt3oug3 t3e "usiness earned a profit of Rs. 1.9... "ut it 3as no cas3 to pay to its creditors. T3is simple e/ample 3elps us to understand t3at li1uidity is different from profita"ility But it is as important as profita"ility.
235
'inancial Accounting = * > 7?T1.1 Co/-onen"s o. Cas% F&o, S"a"e/en" Cas3 flo( statement is di8ided into t3ree components Cas3 'lo( from Iperating Acti8ities Cas3 'lo( from *n8esting Acti8ities Cas3 'lo( from 'inancing Acti8ities Cas% F&o, .ro/ O-era"ing A!"i#i"ies
VU
Cas3 flo( from operating acti8ities is generally deri8ed from t3e principal re8enue producing acti8ities of t3e "usiness. Cas3 'lo( from Iperating Acti8ities is t3e indicator of success or failure of a "usinessGs operations. *f t3e cas3 flo( from operations is continuously negati8e9 t3is means t3at t3e "usiness re8enue is not enoug3 to reco8er t3e costs t3at are incurred to earn it. T3erefore9 in t3e long run Cas3 flo( from operations must "e positi8e. #/amples of cas3 flo(s from operating acti8ities are0 Cas3 receipt from sale of goods and rendering of ser8ices. Cas3 receipts from fees9 commission and ot3er re8enues. Cas3 payments to suppliers for goods and ser8ices. Cas3 payments to and on "e3alf of t3e employees. Cas3 payments or refunds of income ta/es. E>a/-&e Ne" Pro.i" be.ore Ta> Add0 AdAustment for Hon=Cas3 *tems !epreciation for t3e Qear 4ro8ision for !ou"tful !e"ts #/c3ange ?ain ; 5oss ?ain ; 5oss on !isposal of Assets Return on *n8estments 7ar)=up on 5oans O-era"ing Pro.i" Be.ore $or6ing Ca-i"a& C%anges Jor)ing Capital C3anges Add0 !ecrease in Current Assets 5ess0 *ncrease in Current Assets Add0 *ncrease in Current 5ia"ilities 5ess0 !ecrease in Current 5ia"ilities Cas% Genera"e* Fro/ O-era"ions 5ess0 7ar)up paid on loans 5ess0 Ta/es 4aid Ne" Cas% F&o, .ro/ O-era"ing A!"i#i"ies Cas% F&o, .ro/ In#es"ing A!"i#i"ies Cas3 flo( from in8esting acti8ities includes cas3 receipts and payments t3at arise from 'i/ed and 5ong Term assets of t3e organiKation. 1MFI1H %9%.. $1. = = 49... 39%.. 40F43H 4.9... ,%.9...= = 30F43H ,39...,%9...13F43H
236
VU
Cas3 'lo(s from *n8esting Acti8ities s3o(s t3e in8estment trend of t3e "usiness. *f it is negati8e ,Iutflo(- t3is means t3at t3e company is in8esting in long term assets and is e/panding. In t3e ot3er 3and if it is positi8e ,*nflo(- o8er t3e years9 t3is means t3at t3e company is selling its long term in8estments. #/amples of cas3 flo(s from in8esting acti8ities are0 Cas3 payments to ac1uire property plant and e1uipment. T3ese also include payments made for self=constructed assets. Cas3 receipts from sale of property plant and e1uipment. Cas3 payments and receipts from ac1uisition and disposal of ot3er t3an long term assets e.g. S3ares9 de"entures9 T'C9 long term loans gi8en etc. *f assets are 3eld for trading purposes or in normal course of "usiness e.g. car ; property dealers and loans gi8en "y "an)s9 t3en cas3 flo( from t3ese are included in Iperating Cas3 'lo(. E>a/-&e Cas% F&o, .ro/ In#es"ing A!"i#i"ies Add0 !isposal of 'i/ed Asset and 5ong Term *n8estments 5ess0 Ac1uisition of 'i/ed Assets and 5ong Term *n8estments Add0 !i8idend Recei8ed ; Returns on *n8estment Recei8ed Ne" Cas% F&o, .ro/ In#es"ing A!"i#i"ies Cas% F&o, .ro/ Finan!ing A!"i#i"ies Cas3 flo( from financing acti8ities includes cas3 receipts and payments t3at arise from I(ners of t3e "usiness and ot3er long term lia"ilities of t3e organiKation. Cas3 'lo(s from 'inancing Acti8ities s3o(s t3e "e3a8ior of in8estors ,"ot3 e1uity capital and de"t capital-. A positi8e figure ,inflo(- s3o(s t3at funds are "eing in8ested in t3e company and 8ice 8ersa. #/amples of cas3 flo(s from financing acti8ities are0 Cas3 recei8ed from o(ners i.e. s3are issue in case of company and capital in8ested "y sole proprietor or partners. Cas3 payments to o(ners i.e. di8idend9 dra(ings etc. Cas3 receipts and payments for ot3er long term loans and "orro(ings. E>a/-&e Cas% F&o, .ro/ Finan!ing A!"i#i"ies Add0 S3ares *ssued ; Capital *n8ested 5ess0 !i8idend 4aid ; !ra(ings Add0 *ncrease in 5ong Term Borro(ings Ne" Cas% F&o, .ro/ Finan!ing A!"i#i"ies Pro!e*'re o. Pre-aring Cas% F&o, Cas3 'lo( Statement is prepared as follo(s0 Je start from t3e 4rofit ; 5oss for t3e period "efore ta/ation. AdAustments are made for non=cas3 items t3at are included in t3e profit and loss account suc3 as !epreciation9 4ro8isions and ot3er items t3at relate to in8esting and financing acti8ities. T3is gi8es us Iperating 4rofit "efore Jor)ing Capital C3anges. @ Copyrig3t 2irtual :ni8ersity of 4a)istan 19...9... ,4..9...1%.9... JI0F000 1..9... ,$.9...= 30F000
237
VU
T3en Jor)ing Capital C3anges9 i.e. increase or decrease in items of current assets and lia"ilities9 are added ; su"tracted ,Cas3 and Cas3 #1ui8alents are not included 3ereT3is gi8es t3e Cas3 'lo( from Iperations. To t3is figure9 (e add ; su"tract cas3 flo(s from in8esting and financing acti8ities. T3is gi8es us Het *ncrease ; !ecrease in Cas3 and Cas3 #1ui8alents. To t3is figure (e add Ipening Balance of Cas3 and Cas3 #1ui8alents ,t3at (e e/cluded from current assetsT3is gi8es us t3e Closing Balance of Cas3 and Cas3 #1ui8alents.
*ncrease or !ecrease is generally ta)en as difference in opening and closing "alances of accounts reported in "alance s3eets. For/ o. Cas% F&o, S"a"e/en" Na/e o. "%e En"i") Cas% F&o, S"a"e/en" .or "%e Perio* En*ing ----Ne" Pro.i" be.ore Ta> Add0 AdAustment for Hon=Cas3 *tems !epreciation for t3e Qear 4ro8ision for !ou"tful !e"ts #/c3ange ?ain ; 5oss ?ain ; 5oss on !isposal of Assets Return on *n8estments 7ar)=up on 5oans O-era"ing Pro.i" be.ore $or6ing Ca-i"a& C%anges Jor)ing Capital C3anges Add0 !ecrease in Current Assets 5ess0 *ncrease in Current Assets Add0 *ncrease in Current 5ia"ilities 5ess0 !ecrease in Current 5ia"ilities Cas% Genera"e* Fro/ O-era"ions 5ess0 7ar)up paid on loans 5ess0 Ta/es 4aid Ne" Cas% F&o, .ro/ O-era"ing A!"i#i"ies Cas3 'lo( from *n8esting Acti8ities Add0 !isposal of 'i/ed Asset and 5ong Term *n8estments 5ess0 Ac1uisition of 'i/ed Assets and 5ong Term *n8estments Add0 !i8idend Recei8ed ; Returns on *n8estment Recei8ed Ne" Cas% F&o, .ro/ In#es"ing A!"i#i"ies Cas3 'lo( from 'inancing Acti8ities Add0 S3ares *ssued ; Capital *n8ested 5ess0 !i8idend 4aid ; !ra(ings Add0 *ncrease in 5ong Term Borro(ings Ne" Cas% F&o, .ro/ Finan!ing A!"i#i"ies Het *ncrease ; !ecrease in Cas3 and Cas3 #1ui8alents Add0 Ipening Balance of Cas3 and Cas3 #1ui8alents C&osing Ba&an!e o. Cas% an* Cas% E;'i#a&en"s N=Q RQS RQS RQS RQS RQS RQS N=Q RQS ,RQSRQS ,RQS[ N=Q ,RQS,RQSN=Q RQS ,RQSRQS N=Q RQS ,RQSRQS N=Q RQS RQS N=Q
238
'inancial Accounting = * > 7?T1.1 CAS+ FLO$ STATEMENT 9Con"in'e*: O'es"ion G 1
VU Lesson-42
Qou are gi8en t3e Balance S3eet of ABC 5imited as at Nune 3.9 2..1 and Nune 3.9 2..2 and its 4rofit and 5oss Account for t3e year ended Nune 3. 2..2. Re1uired Qou are re1uired to prepare Cas3 'lo( Statement for t3e gi8en period. ABC L"* Ba&an!e S%ee" As A" 5'ne 40 3003 2..2 Rs. Rs. F... 1$19... 3&9... 14%9... $39... 3&9... 4 9... 1L3F000 1 9... 3.9... 2%9... 1$9... 3.9... 104F000 1%9... 1$9... +9... 429... M1F000 3J0F000 1$.9... 1 9... 239... 349... 3IHF000 1&9... 3J0F000 2..1 Rs. Rs. F... 14.9... 3.9... 11.9... +.9... 3%9... %%9... 1MIF000 1.9... 219... 4.9... 1%9... 249... 100F000 129... 1&9... $9... 3&9... MHF000 34LF000 1&.9... 129... 2.9... 2 9... 31LF000 2.9... 34LF000
Building at Cost Accumulated !epreciation Jritten !o(n 2alue 4lant and 7ac3inery cost Accumulated !epreciation Jritten !o(n 2alue To"a& Fi>e* Asse"s a" $1V 5ong Term *n8estment C'rren" Asse"s !e"tors Stoc) S3ort Term !eposits Cas3 and Ban) C'rren" Liabi&i"ies Creditors 4roposed !i8idend Ta/ 4aya"le $or6ing Ca-i"a& Ne" Asse"s E/-&o)e* 'inanced By S3are Capital S3are 4remium Account ?eneral Reser8e Accumulated 4rofit and 5oss S%are +o&*ers0 E;'i") Term 'inance Certificates To"a&
239
'inancial Accounting = * > 7?T1.1 ABC L"* Pro.i" an* Loss A!!o'n" For "%e =ear En*e* 5'ne 40 3003 7s. B000 Sales Cost of Sales ?ross 4rofit It3er *ncome 5ess0 Administrati8e #/penses !irectorGs Remuneration !epreciation on Building 5oss on Sale of 7ac3inery It3er Administrati8e #/penses 5ess0 Selling #/penses 5ess0 7ar) up on T'C Pro.i" .or "%e =ear Be.ore Ta> 4ro8ision for ta/ 4rofit after ta/ Acc. 4rofit Broug3t 'or(ard Appropriation Transfer to Reser8e 4roposed !i8idend A!!'/'&a"e* Pro.i" Carrie* For,ar* 3..9... ,2319...&+9... 49... 39... 49... &9... 29... 129... 249... 1.9... 29... 3&9... 4JF000 +9... 2$9... 2 9... %%9... 39... 1$9... 219... 4HF000
VU
A**i"iona& In.or/a"ion 1. It3er income include di8idend on 5ong Term *n8estment 2. Cost of goods sold includes depreciation for t3e year on mac3inery Rs. %9.... 3. Accumulated !epreciation on t3e mac3ine disposed off amounts to Rs. 49....
240
