PRACTICAL

36.Journals and Ledgers

JOURNAL

It is the book of original entry i.e. the entries of all transactions are recorded in
chronological order in the book of prime or first entry.
Journal proper is used only when absolutely necessary, i.e. when the other subsidiary
books do not serve the purpose and it becomes useful in the following cases;
o Opening entries
o Rectification entries
o Adjustment entries
o Closing entries
o Self- balancing entries for internal check purpose
o Entries involving purpose and sale on credit of items bought otherwise than
for resale at a profit
o Transactions for which there is no specific subsidiary book eg. Consignment,
joint ventures and dissolution.
These entries are written in a technical form.
The process of making entries in the journal is known as journalizing and the entries
are known as journal entries.
In a business, every transaction is passed through the journal before making the final
entries in the ledger.
The model ruling of a journal is as follows.

Date Particulars V.No L.F. Debit(Rs) Credit(Rs)

A complete Journal Entry should contain the following items

o Data of transaction
o Particulars of accounts to be Debited or Credited
o The amount involved
o Number of voucher or evidence for the transaction
o Page of ledger where it is entered
o The narration, i-e Circumstances for the journal entry

LEDGER

The Ledger is a book of final or ultimate entry and is very important as it contains the
essential details of pecuniary transactions.
The first/prime entry though made in the books (Journal) is ultimately recorded in the
ledger.
Ledger contains the various accounts and shows the final and actual effect of
transactions.
The method of entering the from the journals to the ledger is known as posting.
Postings are made not only from the journal but also from the book of subsidiary
journals.

1
 First of all, Opening entry should be posted as it indicates the balances with which assets
and liabilities start the new period.
The way to post the opening entry is to write as the debit side of various assets (which
have to be debited according to the opening entry). To balance brought down or just
To balance b/d

Dr. Cr.
Date Particulars Folic Amount Date Particulars Folio Amount
0

CLASSIFICATION OF LEDGER

Personal Ledger

Contains all other accounts of all persons with whom trade transactions have been
effected, i.e. with whom purchase/sales have been made.

Impersonal Ledger

Contains all other accounts and it is subdivided into

Nominal Ledger

All the fictitious and nominal accounts are maintained.

General ledger

All the other accounts like property or Real accounts are maintained.

ILLUSTRATION

Journalize and make Ledger entries for the following transactions of a trader in January
2004.

o 3 Started businesses with cash Rs.50000

o 4 Opened bank accounts with Rs.35000
o 7 Bought goods for cash Rs.1500
o 12 Bought furniture by cheque Rs.1750
o 14 Purchases from Mohan Rs.11000
o 17 Sales by cash Rs.2750
o 20 Retuned goods to Mohan Rs.1000
o 23 Withdrew cash from bank Rs.2500
o 25 Rent paid in cash Rs.500
o 28 Commission received in cash Rs.200

Solution: Journal

2
Date Particulars V.No L.F Dr(Rs) Cr(Rs)
Jan 2004
3 Cash Account Dr. 50000 50000
To Capital Account
(Being the capital brought in cash)

4 Bank Account Dr 35000 35000

To cash Account
(Being cash paid into Bank)

7 Purchases Account Dr 1500 1500

To Cash Account
(Being Cash Purchase made)

12 Furniture Account Dr 1750 1750

To Bank Account
(Being Purchase of furniture by
Cheque)

14 Purchases Account Dr 11000 11000

To Mohans Account
(Being credit Purchase from Mohan)

17 Cash Account Dr 2750 2750

To sales Account
(Being cash received on account of
sales)

20 Mohans Account Dr 1000 1000

To purchases return Account
( Being returns to Mohan)

23 Cash Account Dr 2500 2500

To Bank Account
(Being cash drawn from Bank)

25 Rent Accounts Dr 500 500

To Cash Accounts
(Being the rent paid in cash)

28 Cash Account Dr 200 200

To Commission Account

3
 (Being Commission received in cash)

Solution: Ledger

Dr Capital Account Cr
2004 Rs 2004 Rs.
Jan 3 By Cash Account 50000
Dr Cash Account Cr
Jan 3 To Capital Account 50000 Jan4 By Bank Account 35000
Jan 17 To Sales Account 2750 Jan 7 By Purchase Account 1500
Jan 23 To Bank Account 2500 Jan25 By Rent Account 500
Jan 28 To Commission Account 200
Dr Bank Account Cr
Jan 4 To Cash Account 45000 Jan12 By Furniture Account 1750
Jan 23 By Cash Account 2500
Jan 25 By Capital Account 10000
Dr Drawings Account Cr
Jan 2 To Bank Account 250
Dr Furniture Account Cr
Jan 4 To Bank Account 1750
Dr Mohans Account Cr
Jan To Purchase Return Account 1000 Jan 14 By Purchases Account 11000
20
Dr Purchases Account Cr
Jan 7 To Cash Account 1500
Jan14 To Mohans Account 11000
Dr Purchases Returns Account Cr
Jan 20 By Mohans Account 1000
Dr Rent Account Cr
Jan 25 To Cash Account 500
Dr Commission Account Cr

4
 Jan 28 By Cash Account 200

37.Cash Book

CASH BOOK

The subsidiary book for all cash receipts and payments other than for petty expenses
(When there is a separate petty cash book) is the Cash Book.

Types of Cash Book

The cash book can be any one of the following types

Simple Cash Book

Simple cash book is like an ordinary cash account.

Its preformed is given below.

Dr. Cr.

Date Particulars L.F Amount Date Particulars L.F Amount

0
0
0

Two columnar cash book

Cash book with cash and discount columns only

Cash book with bank and discount columns only

Three columnar cash book

Cash book with cash, bank and discount columns only

Multi-columnar cash book

In practice, there are three main types of cash books which are explained as follows

Two columnar Cash book

Cash book with Cash and Discount Columns only: In this case, a separate bank account
will be maintained in the general ledger. However all transactions involving cash
and/or bank must be passed through the cash book.
Model: Cash book with Cash and Discount Columns Only

5
0 Dr Cr
Dat Receip V.N L. Discou Amou Dat Paymen V.N L. Discou Amou
e ts o. F nt Rs nt e ts o F nt nt
Rs Rs Rs
0
0

The entries for cash receipts and payments are made in the usual manner. However,
wherever discounts are involved, they are entered in the discount column in the same
line.
The other point is to be noted that the transactions involving cheque payments are first
treated as withdraws of necessary cash from bank and subsequent payment in the
form of cash.
It is also noted that at the end of each period, the cash book is balanced with the words
By balance c/d. However, the discount columns are merely totaled but not balanced

PROCEDURE FOR POSTING FROM THE CASH BOOK

For every item appearing in the debit side, other than opening balance, a credit is given
in the corresponding account. If there is discount, it will also be credited to that
account.
Likewise, items appearing on the credit side of cash book will have their debits in the
corresponding accounts together with discount if any.
As for the discount columns, they are totally at the end of each period, and the debit and
credit totals carried respectively to the debit and credit sides of the discount account
and posted as To Sundries respectively.
Cash book with Bank and Discount Columns only: This type of cash book is maintained
where all cash received is banked at once and all payments other than petty items
(Which met out of petty cash) are made by cheques.
As in the previous case, are taken to the two sides of the Discount Account.

