AFM Theory Notes-1

Accounting for Managers 14MBA13
Subject Code: 14MBA13 IA Marks: 50

No. of Lecture Hours / Week: 04 Exam Hours: 03
Total Number of Lecture Hours: 56 Exam Marks: 100
Practical Component: 01 Hour / Week
Syllabus
Module 1: (4 Hours)
Introduction to Accounting: Need and Types of Accounting, Users of Accounting, concepts
and conventions of Accounting, Accounting Equation (problems on accounting equation).
Module 2: (10 Hours)

Preparation of books of Accounts: Journals, Subsidiary books, three column cash book, ledgers
and trial balance. Depreciation- Straight line and Written down Value Methods.

Preparation of Financial Statements: Preparation of final accounts of sole traders. Preparation
of final accounts / statement of companies-both horizontal & vertical form of financial
statements. (Basic problems on Final accounts of companies)

Analysis of Financial Statements: Comparative, common size and trend analysis, Ratio
Analysis, Preparation of financial statements using ratios, Preparation of Cash flow Statement
(Only indirect method).
Module 5: (6 Hours)
Accounting Standards and IFRS: Need for accounting standards. IFRS and proposed changes
in Indian Accounting Standards.
Module 6: (4 Hours)
Emerging issues in Accounting: Corporate Governance and clause 49 of the listing agreement,
Human Resource Accounting, Forensic Accounting, Window Dressing- Sustainability Reporting
Module 7: (6 Hours)
Fundamentals of Taxation: Overview of Heads of Income, deductions u/s 80C, Income Tax
Rates and Returns – For Individuals only (Only Theory)
Dept. of MBA-SJBIT Page 1

Index
Module
Content Page No.
Module-1 Introduction to Accounting 3-9
Module -2 Preparation of books of 10-20

Accounts
Module 3 Preparation of Financial 21-27

Statements
Module 4 Analysis of Financial 28-40

Statements
Module 5 Accounting Standards and 41-42

IFRS
Module 6 Emerging issues in 43-49

Accounting
Module 7 Fundamentals of Taxation 47-58

MODULE I
Introduction to Accounting
An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as
represented by individual ledger pages, to which changes in value are chronologically recorded
with debit and credit entries. These entries, referred to as postings, become part of a book of final
entry or ledger. Examples of common financial accounts are cash, accounts receivable,
mortgages, loans, PP&E, common stock, sales, services, wages, and payroll.
Definition of Accounting
Accounting operates within a broad socio-economic environment, and so, the knowledge
required of the accountant cannot be sharply compartmentalized.It is therefore, difficult to
discuss one area without relating to other areas of knowledge. We place a great emphasis on the
conceptual knowledge. The accountant should not only know but he should understand.
From the above it is clear that to define accounting as such, is rather difficult. Many accountants
have defined Accounting in very many languages. However, we can consider the following
definitions:
1.H.Chakravorty: ―Accountancy is the science of recording, classifying and summarizing
transactions so that relation with outsiders is exactly determined and result of operation during a
particular period can be calculated, and the financial position as the end of the period may be
shown.
2.A.I.C.P.A.: "Accountancy may be defined as the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events, which are in part, at least
of financial character, and interpreting the results thereof".
3.Taylor and Shearing: "Accounting may be defined as the art and science of recording business
transactions in a methodological manner so as to show: (a) the true state of affairs of a business
of a particular period of time and, (b) the surplus or deficiency which has accrued during a
specific period."
Objectives of Accounting
The broad objects of Accounting may be briefly stated follows:
1.To maintain the cash accounts through the Cash Book and to find out the Cash balance on any
particular day.
2.To maintain various other Journals for recording day-to –day non –cash transactions.
3.To maintain various Ledger Accounts to find out the exact amounts of incomes and expenses
or gain and losses or receivables and payables.
4.To furnish information regarding Purchases and Sales, both Cash and Credit.
5.To find out the net profit or net loss or surplus or deficit for any particular period.
6.To find out the total capital on a particular date.
7.To find out the positions of assets on a particular date.

Importance or Uses of Accounting

1. Facilitate to replace memory
Accounting facilitates replace human memory by maintaining complete record of
financial transactions.
Facilitates to comply with legal requirements
2. Accounting facilitates to comply with legal requirements which require an
Enterprise to maintain books of accounts. For e.g. Sec 209 of the Companies Act 1956,
requires a company to maintain proper books of accounts on accrual basis.
3. Facilitate to ascertain net results of operations
Accounting facilitates to ascertain net result of operations by preparing Income
Statement or P&L A/c.
4. Facilitates to ascertain financial position
Accounting facilitates to ascertain financial position by preparing Balance Sheet.
5. Facilitates the users to take decisions
Accounting facilitates the users to take decisions by communicating accounting
information to them.
6. Facilitates to comparative study
Accounting facilitates a comparative study in the following four ways:
(i) Comparison of actual figures with standard or budgeted figures for the same period
and the same firm.
(ii) Comparison of actual figures of one period with those of another period for the
same firm
(iii)Comparison of actual figures of one firm with those of another standard firm
belonging to the same industry.
(iv) C
omparison of actual figures of one firm with those of industry to industry to whom
the firm belong.
7. Assists the management
Accounting assists the management in planning and controlling business activities and
in taking decision.
8. Facilitates control over assets
Accounting facilitates control over assets by providing information regarding Cash
balance, Bank balance, Debtors, Fixed Assets, Stock etc.

Scope of Accounting
Accounting covers the following activities:
1. Identifying the transactions and events

Accounting identifies transactions and events of a specific firm. A transaction is an
exchange in which each participant receives or gives value. An event is a happening of
consequence to a firm. E.g. use of raw materials for production.
2. Measuring the identified transactions and events

Accounting measures the transaction and events in terms of a common measurement
unit that is the ruling currency of a country.
3. Recording
It is concerned with the recording of identified and measured financial transactions in an
orderly manner.
4. Classifying
It is concerned with the classification of the recorded transactions so as to group the
transactions of similar type at one place.
E.g. maintaining ledger for each type of Account.
5. Summarizing
It is concerned with the summarization of the classified transactions in a manner useful to
the users.
E.g. Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements.
6. Analyzing
It is concerned with the establishment of relationship between the various items or
group of items taken from P&L A/c & B/S or both.
7. Interpreting
It is concerned with the explaining the meaning and significance of the relationship so
established by the analysis. The accountants should interpret the statements in a manner
useful to the users, so as to enable the users to make reasoned decisions out of alternative
course of action.
8. Communicating
It is concerned with the transmission of summarized, analyzed and interpreted
information to the users to enable them to make reasoned decisions.

Accounting Conventions & Concepts

Accounting Entity Concept
According to this assumption, a business is treated as a separate entity that is distinct from its
owner(s), and all other economic proprietors. This concept requires that for accounting purposes
a distinction should be made between (i) personal transactions and business transactions, and (ii)
transactions of one business entity and those of another business entity.
Money measurement Concept
According to this concept, only those transactions which are capable of being expressed in term
of money are included in the accounting records. Non-monetary transactions should be ignored.
E.g. Guarantee given by bank, Strikes, Lockouts, Layoff etc
Accounting Period Concept

According to this concept, the economic life of an enterprise is artificially split into periodic
intervals which are known as accounting periods at the end of which an income statement and
position statement are prepared to show the performance and financial position.
Going Concern Concept
According to this concept, the enterprise is normally viewed as a going concern that is,
continuing in operation for the foreseeable future. Generally Accepted Accounting
Principles (GAAPs) GAAPs may be defined as those rules of action or conduct which are
derived from experience and practice and when they prove useful, they become accepted as
principles of accounting.
Criteria for acceptance of the Accounting Principles:
• Relevance: A principle is relevant to the extent it results in information that is
meaningful and useful to the user of the accounting information.
• Objectivity: Objectivity connotes reliability and trustworthiness. A principle is
objective to the extent the accounting information is not influenced by personal bias
or judgment of those who provide it.
• Feasibility: A principle is feasible to the extent it can be implemented without much
complexity or costs.
Basic Principles of Accounting

• Duality Principle
• Revenue Recognition Principle
• Historical Cost Principle
• Matching Principle
• Full Disclosure Principle
• Objectivity Principle
• Consistency Principle

Duality Principle
The duality aspects of transaction is the basis of double entry records. The entry made for
each transaction is composed of two parts-one for debit and another for credit. Every debit
has equal amount of credit.
Revenue Recognition Principle

This principle is mainly concerned with the revenue being recognized in the Income Statement
(P&L A/c) of an enterprise. Revenue is the gross inflow of cash. It includes receivable from sale
of goods, rendering of services and use of enterprise resources, interests, royalties and dividends.
Revenue is recognized in the period in which it is earned irrespective of the fact whether it is
received or not during that period.
Historical Cost Principle

According to this principle, an asset is ordinarily recorded in the accounting records at the price
paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts
during the period of acquisition and subsequent accounting periods. The cost of an asset is
systematically reduced from year to year by charging depreciation and the asset is shown in the
balance sheet at book value.
Matching Principle
According to this principle, the expenses incurred in an accounting period should be matched
with the revenues recognized on all goods sold during a period, cost of those goods sold
should also be charged to that period. In Trial balance all debits should be matched with all
credits. In B/S, assets side should be matched with liabilities side.
Full Disclosure Principle

According to this principle, the financial statements should act as means of conveying and not
concealing. The financial statements must disclosure all the relevant and reliable information. It
should be full, fair and adequate so that the users can take correct assessment about the financial
performance and position of the enterprise.
Objectivity Principle
According to this principle, the accounting data should be definite, verifiable and free from
bias of the accountant. This principle requires that each recorded transaction in the books of
accounts should have an adequate evidence to support it. (E.g. vouchers, receipts, invoices
etc.)
Consistency Principle
According to this principle, whatever accounting practices are selected for a given category of
transactions, they should be followed continuously from one accounting year to another.

Accounting Standard
Meaning
Accounting standard is a selected set of accounting policies or broad guidelines regarding

the principles and methods to be chosen out of several alternatives. Standards conform to
applicable laws, customs, usage and business environment.
Objective
The main objective of accounting standards is to harmonize the diverse accounting
policies and practices at present in use in India.
Importance or Advantages of setting Accounting standards
Reduction in variations:
Standards reduce to a reasonable extent or eliminate altogether confusing variances in
the accounting treatment used to prepare financial statements.
Disclosure beyond that required by law;
There are certain areas where important information is not statutorily required to be disclosed.
Standards may call for disclosure beyond that required by law.
Facilitates comparison:
The application of accounting standards would to a limited extent, facilitate comparison of
financial statements of companies situated in different parts of the world and also of
different companies situated in the same industry.
Accounting Equation
• The accounting equation shows the relationship between the economic resources
belonging to a business and the claims against those resources.
• Economic resources are termed as assets. Claims are termed as liabilities and owners
‘claims or owners ‘equity.
Assets = Liabilities + Owners’ equity
Users of Accounting Information
Investors
Investors are the owners of the firm. So, they need information to decide which investments
to buy, retain or sell as well as the timing of the purchases or sales of those investments.
They also need information to assess mgt. performance and the ability of the firm to pay
dividends.
Lenders
Lenders, such as banks and debenture-holders, need to know about the financial
stability of a business who approach them for funds. They are interested in information
that enables them to determine whether their loans, and the related interest, will be paid when
due.

