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ACCOUNTING POLICIES SOME IMPORTANT CONCEPTS

GROUP 7 :NEHA Click to edit Master subtitle style JAINY SANJIT

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Topics To Be Covered

Profit And Loss A/C Provisions And Reserves Prepaid Outstanding Accruals Balance Sheet Schedules - Accounting Policies

PROFIT AND LOSS A/C PROFIT AND LOSS A/C

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The most important report for many analysts, investors or potential investors is the income statement. shows how much the corporation earned or lost during the year.

It

PROFIT AND LOSS A/C ,Contd.

While

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the balance sheet shows the fundamental soundness of a company by reflecting its financial position at a given date, the income statement may be of greater interest to investors for the following reasons: income statement shows the record of a companys operating results for the whole year.

The

PROFIT AND LOSS A/C ,Contd.

It

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also serves as a valuable guide in anticipating how the company may do in the future. year does the income statement for a single not tell the whole story. historical record the series for any is more important than for afigures of yearssingle year.

However, The

PROFIT AND LOSS A/C ,Contd.

An

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income statement matches the revenues earned from selling goods and services or other activities against all the costs and outlays incurred to operate the company. difference is the net income (or loss) for the year.

The

PROFIT AND LOSS A/C ,Contd.

The costs incurred usually consist of:
Cost

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of Sales

Selling General

and Administrative expenses such as wages and salaries, rent, supplies and depreciation on money borrowed

Interest Taxes.

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PROFIT AND LOSS A/C

Consolidated Profit & Loss Account for the year ended Weeks Currency Turnover Cost of sales Gross Profit Operating Expenses Operating Profit Other costs/income Profit before interest and taxation Net interest receivable (payable) Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit for the financial period Dividends Retained profit 2003 52 million 7688.0 -7263.0 425.0 -130.0 295.0 95.0 390.0 -255.0 135.0 -50.0 85.0 -13.0 72.0 0.0 72.0 -142.0 2002 52 million 8340.0 -8291.0 49.0 -137.0 -88.0 166.0 78.0 -278.0 -200.0 -71.0 -129.0 -13.0 -142.0 2001 52 million 9278.0 -8757.0 521.0 -77.0 444.0 -68.0 376.0 -226.0 150.0 -69.0 81.0 -14.0 67.0 -193.0 -126.0

Dividend the share of the profit returned to shareholders Retained Profit the amount kept back for future investment, etc.

Profit And Loss a/c Of Astral

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Reserves And Provision

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Meaning Of Provision

The amount written off or retained by the way ofproving for any known liability ofwhich the amount cannot be determined accurately.

Characteristics Of Provision
Provisionis

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liability.

madeto meet known

The

amount of the liability is uncertain. the profit ofthe year in which it is created provision is created irrespective of whether there is profit or loss in the business.

Reduces A

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Purpose Of Provision
To To To

ascertain the truenet profit ofthe business. ascertain thetrue financial positionof the business. provide for known losses in the future. the equitable distribution of expenses.

For

Example Of Provision
The

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accounting treatment of provision for doubtful debts :

Similarly

1.Entry for recording actual bad debt which did not record in books of business Bad debts account Dr. xxx To Sundry Debtors Account xxx 2.Entry for transferring bad debts to provision for bad debts Account

it is calculated for:

1. Provision for Depreciation for assets. 2. Provision for taxation. 3. Provision for bad and

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RESERVES

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Meaning Of Reserve
Reserve

meansthe amount set aside of the profit and other surpluses, which are not earmarked in any way to meet any particular liability, known to exist on the date ofthe Balance Sheet.

Characteristics Of Reserves
It

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is created out of net profits or divisible profits of reserves is not a legal necessity for meeting an unknown liability or loss in the future represent accumulated or undistributed profits and as such they belong to the proprietors just as capital does. reserve is created only when there is profit in the business

Creation Created

Reserves

Characteristics Of Reserves, contd

It

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is created by debiting the profit and loss appropriation account. is usually shown on the liability side of the balance sheet. can be distributed among shareholders as dividend reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside.

It

It

The

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Purpose Of Reserves
Helpful Helpful

in meeting theunforeseen liability or loss in strengthening in the financial position of the business years. of dividends over the

Equalization To

provide funds for meeting a specific liability

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Example Of Reserves
General

reserve:

Dr Profit & Loss A/c Dr To Reserve A/c (Cr.)