Model: Cash book with bank and Discount Columns Only

Dr Cr.
Dat Receipt V.No L. Discoun Ban Dat Payment V.N L. Ban Amoun
e s . F t Rs k Rs e s o F k Rs t Rs
0
0

Three Columnar Cash book

6
 Cash book with Cash, Bank and Discount Columns only: This is most common and the
best from all points of view.
Here, the entries are made in the respective columns according as whether they
increase/ decrease the cash or bank balance.
At the end of the period , the cash bank balances are balanced, while the discount totals
are dealt with as in the case of other types of Cash Book.
Model: Cash book with Cash, bank and Discount Columns
Only

Dr Cr.
Dat Recei V.N L. Discou Cas Ban Dat Payme V.N L. Discou Cas Ban
e pts o. F nt Rs h k e nts o F nt h k
Rs Rs Rs Rs Rs
0
0
ILLUSTRATION

The following information relates to a businessman for the month of June 2005.
Indicate how it would be recorded in the three different types of cash book.
o 2005 June
o 1 Started business with cash Rs.25000
o 2 Opened a bank account with Rs.20000
o 7 Purchases by cheque Rs.1200
o 9 Sales by cheque Rs.1000
o 12 Draw cheque for personal use Rs.1200
o 13 Raja paid into our bank account Rs.5000 and was allowed discount Rs.300
o 16 Drew cheque for personal use Rs.1000
o 20 Gave cheque of worth Rs.1000 to Ravi and discount Rs.50
o 22 Bought furniture by cheque for Rs.2500
o 28 Sales by cheque Rs.5000
o 30 Above cheque paid into bank.

Cash Book (with Cash and Discount Columns)

Date Receipts Discount Amount Date Payments Discount Amount

V.No Rs Rs V.No L.F. Rs Rs
L.F
2005 2005
June June

1 To 25000 2 By Bank account 20000

Capital
account

4 To Bank 1200 4 By Purchases 12000

7
 account account

7 To Sales 1000 9 By Bank account 1000

account

12 To Bank 1200 12 By Drawings 1200

account account(Personal
use)

13 To Rajus 300 5000 16 By Drawings 1000

account account(Personal
use)

16 To Bank 1000 20 By Ravis 50 1000

account account

30 To Sales 5000 22 By Furniture 2500

account account

30 By Balance c/d 11500

300 39400 50 39400

2005 To 11500
June Balance
1 b/d

Cash Book (With Bank and Discount Columns)

Date Receipts Discount Bank Date Payments Discount Bank

V.No L.F Rs Rs V.No L.F Rs Rs
2005 2005June
June

1 To Capital 25000 4 By Purchases 1200

account account
(Started (Cash Purchases
Business made)
with deposit
in bank)

7 To Sales 1000 12 By drawings 1200

account(cash account(Personal
Sales) use)

13 To Rajus 300 5000 16 By drawings 1000

account account(Personal
use)

8
 30 To Sales 5000 20 By Ravis 50 1000
account account

22 By Furnitures 2500
account

30 By Balance C/d 29100

300 36000 50 36000

2005 To Balance 29100

June b/d
1

38.Purchase sales register

PURCHASE SALES REGISTER

The following subsidiary books are maintained for credit transactions in goods for resale
o The Purchases Book for credit purchases of goods for resale
o The Sales Book for Credit Sales of goods
o The Purchases Returns or Returns Outwards Book for all returns of the goods
bough
o The Sales Returns Books or Returns Inwards Book for all goods returned by
the customers
In modern trade, some transactions are settled by cash, some by cheques and some by
documents known as Bills of Exchange (B/E). Bills of Exchange are documents which
in effect represent money receivable by one party and money payable by another
either on demand or after a certain specified period.
Since a bill of exchange represents money receivable by one party, as far as that party is
concerned it is a Bills Receivable (B/R) i.e. a bill on which money is receivable.
To the party who is liable to pay money on it, the bill of exchange is a Bill Payable (B/P).
Generally, it may also be stated here, that a bill of exchange is an order usually by a
creditor upon his debtor to pay money.
There are two books for transactions of credit instruments like Bills of Exchange and
Promissory note connected with trade and accommodation.
o Bills Receivable (B/R) Book for all bills of exchange received
o Bills Payable (B/P) Books for all bills for all bills of exchange accepted payable
and for all other transactions; the journal proper.
Significantly the above Subsidiary books are used for Credit Purchases/Credit Sales and
Return of goods.
Unlike the Cash Book and petty Cash Book, these are merely day to day record or
subsidiary books, but do not function as Ledgers.

ADVANTAGES OF SUBSIDIARY BOOKS

Time is saved by reducing the number of total postings to be made, apart from the
efforts involved in making elaborate and individual posting and individual journal
entries for every time.

9
 The possibility of mistakes arising from the quantitative aspects of postings is
minimized.
It makes easy to extract the information with regards to specific items such as credit
purchases, returns inwards, etc.
Apart from simplifying the process of postings, retains the major benefits of DES such as
the possibility of preparing a Trial Balance as a sort of prime facie check on the
accuracy of postings.

Procedure for recording Transaction

Usual procedure is to record the transaction as and when they arise in the appropriate
subsidiary books and credit or debit the personal accounts at once according as they
give or receive the goods in each case.
Periodically, these subsidiary books are totaled and the totals carried to the concerned
General Ledger Accounts and posted on the side opposite to that in which postings
has been made in the Personal Accounts.
Thus the total credit purchases will be debited to the Purchases Account, Sales credited
to the Sales Account and Purchases returns and sales returns appropriately credited
and debited respectively to the accounts in terms of their periodical totals.

PROBLEM

Show the method of recording and posting the transactions during January 2004 given
below in the appropriate books of accounts:
o January 1 Bought goods from Kumar Rs.5500
o 4 Sold goods to David Rs.3750
o 8 Purchases from Kumar Rs.2750 and Rajesh Rs.7500
o 11 Sales to David Rs.4650 and Anand Rs.3600
o 14 Returns to Rajesh Rs.500
o 17 Anand returns Rs.600 goods
o 19 David returned goods worth Rs.650
o 22 Anand brought goods worth Rs.3500
o 25 Kumar sold us goods worth Rs.5250
o 28 Returns from Anand Rs.1250
o 29 Returns to Kumar Rs.250

Solution

Purchases Book

Date Name of Particulars V.No L.F Amount(Rs)

January 1 Kumar 5500

8 Kumar 2750

Rajesh 7500

25 Kumar 5250

10
 21000

Purchases Return Book

Date Name of Particulars V.No L.F Amount(Rs)

January 14 Rajesh 500

29 kumar 250

750

Sales Book

Date Name of Particulars V.No L.F Amount(Rs)

January 4 David 3750

11 David 4650

Anand 3600

25 Anand 3500

15500

Sales Return Book

Date Name of Particulars V.No L.F Amount(Rs)

January 17 Anand 600

19 David 650

28 Anand 1250

2500

BILLS OF EXCHANGE

Problem 2

Write up the appropriate subsidiary books for the following particulars during the month
of February 2005
o February 1 Draw a three-month bill on Babu for Rs.7500
o 4 Accepted Krishnas bill for Rs.5000 payable at three months
o 8 Received from Shankar his acceptance for Rs.2500

11
 o 11 Sent Raja acceptance for 2250
o 17 Babu endorsed in Mohans favors an acceptance for Rs.4500
o 20 Babu acceptance Mohan draft for Rs.7750
o 22 Krishna drew on Mohan at three months
o 27 Drew a bill at two months on Shankar for Rs.2000
o 28 Shankar accepted Mohans draft for Rs.6250

Solution

Bills Receivable Book

Date Party from Whom Received Acceptor Period in months Amount Remarks
2005 Feb 3
1 Babu Babu 7500
8 Shankar Shankar 2500
17 Babu 4500
20 Babu 7750
27 Shanka Shankar 2 2000
28 Shankar Shankar 6250
30500

Bills Payable Book

Date Drawers name Period in months Amount Remarks

2005 Feb
4 Krishna 3 5000
11 Raja 2250
22 Krishna 3 5750
13000

PROBLEMS

To illustrate the given transactions during the month of August 2005 in the appropriate
books of accounts by using the method of recording and posting.
o August 2005
o 1 Purchases from Anbu Rs.3000
o 7 Purchases from Babu Rs.6000
o 10 Sold goods to Kumar Rs.4000
o 15 Bought goods from Babu Rs.2800

12
 o 17 Sales to Anand Rs.3300
o 19 Sales to David Rs.4000
o 20 Returns to Babu Rs.500
o 21 Anand returns Rs.600 worth of goods
o 22 David return Rs.800
o 23 Anand bought of goods Rs.3000
o 24 Babu sold as goods for the value of good Rs.8200
o 25 Returns from Anand Rs.1300
o 27 Returns to anbu Rs.300
Write up the appropriate subsidiary books for the following particulars during the month
of July 2005
o July 1 Drawn a two months bill from Balu for Rs.8000
o 6 Accepted Kannans bill for Rs.6000 payable at two months
o 8 Received from Sekar his acceptance for Rs.3000
o 12 Sent Kumar acceptance for Rs.300
o 17 Rajesh endorsed in Sudhans favour an acceptance for Rs.4500
o 18 Babu accepted Mohans draft for Rs.8500
o 25 Krishna drew on Mohan at three months
o 28 Drew a bill at two months on Shankar for Rs.3000
o 29 Shankar accepted Mohans draft for Rs 5500

39.Trading, Profit and Loss Account

TRADING ACCOUNT

Final Accounts is the general name given for the Trading and Profit and Loss Account
and Balance Sheet.
o Trading Account is prepared to find out the Gross Profit or loss during the
period.
o Profit and loss Accounts is prepared to find out the net profit/ loss for the
period and
o Balance sheet indicates the overall position of the business at the every end of
the period.