'inancial Accounting = * > 7?T1.1 So&'"ion ABC L"* Cas% F&o, S"a"e/en" For "%e =ear En*e* 5'ne 40 3003 No"e Het 4rofit Before Ta/ AdAustment of Hon Cas3 *tems !epreciation 5oss on Sale of 7ac3inery 7ar)up on T'C 5ess0 It3er *ncome Iperating 4rofit Before Jor)ing Capital C3anges Jor)ing Capital C3anges Reduction in Stoc) *ncrease in Creditors *ncrease in !e"tors Cas3 'lo( from Iperations 7ar)up on T'C 4aid Ta/ 4aid 1 Het Cas3 'lo( 'rom Iperating Acti8ities Cas3 'lo( 'rom *n8esting Acti8ities !i8idend Recei8ed 4ayment to Ac1uire *n8estments 2 4urc3ase of 'i/ed Assets ,Building3 Receipt from Sale of Assets 4 Het Cas3 'lo( 'rom *n8esting Acti8ities Cas3 'lo( 'rom 'inancing Acti8ities *ssue of Irdinary S3ares S3are 4remium Account !i8idend 4aid % Repayment of T'C & Het Cas3 'lo( 'rom 'inancing Acti8ities Het *ncrease ; ,!ecrease- in Cas3 and Cas3 #1ui8alents !uring T3e Qear I;B of Cas3 and Cas3 #1ui8alents C<B o. Cas% an* Cas% E;'i#a&en"s 1%9... 39... ,+9...+9... % 9... ,29...,$9...4 9... 49... , 9...,419...19... ,439...2.9... %9... ,1&9...,49...%9... +9... 3+9... HKF000 119... 29... 29... %29... ,49...4$9...
VU
7s. B000 3 9...
241
'inancial Accounting = * > 7?T1.1 No"e G 1 Ta> Pai*
VU
Pro#ision .or Ta> A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Cas3 $9... Bal. B;' Balance c;f +9... 'or t3e year To"a& No"e G 3 4articulars Bal. B;' Cas3 1JF000 To"a& Pa)/en"s "o A!;'ire In#es"/en"s In#es"/en" A!!o'n" Co*e -------Amount 4articulars !r. ,Rs.1.9... 9... Bal. C;' To"a& No"e G 4 1JF000 To"a& P'r!%ases o. Fi>e* Asse"s B'i&*ing Cos" Amount !r. ,Rs.14.9... 419... A!!o'n" Co*e -------4articulars
$9... +9... 1JF000
Amount Cr. ,Rs.-
1 9... 1JF000
4articulars Bal. B;' Cas3
Amount Cr. ,Rs.-
Bal. C;' To"a& No"e G H 1K1F000 To"a&
1$19... 1K1F000
Sa&e Pro!ee* o. Ma!%iner) Ma!%iner) a" Cos" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.Bal. B;' +.9... !isposal A;c
9...
Bal. C;' To"a& L0F000 To"a&
$39... L0F000
242
'inancial Accounting = * > 7?T1.1 1is-osa& o. asse" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.9... Accumulated !ep. 5oss on Sale Sale 4roceed
VU
Cost
49... 29... 19...
To"a& No"e G I
JF000 To"a& 1i#i*en* Pa)ab&e 1i#i*en* Pa)ab&e A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.1&9... I;B 'or t3e Qear
JF000
Cas3
1&9... 1$9...
C;B To"a& No"e G M
1$9... 4HF000 To"a& 7e-a)/en" o. TFC TFC A!!o'n" A!!o'n" Co*e -------4articulars Amount 4articulars Amount !r. ,Rs.Cr. ,Rs.49... I;B
4HF000
Cas3
2.9...
C;B To"a&
1&9... 30F000 To"a& 30F000
243
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF LISTE1<OUOTE1 COMPANIES According to Companies Irdinance 1+$49 t3e contents of financial statements are as follo(s0 Balance S3eet 4rofit and 5oss Account Cas3 'lo( Statement Statement of c3anges in #1uity Hotes to t3e Accounts
VU Lesson-43
'or t3e sa)e of presentation same order s3ould "e follo(ed (3ile sol8ing t3e 1uestions. But (e cannot complete t3e "alance s3eet (it3out first preparing t3e 4rofit and 5oss Account. To sol8e t3e pro"lem in e/am situation (e usually prepare t3e forms of Balance S3eet and 4rofit and 5oss Account first. T3at is (ay (e can also plan t3e Serial Hum"ers of Hotes to t3e Accounts "efore3and. It3er(ise a s3eet of 1uestion paper can "e left "lan) for preparation of Balance S3eet. Comparati8e figures are also included in t3e financial statements for e8ery figure9 e/cept (3ere first set of financial statements is "eing prepared. *n e/amination situation comparati8e figures s3ould "e s3o(n pro8ided t3ese are pro8ided in t3e 1uestion. O'es"ion 'ollo(ing is t3e trial "alance of Alfa 5td. 'or t3e year ended Nune 3.9 2..2. Qou are also gi8en t3e "alance s3eet of Nune 3.9 2..1. 7e;'ire* Qou are re1uired to prepare a set of financial statements of t3e Alfa 5td. A&.a L"*. Tria& Ba&an!e For "%e =ear 5'ne 40F 3003 1ebi" 7s. Fi>e* Asse"s a" Cos" 'ree3old 5and Building 'urniture and 'i/ture 2e3icles A!!'/'&a"e* 1e-re!ia"ion Building 'urniture and 'i/ture 2e3icles Sundry !e"tors Ad8ances9 !eposits and 4repayments *n8estments ,5ong TermCas3 in 3and Cas3 at "an) 4urc3ases Sales Return Stoc) Nuly .19 2..1 Salaries ,Admin. StaffRent9 Rates and Ta/es %..9... &..9... 4..9... +3.9... 1%.9... 1%.9... 3..9... Cre*i" 7s.
$.9... 2&9... 1.%9... 29... %9%.. %..9... 1.9... $%9... &%9... 129%..
244
'inancial Accounting = * > 7?T1.1 Carriage in(ard 5egal C3arges Salaries ,Sales StaffSelling #/penses 'inancial C3arges Sundry Creditors S3ort Term Running 'inance Ad8ances from Customers ?eneral Reser8e Ta/ 4aya"le Accumulated 4rofit Broug3t 'or(ard Sales 7ar)up on *n8estments 4urc3ase Return 5oan from Ban) ,5ong Term*ssued S3are Capital To"a& $9... 9%.. 4%9... 239... 4%9...
VU
%.9%.. 1 %9... 2$9%.. 2%.9... 3%9%.. +.9... $% 92.. 1%9... 129$.. &%%9... %.9... 4FI1LFI00
4FI1LFI00
A**i"iona& in.or/a"ionD T3e aut3oriKed capital of t3e company is Rs. 19...9... di8ided into 1..9... s3ares of Rs. 1. eac3. Additions made in 'i/ed Assets include Building Rs. %9... and 'urniture and 'i/ture Rs. %.9.... T3ese 3a8e already "een recorded in t3e "oo)s of accounts. !epreciation is to "e c3arged on Building %T9 'urniture and 'i/ture V 1.T and 2e3icles 2.T on (ritten do(n 8alue. 'ull yearGs depreciation is c3arged in t3e year of purc3ase (3ilst no depreciation is c3arged in t3e year of disposal. 4ro8ision for dou"tful de"ts to "e created Rs. %9.... Stoc) on Nune 3.9 2..2 Rs. &%9... 4ro8ide Rs. +9$.. for income ta/. A&.a L"*. Ba&an!e S%ee" As a" 5'ne 40F 3001. No"e O-era"ing Fi>e* Asse"s In#es"/en"s C'rren" Asse"s Sundry !e"tors Stoc) in Trade Ad8ances9 !eposits and 4repayments Cas3 in 3and Cas3 at "an) C'rren" Liabi&i"ies Sundry Creditors S3ort Term Running 'inance Ta/ 4aya"le @ Copyrig3t 2irtual :ni8ersity of 4a)istan 3001 19 .%9... %%9... 1FJM0F000 &%9+.. $%9... 219%.. 19%.. %$9&.. 343FI00 &%92.. 12%9%.. 429...
245
'inancial Accounting = * > 7?T1.1 Ad8ances from Customers Jor)ing Capital Ne" Ca-i"a& E/-&o)e* 'inanced "y S3are Capital and Reser8es Aut3oriKed Capital 1..9... s3ares of Rs. 1. eac3. S3are Capital %9... ,2..10 &.9...- s3ares of Rs. 1. eac3 ?eneral reser8e :n=appropriated 4rofit To"a& S%are %o&*ers E;'i") 5ong Term 5oans To"a& So&'"ion A&.a L"*. Ba&an!e S%ee" As a" 5'ne 40F 3003. No"e 1 1+9$.. 3I3FI00 930F000: 1FJH0F000
VU
19...9...
&..9... 2%.9... +.9... LH0F000 $..9... 1FJH0F000
O-era"ing Fi>e* Asse"s In#es"/en"s C'rren" Asse"s Sundry !e"tors
3003 19&%&9%.. 1.%9... 1FJM1FI00
3001 19 .%9... %%9... 1FJM0F000 &%9+.. $%9... 219%.. 19%.. %$9&.. 343FI00 &%92.. 12%9%.. 429... 1+9$..
Stoc) in Trade Ad8ances9 !eposits and 4repayments Cas3 in 3and Cas3 at "an) C'rren" Liabi&i"ies Sundry Creditors S3ort Term Running 'inance Ta/ 4aya"le Ad8ances from Customers
$.9... &%9... 2&9... 29... %9%.. 3HKFI00 %.9%.. 1 %9... 4%93.. 2$9%..
246
'inancial Accounting = * > 7?T1.1 Jor)ing Capital Ne" Ca-i"a& E/-&o)e* 'inanced "y S3are Capital and Reser8es Aut3oriKed Capital 1..9... s3ares of Rs. 1. eac3. S3are Capital %9... ,2..10 &.9...- s3ares of Rs. 1. eac3 ?eneral reser8e :n=appropriated 4rofit To"a& S%are %o&*ers E;'i") 5ong Term 5oans To"a& Pro.i" C Loss A!!o'n" A&.a L"*. Pro.i" an* Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003. No"e Het Sales 5ess0 Cost of ?oods Sold Gross Pro.i" A**D O"%er In!o/e LessD Administrati8e #/penses Selling #/penses O-era"ing Pro.i" 5ess0 'inancial C3arges Het 4rofit ; ,5oss- Before Ta/ 5ess0 4ro8ision for Ta/ Het 4rofit ; ,5oss- After Ta/ Accumulated 4rofit ; ,5oss- Broug3t 'or(ard A!!'/'&a"e* Pro.i" < 9Loss: Carrie* For,ar* @ Copyrig3t 2irtual :ni8ersity of 4a)istan I M 2%$9%.. &$9... 43MFI00 30FI00 4%9... 93HFI00: +9$.. 94HF400: +.9... IIFJ00 / / > / / > / > / > 4 H 3LLF400 9I0FK00: 1FJ10FJ00 3I3FI00 930F000: 1FJH0F000
VU
19...9...
19...9...
%.9... 2%.9... %%9 .. 1F0IIFJ00 &%%9... 1FJ10FJ00
&..9... 2%.9... +.9... LH0F000 $..9... 1FJH0F000
3003 7s. $4 92.. %1%92.. 443F000 1%9... 4HJF000
3001 7s. / / > / >
247
'inancial Accounting = * > 7?T1.1 A&.a L"*. Cas% F&o, S"a"e/en" For "%e )ear en*e* 5'ne 40F 3003 No"e 3003 Cas3 'lo( 'rom Iperating Acti8ities 4rofit ; ,5oss- Before Ta/ AdAustment for0 !epreciation Iperating 4rofit Before Jor)ing Capital c3anges ,*ncrease- ; !ecrease in C. Assets Sundry !e"tors Stoc) in Trade Ad8ances9 !eposits and 4repayments ,249%..1 39%.. 1HLF000 ,1491..2.9... ,49%..1FH00 *ncrease ; ,!ecrease- in C. 5ia"ilities Sundry Creditors S3ort Term Running 'inance Ad8ances from Customers Cas3 ?enerated 'rom Iperations *ncome Ta/ 4aid Het Cas3 'lo( from Iperations Cas3 'lo( 'rom *n8esting Acti8ities Building 'urniture and 'i/ture *n8estments ,5ong TermHet Cas3 'lo( 'rom *n8esting Acti8ities Cas3 'lo( from financing Acti8ities S3are Capital *ssued 5ong Term 5oan Repaid Het *ncrease in Cas3 6 Cas3 #1ui8alents I;B of Cas3 and Cas3 #1. C;B of Cas3 and Cas3 #1. ,149 ..4+9%.. $9 .. H4FI00 1L4FL00 ,&9%..1KJFH00 , %9...,%.9...,%.9...91JIF000: 1%.9... ,14%9...IF000 1JFH00 &.91.. JJFI00
VU
3001
248
'inancial Accounting = * > 7?T1.1 A&.a L"*. S"a"e/en" o. C%anges in E;'i") For "%e =ear En*e* 5'ne 40F 3003 S%are Ca-i"a& / Genera& 7eser#e / Un-a--. Pro.i" / / ,/+.9... To"a& / / ,/+4.9... 1%.9... 3493.. 1F0IIFJ00
VU
Par"i!'&ars Balance as on Nune 3.9 2... 4rofit after ta/ for t3e year !i8idend Balance as on Nune 3.9 2..1 S3ares *ssued 4rofit after ta/ for t3e year
&..9... 1%.9... JI0F000
2%.9...
3I0F000
,3493..IIFJ00
No"es "o "%e A!!o'n"s No"e G 1 Fi>e* Asse"s a" $1V