Security Analysis and Advisers

Investors and creditors seek the assistance of information specialists in assessing
prospective returns. Equity and bond analysts, stock holders and credit rating agencies offer a
wide array of information services. Information specialists serve the need of investors by
providing them with skilled analyses and interpretation of financial reports.
Management
Mgt.needs information for planning and controlling operations, for making special decisions, and
for formulating major plans and policies.
Employees and Trade Unions

Employees are interested in information about the enterprise as well as its general operations,
stability and profitability. Employees have an interest in the financial affairs of ; the enterprise
since it is the main source of their income. Trade unions are required for wage negotiations.
Suppliers and Other Trade Creditors

They are keen to obtain information that enables them to determine whether amounts owed to
them will be paid when due.
Customer
They are interested in the financial affairs of an enterprise to decide how much business to do
with it, and to assess its ability to service the product or to honor warranty agreements.
Govt. & Regulatory Agencies

They also require information in order to regulate the business practices of enterprises, determine
taxation policies and provide a basis for national income.
A number of regulatory agencies like SEBI, Insurance Regulatory Authority and
Stock Exchanges have a legitimate interest in financial reports of publicly held
enterprises to ensure efficient operation of capital markets.
General Public
Financial statements assist the public by providing information about the trends and recent
developments in the prosperity of an enterprise and the range of its activities.

Module II
Preparation of books of original records
Meaning
It is a statement of the various dealings which occur between a customer and the firm. It can also
be expressed as a clear and concise record of the transactions relating to a person or a firm or a
property (asset) or a liability or an expense or an income.
Classification of Accounts
1. Personal Accounts
2. Impersonal Accounts
a) Real Accounts
b) Nominal Accounts
Personal Accounts
Accounts related to an individual person, firm, company and bank is called personal
accounts. The proprietor being an individual his Capital A/c and his Drawing A/c are
also known as ‗Personal Accounts‘.
Real Accounts
Assets or properties or trading goods related to a firm is called Real Accounts.
E.g. Furniture A/c, Purchase A/c, Sales A/c. etc.,
Nominal Accounts
Any expenses incurred or incomes received other than real accounts is called Nominal
Accounts.
E.g. Salary for the staff, Rent paid, Commission received etc.
Debit & Credit Aspects

One aspect will be either the ‗Receiving Aspect‘ or ‗Incoming Aspect‘. This is termed as
Debit Aspect. Another aspect will be ‗Giving Aspect‘ or Outgoing Aspect‘ or ‗Income
Aspect‘. This is termed as Credit Aspect.
Golden Rules of Accounts:

1. Personal A/c – Debit the Receiver
-- Credit the Giver

2. Real A/c -- Debit what Comes in
-- Credit what goes out

3. Nominal A/c -- Debit all expenses & losses

Journal
A daily record of events or business; a private journal is usually referred to as a
Below each journal entry a brief explanation of the transaction is given within the brackets is
called narration
Procedures to enter Journal Entries
1. First find out, which two accounts belongs to a particular transaction.

2. Then find these two accounts belonging to which category i.e. Personal or Real or
Nominal A/cs.
3. Then see rules of the category and match with accounts.
4. Write the journal entry with date, amount in both sides and narration.
Example: 1
Journalize the following transactions:
3.02.06 Goods purchased for Rs.14,500.
7.02.06 Goods sold to Lakshmi Rs.5,000
9.02.06 Received Commission Rs.300
10.02.06 Goods sold for cash Rs.29,000
12.02.06 Goods purchased from Meenakshi for Rs.6,000
15.02.06 5 Chairs purchased from Saravana Stores Rs.300 each
20.02.06 Paid to Saravana Stores
28.02.06 Salary paid Rs.1000, Rent paid Rs.500
Example:2 (Jan 2005)

Journalize the following transactions:
Jan 2004, 2 Started business with Rs.1,00,000
Paid into bank Rs.50,000
Bought furniture for cash Rs.6,000
Bought furniture for resale Rs.4,000
Sold goods to Mr.X Rs.6,000
Sold goods Rs.5,000
Purchased from Y for Rs.5,000
Charged depreciation on Machinery Rs.1,000
Withdrew form bank Rs.3,000 for private use.
Deposited a cheque into bank for Rs.6,000
Cheque deposited on 14th Jan was dishonored
Paid rent, salaries, postage Rs.5,000, Rs.6,000 and Rs.150 respectively.

Prob:3 (Jan 2006) Journalise the following transactions in the books of Vishwanath. .
Vishwanath started his business with the following:
Cash in hand 1500

Cash at bank 3500
Goods in hand 3000
Furniture 2000
Buildings 10,000
ii. Gave charity Rs.20.
iii. Loan taken from the bank Rs.5,000
iv. Purchased a motor car in exchange for goods Rs.2,000 and cheque Rs.3,000
v. Paid proprietor‘s life insurance premium Rs.100
vi. Bought goods from Laskshman on account Rs.2,000
vii. Furniture costing Rs.300 was destroyed by fire.
Prob:5(June 2004) Journalise the following transactions in the books Raju and
Company.
2002
Jan 2 Started the business with Rs.80,000
Jan 3 Bought furniture for Rs.12,000
Jan 6 Bought stationary for Rs.500
Feb1 Purchased goods for cash @ Rs.20,000
Feb5 Sold goods for cash worth Rs.4,000
Feb7 Sold to Mohan goods worth Rs.2,000
Feb14 Bought goods from Tilak @ Rs.8,000
Feb18 Paid office cleaning charges of Rs.200
Feb20 Bought goods from Kamalesh worth Rs.4,000
Feb21 Sold to Vishnu & Co goods worth Rs.3,000
Feb 22 Received form Mohan Rs.2,000
Feb 25 Paid to Kamalesh Rs.2,000
• Ledger
Ledger is a secondary book of entry. The journal entries are posted to the ledger at the end of
each period. Ledger is a book containing various account. In this book, separate account is
opened for each and every transactions of different nature.
Procedures to post entries from Journal book to Ledger book
1. List out the no. of accounts in the journal book.
2. Open separate ledger account for each account.
3. Debit side of the entry in the journal book will come under credit side of the
ledger and vice-versa

4. In debit side of the ledger book while entering the entry, add ‗To‘. In credit side,
add ‗By‘.
5. Balance the amount in both the sides.
Prob:1
1995 Mar1 Kannan commenced business with Rs.25,000
3 Purchased goods for Rs.15,000
5 Paid salary Rs.500
8 Received interest Rs.50
10 Cash Sales Rs.2,000
12 Purchased goods for cash Rs.3,000
15 Goods sold to Kumar Rs.1,000
18 Purchased a cycle for Rs.680
• Trial Balance
Trial Balance is a statement of ledger balances. In this statement four columns are
provided for recording the serial number, name of accounts, debit balances and a credit
balances. The total of such balances must be equal.
Rules Debit : All assets, expenses & losses

Credit : All liabilities, incomes & gains
Prob:1
From the following transactions pass necessary journal entries, prepare ledger accounts
and trial balance:
2003 Apl1 Started business with a capital of Rs.10,000
2 Purchased goods from Mr.Gopal for Rs.1,500
3 Paid to Mr.Gopal in full in cash Rs.1,450
4 Sold to goods Mr. Kannan for Rs.500
5 Received cash from Kannan in full settlement Rs.450
6 Paid salary Rs.300
7 Purchased furniture for Rs.1000
8 Sold goods for Rs.1,300
9 Received interest Rs.50
10 Deposited cash into bank Rs.1000
11 Paid wages Rs.100
12 Withdraw cash from Bank for personal use Rs.200

Prob:2 (Jan 2006) Prepare a trial balance from the following balances of the year ending
2002
Capital 28,000 Purchases 15,000
Stock of goods 4,000 Plant 15,000
Motor car 8,000 Furniture 5,000
Dis.recd. 400 Wages 8,200
Baddebts 400 Creditors 6,500
Sales 40,000 Salaries 2,800
Cash at bank 4,000 Commission (cr) 600
Return inwards 2,000 Returns outwards 1,000
Cash in hand 600 Debtors 5,600
Rent 3,500 General exp. 300
Dis. Allowed 300 Interest recd. 200
Carriage 1,500 Advertisement 500
Prob:3
Prepare a Trial balance from the following as on 31st Mar 2002
Capital 16,800 Drawings 5,000
Stock 21,000 Purchases 36,000
Purchase Ret. 2,000
Sales Ret. 3,000 Debtors 4,500
Creditors 2,500 Furniture 900
Bills receivable 2,300 Bills payable 4,200
Wages 1,200 Advertisement 600
Subsidiary book
A subsidiary book is prepared when the transactions of similar nature are
large. It is prepared as a substitute for journal. By preparing this book, entries are
minimized.
E.g. Sales Book, Purchase Book etc.
Types of Subsidiary Books
1. Purchase book
2. Sales book
3. Purchases Return book
4. Sales Return book
5. Bills Receivable book
6. Bills Payable book
7. Cash book

1. Purchase book
This book is kept with the object of recording credit purchases of goods for
resale. Each inward invoice after it has been entered as to calculations and also to the
quantity, quality and price of the goods received is numbered consecutively and then
entered in the purchase books.
Purchase Book
Postings: Each personal a/c is credited with its respective amount and the monthly total of
this book is debited to purchases a/c in the Ledger.
2. Sales book
The object of this book is to record credit sales. An outward invoice is
made out for credit sale and checked as to quantity, quality and price of the goods before
the letter is sent out to the customer.
Sales Book
Posting: Each personal a/c debited with its respective amount and the monthly total of
the book is credited to sales a/c in the ledger.
3. Purchase Returns Book
This book record returns outward, that is, return of goods bought. A debit
note is made out with a carbon duplicate and sent to the party to whom the goods are
returned.
Purchase Returns Book
Postings: Each individual personal a/c is debited with its respective amount and the
monthly total of the book is credited to returns outward a/c in the ledger.
4. Sales Returns Book
Return inwards, that is, return of goods sold by us, are recorded in this
book. On receipt of goods, credit notes with carbon duplicates are made out and sent to
those customers who have returned us the goods.
Sales Returns Book

Posting: Each personal a/c get the individual credit and the returns inwards account get
the debit with the monthly total of the book.
5. Bills Receivable Book

The purpose of this book is to keep a detailed record of all the bills
receivable received by a trader.
A bill receivable is one is respect of which the trader is entitled to receive
money at some specific date as shown on the face of the bill. Drawer is a person who is
drawing the bills. He is the supplier of the goods. Acceptor is accepting the bill. He is the
purchaser of the goods.
6. Bills Payable Book

This book is kept to record full details of all bills payable accepted by a trade
A bill payable is one, which has been accepted by a person and the amount of which he is under
obligation to pay at some definite future time.