Procedure for the preparation of Trading Account

Debit Trading Account with the opening stock, net purchases and their direct expenses
on the goods by transfer of the balances from the respective ledger accounts. Thus,
Trading Accounts will be debited with the total cost of the goods sold and unsold.
Credit the Trading Account for the transfer of net sales from the sales Account.
Since the profit can be found out only in regard to goods sold, the stock at close is
credited to Trading Account on the basis of an Adjusting Journal Entry.
The Profit and Loss (gross) on the Trading Account is Transferred to the Profit and Loss
Account by means of a Journal Entry.
List of Expenses chargeable under Trading Account or Profit and Loss Account:
o Wages- Productive and Manufacturing.
o Freight- Freight Inwards and Freight on Purchases
o Carriage- Carriage Inwards, Carriage on Purchase coal gas and water, oil,
grease and waste.
o Customs duties, airport duties, dock dues and clearing charges, all factory or
manufacturing expenses.

13
Procedure for preparing profit and Loss Account

The Gross Profit or Loss will be brought down from the Trading Account to the Credit or
Debit side respectively of Profit and Loss Account.
Debit the Profit and Loss Account and Credit the various nominal Accounts for bringing
the various expenses of the business proper into the Profit and Loss Account.
Credit the Profit and Loss Account and Debit the various nominal Accounts for bringing
the various business incomes into the Account.
The difference between the two sides of Profit and Loss Account will represent the Profit
or Loss Account and since the Losses and Gains have to be borne by the proprietor,
Profit and Loss Account will be closed by means of credit(net profit) and a debit(net
loss).
It is most important to note that all business expenses other than those transferred to
Trading Account will have to be transferred to the Profit and Loss Account.
Likewise, all business incomes will have to be brought into profit and Loss Account after
making adjustments and Provisions if any.
The indirect or selling expenses which find a place in profit and Loss Account after
include, among others, the following:
o Unproductive wages, wages and Salaries, Carriage on sales, Carriage outwards,
Freight on sales/ outwards, all office expenses, trade expenses not
accompanied by office expenses, export duties and taxes other than income tax

ILLUSTRATION

The following are the balance taken from the books of Mr. Suresh on March31, 2005

Rs Rs
Capital 30000 Sales 15000
Drawings 5000 Sales Returns 2000
Furniture 2600 Discounts Allowed 1600
Bank overdraft 4200 Discounts Receives 2000
Creditors 13300 Taxes 2000
Buildings 20000 General Expenses 4000
Stock Opening 22000 Salaries 9000
Debtors 18000 Commissions Paid 2200
Rent from Tenants 1000 Carriage Inwards 1800
Purchases 11000 Bad debts 800
Reserve for Bad Debts 500 Closing Stock 20000
Depreciation Building by 25% Furniture by 10%
Provide reserve for Bad Debts at 5% Unexpected Taxes 900
interest on Capital at 5%

14
 Prepare (a) Trading Account and (b) Profit and Loss Account for the year (As on Closing
Date).

Solution

Trading Account

Particulars Rs Rs Particulars Rs Rs
To Stock 20000 By Sales 150000
To Purchases 11000 Less: Returns 2000 148000
To Carriage in 1800 20060
To Gross Profit 34260
168060 168060

Profit and Loss Account of Mr.X for the year ending 31 March, 2005

Particulars Rs Rs Particulars Rs Rs
To interest on Capital By Trading Account (g/p) 34260
To Reserve for b/d 800 By Rent received 1000
Add: new reserve 900
Less: Existing 1700 1200 By Discount Received 2000
500
To Depreciation: 500 760
Building 260
furniture
To Discounts Allowed 2000 1600
To Taxes 900 1100
Less: Pre-Paid
To General Expenses 4000
To Salaries 9000
To Commission Paid 2200
To Net Profit 15900
37260
37260 37260

PROBLEM

15
 Prepare trading, Profit and loss accounts as on 30.06.2005 of the following:
o Interest on Capital Rs.2000
o Discount allowed Rs.1700
o Commission Rs.2000
o Salary Rs.100000
o Opening Stock Rs.25000
o Wages Rs.12000
o Rent received Rs.5000
o Depreciation on Building Rs.750
o Depreciation on Furniture Rs.230
o Discount received Rs.2300
o Insurance Rs.1300
o Sales of 190000
o General expenses Rs.3500
o Taxes Rs.1000
o General Purchases Rs.115000
o Purchase for Rs.5000
o Provision for bad debit Rs.1800
o Closing stock Rs.15000

40.Income statement and revenue

INCOME AND REVENUE

Simply stated, income statement is excess of revenue over expenses. If the expenses
exceed the revenue the result is a loss to the farm.
Income statement is generally prepared for one agricultural year, i.e. at the end of the
year. However it may also be prepared over a period of time, so that one can know the
trend in receipts and expenses which indicates the success or failure of a farm
business.
It shows whether the farm is running under loss or profit. Hence it is also called as Profit
and Loss Statement.
It is different from balance sheet in that the balance sheet indicates about the assets and
liabilities but not about the operational efficiency of the farm business in terms of
receipts, expenses, profit and losses.
The objective of preparing Income Statement is to summaries the income and expenses
incurred in the farm throughout the year and present them in a schematic picture.
This statement lists all the farm expenses on one hand and all the receipts on the
other.

Revenue

In the revenue realized through the sale of following items are included.

Opening Receipts

Crops and feed

Livestock and Poultry sold
Livestock and Poultry Products sold
Custom work- cash

16
 Government payments and patronage dividends, gifts etc.

Capital Receipts

Breeding stock
Machinery and equipment
Appreciation in the value of assets

Non Farm Income

Interest and dividends

EXPENSES

In the expenses column the following items are included.

Opening Expenses

Labour charges
Repairs
Rents and Leases
Seed and Fertilizer
Chemicals
Livestock expense(Breeding Vet., etc)
Gas Fuels, Oil
Insurance
Utilities( Electricity, Gas, Telephone)
Marketing and transport expense
Interest on working capital

Live stock and Feed Purchase

Capital Expenditure/Fixed expenses

Machinery and Equipment

Building and Improvement
Depreciation
Interest on fixed Capital
Rental value of owned land

Other expenses

By subtracting the expenses from receipts the Net income for a year can be calculated.
o Opening ratio = Total Operating expenses / Gross income
o Fixed ratio = Total Fixed expenses / Gross income
o Gross ratio = Total expenses / Gross income