Capital

reserve equalization reserve Fluctuation Fund compensation fund

Dividend

Investment Workmen Reserve

for Redemption

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Types Of Reserves
Open

reserves:-

a) Capital reserves b) Revenue reserves: i) general reserves ii ) Specific reserves

Secret Other

Reserves

Reserves:-

a)Foreign currency translation reserve

Difference :Provision & Reserves

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Difference :Provision & Reserves (contd)

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Prepaid (Deferred Charges)

Represent

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certain assets, usually of an intangible nature, whose usefulness will expire in the near future. insurance policy, prepaid rent, etc.. march 31, 2011, a company purchased for 1,20,000 INR an insurance policy providing three years of protection.

Ex: On

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Outstanding Income
Outstanding These

Income is the income accured but not received. revenues were earned during the period but no record of them has yet been made. Rs. 1 lakh of interest earned by the entity during the period but not yet received.

Ex:

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Accruals
Accruals Accrual

means expenses not yet paid.

accounting measures income for a period as the difference between the revenue recognized in that period and the expenses that are matched with those revenues. expenses represent amounts that have been earned by outside parties but have not yet been paid by the entity.

Accrual

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Accruals (Contd..)
Accrual

wages (wages payable): the wages and salary owed to employees for work they have performed but for which they have not yet been paid. interest expense: the cost of using borrowed money during a period is interest expense of that period.

Accrual

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Balance Sheet
A

snapshot of the firms position at a point in time what a company owns (assets) and what it owes (liabilities) Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds)

Shows

Balance

Balance Sheet: Usefulness

The balance sheet provides information for evaluating:

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Capital structure Rates of return Analyzing an enterprises:

Liquidity Solvency Financial flexibility

Balance Sheet: Limitations

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Most assets and liabilities are stated at historical cost. and estimates are used in determining many of the items. balance sheet does not report items that can not be objectively determined. does not report information regarding offbalance sheet financing.

Judgments The It

Balance Sheet: Classification

Assets
Current

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Liabilities and Equity

Current

Assets Long-term investments Property, plant, and equipment Intangible assets Other assets

liabilities Long-term debt Owners equity Capital stock Additional paid-in capital Retained earnings

Current Assets
Current assets are expected to be consumed, sold, or converted into cash: either in one year or in the operating cycle, whichever is longer. Current assets are presented in order of liquidity. The following valuation principles are used: Short-term investments at fair value Accounts receivable at net realizable value

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1 2

Long-Term Investments
Long-term investments may be: 1 Investments in securities (bonds, stock)

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2 3 4

Investments in fixed assets (land not used in operations) Investments set aside in special funds (e.g., sinking fund) Investments in non-consolidated subsidiaries or affiliated companies

Current Liabilities

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Current liabilities are liquidated:

1 2

Either through the use of current assets, or By creation of other current liabilities
Examples of current liabilities include:

Payables resulting from acquisitions of goods and services Collections received in advance of services Other liabilities which will be paid in the short term

Long-Term Liabilities
Long-term obligations are those not expected to be paid within the operating cycle. Examples are: obligations arising from specific financing situations (issuance of bonds) obligations arising from ordinary business operations (pension obligations) obligations that are contingent (product warranties)

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Balance Sheet: Additional Information Reported

Additional information may be: 1 Information not presented elsewhere, or 2 Information that qualifies items in the balance sheet Supplemental information examples: Material events having an uncertain outcome Explanations regarding accounting policies Covenant restrictions

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Balance Sheet: Techniques of Disclosure

Notes Cross

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references and contra items Supporting schedules

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Balance Sheet Of Astral

 P&L

account shows the real financial result of an organization. One of the components in the BS is to disclose the profit or loss. is shown either under the Reserves and Surplus heading(incase of a profit) or the Miscellaneous expenditure heading(incase of loss). is no way, one can prepare a tallied BS without considering the P&L results. , from a logical stand point, we must realize that the impact of P/L should either be on cash , bank or the debtors or creditors. There has to be an impact. One side of which

Can We Finalize B.S Without Preparing P & L a/c ???

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This

There

Further

How Is P & L a/c Related to B.S ???