Cash Book
A cash book is a special journal which is used for recording all cash receipts and cash
payments. A cash book is a book of original entry since transactions are recorded for the
first time from the source documents. The cash book is a ledger in the sense that it is
designed in the form of a cash a/c and records cash receipts on the debit side and cash
payments on the credit side.
Types of Cash Book
1. Single Column Cash Book
2. Cash Book with Discount Column
3. Cash Book with Bank & Discount Column
4. Petty Cash Book
5. Single Column Cash Book
Single column cash book has one amount column on each side. All cash receipts are
recorded on the debit side and all cash payments are recorded on the credit side.
Format Single Column Cash Book

Dr Cr
Prob:1 Enter the following transactions in Single Column Cash Book.
2001 Jan1 Cash in hand Rs.1,700
5 Paid to Bansal Rs.300 & discount allowed by him Rs.10
8 Purchased goods from Goyal & Co. for cash Rs.400
10 Received from Kansal Rs.980
16 Sold goods to Garg & Co for cash Rs.400
21 Paid to Ansal Rs. 295 & discount received Rs.5
25 Paid wages Rs.50
31 Paid to X & Co in full settlement of his account
(which shows a credit balance of Rs.400.)Rs. 390
31 Purchased Furniture Rs.200
Prob:2 Prepare a simple cash book from the following transactions of Mr. X of Delhi.
2001, Apl 1 Mr.X commenced business with cash Rs.4,800
3 He bought goods for cash Rs.3,000
5 Sold goods for cash Rs.60
6 Received cash from Mr. Manohar Lal Rs.216
9 Paid into bank Rs.1,800
13 Paid cash to Hari Rs.129
17 Paid for stationary Rs.9
Paid for office furniture Rs.1110
Received from Mr. Kailash Chand Rs.408
Paid for advertising Rs.54

Purchased postage stamp Rs.5

Paid rent Rs.60
Paid electricity charges Rs.9
2. Cash Book with Discount Column

Cash book with discount column has two columns I.e cash column and discount column in
each side. All cash receipts & discounts allowed are recorded on the debit side and all cash
payments & discounts received are recorded on the credit side.
Double column Cash book
Prob:1 Prepare a double column cash book from the following transactions of Mr. R.K.
Gupta:
2001 Jan1 Opening Cash balance Rs.4,000
3 Cash sales Rs.6000

5 Sold goods to Suresh for Rs.2,000 & received from him Rs.1,980.
6 Goods purchased for cash Rs.2,000
10 Wages paid Rs.40
19 Goods purchased from Mr. Manjunath Rs.2,500 and paid
27 Cash paid to Radha Rs.400
28 Goods purchased for cash Rs.2,070
Prob:2 Prepare a double column cash book from the following transactions of Mr. Y:
2004 Mar 1 Mr. Y commenced business with cash Rs.3,900
3 Bought goods for cash Rs.4,110
4 Paid Mr.Mohanlal cash Rs.57 and discount recd. Rs.3
6 Deposited in Bank Rs.2,400
Paid for office furniture in cash Rs.279
9 Sold goods for cash Rs.1,800
12 Paid wages in cash Rs.72
13 Paid for stationary Rs. 24
15 Sold goods fro cash Rs.1500
17 Paid for miscellaneous exps.Rs.27
19 Received cash from Mr. Jindhal Chand Rs.291 and allowed his discount Rs.9
21 Purchased a radio set Rs.150
22 Paid salary RS.240
25 Paid rent Rs54
28 Paid electricity bill Rs.21
29 Paid advertising Rs.24

3. Three Column Cash Book

Three column cash book has three amount columns (one for cash, one for bank and one for
discount) on each side. All cash receipts, deposits into bank and discount allowed are
recorded on debit side and all cash payments, withdrawals from bank and discount received
are recorded on the credit side.
Three Column Cash Book
Prob:1 Enter the following transactions in the Three Column Cash Book.
2005 Jan 1 Opened a bank a/c by depositing by Rs.6000 in cash
2 Goods sold to Mohan for cash Rs.250
5 Settled Hari‘s a/c of Rs.200 at a discount of 5%
7 Received from Shyam a cheque for Rs.725. Discount allowed Rs.25
10 Purchased a typewriter for Rs.200. Spent Rs.50 on its repairs.
12 Shyam‘s cheque was returned dishonored
15 Received a money order for Rs.25 from Hari
20 Shyam settled his account by means of a cheque for Rs.755. Rs.5 being for interest charged.
27 Purchased Machinery from Rajiv for Rs.5,000 and paid him by means of a bank draft
purchased from bank for Rs.5,005.
28 Cash withdrawn from the bank Rs.10,000.
Prob:2(June 2004)
From the following information, prepare suitable cash book:
2002, April
1 Cash at hand Rs.2,200
2 Cash at bank Rs.8,700
3 Bought goods from Rahim Rs.7,300
4 Cash sales deposited with the bank Rs.5,500
8 Sold goods to Das Rs.8,200
9 Received cheque in full settlement of Das‘s a/c Rs.8,000
10 Paid to settle Rahim‘s a/c Rs.7,000
12 Purchased office furniture by cheque Rs.3,500
13 Bought goods from Ghosh Rs.10,400
15 Paid carriage Rs.200
18 Bank collected dividend Rs.500
20 Withdrawn from bank Rs.2,000
25 Paid wages Rs.1,500
27 Paid to Ghosh by cheque Rs.10,000

Prob:3 (Jan 2005) Rule the Three column cash book of a merchant and record there in
the following transactions. Balance the cash book on 31st July 1998.
July 1998
1 Commenced business with Rs.10,000
3 Purchased goods by cheque Rs.3,000
4 Paid rent Rs.150
12 Purchased furniture by cheque Rs.1,800
15 Cash sales Rs.650
16 Gave Gopal a cheque Rs.970 (allowed discount by him Rs.25)
18 Received from Narayan a cheque for Rs.1,500 and he was allowed a
discount of Rs.30
25 Paid wages Rs.60
26 Drew for office use Rs.400 from bank
27 Drew for personal use Rs.100 from bank
28 Issued a cheque to Amar was dishonored
30 Furniture purchased for resale for cash Rs.250.
Prob:4 Prepare a three column cash book from the following transactions:
2004, Oct 1 Cash in hand Rs.1,800
Cash at bank Rs.11,000
5 Discount a bill at 5% through bank Rs.4,000.
7 Bought goods by cheque Rs.7,000
8 Bought goods by cash Rs.500
10 Honored our own acceptance by cheque Rs.5,000
14 Paid trade exps.
16 Paid into bank
18 Ramesh who owed us Rs.500 became bankrupt and paid us
50p in the rupee
20 Received cash from Mohan Rs.400 Allowed discount Rs.10
23 Withdrew from bank Rs.400 Paid to Ganesh Rs.300 Allowed us discount Rs.10
24 Received Rs.2000 for a bill from Hari and deposited the same into bank
25 Withdrew from bank for private exps. Rs.300
28 Received cheque for goods sold Rs.9,000
29 Received payment of a loan of Rs.5,000 and deposited Rs.3,000 out of it into bank.
30 Bank charges as per pass book Rs.5
4. Petty Cash Book

Petty cash book is the book which is used for the purposes of recording the payment of petty
cash expenses. E.g.Postage & stationary exps.
Differences between Main cash book and Petty cash book

1. In the main cash book all cash receipts are recorded whereas in the petty cash book only cash

receipts from main cashier are recorded.
2. In the main cash book all cash payments except payments of petty cash exps., are
recorded whereas in the petty cash book only payment of petty cash expenses are recorded.
Imprest System of Petty Cash Book

The amount which the main cashier hands over to the petty cashier in order to meet the
petty cash expenses of a given period is known as ‗imprest‘ or ‗float‘
Advantages of Imprest System of Petty Cash Book
1. Control over mistakes: Chances for mistakes are reduced since the chief cashier
regularly examines petty cash book.
2. Control over petty exps.: Petty expenses are kept within the limits of imprest since the
petty cashier can never spend more than the available petty cash.
3. Control over fraud: Misappropriation if any, is always kept within the limits of imprest.
4. Saving of chief cashier‘s time: The time of chief cashier is saved when pettyexps.are
recorded in petty cash book.
Petty Cash Book

Prob:1 From the following, prepare petty cash book on imprest system of Laxman & Co. for
the month of Jan 2001.
2001 Jan1 Opening balance Rs.100
2 Paid for stamps Rs.12
3 Paid cleaners wages Rs.15
4 Paid for bus fare Rs.16
5 Paid tea etc. Rs.15
6 Paid for repairs of cycle Rs.10
7 Paid for advertisement Rs.30
8 Drew imprest from head cashier
9 Paid for cartage Rs.10
10 Paid for traveling exps. Rs.25
11 Paid for Telegram Rs.15
12 Paid for entertainment to salesman Rs.20
13 Paid for repairs of cycle Rs.10
14 Paid for printing bill Rs.5
15 Paid for stationary Rs.3

Module 3
Preparation of Financial Statements
Final accounts consists of two statements i.e. (I) Income Statement or Trading, profit & Loss
A/c and (ii) Balance Sheet. Income statement which shows the net results of the firm. Balance
sheet shows the financial position of the business. As these two statements provide the final
result of any business, they are called final accounts.
Income Statement
• Income statement consists of both
• Trading A/c and
• Profit & Loss A/c
(i) Trading A/c

The object of this account is to arrive at the results of trading operation.I.e.to find out that the
organization has derived profit or loss out of buying & selling operation.
Profit & Loss A/c

This account is prepared to ascertain the net profit/loss of the business during an accounting
period. The P&L a/c can be defined as a statement that summarizes the revenues and
expenses of an accounting period so as to reflect the changes in various critical areas of
firm‘s operations.
Prob:1 From the following balances extracted at the close of the year ended 31st Dec,
1998, prepare the Profit & Loss a/c as at that date. Rs.
Rs.
Gross Profit 1,53,000 Carriage outward 7,500
Salaries 27,500 Discount (Dr.) 1,500
Apprentice Rent 3,300
Premium(Cr) 4,500 Traveling exp 600
Fire Insur. Premium 2,700 Rates & taxes 1,050
Printing & Stationary 750 Trade exps. 900
Bad debts 6,300