Cos" Par"i!'&ars As On 5'& 01 3001 'ree3old 5and Building 'urniture and 'i/ture 2e3icles A**. 1is-osa&. As On 5'n 01 3003 7 A T E A!!'/'&a"e* 1e-re!ia"ion As On 5'& 01 3001 On 1is-osa&. For T%e =ear As On 5'n 01 3003 $1V As On 5'n 01 3003
%..9... %2%9... 3%.9... +3.9...
= %9... %.9... =
= = = =
%..9... &..9... 4..9... +3.9...
= % 1. 2.
= 1%.9... 1%.9... 3..9...
= = = =
= 229%.. 2%9... 12&9...
= 1 29%.. 1 %9... 42&9...
%..9... 42 9%.. 22%9... %.49...
To"a& 3003 To"a& 3001
3F40IF000 >
13IF000 >
>
3FH40F000 3F40IF000
M00F000 >
>
1J4FI00 >
JJ4FI00 M00F000
1FMIMFI00 1FJ0IF000
No"e G 3 Ta> Pa)ab&e Ta/ 4aya"le as 4er Trial Balance Current Qear\s 4ro8ision
3%9%.. +9$.. HIF400
249
'inancial Accounting = * > 7?T1.1 No"e G 4 Ne" Sa&es ?ross Sales 5ess0 Returns
VU
$% 92.. 1.9... KHJF300
No"e G H Cos" o. Goo*s So&* Ipening Stoc) Add0 Cost of 7aterial 4urc3ased ?ross 4urc3ases 5ess0 Returns Add0 Carriage *n(ard 5ess0 Closing Stoc) Cos" o. goo*s so&* No"e G I A*/inis"ra"i#e E>-enses Salaries ,Admin. StaffRent9 Rates and Ta/es 5egal C3arges !epreciation To"a&
$%9... %..9... 129$.. $9... 4+%92.. &%9... I1IF300
&%9... 129%.. 9%.. 1 39%.. 3IKFI00
No"e G M Se&&ing E>-enses Salaries ,Sales StaffSelling #/penses To"a& 4%9... 239... MKF000
250
'inancial Accounting = * > 7?T1.1 FINANCIAL STATEMENTS OF LISTE1 COMPANIES I&&'s"ra"ionD Be"a L"*. Tria& Ba&an!e For "%e =ear 5'ne 40F 3003 1ebi" 97s.: Fi>e* Asse"s a" Cos"D Building 'urniture and 'i/ture 2e3icles A!!'/'&a"e* 1e-0Building 'urniture and 'i/ture 2e3icles Sundry !e"tors 5ong Term in8estments ?ood(ill Cas3 in 3and Cas3 at "an) 4urc3ases S"o!6 5'&) 01F 3001 Ra( 7aterial Jor) in 4rocess 'inis3ed ?oods Salaries 7isc. #/pense Carriage in(ard 'uel 6 4o(er Jages Salaries Sales Staff 'inancial C3arges Sundry Creditors S3are 4remium Reser8e 4ro8ision for ta/ paya"le. Accumulated 4rofit Broug3t 'or(ard Sales ?ain on sale of 8e3icle Return on *n8estments 5oan from Ban) ,5ong Term*ssued S3are Capital To"a& %..9... $%9... 4&.9... 1+.9%.. 439%.. 21.9... 1&%9... 3..9... 1..9... 339... 14&9... %%9... 1+9... 149%.. 3%9... 12%9... &9&.. 493.. 1%94.. 1439%.. $&9... 293.. 1.%9... 3..9... 2+9%.. +393.. 193&39$.. 3.9... 3.9... 1..9... %..9... 3FLLIFM00
VU Lesson-44
Cre*i" 97s.:
3FLLIFM00
251
'inancial Accounting = * > 7?T1.1 A**i"iona& In.or/a"ionD
VU
T3e aut3oriKed capital of t3e company is Rs. $..9... di8ided into $.9... s3ares of Rs. 1. eac3. !uring t3e year9 a 8e3icle (3ose cost and accumulated depreciation (ere Rs. 1%.9... and Rs. $.9... respecti8ely (as sold for Rs. 1..9.... T3e entry 3as already "een recorded in t3e "oo)s !epreciation is to "e c3arged on Building %T9 'urniture and 'i/ture V 1.T and 2e3icles 2.T on (ritten do(n 8alue. 'ull yearGs depreciation is c3arged in t3e year of purc3ase (3ilst no depreciation is c3arged in t3e year of disposal. Stoc) on Nune 3.9 2..2 o Ra( 7aterial 229... o Jor) in 4rocess 1%9... o 'inis3ed ?oods 4.9... !istri"ution of fuel and po(er0 o Administrati8e #/penses 4.T9 Cost of ?oods Sold &.T T3e management of t3e company 3as decided to maintain a pro8ision for dou"tful de"ts at %T of de"tors from t3is year. 5ong term loan of Rs. 2%9... is paya"le in t3e ne/t financial year. 4ro8ision for current year\s ta/ Rs. 2.9....
Qou are re1uired to prepare a set of financial statements for t3e year ended Nune 3.9 2..2. So&'"ion Be"a L"*. Ba&an!e S%ee" As a" 5'ne 40F 3003. O-era"ing Fi>e* Asse"s In#es"/en"s In"angib&e Asse"s ?ood(ill C'rren" Asse"s Sundry !e"tors Stoc) in Trade Cas3 in 3and Cas3 at "an) C'rren" Liabi&i"ies Sundry Creditors Current 7aturity of 5ong Term 5oan Ta/ 4aya"le $or6ing Ca-i"a& No"e 4 3003 %3193 % 3..9... K41F4JI 100F000 3001 & 19... %.9... J31F000 100F000
H I
1%&9 %. 9... 339... 14&9... H13FJI0 1.%9... 2%9... 4+9%.. 1JLFI00 344F3I0
1 %9... $493.. 2%9$.. 1..9 .. 4KIFK00 1%.9%.. 2%9... 3$9... 314FI00 1J3F400
252
'inancial Accounting = * > 7?T1.1 Ne" Ca-i"a& E/-&o)e* 'inanced "y S3are Capital and Reser8es Aut3oriKed Capital $.9... s3are of Rs. 1. eac3 1F1MHFM3I
VU LL4F400
$..9...
$..9...
S3are Capital S3are premium reser8e :n=appropriated 4rofit To"a& S%are %o&*ers E;'i") 5ong Term 5oans To"a& J
%..9... 3..9... 2$+9&2% 1F0KLFM3I %9... 1F1MHFM3I
%..9... 3..9... +393.. KL4F400 1..9... LL4F400
Be"a L"*. Pro.i" an* Loss A!!o'n" For "%e )ear en*e* 5'ne 40F 3003. No"e Het Sales 5ess0 Cost of ?oods Sold Gross Pro.i" A**D O"%er In!o/e LessD Administrati8e #/penses Selling #/penses O-era"ing Pro.i" 5ess0 'inancial C3arges Het 4rofit ; ,5oss- Before Ta/ 5ees0 4ro8ision for Ta/ Het 4rofit ; ,5oss- After Ta/ Accumulated 4rofit ; ,5oss- Broug3t 'or(ard A!!'/'&a"e* Pro.i" < 9Loss: Carrie* For,ar* 10 11
K L
3003 7s. 193&39$.. +.39%4. HM0F3M0 &.9... I30F3M0 21%9&3% $&9... 401FM4I 31KFM3I 293.. 31MF43I 2.9... 1LMF43I +393.. 3KLFM3I
3001 7s. / / > / > / / > / / > / > / >
253
'inancial Accounting = * > 7?T1.1 A&.a L"*. Cas% F&o, S"a"e/en" For "%e )ear en*e* 5'ne 40F 3003 No"e Cas3 'lo( 'rom Iperating Acti8ities 4rofit ; ,5oss- Before Ta/ AdAustment for0 !epreciation 4ro8ision for !ou"tful !e"ts ?ain on !isposal of 'i/ed Asset Iperating 4rofit Before Jor)ing Capital c3anges ,*ncrease- ; !ecrease in C. Assets Sundry !e"tors Stoc) in Trade *ncrease ; ,!ecrease- in C. 5ia"ilities Sundry Creditors 3003
VU
21&932% &+9&2% $92%. ,3.9...3MHF300 1.9... 93.. 1JF400 ,4%9%..9HIFI00: 34MF000 ,$9%..33JFI00
Cas3 ?enerated 'rom Iperations *ncome Ta/ 4aid Het Cas3 'lo( from Iperations Cas3 'lo( 'rom *n8esting Acti8ities 2e3icles *n8estments ,5ong TermHet Cas3 'lo( 'rom *n8esting Acti8ities Cas3 'lo( from financing Acti8ities 5ong Term 5oan Repaid Het *ncrease in Cas3 6 Cas3 #1ui8alents I;B of Cas3 and Cas3 #1ui8alents C;B of Cas3 and Cas3 #1ui8alents
1..9... ,2%.9...91I0F000: ,2%9...93IF000: I3FI00 12&9%.. 1JLF000
254
'inancial Accounting = * > 7?T1.1 Be"a L"*. S"a"e/en" o. C%anges in E;'i") For "%e =ear En*e* 5'ne 40F 3003 S%are Pre/i'/ 7eser#e /
VU
Par"i!'&ars Balance as on Nune 3.9 2... 4rofit after ta/ for t3e year !i8idend Balance as on Nune 3.9 2..1 S3ares *ssued 4rofit after ta/ for t3e year
S%are Ca-i"a& /
%..9... / JI0F000
3..9...