PROBLEM

17
 Prepare a Net Income Statement for a poultry farm operating with the following details.
The farmer has a capacity of 10,000/ layer birds. He is operating in 4 hectare land
with 10 dairy animals. Last year, by sale of eggs he has received, Rs 22,45,985/. The
casual labour charges were Rs. 2,18,555.00/. Sold paddy for, Rs.50, 000.00/. By sale
of culled birds he received, Rs.50,000.00/.
o Concentrate cost was, Rs.40,000/. Electricity was, Rs25,455.00/and transport
cost was, Rs. 2,45,455.00/. Milk sale was, Rs. 75,000.00/. He has sold old
chaff cutter for Rs.10,000/ and purchased newer one for, Rs.30,000.00/ and
by leaving it for other farmers he has obtained Rs.5,450/. The value of land has
appreciated by, Rs.75,000. He has purchased 2 dairy animals for, Rs. 30,000/.
Fuel charges were, Rs.7,780/. The farmer obtained dividends for, Rs. 10,000/.
Insurance charges were Rs.11,000/. Depreciation value was Rs.25, 550/. The
farm was Rs. 1, 55,550/. His own land rental value was Rs. 45,000/.
Permanent labour charges was, Rs. 1,50,000
Prepare a Net Income statement and work out the operating ratio, fixed ratio and gross
ratios for a farm operating with the following details

Receipts Amount Expenses Amount

Kharif crops Casual labour 8900
Cotton 10500 Repair of building 5750
Ground nut 7000 Repair of equipment 2500
Sugar cane 24500 Seeds 4000
Rabi crops Purchase of chemicals 3500
Paddy 18000 Feed and Concentrate 6500
Vegetables 12000 Insurance 2200
Electricity 14500
Milk 12000 Transport cost 4500
Curd 500 Telephone charges 2000
Butter 1000 Land revenue 2000
Poultry 2400 Permanent labour charges 3500
Mutton 5000 Interest on fixed assets 3000
Machinery sold 3000 Depreciation 1700
Sheep Sold 9000 Sheep purchased 4500
Desi birds sold 2500 Cross bred cow purchased 12000
Appreciation of assets 2000 Power tiller purchased 8000
Decrease in asset value 3000

41.Balance sheet

18
BALANCE SHEET - MEANING

Balance sheet is a statement that gives the assets and liabilities together with a statement
of net worth of new worth at a particular point of time.

Assets

It is defined as anything of value that can be owned. Assets can be classified into three
types

Fixed Assets

Cannot be converted into cash to meet any current obligation. (Eg.Land, Building etc.)

Working Assets

Are normally used during the life of business.

Current Assets

May be liquidated within the normal operation of business. (E.g. Cattle feed, Bank
deposit, Inventory, Debtors, Market securities etc.)

II. Liabilities

It is defined as claim by other against the farm business. It can be classified as three
types.
o Long term Liabilities
do not require repayment during the accounting period (above 7 years).
(E.g. Long term loan)
o Medium term Liabilities
Can be postponed for the present but fall due within certain years (1-7
years).
o Short term Liabilities
fall for immediate payment generally within one year and which cannot
be postponed. (E.g. Accounts payable, taxes payable, interest payable
etc.)

III. Net Worth

Total Assets - Total Liabilities.

o When the value of the asset is greater than that of liabilities, the farmer is
considered as credit worthy; the new worth is stated on the liabilities side of
Balance Sheet.
o The Balance sheet can be used to measure the ability to meet cash
commitments without disrupting the ongoing business

CHARACTERISTICS OF BALANCE SHEET

19
 Balance sheet records values at a specific point of time.
It refers 3 essential components
o Assets
o Liabilities and
o Net worth.
Only items owned or owed are included, e.g. Land rented from others is not entered as
an asset.

Assets Amount Liabilities Amount

Fixed Long term
Working Medium term
Current Current
Total Liabilities
Net Worth = Total Assets Total Liabilities

The most liquid current asset is cash in hand and the least liquid current asset is
inventory.
The most liquid current liability is money at call and the least liquid liability is long term
loans.
The total capital invested in the business is worked out by the addition of total loans and
net worth.

Capital invested = Total loans + Net worth

The gross working capital is the total current assets.

Net working capital is

Total current assets Total current liabilities

Negative working capital is

Current liabilities - Current assets

The important test ratios that can be worked out from the balance sheet are as follows
o Net Capital Ratios = Total assets / Total liabilities
o Percent of equity = {Equity / Total assets}*100
o Current ratio = Total current assets ./ Total current liabilities
o Quick ratio or = Quick assets/ Total current liabilities
Acid test ratio

(Quick assets = Total current assets Inventory)

5. Debt Equity ratio or Leverage ratio = Total debts / Equity

PROBLEM

20
 Form the information given below (as on 1st January 2005) prepares the Balance sheet
for a farm. The farmer has got a medium term loan of Rs.6000 towards the purchase of
an electric motor. The outstanding loan against land is Rs.15000. He borrowed Rs.2500
as crop loan from PACS. The farmer has to repay Rs.2000 to his neighborhood at the end
of the year. He possesses two pairs of bullocks valued Rs.3000 per pair and electric
motor Rs.5000, bullock cart Rs.1800,milck animal Rs.7000 and a thrasher for Rs.7000.
Besides the farmer has Rs.3000 as cash in hand and Rs.1500 in bank in current account.
The farmer has to pay the land tax of Rs.80. The farmer own 6 acres of land valued at the
rate of Rs.10000 per acre, farm buildings Rs.8000 and a cattle shed Rs.2500

42.Bill of exchange

MEANING

A bill of exchange is a written acknowledgement of debt, given by the debtor to his

creditor, for the sum due and the time of payment as well as the date and place of
payment being set down.
A bill of exchange has been defined as an instrument in writing containing an
unconditional order signed by the maker directing a certain person to pay a certain
sum of money only to or to the order of certain person or to the bearer of the
instrument.
When such an order is accepted by writing on the face of the order itself, it becomes a
valid bill of exchange.
For example, suppose Ram order Shyam to pay Rs. 50,000 three months after date and
shyam accepts this order by putting his signature abs name on it, then it will be a bill
of exchange

SPECIMEN

The following is a specimen of a property drawn bill of exchange.

Bill of Exchange

NEW DELHI

Rs. 50,000 September 20, 1997

Stamp Three months after date pay to M/s Zaveri

& Sons or order the sum of Rupees Fifty thousand

only for value received.

Rameshwar Prasad

To,

M/s Diipat & Bros.,

21
 Kamla Nagar,

DELHI-110007.

This is called a draft. This order will be sent to M/s Dilpat & Bros. for acceptance. If it is
accepted by them, they will write across the order as follows:
o Accepted
o For M/s Dilpat & Bros,
o Dilpat Raj
o Partner

PARTIES TO A BILL OF EXCHANGE

There are three parties to a bill of exchange:

o Drawer, i.e., the person who draws the bill. He is the creditor to whom the
amount is owing.
o Drawee, i.e., the person to whom the bill is addressed or on whom it is
drawn. He is the debtor who owes the amount. After he accepts the bill, he is
called the Acceptor .
o Payee, i.e., the person to whom the sum of money is payable. Sometimes, the
drawer requires the amount to be paid to himself, in which case, the drawer
and the payee are the same person.

Essential characteristics of a bill of exchange

The essential characteristics of a bill of exchange are as follows:

o A bill of exchange is an unconditional order.
o It must be in writing.
o It must be dated.
o It is addressed by one person to another.
o It must contain an order to pay a fixed amount of money.
o The amount must be payable to a specified person or to his order or to the
bearer of the bill.
o The draft must be accepted by the party on whom the order is drawn and
addressed

ADVANTAGE OF A BILL OF EXCHANGE

The advantage of the use of a bill of exchange may be enumerated as follows:

o An accepted bill of exchange is a written and signed acknowledgement of debt
and it affords conclusive proof of indebtedness.
o Payment can be enforced on a bill of exchange in a court of law.
o The date of maturity of bill ensures the creditor when of expect his money and
the debtor or acceptor also knows when he will be called upon to pay.
o The debtor enjoys the full period of credit. He can never be called upon to pay
the amount of the bill before the due date.
o The creditor need not lock up his funds because he can, if he so desires,
convert it into cash by discounting the bill. Discounting means converting the

22
 bill into cash with a bank or financier after deducting a small sum known as
discount from the total amount of the bill.
o It is negotiable instrument and can be transferred from hand to hand in
settlement of debts.
o It is easy and convenient method of transmitting money from one place to
another.
o Accommodation bills enable the businessmen to obtain funds from the market
at cheap rates to meet their temporary financial requirements