Prob:2 Prepare P&L a/c as on 31st Dec, 1999 from the following information: Rs.
Doubtful debts 250 Discount on Drs. 420
Discount recd. 1,850 Commission (cr) 1,000
Int. on investment 750 Traveling exp 1,500
Postage 270
Balance Sheet
A Balance Sheet is a statement depicting the financial position of the business on a
specific date. Balance sheet is defined as a still-photograph of the state of affairs of
the business at a particular date. The financial position of a business is revealed by its
assets and liabilities on a particular date.
Prob:1 From the following particulars, prepare a balance sheet as at 31st Dec, 1998
Rs. Rs.
Capital 75,000 Loan to Kumar 7,500
Buildings 82,500 Investments 4,500
Furniture 3,750 Cash in hand 300
Bills receivable 5,250 Cash at bank 5,250
Sundry debtors 30,000 Drawings 4,500
Bills payable 3,750 Net profit 58,350
Sundry creditors 23,700 Stock 10,500
Machinery 6,750
Prob:2 From the following balances, prepare Trading and Profit Loss A/c for the year
ending 31st, Dec 2003 and Balance Sheet on that date.
Rs. Rs.
Capital 35,000 Purchases 46,850
Building 18,750 Wages 2,500
Machinery 9,250 Electric charges 190
Debtors 7,000 Printing & Stationary 2,000
General exp. 800 Carriage inwards 850
Rent paid 3,710 Cash at bank 3,000
Drawings 650 Return outwards 110
Salaries 1,110 Cash in hand 1,800
Dis. Allowed 200 Sundry creditors 10,000
st
Stock (1 Jan) 16,500 Returns inwards 450
Sales 65,900 Bills payable 5,000
Closing stock as Rs.18,210

Prob:3 The following is the Trial Balance of Sri.Balaji on 30th June 2003
Debit Credit
Rs. Rs.
Capital 1,86,000
Drawings 15,735
Stock (1-7-02) 17,280
Sundry creditors 18,900
Sundry debtors 43,500
Machinery 60,000
Patents 22,500
Freehold land 30,000
Buildings 96,000
Sales 2,96,340
Purchase 1,22,025
Sales returns
Purchase returns
Cash in hand 1,620
Cash at bank 7,890
Insurance 1,800
General exp 9,000
Salaries 45,000
Wages 25,440
Factory fuel and power 14,190
Carriage on purchases 6,120
Carriage on sales 9,600
Rent 27,000
5,29,740 5,29,740
The following adjustments are to be effected:

• Stock on 30th June 2003 Rs.20,400
• 5% on sundry debtors is to be written off as bad
• Salaries for the month of June 2003 amounting to Rs.4,500 were unpaid.
• Insurance include a premium of Rs.510 on a policy expiring on Dec, 31st 2003.
• Rent Rs.3,000 is accrued but not received.
• Depreciate Machinery @ 10% and Patents @20%
You are required to prepare Trading, Profit & Loss A/c and the Balance Sheet as
on June 2003.

COMPANY ACCOUNTS
Prob:1 The following are the balances of XYZ Ltd. as on 31st March, 2005:
Debit Rs. Credit Rs.
Premises 30,72,000 Share capital 40,00,000
Plant 33,00,000 12% Debentures 30,00,000
Stock 7,50,000 Profit & Loss A/c 2,62,500
Debtors 8,70,000 Bills payable 3,70,000
Goodwill 2,50,000 Creditors 4,00,000
Cash and bank 4,06,500 Sales 4,50,000
Calls in arrear 75,000 General reserve 2,50,000
Interim dividend paid 3,92,500 Bad debts provision on
Purchases 18,50,000 1.4.04 35,000
Preliminary exp 50,000
Wages 9,79,800
General exp 68,350
Salaries 2,02,250
Bad debts 21,100
Debentures Int. paid 1,80,000
1,24,67,500 1,24,67,500
Adjustments
• Depreciate plant by 15%
• Write off Rs5,000 from Preliminary expenses.
• Half year‘s Debenture Interest due.
• Credit 5% provision on debtors for doubtful debts.
• Provide for Income Tax @ 50%
• Stock on 31st March, 2005 was Rs.9,50,000
Prepare Final Accounts of the company.
Prob:2 Sherry Engg. Ltd. have authorized capital of Rs.50 lakhs divided into 5,00,000
equity shares of Rs.10 each. Their books show the following balances as on 31st
Dec, 2006.
Equity share Capital 20,00,000
Discounts & rebates 30,000 (2,00,000 shares of Rs.10 each)

Carriage inwards 57,500 4% Debentures 5,00,000
Patterns 3,75,000 Bank overdraft 7,57,000
Rates, tax & insurance 55,000 Sundry creditors 2,40,500
Furniture & Fixtures 1,50,000 Sundry Creditors 2,40,500
Materials purchased 12,32,500 Sales 36,17,000
Repairs 46,500 Rent (cr) 30,000
Wages 13,05,000 Transfer fees 6,500
Coal & fuel 63,000 Profit & Loss A/c (cr) 67,000
Freehold land 12,50,000
Engg. Tools 1,50,000
Goodwill 3,75,000
Sundry Debtors 2,66,000

Bills receivables 1,34,500

Advertisement 15,000
Commission & brokerage 67,500
Business exp. 56,000
Bank Current A/c 45,500
Cash in hand 8,000
Debenture interest
(for half year 31.6.06) 10,000
Interest – banks 91,000
Preliminary exp. 10,000
Calls in arrear 10,000
Additional Information
The stock as on 31st Dec 2006 was Rs. 7,08,000. Outstanding wages Rs.25,000 and
outstanding business expenses Rs.25,000. Dividend declared @ 10% on paid-up
capital.
Charge Depreciation: Plant & Machinery @5%; Engg. Tools @ 20%; Patterns @ 10%;
Furniture & Fixtures @10%
Provide 2% on debtors as doubtful debts after writing off Rs.21,500 as bad debts.
Write off preliminary expenses Rs.5,000 and create debenture redemption reserve
Rs.50,000. Provide Rs.2,40,000 for income tax.
Prepare Final Accounts of this company.
Prob:3 On 31st March, 2005 the following balances appears in the books of the Alpha
Hotels Ltd.
Debit Rs. Credit Rs.
Interest on debentures 60,000 12% Mortgage debentures 5,00,000
Rates & Taxes 18,000 Share capital 40,00,000
Stock of provisions on General reserve 5,00,000
1.4.04 2,50,000 Unclaimed dividends 15,000
Purchase of provisions 25,00,000 Prov. For bad debts 50,000
Salaries and wages 7,50,000 Trade Creditors 2,50,000
Provident fund contbn.30,000 Expenses owing 80,000
Misellaneous exp. 50,000 Visitors‘ credit balances 10,000
Directors fees 24,000 Staff Provident fund 7,50,000
Managing director‘s P & L A/c 81,000
Salary 2,15,000 Income from boarding & lodging 51,00,000
Land 15,00,000 Misc. receipts 65,000
Buildings 50,00,000 Depreciation A/c:
Furniture & Fittings 15,00,000 Buildings 20,00,000
Linen, Crockery, Glassware
Cutlery and utensils 3,20,000 Furniture 10,00,000
Sundry debtors 3,50,000 Linen, Crockery etc. 1,80,000
Prepaid exps. 25,000
Advance against 15,00,000

purchase of Buildings
Cash in hand 15,000
Balance at bank 4,74,000
1,45,81,000 1,45,81,000
After taking the following information into account prepare the company‘s
balance sheet as on 31st March 2005 and its profit & loss a/c for the same period:
• Stock of provisions on 31st March, 2005 was valued at 3,00,000

• Provide Rs.1,00,000 for depreciation of furniture and fittings; Rs.20,000 for
depreciation of linen, crockery etc.
• Make a provision for taxation @50%
• The directors decide to recommend a dividend @10% on the paid up capital of the
company and transfer the remaining balance in profit & loss a/c to general reserve.
• The entire paid up share capital of the company consists of fully paid equity shares of
Rs.10 each.
Prob:4 (July 2005) X Ltd. was registered with a nominal capital of Rs.10,00,000 divided
into shares of 10 each, of which 40,000 shares had been issued and fully paid. The
following is the trial balance extracted on 31.12.2003.
Stock (1.1.2003) 1,86,420
Manufacturing wages 1,09,740
Manufacturing exp. 19,240
Purchases and sales 8,21,460 11,69,900
Repair to machinery 8,610
Carriage inwards 4,910
Carriage outwards 9,260
Transfer fees 40
Advance income tax 14,290
Bank loan 50,000
Interest on loan 1,250
Debtors and creditors 1,64,400 92,220
P/L A/c (1.1.2003) 8,640
Returns 12,640 9,810
Bank current A/c 6,860
Cash in hand 1,920
Lease hold factory 64,210
Plant & machinery 78,400
Loose tools 12,500
Share capital 4,00,000
Commission 8,640
Calls in arrears 1,000

Electricity charges 17,610

(factory Rs.14,210, office Rs. 3400) Directors
fees 12,000
Office salaries 13,000
Audit fees 1,250
Office furniture 5,000
Preliminary exp. 6,000
Good will 1,50,000
17,30,610 17,30,610
You are required to prepare trading and P/L A/c for the year ending 31.12.03 and a
balance sheet as at that date after taking in to consideration the following
adjustments.
• Write off 1/3 of preliminary exp.
• Depreciation is to charge at 20% on plant and machinery and 10% on furniture.
• Manufacturing wages Rs.1,890 and offices salaries Rs.1,200 are outstanding.
• Provide for interest on bank loan for 6 months.
• Stock was valued at Rs.1,24,840 and loose tools at Rs.10,000
• Reserve Rs.8,500 on debtors for doubtful debts.
• Reserve further Rs.3,120 for discount on debtors

Module-4
Analysis of Financial Statement
INTRODUCTION TO FINANCIAL ANALYSIS
Analysis means methodical classification of the data given in the financial

statements.
Interpretation means explaining the meaning and significance of the data so
simplified.
Financial Analysis is the process of identifying the financial strengths and
weakness of the firm by properly establishing relationships between the items of
the balance sheet and the profit and loss account.
Different tools of financial Analysis

The various tools used for the analysis of the financial statements of a firm are:
1. Comparative Financial Statements
2. Common size Financial Statements
3. Trend Analysis
4. Ratio Analysis.
ILLUSTRATION
The following illustration will be used for explaining the various tools of
financial analysis:
Illustration: From the following profit and loss Account and Balance sheets of
Swadeshi Polytex Ltd. For the year ended 31st December 1987 and 1988, you are
required to prepare a Comparative Income Statement and a Comparative Balance Sheet.
Profit and Loss Account (in lakhs of rupees)

1987 1988 1987 1988
Particulars Particulars
Rs. Rs. Rs. Rs.
To Cost of goods sold 600 750 By Net Sales 800 1000
To Operating Expenses:
Administrative expenses 20 20
Selling expenses 30 40
To Net Profit 150 190
800 1000 800 1000

Balance Sheet (in lakhs of rupees)