Un-a--. Pro.i" / / ,/+393.. 1+&932% 3KLFM3I
To"a& / / ,/$+393.. / 1+&932% 1F0KLFM3I
3I0F000
No"es "o "%e A!!o'n"s 1. Co/-an) an* i"s o-era"ions o T3e company is a pu"lic limited company incorporated in 4a)istan and manufacture ============ 3. Signi.i!an" a!!o'n"ing -o&i!ies o T3ese accounts 3a8e "een prepared in accordance (it3 t3e re1uirements of t3e Companies Irdinance 1+$4 and *nternational accounting standards as applica"le in 4a)istan. o +is"ori!a& !os"s Eistorical costs are used as a "asis for 8aluing transactions. o 7e#en'e 7e!ogni"ion Sales are recorded upon deli8ery of goods to t3e customers. o O"%er Po&i!ies *ncome from "an) deposits9 loans and ad8ances are recogniKed on accrual "asis. Jor)ing of all figures and 'i/ed assets sc3edule are included in t3e notes to t3e accounts
255
'inancial Accounting = * > 7?T1.1 No"e G 4 Fi>e* Asse"s a" $1V
VU
7sT 000 Cos" Par"i!'&ars As On 5'& 01 3001 Building 'urniture and 'i/ture 2e3icles %..9... $%9... &1.9... = = 1%.9... A**. 1is-osa&. As On 5'n 40 3003 7 A T E A!!'/'&a"e* 1e-re!ia"ion As On 5'& 01 3001 = = $.9... On 1is-osa&. For T%e =ear As On 5'n 40 3003 $1V As On 5'n 40 3003
= = =
%..9... $%9... 4&.9...
% 1. 2.
1+.9%.. 439%.. 2+.9...
1%94 % 491%. %.9...
2.%9+ % 4 9&%. 2&.9...
2+49.2% 3 93%. 2..9...
To"a& 3003 To"a& 3001
1F1LIF000 >
>
1I0F000 >
1F0HIF000 1F1LIF000
I3HF000 >
K0F000 >
MLFM3I >
I14FM3I I3HF000
I41F4JI MJ1F000
No"e G H S'n*r) 1eb"ors 3003 !e"tors 5ess0 4ro8ision for !ou"tful !e"ts 1&%9... ,$92%.1%&9 %. No"e G I S"o!6 in Tra*e 3001 1 %9... = 1 %9...
Ra( 7aterial Jor) in 4rocess 'inis3ed ?oods
229... 1%9... 4.9... 9...
2%9... 1&9$.. 429%.. $493..
No"e G M Ta> Pa)ab&e
Ta/ 4aya"le as 4er Trial Balance Current Qear\s 4ro8ision
2+9%.. 2.9... HLFI00
2.9... 1$9... 4KF000
256
'inancial Accounting = * > 7?T1.1 No"e G J Long Ter/ Loans 5ong Term 5oan 5ess0 Current 7aturity of 5ong Term 5oan 1..9... 2%9... JIF000 No"e G K Cos" o. Goo*s So&* Ipening Stoc) = Ra( 7aterial Add0 Cost of 7aterial 4urc3ased 4urc3ases Add0 Carriage *n(ard 5ess0 Closing Stoc) = Ra( 7aterial Ra( 7aterial Consumed Jages 'uel and 4o(er Add0 Ipening Stoc) = Jor) in 4rocess 5ess0 Closing Stoc) = Jor) in 4rocess Add0 Ipening Stoc) = 'inis3ed ?oods 5ess0 Closing Stoc) = 'inis3ed ?oods 1+9... %%9... 493.. %+93.. 229... %&93.. 1439%.. +924. +.+9.4. 149%.. 1%9... +.$9%4. 3%9... 4.9... L04FIH0 No"e G L O"%er In!o/e ?ain on sale of 8e3icle Return on in8estments 3.9... 3.9... M0F000 No"e G 10 A*/inis"ra"i#e E>-enses Salaries 'uel and 4o(er 7isc. #/pense 4ro8ision for !ou"tful !e"ts !epreciation 12%9... &91&. &9&.. $92%. &+9&2% 31IFM4I No"e G 11 Se&&ing E>-enses Salaries ,Sales Staff$&9... 12%9... 2%9... 100F000
VU
257
VU
Lesson-45 FINANCIAL STATEMENTS OF LISTE1 COMPANIES AN1 FINANCIAL 7ATIOS
Question # 1 Following is the trial balance and balance sheet of Sheraz Ltd. as on June 30, 2002.
S%era2 L"*. Tria& Ba&an!e As On 5'ne 40 3003 1EBIT 7sT000 Tangib&e Fi>e* Asse"s Fi>e* Ass"s A" Cos" 'ree3old 5and Building 4lant and 7ac3inery 'urniture and 'i/ture 7otor 2e3icles 5eased 2e3icles A!!'/'&a"e* 1e-. Building 4lant and 7ac3inery 'urniture and 'i/ture 7otor 2e3icles 5eased 2e3icles Capital Jor) in 4rogress 5ong Term *n8estments *n8estment in S3ares of Co. A *n8estment in S3ares of Co. B 4ro8. 'or !iminution in 2alue Co. B 5ong Term !eposits 5ong Term !eposits C'rren" Asse"s Stores and Spares Stoc) in Trade Nul .1 2..1 Ra( 7aterial 4ac)ing 7aterial 'inis3ed goods Trade !e"ts Trade !e"ts 4ro8ision for !ou"tful !e"ts Ad8. !ep. 6 4repayments Ad8ances !eposits 4repayments @ Copyrig3t 2irtual :ni8ersity of 4a)istan C7E1IT 7sT000
+9%%. 1%9$1% %49&3& 29&+$ 249111 229123 1.9 % 4 931% 294 4 12934 1291$& 49. % 2.9... 29%.. 192%. 39.&+ 19114 = 1392&4 4291$+ $%92+& 1$91$% 223 = 29434 $1& 19&3
258
'inancial Accounting = * > 7?T1.1 Accrued 4rofit on Ban) !ep Ad8ance #/cise !uty Sales Ta/ Refunda"le It3er Recei8a"les !i8idend Recei8a"le Cas3 and Ban) Cas3 in Eand Cas3 at Ban) = Current Cas3 at Ban) = Sa8ings C'rren" Liabi&i"ies S3ort Term Running 'inance Creditors9 Accrued 6 It3er 5. Creditors Customers !eposits Accrued #/p. It3er 5ia"ilities Ta/ 4aya"le !i8idends 5ong Term and !effered. 5ia !effered. Ta/ I"lig. :nder 5ease 'inance S%are Ca-i"a& ?eneral Reser8e Sa&es ?ross Sale = !omestic ?ross Sale = #/port Sales Ta/ Cos" o. Sa&es 4urc3ases. !uring t3e Qear Ra( 7 4urc3ases. !uring t3e Qear 4ac)ing 7 I8er3eads Jages Stores Consumed Tra8eling and Con8eyance. Repairs and 7aintenance. *nsurance 'uel and 4o(er Bottle Brea)age #/cise !uty 7isc. #/penses A*/in. E>-enses Salaries and Jages 4ostage and Telegram Tra8eling and Con8eyance 3$$ 29&.1 $94+2 3 % 2%9... = 3933. 2%9.24 1&9%21 %92% = &39.1& 229% 1 22944$ 19$2& 39$%$ 2.. 39... 1%92$2 I0F000 1.49... %19244 +393.% 1.&91%$ 2+19%&+ 1+.92+% 2391%% 9+22 1%$ 1.92& 34% 23933+ &9%%2 4+9& 1 9412 3&911 19&%2 19. %
VU
259
'inancial Accounting = * > 7?T1.1 Repairs and 7aintenance. *nsurance 4rinting and Stationery Rent9 Rates and Ta/es Auditors\ Remuneration 5egal and 4rofessional !onations ?eneral #/penses Se&&ing an* 1is"rib'"ion E>-enses Salaries and Jages 4ostage and Telegram Tra8eling and Con8eyance Repairs and 7aintenance. 2e3icle Running 4rinting and Stationery Rent9 Rates and Ta/es Ad8ertising Iut(ard 'reig3t Sales Staff *ncenti8es 4etrol9 Iil etc. 7isc. #/penses Finan!ia& C%arges 7ar)up on 5oans 'inance 5ease C3arges Ban) C3arges O"%er E>-enses an* Pro#isions It3er *ncome 4rofit on Ban) !eposits !i8idends *ncome 'oreign #/c3ange ?ain ?ain on !isposal of '. Assts. Sale of Scrap *ncome Ta/ for t3e year :nappropriated 4rofit B;' 192 2 191 + 19121 191%% 1&1 &$ $1 4.. 23922 19% $ 29&1& &91&$ $%+ 4+ 19+%4 1+92%4 +9&2$ 19&42 $9%&1 193+2 2$2 19 %. $2% = + 4 2%91.. %9 32 &+2 194 . 149$.. %9%%% 1F3M3F100 1F3M3F100
VU
A* 's"/en"s 1. 4ro8ision for diminution in t3e 8alue of in8estments to "e increased to Rs. 19$ %. 2. 5ong term deposits maturing during t3e year Rs. 2+1 3. 4ro8ision for dou"tful de"ts to "e increased "y Rs. +$ 4. &.T !i8idend declared. %. 5ia"ility against lease finance paya"le in current year Rs. &9&43 &. Aut3oriKed capital of 1.9...9... s3ares of Rs. 1. eac3. . Transfer to general reser8e 219... $. Addition in 'i/ed Assets9 4lant and 7ac3. 292&2 @ Copyrig3t 2irtual :ni8ersity of 4a)istan