MATURITY OF A BILL OF EXCHANGE

The maturity of a bill is the date on which it falls due for payment.
A bill not payable on demand, at sight or on presentation, is at maturity on the third day
after the day on which it is indicated to be payable. These three day are known as
Days of Grace. These are added to the term of the bill and the bill becomes due and
payable on the last day of grace.
Where a bill is payable at a specified period after date, the time of payment is determined
by excluding the day from which the time is to run and by including the day of
payment.
For example, a bill of exchange drawn on 15th March at three months after date would
mature on 18th June

BILLS RECEIVABLE AND BILLS PAYABLE

For accounting purpose, bills of exchange and promissory notes are treated alike, i.e.,
similar.
For the drawer or the payee, a bill of exchange duly accepted is known as a bill receivable
(B/R).For the drawee, the same is known as bill payable(B/P).
A bill receivable is an example of current asset for the business while a bill payable is a
current liability.
On the other hand, a promissory note is a bill receivable for the payee and a bill payable
for the maker for the promisor.
Thus, a bill is regarded as a bill receivable by one who is entitled to receive the sum of
money due on it.
It may have been drawn by him and accepted by his debtor, or it may be a bill which his
debtor has endorsed over to him in lieu of payment of his debt.
Similarly, a bill of exchange is treated as a bill payable by one who is liable to pay the
amount on the due date.
Thus, the same bill is a bill receivable to one party and a bill payable to the other

43.System of book keeping

MEANING

Book Keeping is mainly concerned with recording of financial data relating to business
operations in a significant and orderly manner.
A book keeper may be responsible for keeping all records of a business or only of a minor
segment, such as a position of Customers accounts in a departmental store.
A substantial portion of book keepers work is of a clerical nature and is increasingly
being accomplished through the use of mechanical and electronical devices.

23
ACCOUNTING EQUATION

Assets = Equities

The properties owned by business are called Assets. The rights to properties called
Equities.
Equities may be subdivided into two types: the rights of creditors and the rights of the
owners.
The Equity of creditors represents debts of the business and are called liabilities.
The Equity of the owner is called capital.

So, Assets = Liabilities + Capital

Or Assets Liabilities = Capital

The Accounting Equation can be understood with the help of following transactions.

TRANSACTION FOR SYSTEM OF BOOK KEEPING

Transaction 1

A starts a business with a capital of Rs.10000

There are two aspects of transactions. The business has received a cash of Rs.10000. It is
its asset but on the other hand it has to pay a sum of Rs.10000 to A. Thus:

Capital and Liabilities Rs Assets Rs

Capital 10000 Cash 10000

Transaction 2

A Purchase furniture for cash worth Rs.2000. The position of his business will be as
follows:

Capital and Liabilities Rs Assets Rs

Capital 10000 Cash 8000

Furniture 2000
10000 10000

Transaction 3

A purchase cotton bales from B are Rs.5000 on credit. He sells for cash cotton bales
costing 3000 for Rs.4000 and Rs.1500 on credit to P.
As a result of these transactions the business makes a profit of Rs 1500(i.e. Rs.5500
Rs.4000), this will increase As capital from Rs.10000 to Rs.11500.

24
 The business will have liability of Rs.5000 to B and two more assets in the form of a
debtor P for Rs.1500 and stock of cotton bales of Rs.1000.
The position of his business will now be as follows:

Capital and Liabilities Rs Assets Rs

Creditor(B) 5000 Cash(Rs.8000+4000) 12000

Capital 11500 Stock of cotton bales 1000

Debtor(P) 1500

Furniture 2000
16500 16500

Transaction 4

A withdraws cash of Rs.1000 and cotton bales of Rs.200 for his personal use. The
amount and the goods withdrawn will decrease relevant assets and As capital.
The position will be now as follows.

Capital and Liabilities Rs Assets Rs

Creditor(B) 5000 Cash(Rs.12000+Rs 1000) 11000

Capital 10300 Stock of cotton bales 800

(Rs 11500-Rs 1200) Debtor(P) 1500

Furniture 2000
15300 15300

The result of applying the system of double entry system may be summarised in the
following rule:The every debit there must be equivalent credit and vice versa

44.Bank reconciliation statement

BANK RECONCILIATION STATEMENT

The Bank Reconciliation Statement is as the same suggests, a statement setting for the
bank balance as per the Cash book and Pass book and reconciling the two by stating
how such differences have arisen. Is important to note that the bank Reconciliation
Statement is reconciliation as on a specified data.
The customer may have money with the bank, then he is said to have a favourable
balance or in other words, a balance to his credit. This implies that in Cash book there
will be debit balance in the bank columns, while in the pass Book it will be a credit.

25
 On the other hand, where the customer has drawn more from the bank then it is said to
what extent the corresponding entry has not been made.
It is important to remember very clearly clearly that the differences between Cash book
and Pass book balances arise because of entries made partly or wholly in, and only in
one of the two books.
In order to do the entries satisfactorily one should be clear in ones mind as to where
(Cash book or Pass book), the first record of transaction is made and therefore where
and to what extent the corresponding entry has not been made.
It is important to remember very clearly that the differences between Cash book and
Pass book balance arise because of entries made party or wholly in, and only in one of
the two books

ILLUSTRATION

From the following particulars, prepare the Bank Reconciliation Statement as on 31

December 2005.
o Bank balance as per Cash Book on that date was Rs.45000.
o Cheques paid into bank, but not collected before that date amounted to Rs.12250.
o Cheques drawn but not presented before that date were of the value of Rs.7900.
o There were the following entries in the Passbook for which there were no entries
in the Cash Book: Bank Interest Rs.150 and Life Policy Premium Paid by the bank
on standing order Rs.750.
o Cheques for Rs.4500 were entered in the Cash Book as banked but had been
omitted to be banked.

Solution

Bank Reconciliation Statement as on 31 December 2005

Particulars Rs Rs
Bank balance as per Cash Book 45000
Add Cheques drawn but not cleared to data 7900
Add Bank interest credited in Passbook 150 8050
53050
Less Cheques banked but not collected date 12250
Less Life Policy Premium debited in Passbook 750
Less Cheques wrongly recorded as banked 4500 17500
35550

PROBLEM

The Passbook of a trader showed a bank balance of Rs.85400 to his credit.

26
 On comparing the Passbook entries with those in the Cash Book, the following facts were
noticed:
o Out of cheque worth Rs.12000 paid into bank for collection, only Rs.8000 has
been collected during the same financial Period.
o Out of cheques worth Rs.6250 issued during the period, cheques worth
Rs.5000 had not been presented for payment.
o There were entries only in the Passbook for Rs.150, bank charges and Rs.1200
interest on investment collected by bank.
o There was a wrong debit for Rs.5250 in the Passbook in respect of a cheque
drawn by some other party.
Prepare a Bank Reconciliation Statement as on that date and derive the Bank Balance as
per the Cash Book

27
 45.Project - Dairy unit (10 cows)

PROJECT-DAIRY UNIT (10 COWS)

Assumptions

Cost of cow yielding 10 liters of milk / day is taken at Rs.15,000/.

Floor space required / cow is 50 sq.ft, cost of construction of shed is taken @ Rs.150/
sq.ft and cost of equipment is taken @ Rs.600/ cow.
Depreciation on building and equipments is taken @ 10% and 20% per annum
respectively.
One labourer will be employed and paid @ Rs.15000/ annum.
Insurance charge is assumed as 6% of the value of animals.
Each animal will be fed with 4kg of concentrate, which will be reduced to 2kg during dry
period.
Cost of one kg of concentrate is taken @ Rs.800/.
Intensive cultivation of greens in 2 acres of land will satisfy the necessary green fodder
requirement of the cows.
Since it is annual project, project life is assumed to be one year to know the cost involved
and return.