1987 1988 1987 1988
Liabilities Assets
Rs. Rs. Rs. Rs.
Bills Payable 50 75 Cash 100 140
Sundry Creditors 150 200 Sundry Debtors 200 300
Tax Payable 100 150 Stock 200 300
14% Debentures 100 150 Land 100 100
16% Preference Capital 300 300 Building 300 270
Equity Capital 400 400 Plant 300 270
Reserves 200 245 Furniture 100 140
1,300 1, 520 1,300 1,520
COMPARATIVE FINANCIAL STATEMENTS
A simple method for financial analysis is Comparative Financial

Statements. Comparative financial statements will contain items at least for two
periods. Changes – increases and decreases – in income statement and balance sheet
over period are shown.
Comparative Financial Statements can be prepared for more than two periods or
on more than two dates.
Illustration: From the illustration of M/s Swadeshi Polytex Ltd prepare

comparative income statement comparative balance sheet.
Swadeshi Polytex
Ltd.
Comparative Income Statement for the years ended 31st December 1987 and 1988
(in lakhs of rupees)
Absolute Absolute
increase(+) increase (+)
1987 1988 or decrease or
Particulars
Rs. Rs. (-) in 1988 decrease(-)
Rs. in 1988
%

Net Sales 800 1000 +200 +25

Less: Cost of goods sold 600 750 +150 +25
Gross Profit 200 250 +50 +25
Operating Expenses:
Administrative expenses 20 20 -- --
Selling expenses 30 40 +10 +33.33
Total Operating expenses 50 60 +20 +20
Net Profit 150 190 +40 +26.67

Absolute Absolute
increase(+) increase (+)
1987 1988 or decrease or
Rs. Rs. (-) in 1988 decrease(-)
Rs. in 1988
%
COMMON SIZE FINANCIAL STATEMENTS
Comparative Financial Statements can be prepared for more than two periods or
on more than two dates. However, it becomes very cumbersome to study the trend with
more than two periods data. Trend percentages are more useful in such cases.
Common size financial statements are those in which figures reported are
converted into percentages to some common base. In the income statement, the sale
figure is assumed to be 100 and all figures are expressed as a percentage of sales.
Similarly, in the Balance Sheet, the total of assets or liabilities is taken as 100 and all
figures are expressed as a percentage of this total.
Illustration: On the basis of the data given in the previous illustration pertaining to
Swadeshi Polytex limited, prepare the common size income statement and common size
balance sheet for the years ended 31st March 1987 and 1988.
Solution:

Swadeshi Polytex limited

Common Size Income Statement for the years ended 31st March 1987 and 1988
1987 1988
Particulars
Figures in %
Net sales 100 100
Less: Cost of goods 75 75
GROSS PROFIT 25 25
Operating Expenses:
Administrative Expenses 2.50 2.00
Selling Expenses 3.75 4.00
Total Operating 6.25 6.00
The above statement shows that though in absolute terms, the cost of goods has
gone up, the percentage of its cost to sales remains consistent at 75%. This is the reason
why the gross profit continues at 25% of sales. Similarly, n absolute terms the amount of
administrative remains the same but as percentage to sales it has come down by 0.5%.
Selling expenses have increased by0.25%. These all lead to net increase in net profit by
0.25%.
Swadeshi Polytex limited
Common Size Balance Sheet for the years ended 31st March 1987 and 1988
1987 1988
Particular % %
s 100 100
CURRENT ASSETS
Cash 7.7 9.2
Debtors 15.3
0 19.7
1
Stock 15.3
8 19.7
4
Total Current Assets 38.4
8 48.6
4
FIXED ASSETS 6 9
Building 23.0 17.7
Plant 23.0
7 17.7
6
Furniture 77.7 69.2
Land 7.7
0 6.6
1
Total fixed assets 61.5
0 51.3
8
4 1
TOTAL ASSETS 100.0 100.0
0 0
1987 1988
Particular % %
s 100 100
CURRENT LIABILITIES
Bills Payable 3.8 4.9
4 3
Sundry Creditors 11.5 13.1

Taxes payable 47.6 69.8
Total Current Liab ilities 23.0
9 27.9
6
LONG TERM LIABILITIES 7 5
14% Debentures 7.6 9.8
CAPITAL & RESERVES 9 6
16% Preference share capital 23.1 19.7
Equity share capital 30.7
0 26.3
2
Reserves 15.3
6 16.1
2
Total Shareholders' Funds 76.9
8 72.0
5
3 5
TOTAL LIABILITIES AND 10 100
CAPITAL 0
Interpretation
The percentage of current assets to total assets was 38.46 in 1987. It has gone up to
48.69 in 1988. Similarly the percentage of current liabilities to total liabilities
(including capital) has gone up from 2307 in 1987 to 27.95 in 1988. Thus the proportion of
current assets has increased by percentage of 10 as compared to increase in the
proportion of current liabilities, which is about 5%. This has improved the working
capital position of the company. There has been a slight deterioration in the debt-equity
ratio though it continues to be sound. The proportion of shareholders‘ funds in the total
liabilities has come down from 69.24% to 61.19% while that of debenture holders has
gone up from 7.69% to 9.86%.
TREND ANALYSIS
Trend percentages are immensely useful in making a

comparative study of financial statements for several years.
The method of calculating trend percentages involves the
calculation of percentage relationship that each item bears
to the same item in the base year.
Any year may be taken as the base year. It is usually the earliest
year. Any intervening year m
Each item of base year is taken as 100 and on that basis
the percentage for each item of the years is calculated.
These percentages can also be taken as Index Numbers
showing relative changes in the financial data resulting with
the passage of time.

Illustration: From the following data relating to the assets side of the balance sheet
of Kamadhenu Ltd., for the period 31st December 1985 to 31st December 1988 you
are required to calculate the trend percentage taking 1985 as the base year.
In lakhs of Rs. As on 31st

Assets December1986
1985 1987 1988
Cash 100 120 80 140
Debtors 200 250 325 400
Stock-in-trade 300 400 350 500
Others current 50 75 125 150
Land
assets 400 500 500 500
Building 800 1,00 1,20 1,50
Plant 1,00 1,00
0 1,20
0 1,50
0
TOTA 2,85
0 3,34
0 3,78
0 4,69
0
L 0 5 0 0
Solution
December 31st (Rupees in Trend percentages Base year

ASSETS
lakhs) 1986
1985 1987 1988 1985 1986
1985 1987 1988
Current Assets
Cash 100 120 80 140 100 120 80 140
Debtors 200 250 325 400 100 125 163 200
Stock-in-trade 300 400 350 500 100 133 117 167
Other Current 50 75 125 150 100 150 250 300
Assets
Total Current 650 845 880 119 100 129 135 183
Assets
Fixed Assets 0
Land 400 500 500 500 100 125 125 125
Building 800 100 120 150 100 125 150 175
Plant 100 0
100 0
120 0
150 100 100 100 150
Total Fixed Assets 0220 0250 0290 0350 100 114 132 159
0 0 0 0
Ratios for Financial Statement Analysis
A ratio gives the mathematical relationship between one variable and another.
Ratios are well known and most widely used tools for financial analysis.
The various types of ratios have been classified into the following categories:
1. Liquidity ratios
2. Turnover ratios
3. Profitability ratios

4. Ownership ratios
Earnings ratio
Dividend ratios
Leverage ratios -- Capital structure ratios
-- Coverage ratios
LIQUIDITY
RATIOS
Liquidity implies a firm‟s ability to pay its debts in the short term. This
ability can be measured by the use of liquidity ratios. Short term liquidity
involves the relationship between current assets and current liabilities.
1. Current Ratio
Current Assets
Current Ratio = ----------------------------
Current Liabilities
Current assets include cash, marketable securities, debtors, inventories, loans and
advances and prepaid expenses. Current liabilities include loans and advances taken,
trade creditors, accrued expenses and provisions.
2. Quick Ratio
This ratio is also termed as Acid Test Ratio.
Quick Assets
Quick Ratio = ------------------------
----- Current
Liabilities
Quick Assets = Current Assets – Inventories

TURNOVER RATIOS
3. Accounts Receivable Turnover Ratio
Accounts Receivable Ratio

(Debtors turnover ratio) = Net sales (or) Net Credit sales
Receivables Average Accounts Receivables
The average accounts receivable is obtained by adding the beginning receivables of

the period and the ending receivables and by dividing the sum by 2. The net sales or net
credit sales made by the firm should be taken for analysis.
4. Average Collection Period
The average number of days for which the debtors remain outstanding is
called the average collection period. It is calculated as under:
Average Collection period = 360

Average Accounts Receivables Turnover
. Inventory turnover ratio
The liquidity of a firm‘s inventory may be calculated by dividing the cost of gods sold,
by the firm‘s inventory. The invent ory or stock turnover, measures how fast the
inventory is moving through the firm and generating sales. It is calculated by the
following formula:
Inventory turnover = Cost of goods sold (or) Net sales
Average inventory Inventory
Where, average inventory is the average of the opening and closing

inventory in any year and inventory means only the closing inventory at the end of a
year.
6. Fixed Assets Turnover ratio
Fixed assets turnover ratio = Net sales (or) _Cost of goods sold
Fixed assets fixed sales
This ratio is supposed to measure the efficiency with which the fixed assets are
employed

7. Total Assets Turnover Ratio
Total Assets Turnover Ratio = Net sales

Total Assets.
Total assets are simply the balance sheet total at the end of the year.
PROFITABILITY RATIOS
8. Gross Profit Margin Ratio

Gross profit is the difference between the net sales and the cost of goods sold
Gross Profit Margin Ratio = Gross profit

Net sales
This ratio shows the margin left after meeting manufacturing costs.
9. Net Profit Margin Ratio
Net Profit Margin Ratio = Net profit

Net sales
It shows the earnings left for the shareholders (both equity and preference) as a
percentage of net sales.
10. Earnings power

Earnings is a measure of the operating profitability and is arrived at by the following
formula:
Earnings Power = Earnings before interest and taxes

Average total assets
EARNINGS RATIO
11. Earnings per share

The shareholders are concerned about the earnings of the firm in two ways. One is the
availability of the funds with the firm to pay their dividends and the other is to expand
their interest in the form of retained earnings that the firm can use to improve its
profitability. Earnings are expressed on a per share basis which is in short called EPS.
Earnings Per Share = Net Profit after Tax

Number of outstanding shares

12. P/E Ratio

It is calculated as under
Price – Earnings Ratio = Market Value per share

Earnings per share
13. Capitalization Rate

The capitalisation rate is just the inverse of the Price-Earnings Ratio.
Capitalisation Rate = Earnings per share

Market Value per share
LEVERAGE RATIOS
Leverage refers to the use of debt finance. While debt capital is a cheaper source of
finance, it is also riskier source of finance. Leverage ratios help in assessing the risk
arising form the use of debt capital.
14. Debt Ratio