260
'inancial Accounting = * > 7?T1.1 +. 1.. 11. 12. 13. 'urniture +$+9 I(ned 8e3icles 1 %$ Cas3 recei8ed on disposal of 8e3icles Rs. 1931& !ep. Building 1.T 4lant and 'urniture 1%T and 2e3icles 2.T on (ritten do(n 8alue Ho depreciation on year of sale and full depericiation in t3e year of purc3ase. !istri"ution of !epreciation o Building and 4lant to Cost of Sales o 'urniture and I(ned 2e3icles to Admin #/penses o 5eased 2e3icles to Selling #/penses 14. Closing Stoc)s Ra( 7aterial 2 9%4% 4ac)ing 7aterial 49 31 'inis3ed ?oods $9%%. S%era2 L"*. Ba&an!e S%ee" As A" 5'ne 40F 3001 No"e Tangib&e Fi>e* Asse"s Iperating 'i/ed Assets Capital Jor) in 4rogress 5ong Term *n8estments 5ong Term !eposits C'rren" Asse"s Stores and Spares Stoc) in Trade Trade !e"ts Ad8. !ep. And 4repayments Cas3 and Ban) Balances C'rren" Liabi&i"ies S3ort Term Running 'inances Current 7aturity of I"ligation :nder lease finance Creditors9 Accrued and It3er 5ia"ilities Ta/ 4aya"le !i8ided 4aya"le $or6ing Ca-i"a& Total Capital #mployed 'inanced By S%are Ca-i"a& an* 7eser#es S3are Capital ?eneral Reser8e :n appropriated 4rofit S%are%o&*ers E;'i") @ Copyrig3t 2irtual :ni8ersity of 4a)istan 3001 7sT000 3+94%1 = 2192%. 29..4 &29 .% 194.% 1$$9&3+ 249+$4 $9$2& 24943 24$92+1 39111 3942% ++91.+ %94 2 3.91&4 14192$1 1. 9.1. 1MLFJ1I
VU
%.9... 1.49... %9%%% 1%+9%%%
261
'inancial Accounting = * > 7?T1.1 5ong Term 5ia"ilities !eferred Ta/ation I"ligation under 5ease 'inance TOTAL 7e;'ire*D 4repare a set of financial statements as on Nune 3.9 2..2. So&'"ion S%era2 L"*. Ba&an!e S%ee" As A" 5'ne 40F 3003 No"e Tangib&e Fi>e* Asse"s Iperating 'i/ed Assets Capital Jor) in 4rogress 5ong Term *n8estments 5ong Term !eposits C'rren" Asse"s Stores and Spares Stoc) in Trade Trade !e"ts Ad8. !ep. And 4repayments Cas3 and Ban) Balances C'rren" Liabi&i"ies S3ort Term Running 'inances Current 7aturity of I"ligation under lease finance Creditors9 Accrued and It3er lia"ilities Ta/ 4aya"le !i8ided 4aya"le $or6ing Ca-i"a& Total Capital #mployed 'inanced By S%are Ca-i"a& an* 7eser#es S3are Capital ?eneral Reser8e :n=appropriated 4rofit S%are%o&*ers E;'i") 3 4 % 3003 7sT000 3 9$%+ 49. % 2.9&2% 29 $ &%933 19114 1$.9$2& 1&9+ % 429.34 449$ % 2$%9$24 %92% 13 1. 11 &9&43 1.+9$&1 39$%$ 3.92.. 1%%9$1+ 140F00I 1+%9342 3001 7sT000 3+94%1 = 2192%. 29..4 &29 .% 194.% 1$$9&3+ 249+$4 $9$2& 24943 24$92+1 39111 3942% ++91.+ %94 2 3.91&4 14192$1 10JF010 1&+9 1% 39... 91&. 1.91&. 1MLFJ1I
VU
& $ +
12
%.9... 12%9... $9 .3 1K4FJ04
%.9... 1.49... %9%%% 1ILFIII
262
'inancial Accounting = * > 7?T1.1 5ong Term 5ia"ilities !eferred Ta/ation I"ligation under 5ease 'inance 39... $9&3+ 119&3+ 1LIF4H3 39... 91&. 1.91&. 1MLFJ1I
VU
13
S%era2 L"*. Pro.i" an* Loss A!!o'n" For "%e =ear En*e* 5'ne 40F 3003 No"e Sales Cost of Sales ?ross 4rofit It3er *ncome 5ess0 Administrati8e #/penses Selling and !istri"ution #/penses 14 1% 1& 1 1$ 3003 7sT000 3$93+1 % 2921. 1&&91$1 339+&$ 4$9+$. +93&4 12$9344 19$.% 29$% &$9+4$ 149$.. %4914$ %9%%% %+9 .3 Appropriation Transfer to Reser8e 4roposed di8idend V &.T :n=appropriated 4rofit Carried 'or(ard 219... 3.9... %19... $9 .3 3001 7sT000 R R R R R R R R R R R R R R R R R R
4rofit 'rom Iperations 5ess0 'inancial C3arges Het 4rofit Before Ta/ation *ncome Ta/ for t3e Qear 4rofit After Ta/ation :n=appropriated 4rofit Broug3t 'or(ard
1+
263
'inancial Accounting = * > 7?T1.1 S%era2 L"*. Cas% F&o, S"a"e/en"F For "%e =ear En*e* 5'ne 40F 3003 No"e Cas3 'lo( 'rom Iperating Acti8ities 4rofit Before Ta/ AdAustment for0 !epreciation 4ro8ision for !ou"tful !e"ts 4ro8ision for !iminutions in 2alue of *n8estment 4rofit on Ban) !eposits !i8idends *ncome ?ain on !isposal of '. Assts. Iperating 4rofit Before Jor)ing Capital c3anges ,*ncrease- ; !ecrease in C. Assets Stores and Spares Stoc) in Trade Trade !e"ts Ad8. !ep. And 4repayments &$9+4$ %9+ +$ &2% ,+ 4,2%91..,&+2,1+91 4+9 1 2+1 9$13 9122 , 9+$+923 3003 7sT000
VU
*ncrease ; ,!ecrease- in C. 5ia"ilities S3ort Term Running 'inances Creditors9 Accrued and It3er lia"ilities Cas3 ?enerated 'rom Iperations 4rofit on Ban) !eposits *ncome Ta/ 4aid Het Cas3 'lo( from Iperations
2914& 1.9 %2 129$+$ &+9+.& ,+ 4,%91..&39$32
264
'inancial Accounting = * > 7?T1.1 Cas3 'lo( 'rom *n8esting Acti8ities 4urc3ase of 'i/ed Assets Capital Jor) in 4rogress Sale 4roceeds If 'i/ed Assets !i8idend Recei8ed 5ong Term !eposits
VU
,%9..+,49. %1931& 1.. ,19.&%,$9 33-
Cas3 'lo( from financing Acti8ities Repayment of 5ease 5ia"ility di8idend 4aid
,49&+ ,2+9+&4,349&&12.943$ 24943 HHFKJI
Het *ncrease in Cas3 6 Cas3 #1ui8alents I;B of Cas3 and Cas3 #1ui8alents C<B o. Cas% an* Cas% E;'i#a&en"s
S%era2 L"*. S"a"e/en" o. C%anges in E;'i") For "%e =ear En*e* 5'ne 40F 3003 S%are Ca-i"a& Balance as on Nune 3.9 2... 4rofit after ta/ for t3e year !i8idend Balance as on Nune 3.9 2..1 4rofit after ta/ for t3e year Transfer to reser8e !i8idend Ba&an!e as on 5'ne 40F 3003 I0F000 13IF000 219... %.9... 1.49... %.9... Genera& 7eser#e 1.49... Un-a--. Pro.i" 4911+ 31943& ,3.9...%9%%% %4914$ ,219...,3.9...KFJ04 To"a&
1%$911+ 31943& ,3.9...1%+9%%% %4914$ = ,3.9...1K4FJ04
265
'inancial Accounting = * > 7?T1.1 No"es "o "%e A!!o'n"s
VU
1. Co/-an) an* i"s o-era"ions T3e company is a pu"lic limited company incorporated in 4a)istan and manufacture ========= === 3. Signi.i!an" a!!o'n"ing -o&i!ies T3ese accounts 3a8e "een prepared in accordance (it3 t3e re1uirements of t3e Companies Irdinance 1+$4 and *nternational accounting standards as applica"le in 4a)istan. +is"ori!a& !os"s Eistorical costs are used as a "asis for 8aluing transactions. 7e#en'e 7e!ogni"ion Sales are recorded upon deli8ery of goods to t3e customers. Eo(e8er #/ported goods are considered sold (3en s3ipped on "oard. O"%er Po&i!ies *ncome from "an) deposits9 loans and ad8ances are recogniKed on accrual "asis. !i8idend income is recogniKed (3en rig3t to recei8e is esta"lis3ed. Researc3 and de8elopment casts are e/pensed as and (3en incurred. Jor)ing of all figures9 fi/ed assets sc3edule and all agreements. *.e. 5ease agreements and agreements for o"taining loan from "an)s are included in t3e notes to t3e accounts.