Fixed Investment

Particulars Rs
Cost of 10 cows @ Rs.15000/ cow 1,50,000
Cost of building @ 50sq.ft / cow @ Rs.150/sq.ft 75,000
Cost of equipment @Rs600/ cow 6,000
Total fixed Investment 2,31,000

Fixed Cost

Particulars Rs
Interest on fixed investment @ 15% / annum 34,650
Depreciation on building @ 10% / annum 7,500
Depreciation on equipment @ 20% / annum 1,200
Insurance charges @ 6% of value of animals 9,000
Cost of labour @ Rs.14400 annum 15,000
Cost of cultivation of fodder 40,000
Total Fixed cost 1,07,350

Variable Cost

28
 Particulars Rs
Cost of concentrate @ 4kg / cow/ day for 300 days and 2kg / cow / dry 1,06,400
13300*Rs.8 for 65 days
Veterinary charges @ Rs.400 4,000
Electricity charges @ Rs.150 / month 1,800
Miscellaneous cost @ Rs.100 / cow / year 1,000
Total Variable cost 1,13,200

Total Cost (III+IV) 2,20,550

Returns

Particulars Rs
Sales of milk @ 10 litres / cow / day for 300 days @ Rs. 9.50 / litre 2,85,000
Sale of manure @ Rs. 300 / cow / yr. 3,000
Sale of empty gunny bags @ Rs.8 / bag 2,660
Gross returns 2,90,660

Net return / year (VI-V) 70,110

Problem

Prepare one model project with 20 dairy animals at the cost of Rs.20,000 per cow with
yielding 15lts per day

46.Project - Sheep unit (20 Ewes + 1 Ram)

ASSUMPTIONS

Cost of a ram is taken at Rs.1800 and cost of an ewe is taken at Rs.1500

o Cost of construction of a kutcha pen is taken at 7000 and equipment worth of
Rs.700 will be bought.
o Depreciation of building and equipment is taken at 20% per annum
o Animals will be insured at a premium rate of 6% of value of animals.
o As animals will be reared under extensive system, veterinary charges alone are
accounted. The family
Labour (Male/Female) will be employed.
Veterinary charges are taken at Rs.75 / animal / year.
o In total 48 lambs will be obtained (16 lambs in each lambing, lambs will be
sold at Rs.1000/lamb (8 months of age)

FIXED INVESTMENT AND FIXED COST

29
 Fixed Investment

Particulars Rs
Cost of one ram 1,800
Cost of 20 ewes @ Rs.1500 30,000
Cost of construction of a kutcha Pen 7,000
Cost of equipment 700
Total fixed investment 39,500

Fixed Cost

Particulars Rs
Interest on fixed investment @ 15% / annum 11,850
Depreciation on Pen and equipment @ 20% / annum 3,080
Insurance cost @ 6% of value of animal / annum 3,816
Total Fixed cost 18,746
VARIABLE COST AND RETURNS

Variable Cost

Particulars Rs
Veterinary charges @ Rs.75/ animal / year 3,150
Total Variable Cost(TVC) 3,150
Total cost(III + IV) 21,846

Returns

Particulars Rs
Sale of 48 lambs @ Rs. 1000 / lamb 48,000
Value of manure 1,500
Total returns (TR) 49,500
Net return in 2 years(V-IV) 27,604
Net return / year 13,802

Problem

30
 Prepare one model project for 40+2 sheep unit at the cost of Rs.3000 per ram and
Rs.2300 per ewe.

47.Project - Broiler unit

MEANING

Broilers are meat type chicken they are received as old chicks of the farmers premises
and grown 6 to 8 weeks of age and sold on live weight basis.
Day old chicks can bought from commercial hatcheries booking offers are located in
most of the towns in the state, while broiler feed (Starter and finisher is also available
in the market).

ASSUMPTIONS

A total of 2000 day old broiler chicks are received every alternate week under multiple
batch rearing system.
Deep litter system is practiced for rearing broilers.
Floor space requirement per broiler is taken as 1 sq.ft. Per bird.
The broilers received as day old chicks will be sold to market at seven weeks of age.
2% of extra chicks will be supplied by the hatchery to cover the loss due to mortality.
One tone of litter manure will be available for every 500 broilers raised.
Each bird consumes 3 kg of feed to put up 1.7kg live body weight at seven weeks age.
The farmer makes use or company feed available in the market

FIXED INVESTMENT, RECURRING COST AND FIXED COST

Fixed Investment

Cost of construction of poultry sheds with asbestos roofing 8000 sq.ft.

Particulars Rs
Cost of construction of poultry sheds with 6,40,000
asbestos roofing 8000 Sq.ft.
Store room 800sq.ft.@ Rs.160 / sq.ft 1,28000
Cost of digging well, motor and electrical installation etc., 40,000
Cost of equipment @ Rs.10 per bird 80,000
Total(A) 9,23,000

Recurring Cost (capitalized)

Particulars Rs
Chicks cost : 8000(+2%) * Rs.13.00 1,04,000
Feed cost:2000*4/2 batches * 3.8 kg / bird Rs.10.00 1,52,000

31
 Labour cost: Rs.1200 *2 months *2 No 4,800
Medicine & Vaccine cost Rs.1.50 * 8000 / birds 12,000
Litter, electricity and miscellaneous charges Rs.1.60 *8000 12,800
Total (B) 2,85,600
Total financial outlay (A+B) 12,08,600

Fixed Cost

Particulars Rs
Interest on capital investment @ 15 % per annum 1,81,290
Depreciation on building @ 10 % Per annum 76,800
Depreciation on equipment @ 20% per annum 16,000
Insurance charges @ Rs.1.25 / bird 10,000
Total 26,59,800

FIXED COST, VARIABLE COST PER BATCH AND TOTAL COST

Fixed Cost

Particulars Rs
Depreciation on building @ 10 % 1,47,000
Depreciation on equipment and cages @ 15% 87,225
Interest on capital @ 15 % 4,32,361
Insurance charges @ Rs.4.00 / bird 40,000
Total fixed cost 2,84,090

Variable Cost Per batch

Particulars Rs
Chick cost: 2000 * Rs.14.00 28000
Feed cost: 2000 * 3.8 kg / bird * Rs.10/kg 76000
Labour cost (Per Batch) 1200
Medicine & Vaccine Cost Rs.1.50 * 2000 3000
Litter, electricity miscellaneous expenditure etc., Rs.1.60 * 2000 3200

32
 Total variable cost 1,11,400

Total Cost

Particulars Rs
Total fixed cost per year 2,84,090
Total variable cost per year Rs.1,11,400*26 batches 28,96,400
Total Cost 31,80,490
INCOME PER BATCH AND NET INCOME PER YEAR

Income Per batch

Particulars Rs
By sale of Broilers 2000 broilers(2% extra chicks & 4% mortality) 1,26,616
1960*1.7*Rs.38 / kg/live
By sale of empty gunny bags 100 bags * Rs.15 1,500
By sale of manure $ tones * Rs.220/- 880
Total Income 1,28,996

Net Income per Year

Particulars Rs
Total income per year Rs.1,28,996 *26 batches 33,53,896
Total cost 31,80,490
Net Income per year (Total income Total cost) 1,73,406

Net income per batch 6,670

Problem

Prepare one model project with 5000 broiler chicks per batch.