The firm may be interested to know the proportion of interest bearing funded debt in
the capital structure. Then this debt ratio will be helpful. It is arrived at by
dividing the total debt (TD) by the capital employed (CE) or Net Assets (NA)
Debt Ratio = Total Debt (TD) = Total Debt
Total Debt (TD) + Net Worth (NW) Capital Employed
Note: 1. Capital Employed = Net Assets = Net Fixed Assets + Net Current Assets
2. Net Current Assets = Current Assets – Current liabilities excluding
interest bearing short term debt for working capital.
NFA + CA = NW + TD + CL
NFA + CA – CL = NW + TD
NFA + NCA = NW + TD
NA = CE
Because equality of capital employed and Net assets, the debt ratio can also expressed as
Debt Ratio = Total Debt (TD)
Capital Employed (CE)

15. Debt-Equity Ratio

This ratio indicates the relative contributions of creditors and owners
Debt – Equity ratio = Debt

Equity
CASH FLOW STATEMENT
MEANING
Cash flow statement is a statement, which describes the inflows and outflows of
cash and cash equivalents in an enterprise during a specific period of time. Such
statement takes into account the receipts and disbursements of cash. A cash flow
statement summarises the causes of changes in cash position of a business enterprise
between two dates.
CLASSIFICATION OF CASH FLOWS

The cash flow are classified into three main categories as:
1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities
1. CASH FLOW FROM OPERATING ACTIVITIES

Operating activities are the principal revenue – producing activities of the
enterprise and other activities that are not investing or financing activities. Cash flow
from operating activities is principally derived from the principal revenue-producing
activities of the enterprise.
The cash inflows from operating activities include receipts from customers for sales
or goods and services (including collection from debtors). Cash outflows from
operating activities include payments to suppliers for purchase of materials and for
services, payments to employees for services and payments to governments for tax duties.
2. CASH FLOW FROM INVESTING ACTIVITIES

Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents. It involves making and collecting of loans
and acquiring and disposing of debt and equity instruments and fixed assets.
The cash inflows from investing activities are receipts from collection of loans,
receipts from sales of shares, debt or similar instruments of other enterprises, receipts
from sales of fixed assets, and interest and dividends received on loans and investments.
Cash outflows from investing activities are disbursements of loans, payments to acquire
shares, debt or similar instruments of other enterprises, and payments (including advance
and down payments) to acquire fixed assets.

3. CASH FLOW FROM FINANCING ACTIVITIES

Financing activities are the activities that result in change in the size and consumption
of the owners capital (including preference share capital in case of a company) and
borrowings of the enterprise.
Cash inflows from financing activities are proceeds from issuing shares or other
similar instruments, debentures, mortgages, bonds and other short or long-term
borrowings. Cash outflows from financing activities are the payments of dividends,
payments to acquire or redeem shares or other similar instruments of the enterprise,
repayments of amounts borrowed, principal payments to creditors who have extended
long-term credit, and interest paid.
Cash flow statement for the year ended
Particula Rs. Rs.

rs
Cash flows from Operating Activities
Eithe
r xxxx
Cash receipts from customers x
xxxx
(xxx
(-) Cash paid to customers
x)
Cash generated from operations xxxx
(xxx
(-) Income tax paid x)
Cash flow before extra ordinary items xxxx xxxx
Extraordinary items x
xxxxx
Net cash from (used in) operating activities x
[List of individual items such as xx
depreciation, foreign exchange OR loss,Net
loss on x
profit before tax and extraordinary items
sale of fixed assets, interest Income,
Adjustments for non-cash and non- xxxxx
dividenditems
operating income, interest expense etc.]
Operating profit before working capital changes
xxx
Adjustments for changes in current assets and xxx
Current liabilities ( list of individual x
items) xxx
(xx
Cash generated from (used in) operations before tax x
x)
(-) Income tax paid xxx xxxx
x x
Cash flow before extra ordinary items
Extraordinary items xx
Net cash from (used in) operating activities x
xx
x
xx
x

Cash flow from Investing Activities

Individual items of cash inflows and cash outflows from investing xxxx
activities xxx
[Such as purchase/sale of fixed assets, purchase or sale of x
investments, Interest received, dividend received etc.] xxx
Net cash from (used in) investing activities x
xxx xxx
xxxx
Cash flows from Finance Activities x x
xxxx
Individual items of cash inflows and cash outflows from
x
financing activities [Such as proceeds from issue of shares,
xxxx
long-term borrowings, repayments of long-term borrowings, x
Receipts
interest paid, dividend from sales of investments and fro collection
paid etc.
of loans
Net cash from (used in) investing activities
Net Increase (Decrease) in cash and cash equivalents
INVESTING
ACTIVITIES
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Payments for
Receipts from interest purchase of
and dividends on loans investments
and investments and making
loans
Receipts from Payments

issuance of share for
capital dividends
on share
capital
FINANCING Payments for

Receipts from principal on
issuance of debentures ACTIVITIES debentures
and other
borrowings
Payments for
Receipts from other interest on
long-term borrowings debentures
and other
borrowings

Module-5
Accounting Standards and IFRS:
The Accounting standards bring uniformity in the preparation and
presentation of financial statements and aids in comparison of differen
Procedure for framing Accounting Standards
The International Accounting Standards are issued by the IASC
These Standards are received by ICAI assigned to ASB
The Accounting standards are issued under the authority of the council of
ICAI. So far the ASB of ICAI has issued 28 Accounting standards as shown
below
Mandatory for Accounting period beginning on or after
Disclosure of Accounting Policies 1.4.1991

AS-2(Revised) Valuation of inventories 1.4.1999
AS-3(Revised) Cash Flow Statements 1.4.2001
Contingencies and Events occurring after
AS-4(Revised) 1.4.1995
Balance Sheet Date
Net Profit or Loss, prior period items and
AS-5(Revised) 1.4.1996
changes in Accounting policies
AS-6(Revised) Depreciation Accounting 1.4.1995
AS-7(Revised) Accounting for construction contracts 1.4.2003
AS-8 Accounting for Research and Development 1.4.1991
AS-9 Revenue Recognition 1.4.1991
AS-10 Accounting of Fixed Assets 1.4.1991
Accounting for the effect of changes in foreign
AS-11(Revised) 1.4.1995
exchange rates
AS-12 Accounting for Government Grants 1.4.1994
AS-13 Accounting for Investments 1.4.1995
AS-14 Accounting for Amalgamations 1.4.1994
Accounting for retirement benefits in the
AS-15 1.4.1995
financial statements of employers
AS-16 Borrowing costs 1.4.2000
AS-17 Segment reporting 1.4.2001
AS-18 Related Party Disclosures 1.4.2001
AS-19 Leases 1.4.2001
AS-20 Consolidated Financial Statements 1.4.2001
AS-21 Earnings per share 1.4.2001

AS-22 Accounting for taxes on income 1.4.2001

Accounting for investments in consolidated
AS-23 1.4.2002
finance statements
AS-24 Discounting operations 1.4.2004
AS-25 Interim financial reporting 1.4.2002
AS-26 Intangible assets 1.4.2003
AS-27 Financial reporting of interest in joint ventures 1.4.2002
AS-28 Impairment of Assets 1.4.2004
Provisions, Contingent Liabilities and
AS-29 1-4-2004
Contingent Assets
IFRS vs. Indian Accounting Standards
The International Financial Reporting Standards refer to the reporting standards of

finance as set by the international accounting standards. Both IFRS and Indian
Accounting Standards have different accounting standards. However, with the
growing market trend, the need of a common set of accounting standards was felt by
all. Hence, IFRS is to be followed. However, with the differences in the standards
existing between both the bodies, a careful handling is to be carried out. Following
are few changes that will be made in case IFRS is issued and made compulsory:
•AS-1: Disclosure of Accounting principles

IFRS-/IAS-1: Adoption of international financial reporting
standards/presentation of financial statements.
•AS-3:cash flow statements
IAS-7: cash flow statements
•AS-4: events after the balance sheet date
IAS-10: events recorded after the balance sheet date
• AS-5: changes in accounting policies and accounting errors
IAS-8: prior period changes and accounting policies and errors changes
•AS-6 and AS-10: Depreciation and fixed assets
IAS-16: plants, property and equipment‘s
• AS-9: revenue recognition
IAS-18: revenue
The above mentioned standards were some of the examples to the changes in accounting
standards of both the bodies. Not only that, IFRS deals with the balance sheet in the reverse
manner as ours. The first emphasis is laid on to the assets in the order of liquidity. The next
recorded details are that of the liabilities starting with the borrowings. Then finally the next
recorded details are that of the equity capital which is completely opposite according to the
Indian Accounting standards
Module-VI
Emerging issues in Accounting
Corporate Governance
Corporate governance refers to the system of structures, rights, duties, and obligations by
which corporations are directed and controlled. The governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation (such
as the board of directors, managers, shareholders, creditors, auditors, regulators, and other
stakeholders) and specifies the rules and procedures for making decisions in corporate affairs.
Governance provides the structure through which corporations set and pursue their objectives,
while reflecting the context of the social, regulatory and market environment. Governance is a
mechanism for monitoring the actions, policies and decisions of corporations. Governance
involves the alignment of interests among the stakeholders.
There has been renewed interest in the corporate governance practices of modern corporations,
particularly in relation to accountability, since the high-profile collapses of a number of large
corporations during 2001–2002, most of which involved accounting fraud; and then again after
the recent financial crisis in 2008. Corporate scandals of various forms have maintained public
and political interest in the regulation of corporate governance. In the U.S., these include Enron
and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal
government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in
corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the
eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries
stimulated increased regulatory interest
The term corporate governance has come to mean two things.
* the processes by which companies are directed and controlled.
* a field in economics, which studies the many issues arising from the separation of
ownership and control.
In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines
corporate governance as 'an internal system encompassing policies, processes and people,
which serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity. Sound
corporate governance is reliant on external marketplace commitment and legislation, plus a
healthy board culture which safeguards policies and processes'.
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and the
community at large.
Issues involving corporate governance principles include:
* oversight of the preparation of the entity's financial statements

* internal controls and the independence of the entity's auditors
* review of the compensation arrangements for the chief executive officer and other
senior executives

Human Resource Accounting
Human Resource Accounting (HRA) means to measure the cost and value of the people
(i.e. of employees and managers) in the organisation. It measures the cost incurred to
recruit, hire, train and develop employees and managers.
HRA also finds out the present economic value of its employees and managers. After
measuring the cost and value of its employees and managers, the organisation prepares a
report. This report is called HRA Report. It is shown to the top level management. It can
also be shown to the employees, managers and outside investors.
What is Human Resource Accounting?
Human Resource Accounting is the process of identifying and measuring data about
Human Resources and communicating this information to the interested parties. It is an
attempt to identify and report the Investments made in Human Resources of an
organisation that are currently not accounted for in the Conventional Accounting
Practices.
Methods of Human Resource Accounting
Quite a few Models have been suggested in the past for the Human Resource
Accounting and these can be classified into 2 parts each having various Models. Some of
the Important ones are:-
A. Cost Based Models
I. Capitalisation of Historical Costs Model
II. Replacement Costs Model
III. Opportunity Cost Model
B. Value Based Models
I. Present Value of Future Earnings Model/ Lev and Schwartz Model
II. Reward Valuation Model/ Flamholtz Model
III. Valuation on Group Basis
A. COST BASED MODELS
I. Capitalisation of Historical Costs
As per this Method of HR Accounting, the sum of all costs related to Human Resources (i.e.