266
'inancial Accounting = * > 7?T1.1 Fi>e* Asse"s S!%e*'&e Cos" As On 5'& 01 3001 Co/-an) O,ne* Asse"s 'ree3old 5and +9%%. Building 4lant and 7ac3inery 'urniture and 'i/ture 2e3icles 1%9$1% %293 4 19 .+ 249$$1 10HF43L Lease* Asse"s 2e3icles 229123 33F134 To"a& 3003 To"a& 3001 13MFHI3 > IF00L > 93FI3K: > 229123 33F134 13KFL44 > 2. 1291$& 13F1KM KJF001 > 91FL0H: > 19+$$ 1FLKK IFLJJ > 1491 4 1HF1JH L1F0JH > 292&2 +$+ 19 %$ IF00L ,29%2$93FI3K: Par"i!'&ars A**. 1is-osa&. As On 5'n 40 3003 7 A T E A!!'/'&a"e* 1e-re!ia"ion On As On For As On 5'& 01 1is-osa&. T%e 5'n 01 3001 =ear 3003
VU
$1V As On 5'n 01 3003
+9%%. 1%9$1% %49&3& 29&+$ 249111 10MFK10 1. 1% 1% 2.
= 1.9 % 4 931% 294 4 1492%1 JHFK1I
= = = = ,19+.491FL0H:
= %.4 19.+$ 34 293%3 4FLKL
= 1192 + 4$9413 29%.$ 149 .. JMFL00
+9%%. 49%3& &9223 1+. +9411 3LFL10
9+4+ JFLHL 4JFKIL 4LFHI1
1is"rib'"ion o. 1e-re!ia"ion 3003 3001 Rs\... Rs\... Cost of ?oods Sold 19&.2 Admin #/penses 293$ Selling #/penses 19+$$ IFLJJ >
Jor)ing 5and O. Building O 1%9$1$ = 1.9 % 4lant O %49&3& = 4 931% 294 4
O O O O O 3003 7sT000
%9.4. / 1.T 9321 / 1%T 224 / 1%T 119 &4 / 2.T +9+3 / 2.T
O O O O O
%.4 19.+$ 34 293%3 19+$$
'urnitureO 29&+$ =
2e3icles O 249111 = 1492%1 M 1+.4 2e3icles O 229123 = 1291$& No"e
3001 7sT000 2.9... 29%.. 19$ % &2% 2.9&2% 2.9... 29%.. 192%. 2.9...
Long Ter/ In#es"/en" *n8estment in S3ares of Co. A *n8estment in S3ares of Co. B 5ess0 4ro8. 'or !iminution in 2alue Co. B
267
'inancial Accounting = * > 7?T1.1 Long Ter/ 1e-osi"s 5ong Term !eposits 5ess0 Current 7aturity 39.&+ 2+1 29 $ 2 9%4% 49 31 $9%%. 1$.9$2&
VU 29..4 29..4 319 ++ &9%4. $.93.. 1$$9&3+
S"o!6 in Tra*e Ra( 7aterial 4ac)ing 7aterial 'inis3ed ?oods
Tra*e 1eb"ors Trade !e"ts 5ess0 4ro8ision for !ou"tful !e"ts
1$91$% 1921. 1&9+ %
2%93. 323 249+$4 193 + 19 3. 193.% 291+2 193&& 3+4 = 4&. = $93&&
A*#an!es 1e-osi"s an* Pre-a)/en"s Ad8ances !eposits 4repayments Ad8ance #/cise !uty Sales Ta/ Refunda"le It3er Recei8a"les !i8idend Recei8a"le Accrued 4rofit on Ban) !epericiation Current 7aturity of 5ong Term !ep.
29434 $1& 19&3 29&.1 $94+2 3 % 2%9... 3$$ 2+1 429.34
Cas% an* Ban6 Cas3 in Eand Cas3 at Ban) = Current Accounts Cas3 at Ban) = Sa8ings Accounts Cre*i"orsF A!!r'e* C O"%er Creditors Customers !eposits Accrued #/p. It3er 5ia"ilities Liabi&i"ies
3933. 2%9.24 1&9%21 449$ % &39.1& 229% 1 22944$ 19$2& 1.+9$&1 %$9++ 1+9$&& 1 9%34 29 12 ++91.+
1i#i*en* Pa)ab&e 4aya"le from 4re8ious Qear Accrued !uring t3e Qear
2.. 3.9... 3.92..
1&4 3.9... 3.91&4
268
'inancial Accounting = * > 7?T1.1 S%are Ca-i"a& Aut3oriKed Capital 1.9...9... ,2...0 1.9...9...ordinary s3ares of Rs. 1. eac3 4aid :p Capital %9...9... ,2...0 %9...9...ordinary s3ares of Rs. 1. eac3
VU
1..9...
1..9...
%..9...
%..9...
Ob&iga"ion Un*er Lease Finan!e I"ligation. :nder 5ease 'inance 5ess0 Current 7aturity
1%92$2 &9&43 $9&3+
1.9%$% 3942% 91&.
Sa&es ?ross Sale = !omestic ?ross Sale = #/port 5ess0 Sales Ta/
%19244 +393.% 1.&91%$ 3$93+1
Cos" o. Sa&es Ra( 7aterial = Ipening Stoc) Ra( 7aterial = 4urc3ases 5ess 0 Ra( 7aterial = Closing Stoc) Ra( 7aterial Consumed 4ac)ing 7aterial = Ipening Stoc) 4ac)ing 7aterial = 4urc3ases 5ess0 4ac)ing 7aterial = Closing Stoc) 4ac)ing 7aterial consumed I8er3eads Jages Stores Consumed Tra8eling and Con8eyance. Repairs and 7aintenance. *nsurance 'uel and 4o(er Bottle Brea)age #/cise !uty 7isc. #/penses !epreciation Cost of 4roduction @ Copyrig3t 2irtual :ni8ersity of 4a)istan
1392&4 2+19%&+ 2 9%4% 2 92$$ 4291$+ 1+.92+% 49 31 1% 9 %3
3.1
2391%% 9+22 1%$ 1.92& 34% 23933+ &9%%2 4+9& 1 9412 19&.2 13.9423 %&%94&4
269
'inancial Accounting = * > 7?T1.1 'inis3ed ?oods = Ipening Stoc) 5ess0 'inis3ed ?oods = Closing Stoc) Cost of ?oods Sold O"%er In!o/e 4rofit on Ban) !eposits !i8idends *ncome 'oreign #/c3ange ?ain ?ain on !isposal of '. Assts. Sale of Scrap $%92+& $9%%. % 2921.
VU
+ 4 2%91.. %9 32 &+2 194 . 339+&$
A*/inis"ra"i#e E>-enses Salaries and Jages 4ostage and Telegram Tra8eling and Con8eyance Repairs and 7aintenance. *nsurance 4rinting and Stationery Rent9 Rates and Ta/es Auditors\ Remuneration 5egal and 4rofessional !onations ?eneral #/penses !epreciation 4ro8ision for !ou"tful !e"ts 4ro8ision for !iminution in 2alue of *n8estment
3.1
3&911 19&%2 19. % 192 2 191 + 19121 191%% 1&1 &$ $1 4.. 293$ +$ &2% 4$9+$.
Se&&ing an* 1is"rib'"ion E>-enses Salaries and Jages 4ostage and Telegram Tra8eling and Con8eyance Repairs and 7aintenance. 2e3icle Running 4rinting and Stationery Rent9 Rates and Ta/es Ad8ertising Iut(ard 'reig3t Sales Staff *ncenti8es 4etrol9 Iil etc. 7isc. #/penses @ Copyrig3t 2irtual :ni8ersity of 4a)istan
23922 19% $ 29&1& &91&$ $%+ 4+ 19+%4 1+92%4 +9&2$ 19&42 $9%&1 193+2
270
'inancial Accounting = * > 7?T1.1 !epreciation 3.1 19+$$ +93&4
VU
Finan!ia& C%arges 7ar)up on 5oans 'inance 5ease C3arges Ban) C3arges
2$2 19 %. $2% 29$%
Finan!ia& 7a"io Ana&)sis T3e management of t3e "usiness 3as to analyKe se8eral t3ings to (or) out performance of t3e "usiness. T3ese analysis 3elp t3e management in decision ma)ing. T3e management (or)s out t3e performance of t3e "usiness "y calculating some ratios. 'ollo(ing are some of t3e important ratios9 a management may calculate to get first 3and )no(ledge a"out "usinessGs performance0 Pro.i"abi&i") 7a"ios 4rofita"ility ratios contain t3e follo(ing ratios0 ?ross 4rofit Ratio Het 4rofit Ratio