Income

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Statement is another type of a financial statement. It summarizes activities and events of one company which happened in a period of time. there are monthly, quarterly, and annual income statement. An income statement will show all revenues, all expenses, and net profits in detail. the contrary, a balance sheet show a company financial positions such as assets and debt at that precise date. balance sheet will show company's assets,

Usually,

On

Supporting Schedules

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Supporting Schedules

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Supporting Schedules

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Supporting Schedules

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Accounting Policies
1. Basis of Preparation of Financial Statements :The financial statements have been prepared on a going concern basis under the historical cost convention, except in case of certain fixed assets which are re-valued, on accrual basis of accounting in accordance with the generally accepted accounting principles and applicable provisions of the Companies Act, 1956. Except where otherwise stated, the accounting principlesareconsistently applied

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Accounting Policies
2. Use of Estimates :The preparationofFinancial Statements inconformity with GenerallyAcceptedAccounting Principles (GAAP), requires estimates and assumptions to be made that affect the reported amount of assets and liabilities on the date of the Financial Statements and the reported amount ofrevenuesand expensesduring the reporting period. Difference between the actual results and estimates are recognized in the period in which the results are known

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Accounting Policies
3. Fixed Assets :Fixed Assets are stated at cost of acquisition inclusive of freight, duties, taxes & incidental expenses related to acquisition / installation , adjusted by revaluation of Land . 4. Lease Operating :Lease rentals are expenses with reference to lease terms and other considerations. There are no finance leases.

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Accounting Policies
5. Impairment of Assets :An asset is treated as impaired when the carrying cost of the same exceeds its recoverable amount. Impairment is charged to the Profit and Loss Account in the year in which an asset is identified as impaired. The impairment loss recognized in prior accounting period is reversed if there has been a change in the estimate of the recoverable amount

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Accounting Policies
6. Depreciation :Depreciation is charged under StraightLine Methodin accordancewith the rates and manner asspecifiedin Schedule XIVofthe Companies Act, 1956. 7. Investments :Long Term investments are stated at costlessprovision for diminutionin value other than temporary,if any.

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Accounting Policies
8. Inventories :Inventories are valuedat lower of cost andnetrealizable value.Cost is determined onfirst-in-first-out(FIFO)basis. The cost of finished goods comprises of raw materials, direct labour, other direct costs and related production overhead,butexcludes interestexpenses.Netrealizable value is the estimate ofthe selling price in the ordinary course of business, less the cost ofcompletion andselling expenses.

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Accounting Policies
9. Revenue Recognition :Sales are recognized on transfer of significant risks and rewards of ownership to the buyer. Sales are net of trade discounts butexclude Excise duty and Sales Tax.

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Accounting Policies
10. Cenvat :Cenvat (Central Value Added Tax) credit in respect of Excise, Custom and Service tax is accounted on accrual basis on purchase of eligible inputs, capital goods and services. The balance of cenvat credit is reviewed at the end of each year and amount estimated to be unutilisable is charged to the Profit and Loss Account for the year.

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Accounting Policies
11. Foreign Currency Transactions :Transactions denominated inforeigncurrenciesare normally recorded at exchange rate prevailingat the time of transaction. Monetary itemsdenominated in foreign currencies atthe year end and notcovered by forward exchange contracts are translated at year end rates. In case of items which are covered by forward exchange contracts, the difference between the yearend rate and rate on the date of the contract

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Accounting Policies
12. Borrowing costs :Borrowing costs relating to (i) funds borrowed for qualifying assets are capitalized up to the date the assets are put to use,and (ii) funds borrowed for other purposes are charged to the Profitand Loss Account

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Accounting Policies
13. Taxes on Income :Income tax expenses for the year comprises of current tax and deferred tax. Current tax provision is determined on the basis of taxable income computed asper the provisions ofthe Income Tax Act. Deferred tax recognized for all timing differences that are capable of reversal in one or more subsequent periods by applying tax rates that have been substantively enacted by the balance sheet date. Deferred tax assets are recognized to the extent there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assets can be realized

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Accounting Policies
14. Research & Development :Expenditure Research and Development expenses of revenue nature are charged to the Profit and Loss Account and the expenditure on capital assets is added to the fixed assets.

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Accounting Policies
15. Employee Benefits :Contributions to Provident Fund, a defined contribution scheme, is made to a government administered Provident Fund and is charged to the Profit and Loss account as incurred. The Company has no further obligations beyond its monthly contributions to this fund. Provision for gratuity, under a LIC administered fund, which is in the nature of defined benefit plan, is provided based on valuations, as at the balance sheet date, made by the independent actuaries. Termination benefits are recognized as expense

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Accounting Policies
16. Amortization of Miscellaneous :Expenditure Preliminaries Expenses are beingwritten off equally over a periodof ten years. Share issue expenses are deducted from the balance of Securities Premium Account as per the permission of Section 78 ofthe Companies Act,1956.

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Accounting Policies
17. Provisions, Contingent Liabilities and Contingent Assets :Provisions involving substantialdegree of estimation in measurementare recognized whenthere is apresent obligation as a result of past events and it is probable that there will be an outflow of resources. Contingent Liabilities are not recognized but are disclosed in the notes. Contingent Assets are neither recognized nor disclosed in the financial statements

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