Recruitment, Acquisition, Formal Training, Informal Training, Informal

Familiarisation, experience and development) is taken together to represent the value of the
human resources.
II. Replacement Costs
The Historical Cost Method was highly criticised as it only takes into account the Sunk
Costs which are irrelevant for Decision Making. Thus, a new model for Human Resource
Accounting was conceptualised which took into the account, the costs that would be
incurred to replace its existing human resources by an identical one.
1. Individual Replacement Costs – which refers to the cost that would have to be
incurred to replace an individual by a substitute who can provide the same set of
services as that of the individual being replaced
2. Positional Replacement Costs – which refers to the cost of replacing the set of
services referred by an incumbent in a defined position
III. Opportunity Cost Model
This model was advocated by Hekimian and Jones in the year 1967 and is also known as
the Market Value Method.
This method of measuring Human Resources under this Model is based on the concept of
opportunity cost i.e. the value of an employee in its alternative best use, as a basis of
estimating the value of human resources. The opportunity cost value may be established
by competitive bidding within the firm, so that in effect, managers bid for any scarce
employee. A human asset therefore, will have a value only if it is a scarce resource, that is,
when its employment in one division denies it to another division.
B. ECONOMIC VALUE MODELS

I. Present Value of Future Earnings Model
This Model of human resource accounting was developed by Lev and Schwartz in the
year 1971 and involves determining the value of human resources as per the present value
of estimated future earnings discounted by the rate of return on Investment (Cost of
Capital).
II. Reward Valuation Model/ Flamholtz Model
Flamholtz advocated that an Individual‘s Value to an organisation is determined by

theservices he is expected to render. This model of Human Resource Accounting is
an improvement to the ―Present Value of Future Earnings Model‖ as it takes into account

NATURE AND INCIDENCE OF WINDOW DRESSING

Window Dressing
It is the act or instance of making something appear deceptively attractive or
favourable; something used to create a deceptively attractive or favourable impression.
The act or practice of giving something superficial appeal by skilful presentation.
Nature of Window Dressing
1. Inflate the sales from the current year by advancing the sales from the following
year.
2. Alter the ‗other income‘ figure by playing with non-operational figures like sale
of fixed assets.
3. Fiddle with the method and rate of depreciation. (A switch may be effected from
the written down value method to the straight line method or vice versa.)
4. Change the method of stock valuation from, say, direct costing to absorption, to
minimize the cost of goods sold.
5. Capitalise certain expenses like research and development costs and product
promotion cost, that are ordinarily written off in the profit and loss account.
6. Defer certain discretionary expenditures (like repairs, advertising, research and
development) to the following year.
7. Make inadequate provision for certain known liabilities (gratuity etc.,) and treat
certain liabilities as contingent liabilities
8. Make extra provisions during prosperous years and written them back in lean
years.
9. Use totally unacceptable accounting practices.
10. Revalue assets to create the impression of substantial reserves.

Module-VII
Fundamentals of Taxation
VARIOUS HEADS OF INCOME
All income shall be classified under the following heads of income for the purpose of
charge of income tax and computation of total income.
Income from Salaries
Income from house property
Profits and gains of business or profession
Income from Capital gains
Income from other sources
Income from Salaries:
Under section 15, the following incomes are chargeable under the head „salaries‟
Any salary due from an employer or former employer to an assessee in the
previous year, whether paid or not;
Any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, though not due or before it became due to him.
Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer of former employer, if not charged to income tax for any earlier previous year.
Definitions: Under section 17 of the Act the following have been defined.
Salary
Perquisites
Profits in lieu of salary
Salary [Sec. 17(1)]: Salary includes

Wages
Any annuity or pension
Any gratuity
Any fees, commission, perquisites or profits in lieu of or in addition to any salary or
wages.
Any advance of salary, but not advance for purchasing a car, cycle, scooter or a house;
etc
Any payment received by an employee in respect of any period of leave not availed
of by him.

The annual accretion to RPF to the extent of the following

o Employer‘s contribution in excess of 12% of salary
o Interest on the balance in the RPF credited in excess of 9.5%
The accumulated transferred balance from URPF account to a RPF account to the extent of
it is chargeable.
The contribution made by the central government or any other employer in the
previous year to the account of an employee under a pension scheme referred to in sec
80CCD.
Deductions: The income chargeable under the head salaries shall be computed after
making the following deductions from gross salary: -
Deduction for entertainment allowance
Deduction in respect of professional tax
Entertainment Allowance [sec. 16(ii)]

Entertainment allowance is not eligible for exemption but it only qualifies for
deduction. Therefore, entertainment allowance is first included in gross salary and then
deduction is allowed under section 16(ii). This deduction is available only in case of
government employees and not in case of other employees. The deduction allowable in the
case of government employees is to the extent of least of the following: -
Rs. 5,000; or
1/5 of salary; or
Actual entertainment allowance received for the previous year.
Salary for the purpose of entertainment allowance deduction means only basic
salary.
Professional Tax [sec. 16(iii)
Deduction is allowed in respect of any sum paid by the assessee on account of a tax on
employment. In case, if the professional tax is paid by the employer on behalf of the
employee, the amount so paid should be included in gross salary as a perquisite and then
deduction under section 16(iii) can be claimed.
Death-cum-retirement Gratuity: [Sec. 10(10)]

In case of Government employees: Any death cum retirement gratuity received by
government employees is fully exempt from tax.
In case of non-government employees covered by the payment of gratuity Act,
1972: Any gratuity received by a non-government employee who is covered by the
payment of gratuity act of 1972, is exempt from tax to the extent of least of the
following:
(a) Rs. 3,50,000; or
(b) 15 days salary (last drawn salary *15/26)
based on last drawn salary for each completed year of
service or part of the year in excess of 6 months; or

Salary for this purpose means basic salary and dearness allowance
In case of non- government employees who are not covered by the payment of
gratuity Act of 1972
Any gratuity received by any other employee on retirement, death, termination or
resignation is exempt from tax to the extent of the least of the following;
(a) Rs. 3,50,000; or
(b) Half month‘s salary (on the basis of last 10 months average immediately
preceding the month in which any such event occurs) for each completed year
of service (fraction to be ignored); or
(c) Gratuity actually received.
Salary for this purpose means basic salary, dearness allowance-if provided in terms
of employment and commission as a percentage of turnover achieved by the
employee.
Note:
(a)Gratuity received during the period of service is always taxable

(b)Where gratuity is received by an employee from 2 or more employers in the same
previous year then the aggregate amount of gratuity exempt form tax cannot exceed
the above limits prescribed.
(c) In case where the employee has received gratuity in any earlier year from his
former employer and also receives gratuity from another employer in a later
year, the limit of Rs. 3,50,000 will be reduced by the amount of gratuity
exempt from tax in any earlier year.
Commuted Pension [Sec 10(10A)]

Uncommuted pension refers to the pension periodically received by the employee.
Commuted pension means lump sum amount taken by commuting the pension or part
of the pension. Where an employee commutes, under pension rules, part of pension,
the remaining portion will periodically received.
Uncommuted pension is taxable as salary u/s 15 in the hands of both government
and non-government employees.
Any commuted pension received by a government employee is wholly exempt
from tax. CBDT has clarified by circular number 623-dated 6-1-92 that judges of the
High courts and Supreme courts are also entitled to the exemption.
A non-government employee can avail exemption to the following extent
(1) If the employee is in receipt of gratuity, 1/3 of the full value of the pension.
(2) If the employee is not in receipt of gratuity, ½ of the full value of the pension.

Leave Salary [sec. 10(10AA)]

Government employee: Any amount received as cash equivalent of leave in respect of
period of earned leave to his credit at the time of retirement whether on
superannuation or otherwise, is exempt from tax
Non-Government Employees: Leave salary is exempt from tax to the extent of least of the
following;
Cash equivalent of the leave (on the basis of average of last 10 months‘ salary) to
the credit of the employee at the time of retirement (calculated at 30 days credit for each
completed year of service); or
10months‘ salary (on the basis of average of 10 months‘ salary); or
The amount specified by the government --- Rs. 3,00,000
Leave encashment actually received.
Even in the case of voluntary retirement by way of resignation, leave salary received
qualifies for exemption.
Salary for this purpose means basic salary, dearness allowance if provided in terms of
employment and commission as a percentage of turnover achieved by the employee.
Note:
1. Leave salary received during the period of service is taxable
2. Where leave salary is received by an employee from 2 or more employers in the same
previous year then the aggregate amount of leave salary exempt from tax cannot exceed the
limits prescribed.
3. In case where the employee has received cash equivalent of earned leave in any earlier
year from his former employer and also receives leave salary from another employer in a
later year, the limit of Rs. 3,00,000 will be reduced by the amount of gratuity exempt from
tax in any earlier year.
ALLOWANCES
The various allowances, which are allowed from the employer to the employees, are
classified under three categories
Fully taxable Allowances
Partly taxable allowances or allowances exempted up to specified limit.
Fully exempted allowances.
Fully Taxable Allowances.
(1)Dearness allowance or dearness pay
(2)Medical allowances
(3)Tiffin allowance
(4)Servant allowance
(5)Non-practicing allowance
(6)Warden allowance and proctor allowance
(7)Deputation allowance
(8)Overtime allowance

Partly taxable allowances or allowances exempted up to specified limit:
(1) House Rent Allowance [sec. 10(13A)]

House rent allowance granted to an assessee by his employer is exempt from tax to the
extent of least of the following
(a) Excess of rent paid over 10% of salary, or
(b) If the accommodation is situated in Mumbai, Kolkatta, Chennai and Delhi---
50% of salary
If the accommodation is situated at any other places--- 40% of salary
(c) Actual HRA received for the relevant period