Gross Pro.i" 7a"io T3e ?ross 4rofit ratio tells t3e management of t3e company a"out profita"ility of t3e company. *t 3elps t3e management of t3e company to )no( a"out cost of production of t3e company. J3en management compares it (it3 pre8ious yearGs ratios9 it came to )no(9 3o( (ell t3e "usiness 3as performed and 3o( to impro8e its efficiency furt3erD ?ross 4rofit ratio also gi8es information a"out sales. *t tells t3e management (3et3er sales 3as increased or decreased. T3e management ta)es appropriate steps accordingly. T3e formula for calculating t3is ratio is as follo(s0 ?ross 4rofit Ratio O ,?ross 4rofit ; Sales- / 1.. Ne" Pro.i" 7a"io T3e "enefit of net profit ratio is same as t3at of gross profit ratio. *t 3elps t3e management to )no( a"out net profit. *f gross profit ratio is greater as compared to last year and net profit ratio is lesser9 it means t3at administrati8e and selling e/penses of t3e company 3a8e increased. T3e management ta)es appropriate steps to control t3e e/penses. T3e formula for t3is ratio is as follo(s0 Het 4rofit Ratio O ,Het 4rofit ; Sales- / 1.. S"o!6 T'rno#er 7a"io T3is ratio tells us a"out sale of stoc). *t can "e calculated in days as (ell as in num"er of times. *t tells us 3o( many times in a year or in a mont39 t3e stoc) is sold or in 3o( many days9 t3e stoc) is sold. *f it is calculated in days and t3e result is 3ig3er t3an t3at of pre8ious years. T3is means t3at t3e stoc) ta)es more days to "e sold. T3at means demand of t3e product of t3e company is decreasing and 8ice 8ersa. T3e formula to calculate stoc) turno8er in num"er of days is as follo(s0
271
'inancial Accounting = * > 7?T1.1 J3ere9 A8erage stoc) O ,Ipening Stoc) M Closing Stoc)- ; 2 Stoc) Turno8er in days O ,A8erage Stoc) ; Cost of goods sold- / 3&%
VU
T3is opening and closing stoc) may "e for a year or for a mont3 depending upon t3e policy for calculating t3is ratio. *f t3is ratio is calculated for num"er of times9 it means t3at 3o( many times in a gi8en period ,(3et3er a year or a mont3- t3e stoc) is sold. T3e formula for calculating t3is ratio is as follo(s0 Stoc) Turno8er ,Hum"er of times- O ,Cost of goods sold ; A8erage stoc)1eb"ors T'rno#er 7a"io T3is ratio is used to get first 3and )no(ledge a"out payment recei8ed from de"tors. *t is e8ident t3at a company cannot meet its e/penses (it3out recei8ing cas3 from its customers. *f de"tors do not pay in time9 3o( (ould a company pay its lia"ilitiesD Conse1uently its reputation (ill go do(n and no"ody (ill place 3is trust on t3at company. T3is ratio 3elps management to identify de"tors (3o do not pay in time and to pursue t3em to pay. T3is ratio is also calculated for num"er of days and num"er of times. T3e formulae for t3is ratio are as follo(s0 !e"tor Turno8er ,Hum"er of days- O ,A8erage !e"tors ; Credit Sales- / 3&% !e"tor Turno8er ,Hum"er of times- O Credit Sales ; A8erage !e"tors Cre*i"ors T'rno#er 7a"io CreditorsG turno8er means 3o( many times or in 3o( many days a company pays to its creditors. As mentioned a"o8e9 if a company does not collect its payment in time9 3o( (ould it "e a"le to pay its creditors on timeD *f it does not pay its de"tors on time9 t3is situation (ill ma)e "ad impression on its reputation. 5i)e de"tors turno8er9 creditorsG turno8er is also calculated for num"er of days and num"er of times. T3e formulae for t3is ratio are as follo(s0 Creditor Turno8er ,Hum"er of days- O ,A8erage Creditors ; Credit 4urc3ases- / 3&% Creditor Turno8er ,Hum"er of times- O Credit 4urc3ases ; A8erage Creditors 7e"'rn on Ca-i"a& E/-&o)e* 7a"io 97OCE: T3is ratio is calculated for t3e s3are 3olders of t3e company. As s3are 3olders are concerned (it3 profit paid "y companies to its s3are 3olders. T3is ratio gi8es us t3e proportion of net profit "efore ta/ to a8erage capital employed "y t3e company. T3e return rate of profit gi8en to its mem"ers s3ould "e 3ig3er t3an current mar)et rate. *f return rate is less t3an current mar)et rate t3an t3e s3are 3olders (ill in8est t3eir money in t3e mar)et instead of in8esting in t3e company. T3e formula for calculating t3is ratio is as follo(s0 Return on Capital #mployed Ratio ,RIC#- O Het profit after ta/ "efore appropriation ; A8erage Capital #mployed
272
'inancial Accounting = * > 7?T1.1 Earning Per S%are 7a"io
VU
#arning per s3are ratio indicates t3e proportion of net profitL a company is getting per s3are. S3are 3olders are al(ays interested to )no( t3e proportionate rateL a company is getting per s3are. As price is numerator and earning in denominator9 t3erefore lo(er 8alue means "etter return. T3e formula for calculating t3is ratio is as follo(s0 #arning per s3are ratio O Het profit after ta/ "efore appropriation ; Hum"er of s3ares Pri!e Earning 7a"io T3is ratio is calculated for t3ose s3ares (3ic3 3a8e mar)et 8alue. T3is ratio compares earning per s3are (it3 mar)et 8alue of t3at s3are. T3e formula for calculating t3is ratio is as follo(s0 4rice #arning Ratio O 7ar)et 8alue per s3are ; #arning per s3are 1eb" E;'i") 7a"io T3is ratio s3o(s t3e composition of finance t3at 3as funded t3e asset of t3e company. T3is ratio 8aries for different proAects. *n 4a)istan9 ma/imum ad8ised ratio is &.0 4.. i.e. 4.T of t3e assets s3ould "e "oug3t (it3 company9 s in8estment and &.T s3ould "e "oug3t (it3 t3e loan ta)en "y t3e company. T3is standard is accepta"le in 4a)istan. *f a companyGs li1uidity ratio is more t3an t3e a"o8e mentioned standard9 (3ic3 means condition of t3e company is not 8ery good. *f it 3as to pat its lia"ilities9 its assets (ould not support it to pay its lia"ilities. T3e formula for calculating t3is ratio is as follo(s0 !e"t #1uity Ratio O 5ong term 5ia"ilities ; #1uity C'rren" 7a"io Current ratio s3o(s t3e proportion of current assets and current lia"ilities. T3is ratio s3ould "e 101. i=e.. 'or e8ery lia"ility of one rupee9 t3ere s3ould "e an asset of one rupee to pay it. T3e formula for calculating t3is ratio is as follo(s0 Current Ratio O Current Assets ; Current 5ia"ilities A!i* Tes" 7a"io Acid test ratio is t3e proportion of current assets (3ic3 are con8erti"le into cas3 and current lia"ilities. T3e formula for calculating t3is ratio is as follo(s0 Acid Test Ratio O ,Current Assets > Stoc)- ; Current 5ia"ilities Mar6 U- Co#er 7a"io T3is ratio s3o(s t3e proportion of operating profit ,Iperating 4rofit "efore financial c3arges- and financial c3arges. T3is ratio is useful for "an)ers. *f a company 3as ta)en loan and its financial c3arges are so large t3at all or a "ig part of profit is a"sor"ed "y financial c3arges9 t3en 3o( (ould a company repay its loans. T3e formula for calculating t3is ratio is as follo(s0 7ar) up Co8er Ratio O Iperating 4rofit "efore financial c3arges ; 'inancial c3arges ================TE# #H!===============
273