48.Layer project

TECHNOECONOMIC ASSUMPTIONS
Layer project for 1,00,000 birds Technical Assumptions
1 No. of birds in lay 100,000
2 Rearing period (weeks) 72

33
 Brooding cum growing period (weeks) 20
Laying period (weeks) 52
3 No. of batches 3
4 Space requirement per bird (s.ft.)
Brooder cum grower period 1
Layer period 0.8
5 Cost of construction (Rs./s.ft.)
Brooder cum grower shed 65
Layer shed 70
6 Store room (s.ft.) 100
7 Cost of construction of store room (Rs./s.ft) 90
Water facility (Rs) 10000
8 Equipment cost (Rs./bird)
Brooder cum grower house 7
Layer house - cages 35
9 Mortality (%)
Brooding cum growing stage 6
Laying stage 7
10 Cost of DOCs (Rs./chick) 14.1
11 Supply of free chicks (%) 3
12 Extra chicks purchased (%) 3
13 Feed requirement (Kg./bird)
Brooding cum growing stage 7
Laying stage 38
14 Feed cost (Rs./kg.)
Chick/grower mash 7
Layer mash 6.7
15 Labour cost 0
16 Over heads cost
(Cost of litter, electricity, medicines, vaccine, insurance, etc.)
Brooding cum growing stage (Rs./bird) 5.5

34
 Laying stage (Rs./bird) 7
17 Egg production 295
18 Egg price (Rs./egg) 1.3
19 Average body wt. Of culled birds (Kg.) 1.5
20 Sale price of culled bird (Rs./bird) 38
21 Income from manure (Rs./bird)
Brooding cum growing stage 1.15
Laying stage 5.85
22 No. Of gunny bags per ton of feed 13.3
23 Income from gunny bags (Rs./bag) 6
24 Depreciation on sheds (%) 5
25 Depreciation on equipment (%) 10
26 Margin money (%) 25
27 Interest rate (%) 15
28 Repayment period (years) 8
29 Grace period (years) 1
30 Construction period (months) 3
31 Rest period (weeks)
Brooder cum grower house (weeks) 4
Layer house (weeks) 4

FIXED INVESTMETN
DETAILS OF INVESTMENT
Sl.No Particulars (Rs.)
A FIXED INVESTMENT
1 Sheds and other stuctures
A) Brooder cum grower shed 2166666.667
B) Layer sheds 5600000
C) Store room 9000
2 Water supply system (Bore well, 10000
Electric motor pumpset
- 1 HP, water tank and pipeline)

35
 3 Equipments
Brooding cum growing house 233333.3333
Laying house 3500000
Total Fixed Cost 11519000
C VARIABLE COST
Capitalisation of recurring expenses
for first 3 batches
1 A) Chick cost 1452300
2 B) Feed cost 5047000
3 C) Overheads such as cost of eletricity, 566500
medicines, vaccine, insurance, litter,
etc.
Total Variable Cost 7065800
GRAND TOTAL 18584800
Cost of Project
1 Loan From Bank 13938000
2 Margin amount from entrepreneur 4647000
Total cost of project 18585000

INCOME AND EXPENDITURE

INCOME-EXPENDITURE STATEMENT
Particular I year II year III year IV year V year VI year VII VII
s year year
Income
Sale of Eggs 455603 2915865 300698 309810 3098106 300698 3189227 3006985
9 0 57 65 5 57 3 7
Sale of 0 2347518 2347518 3521278 2347518 3521278 3521278 2347518
culled birds
Sale of 76391 99308 99308 99308 99308 99308 99308 99308
manure -
Growing
stage
Laying 69499 444793 458693 472593 472593 458693 486492 458693
stage
Sale of 70534 275423 282629 289834 289834 282629 297039 282629

36
gunny bags
Depreciate
d value of
Sheds 5158536
Equipment 104747
s
Value of 110,760
closing
stock
Total 477246 323256 332580 353640 341903 344317 362963 386320
Income 2 92 05 77 18 64 89 48
Expendit
utre
Cost of 968,200 1,452,30 1,452,30 968,200 1,452,30 968,200 1,452,30 1,452,30
chicks 0 0 0 0 0
Cost of feed 346266 4501467 4501467 4501467 4501467 4501467 4501467 4501467
Growing 7
stage
Laying 3252352 2081505 2146552 2211599 2211599 2146552 2276646 2146552
Stage 1 2 2 2 2 3 2
Misc.
Expenses
Growing 377,667 490,967 490,967 490,967 490,967 490,967 490,967 490,967
stage
Laying 83161 532231 548863 565495 565495 548863 582128 548863
stage
On interest 209070 209070 1792029 1493357 1194686 896014 597343 298671
0 0
Depreciat
ion on
Sheds 388783. 369344 350877 333333 316666 300833 285791 271502
3
Equipment 24333.3 21900 19710 17739 15965 14369 12932 11639
s 3
Total 102347 298827 302511 301354 303209 288710 303906 287577
Expendit 46 16 47 78 07 33 66 90
ure

37
FINANCIAL ANALYSIS OF THE PROJECT
Particula I year II year III year IV year V year VI year VII VIII
rs year year
Capital 13938000
Investmen
t
Working 7730930 2740077 280885 282910 287935 276598 294946 2817597
Capital 2 31 49 89 17 00 8
Total Cost 21668930 2740077 280885 282910 287935 276598 294946 2817597
2 31 49 89 17 00 8
Total 4772462 3232569 332580 353640 3419031 344317 3629638 386320
Benefit 2 05 77 8 64 9 48
Net Cash -16896467 4924921 5169474 707302 539672 677194 6801789 1045607
Flow 8 8 8 0
DCF at 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233
20%
Disc. 3977052 2244839 1924653 1705443 1374032 1153112 1012965 898458
Benefit 7 1 5 2 8 6 0
Disc.cost 18057441 1902831 1625493 1364344 1157149 926321 8231402 6552832
4 7 6 8 7
NPV at - 342008 299159 341099 216882 226791 189825 243174
20% DCF 1408038 4 4 0 4 2 5 8
9
DCF at 0.800 0.640 0.512 0.410 0.328 0.262 0.210 0.168
25%
Disc. 3817970 206884 1702809 1448512 1120348 902608 7611905 6481382
Benefit 43 9 6 3 0
Disc.cost 17335144 1753649 1438132 1158801 943508 725085 6185466 4727145
4 8 4 3 5
NVP at - 315194 264677 289711 176840 177522 142643 175423
25% DCV 13517174 9 1 2 0 5 9 8
NPV at 4509016 B:C ratio at 20% 1.044 :1
20%
NPV at 1902960 B:C ratio at 25% 1.022 :1
25%
IRR 30%

49.Project Feasibility report

MEANING

38
 Generally in agricultural projects, the investment is made during different time periods
and the associated benefits were also spread overtime.
These investments and returns are not comparables as such without adjusting for their
time value.
Thus the time value of money has to be necessarily taken into reckoning in the
investment analysis of agricultural projects.
The project appraisal techniques are broadly classified under two heads namely,
o Undiscounted Measures
o Discounted Measures

UNDISCOUNTED MEASURES

They are the nave (Simple) methods of ranking agricultural projects.

The three important undiscounted measures are
o Payback period
o Proceeds per rupee of outlay
o Average annual proceeds of rupee outlay

Pay Back Period

Payback period is a simple technique of ranking project based on the actual period of
time in which one can get back total investment.
o Where, P is payback period.
o I is the total investment made is the projects and
o E is the net cash revenues / net revenues per annum.

Proceeds per rupee of outlay

This is measured by dividing the total proceeds by the total investment.

The projects are tanked by the highest by the higher magnitude of the parameter.

Average annual proceeds of rupee outlay

This method is another method choosing between the projects and measures by the
following formula

The projects are estimated by the magnitude of the estimate

The major drawback of the undiscounted measures is that for the same data of the
project, we will get different rankings.
Thus undiscounted measures are inconsistent and incompatible in ranking.

DISCOUNTED MEASURES

39
 Here the cash flows which are accrued in the project are discounted with an appropriate
discount rate.
Generally the exiting interest rate is taken as discount rate for this purpose.
The discount rate cash flows are the best estimates to measure the worth of the projects.
The following three important discount rate measures are
o Net Present Worth (NPW)
o Benefit Cost Ratio (BCR)
o Internal rate of Returns (IRR)

Net Present worth (NPW)

The Net Present worth which is also called as Net Present Value (NPV) is nothing but the
present value / worth of the cash flow stream in the project.
The cash flow in the project is the different between cash inflow and cash outflow.
The investments made in the projects are generally called costs or cash outflows or gross
returns.
The cash flow discounted with an appropriate discount rate will give the net present
worth of the project.

o Bt is cash flows in tth year,

o Ct is cash outflows in tth year, t is 1 to 10 years that is life span of the project
and r is the rate of interest.
The choice criterion using NPW is that the project with positive NPW is accepted for
implementation and the project with negative NPW is rejected.
If the NPW is NPW is zero, the entrepreneur is left in indifference. If he is to choose
among different projects, the project with highest NPW has to be chosen.