MGT101 - Financial Accounting - I

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MGT101 - Financial Accounting - I

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MGT101 - FINANCIAL ACCOUNTING I

'inancial Accounting = * > 7?T1.1 BASIC CONCEPTS OF ACCOUNTING Learning Ob e!"i#e

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1 A#ai&ab&e A&"erna"e

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

boo6s o. a!!o'n"s is !a&&e* *o'b&e en"r) s)s"e/.

'inancial Accounting = * > 7?T1.1 o

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1 1ebi" Cre*i" Cas3 Rs.1..9 ...

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

C7E1ITS Cas3 M 7r. A %... M 1..9...

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

The Flow of Transactions

General Journal Cash/Bank Book

Profit & Loss Account

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

To"a&D Narra"ionD Pre-are* B)D T%e Genera& 5o'rna&

100F000 Ca-i"a& In"ro*'!e* in Cas% b) O,ner C%e!6e* b)D

Title of Account Left hand side. The Debit side.

Right hand side. The Credit side.

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

Capital *ntroduced in Cas3 "y I(ner

Account code .2 !e"it Amount Credit Amount 1..9...

Capital *ntroduced in Cas3 "y I(ner

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

2ouc3er 4articulars ; Harration Hum"er

A Simple Presentation of a Recorded Transaction is as under:

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

Title of Account Debit Side Narration / Date No. Particulars 1 2

Receipt Amount 100,000 20,000 120,000

Account Code 01 Credit Side Narration / No. Particulars 3 4 Balance

Payment Amount 80,000 30,000 110,000 10,000

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1 INT7O1UCTION TO FINANCIAL STATEMENTS

'inancial Accounting = * > 7?T1.1 o Ban) c3arges

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

A/o'n" 7s. %9... 2.9... $.9...

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

Amount Rs. %9... 2.9... $.9... 1JIF000

1&9... 3&$9... 4$ 9...

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

Gross Pro.i" LessD Administrati8e e/penses Salaries Rent Ne" Pro.i"

IKF000 ,129...,%9...,1 9...H1F000

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

@ Copyrig3t 2irtual :ni8ersity of 4a)istan

'inancial Accounting = * > 7?T1.1

100F000 Ca-i"a& In"ro'!e in Cas% b) O,ner C%e!6e* b)D