Benefit Cost Ratio (BCR)

The Benefit Cost Ratio is worked out by dividing the present value of cash inflows by the
present value of cash outflows.
If the BCR is more than one, that project is accepted and if BCR is less than one the
project is rejected.
Among the different projects, the project with highest BCR is to be selected.

PROBLEM

Undiscounted measures

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 Total investment / outlay is Rs.50,000/, average net benefits per year is Rs. 12,500/, life
span of the project is 7 years. Find out, pay back period, proceeds per rupee of outlay and
Average annual proceeds of rupee outlay.
In a project, the cash outlay is rs.20,000/ and the average annual returns are
Rs.8,000,7,000,4,000 and 3,000 in 4 years. Assume that the returns occur evenly
during the year. Calculate pay back period, proceeds per rupee of outlay and Average
annual proceeds of rupee outlay.

Discounted measures

Find out NPW and BCR for the following project. Discount rate is 12% and life span is 5
years.

Year 1 2 3 4 5
Cash outflows 38900 9239 10575 11952 12858
Cash inflows - 28475 32550 35610 39802

Work out the NPW and BCR for the following data of an agricultural project. Discount
rate is 12%.

Year 1 2 3 4 5 6 7
Cash outflows 25000 4250 4792 5368 5975 6456 7187
Cash inflows - 10260 12550 14530 16275 19396 21470

50.Project Feasibility Report IRR

INTERNAL RATE OF RETURNS IRR)

It is the rate of return per rupee invested in an agricultural project over its life span.
For example if the IRR is 30 percent in a livestock project, it means that this project gets
an average annual return of Rs.30/ per Rs.100/ invested in the project over its life
span.
It is the rate of return at which the present value of total cash flows in a project over its
life span.
It is the rate of return at which the present value of total cash flows in a project is equal
to zero.
In other words, it is the discount rate at which NPW of the project is zero i.e.

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 Present worth = Future value / (1+r) t
For a project to be viable it should have a BCR of one or greater than one at the
opportunity cost of capital and NPW of zero or greater than zero at the opportunity
cost of capital and the discount rate for IRR should be greater than the opportunity
cost of capital.
The NPW is inversely related with the discount rate. Higher the NPW lower the discount
rate and lower the NPW higher the discount rate and vice versa.

HOW TO FIND OUT INTERNAL RATE OF RETURNS?</<>

First one should discount the total cash flows in a project with a certain discount rate
and find out NPW.
If the NPW is positive we should discount the cash flows with a higher discount rate and
see whether the NPW is positive or negative. If the NPW is still positive we should go
on discount the cash flows with higher discount rates until NPW becomes negative.
Then using interpolation method the IRR can be found out.
For a given project if IRR is greater than the opportunity cost of the capital, then the
project is accepted.
If the IRR is less than the opportunity cost of the capital then the project has to be
rejected that means.
o If IRR > C Project is accepted
o If IRRM<C - Project is rejected
For choosing among various alternate projects the project with the highest IRR is to be
selected.

Find out NPW, BCR and IRR for a dairy project with following details and draw inferences.
(Interest rate = 12%).

Years Cash outflow Cash inflow

1 38900 -
2 9230 28475
3 10525 32500
4 11952 35610

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 5 12858 39800

Work out NPW, BCR and IRR for a dairy project with following details and draw inferences.

(Interest rate = 20%).

Year Cash Outflow Cash Inflow

1 1040 43940
2 38350 30126
3 41452 32987
4 44683 34372
5 50668 34768
6 77513 24179

51.Cost principles

FIXED COST, VARIABLE COST AND TOTAL COST

A resource or input is called a fixed resource if its quantity does not vary during the
production period.
An input is a variable input if its quantity varies during the production period.
In general, costs associated with the fixed inputs are called fixed costs and the costs
associated with variable inputs arte called variable costs.
Fixed costs have to be incurred even when the production is not undertaken.
Variable costs vary with the level of production.
Total costs of production will include both fixed and variable costs.
Fixed cost is also called as sunk cost or overhead charges.

UNIT COSTS

Unit costs are average fixed cost (AFC), average variable cost (AVC), average total cost
(ATC or AC) and marginal cost (MC).
These unit cost curves are more important than total costs in decision-making process.

Average fixed cost (AFC)

It is worked out by dividing the total fixed cost by the amount of output.
Hence as output increases, average fixed cost (AFC) continues to decline.

AFC = TFC/Y

Average variable cost (AVC)

It is worked out by dividing the total variable cost by the amount of output.

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 Average variable cost decreases, reaches a minimum and increases thereafter.

AVC = TVC/Y

Shut down point is the output level corresponding to minimum point of average

VARIABLE COST

Average total cost (AC)

Average total cost, as Average variable cost, first decreases, attains a minimum and
increases thereafter.
AC is the cost of producing one unit of output.

AC = TC/Y

Break-even point

It is the output level corresponding to minimum point of average total cost

MARGINAL COST (MC)

Marginal cost is the change in total cost in response to a unit increase in output.
It is found out by dividing the change in total cost (or total variable cost, because total
fixed cost is not going to change) by change in output.
As output increases, Marginal cost first falls, reaches the minimum and then it slopes
upwards and passes through average variable cost and average cost at their minimum
points.
In other words, average variable cost and average cost will slope downwards and keep
falling as long as the marginal cost is below them.

MC = TC/ Y

DEFINITIONS

From the following data, graphically present the Total Cost curves and Unit Cost curves
and identify the Break even and Shut down point of a dairy farm.

Y 0 2 5 9 14 19 23 26 28 29 29 28 26
TFC 10 10 10 10 10 10 10 10 10 10 10 10 10
TVC 0 2 4 6 8 10 12 14 15 18 20 22 24

From the given data, graphically present the Total Cost curves and Unit Cost curves and
identify the Break even point and Shut down point.

Y 0 1 2 3 4 5 6 7 8

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 TFC 50 50 50 50 50 50 50 50 50
TVC 0 20 35 60 100 145 190 237 284

52.Break even analysis

BREAK-EVEN POINT

Break-even point is the output level corresponding to minimum point of average total
cost.
A farmer must produce at least this amount of product to cover the total cost of
production. Whatever is produced above this point will be the profit for the farmer.
The point where the farmer recoups his investment is the Break-even point.
The investment is in the form of fixed cost and variable cost, which constitutes the total
cost.
When the total cost is equal to total revenue it is Break-even point. It can be calculated
by,

Service charge = How much one gets by selling an individual unit of output.
The Break-even point nearer to the origin indicates less loss and more profit zones.
The Break-even point away from the origin indicates more and more loss zone and less
and less profit zone.
Nearness of Break even point to the origin also indicates whatever the farmer is
producing is market worthwhile.
Due to this the farmer will recoup his investment even by producing less number of units
of output.
The Break even point away from the origin indicates to recoup the investment the farmer
has to produce larger number of units of output which is an indication that whatever
the farmer is producing is not so market worthwhile.

SHUT DOWN POINT

Shut down point is the output level corresponding to minimum point of average variable
cost.
A farmer must produce at least this amount so that he will be able to cover the variable
cost of production.
If the total revenue curve goes below this point, it is better to close the business instead
of incurring losses. So this point is called as Shut down point.
Margin of Safety = Output BEO

Particulars Problem 1 Problem 2 Problem 3 Problem 4 Problem 5

Total Variable Cost Rs.16,000 Rs.40,000 Rs.60,000 Rs.6

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Total Cost Rs,24,000 Rs.30,000 Rs.50,000 Rs.8,000
Total Fixed Cost Rs.10,000 Rs.10,000
Milk Production 3,000 lts 3,500 lts
Gross Income Rs.30,000 Rs.35,000 Rs.60,000 Rs.1,00,000
Meat Production 500 Kg.
Number of sheep 100 100
Service charge Rs.15/unit

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