Exemption is not available to an assessee who lives in his own house; or in a house for
which he does not pay any rent.
Salary for this purpose means basic salary, dearness allowance if provided in terms of
employment and commission as a percentage of turnover achieved by the employee
calculated on due basis for the relevant period.
Relevant period means the period during which the said accommodation was occupied by
the assessee during the previous year.
(2) Any allowance granted to an employee working in any transport system to meet his
personal expenses during his duty performed in the course of running of such transport
form one place to another place is exempt from tax to the extent of 70% of such
allowance or Rs. 6,000 per month, whichever is less
(3) Transport allowance: any transport allowance granted to an employee to meet his
expenditure for the purpose of commuting between the place of his residence and place of
his duty to the extent of Rs. 800 per month. The same is exempted from tax up to Rs.
1,600 per month if it is given to an employee who is blind and/or physically handicapped.
(4) Children Education Allowance: It is exempt from tax up to Rs. 100 per month per
child up to a maximum of 2 children.
(5) Children Hostel Allowance: It is exempt from tax up to Rs. 300 per month per child
up to a maximum of 2 children
Fully Exempted Allowances:
(1) Foreign allowance

(2) Sumptuary allowance to High court and Supreme court judges
(3) Allowances from U.N.O

PERQUISITES
Perquisites mean any casual emoluments fee or profit attached to an office or position in
addition to salary or wages.It is a personal advantage--- something that benefits a man by
going into his own packet. It does not cover a mere reimbursement of expenditure.
The perquisites may in cash or in kind or in the form of benefits and amenities, whether
they are convertible into money or not. The employer may provide it voluntarily or under
service contract.
For income tax purposes, the perquisites have been divided into three categories.
Tax-free perquisites
Taxable perquisites
Perquisites taxable under specified cases.
Tax-free Perquisites: The value of the following perquisites shall not be included in the
salary income of an employee.
Medical benefits
Tea and snacks or free food or beverages provided in office or factory (work place)
or through paid vouchers where are nor transferable and usable only at eating joints.
Facility of motor car(s)
Residential accommodation provided at site
Facility of club or health club and similar facilities
Expenses on telephone including mobile phone
Employer‘s contribution to staff group insurance scheme
Scholarship to employees or their children paid by the employer
The facility of conveyance provided by the employer from residence to place of
employment and vice versa
Refreshment courses, etc. If the employer pays fees for an employee taking refresher
course or management course in order to enable to the employee to perform his services
more efficiently. Such expenses are treated as scholarship.
Free rations to armed forces personnel
Facility of guest house or holiday home‘
Welfare expenses
Entertainment expenses
Free or concessional ticket provided by the employer (engaged in the business of
transport) for private journeys of the employee or his family members.
Any perquisites paid or allowed by the government to its employees who are posted
abroad.
The value of rent-free official residence and the value of conveyance facilities
provided to a judge.
The value of rent-free furnished residence (including maintenance thereof)
provided to a minister, an officer of parliament or a leader of the opposition in parliament.
Gifts in kind laptops and computers provided by the employer for personal use of
employees or any member of his house hold

Interest free or concessional loan, if the amount loan in aggregate does not exceed
Rs. 20,000 during the previous year.
Transfer without consideration to an employee of a movable asset (other than
computers, electronic items and car) by the employer after using it for ten years or more.
Periodicals and journals required for discharge of work
INCOME FROM HOUSE PROPERTY
Basis of Charge: The annual value of property consisting of any building or lands
appurtenant thereto of which the assessee is the owner shall be chargeable to income tax
under this head. However, the said excludes the property used by the assessee for the
purpose of any business or profession carried on by him and profits of which are
chargeable to income tax under the head profits and gains of business or profession.
INCOME FROM OTHER SOURCES

This is a residuary head of income and sweeps all such taxable income, profits and gains
which are not chargeable to income tax under any of the first four heads specified above.
It is important to note that where there is a specified head for the income in question and a
specified section providing for the head, such income cannot be assessed under this
According to section 56(2), in a particular, the following incomes shall be

chargeable to income tax under the head income from other sources.
Dividend
Lottery, crossword Puzzles, etc.
Interest on securities.
Hire of machinery, plant, etc.
Hire of machinery, plant and buildings nor separately.
Gift. Where any sum of money, the aggregate value of which exceeds Rs.
50,000, is received without consideration, by an individual or a HUF, in any
previous year form any person or persons on or after 01-04-2006, the value of
whole of the aggregate value of such sum.
INCOMES CHARGEABLE TO TAX UNDER THE HEAD “PROFITS AND GAINS

OF BUSINESS OR PROFESSION” [Section 28]
(1) Profits and gains of any business or profession carried on by assesses at any time
during previous year.
(2) Compensation or other payment due to or received by any person –
(a) managing whole or substantially whole of affairs of an Indian company or any other
company in India at or in connection with the termination of his management or
modification of the terms and conditions relating thereto;
(b) on termination or modification of contract of his agency in India;
(c) For vesting the management of any property or business in Government or any
corporation owned or controlled by the Government.
(3) Income derived by trade, professional or other similar association from specific
services rendered to its members. This clause is an exception to general rule
that income from mutual activity is not chargeable to tax.
(4) Profits on sale of import licence; or Profits on transfer of Duty Entitlement Pass Book
(DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM Policy;
(5) Cash assistance against exports from Government of India and Duty
Drawback;
(6) Value of any benefit or perquisite, whether convertible into money or not arising from
exercise of business or profession;
(7) Interest, salary, bonus, commission or remuneration due to or received by partner
from the firm. Such income is taxable in hands of partners to the extent it is allowed as
deduction in hands of firm. Any amount not allowed as deduction to firm under Section
40(b), is not taxable in the hands of partner.
(8) Any sum received or receivable, in cash or in kind, under an agreement for –
(a) Non-competition i.e. not carrying out any activity in relation to any business; or
(b) Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, license,
franchise or any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provision of
services.
Exceptions : However, sum received for transfer of business, or transfer of right to

manufacture, produce or process any article/thing, which is chargeable under ‗Capital
Gains‘ is not taxable under this Section.
(9) Any sum (including bonus) received under Keyman Insurance Policy.

INCOME FROM CAPITAL GAINS
1. Chargeability u/s 45
Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year
in which transfer take place under the head "Capital Gains".
Definitions
Transfer: Sec. 2(47): Transfer in relation to a capital asset includes sale, Exchange, or
relinquishment of the asset or extinguishment of any rights therein or the compulsory
acquisition thereof under any law or conversion of the asset by the owner in stock-in-
trade of a business carried on by him or the maturity or redemption of a zero coupon
bond.
Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating,
movable, immovable, tangible or intangible) whether or not connected with business or
profession.
Exclusions —
a. Stock-in-trade
b. Personal effects of the assessee c.
Agricultural land in a rural area
d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds,
1980 issued by the Central Government
e. Special Bearer Bonds, 1991 issued by the Central Government.
f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999
Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not
more than thirty six months immediately preceding the date of its transfer. However, in
the following cases, an asset, held for not more than twelve months, is treated as short-
term capital asset—
a. Quoted or unquoted equity or preference shares in a company Circular No. 495

dated 22.9.1987 explaining amendments by Finance Act, 1987 whereby unquoted
shares of a private limited company also if held more than 12 months falls in the
category of LTCG. Also Refer the Judgment in 120 TTJ 699 for unquoted shares held
for less than 36 months.
b. Quoted Securities

c. Quoted or unquoted Units of UTI
d. Quoted or unquoted Units of Mutual Funds specified u/s. 10(23D)
e. Quoted or unquoted zero coupon bonds
Long-term capital asset: Sec. 2(29A): means a capital asset which is not a short-term
capital asset
2. Year of chargeability to tax
Capital gains are generally charged to tax in the year in which ‗transfer‘ takes place.
Exceptions —
a. Sec. 45(1A) — Insurance Claim — In the year of receipt.
b. Sec. 45(2) — Conversion of capital asset into stock-in-trade — In the year of

actual sale of the stock.
c. Sec. 45(5) — Compulsory acquisition — When consideration or part thereof is

first received.
Exempt Capital Gains under Section 10
10(33) : Transfer of US 64 on or after April 1, 2002
Compulsory acquisition of Urban Agriculture Land where

10(37) :
consideration is received after March 31, 2004.
Long-term capital gain arising on transfer on or after
10(38) : October 1, 2004 of equity shares or units of equity oriented
mutual fund and the STT is paid at the time of transfer
Income Tax Deductions u/s 80C
One can get following income tax deductions with qualified investments u/s 80C are
as appended below:

Section Details Quantum of Deduction

Life Insurance Premium,
PPF, NSC, EPF, 5-year
Fixed Deposit, Post Office Maximum Rs 100000
Senior Citizen Saving
80C Scheme, ELSS, Tuition
Fees including Admission
fees or college fees paid for
full time education of any
two children‘s, Housing
Loan Principal Repayment
Income Tax Deductions u/s 80CCC
One can get following income tax deductions with qualified investments u/s 80CCC
and some are as appended below:
Profit in lieu of salary
Profit in lieu of salary is a part of salary income and accordingly it is taxable under
the head ―Income from Salary‖. Profit in lieu of salary means any payment made
to an employee on lieu of salary even if the same has no connection with the profits
of the employer. The word ‗profit‘ is used only to convey any ‗advantage‘ or ‗gain‘
by receipt of any payment by the employee. As per the Income Tax Act, 1961
―Profit in lieu of salary‖ includes the following:
1. Any compensation due to or received by an assessee from his employer or

former employer at or in connection with the termination of his employment or the
modification of the terms & conditions relating thereto is taxable as profit in lieu of
salary. The recipient may however claim exemption u/s 10(10B) or 10(10C), if eligible.
2. Any payment (except to the extent it is specifically exempt u/s 10) due to or received
by an employee from his employer or former employer or from a provident fund, or other
fund (to the extent it does not consist of contributions made by the assessee or interest
thereon) which may otherwise be taxable as income from salary. It may be noted that the
assessee is entitled to exemption to the prescribed extent in respect of the following
payments received by him-
a. Payment of Gratuity u/s 10(10);
b. Payment of commuted pension u/s 10(10A);
c. Payment of retrenchment compensation u/s 10(10B);

d. Payment from statutory provident fund and public provident fund u/s 10(11);
e. Payment from recognized provident fund u/s 10(12);
f. Payment from an approved superannuation fund u/s 10(13);
g. Payment of House Rent Allowance (HRA) u/s 10(13A).
3. Payment from unrecognized provident fund or superannuation fund to the extent it

does not consist of contribution by the employee or interest on employee‘s contribution
(at the time of payment to the employee).
1. Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy is taxable as ―profit in lieu of salary
Income Tax slab
For Individuals:
Income Slabs Tax Rates

1 Where the total income does not NIL
exceed Rs. 2,00,000/-.
2 Where the total income exceeds 10% of amount by which the total income
Rs. 2,00,000/- but does not exceeds Rs. 2,00,000/-
exceed Rs. 5,00,000/-.
3 Where the total income exceeds Rs. 30,000/- + 20% of the amount by
Rs. 5,00,000/- but does not which the total income exceeds Rs.
exceed Rs. 10,00,000/- 5,00,000/-.
4 Where the total income exceeds Rs. 130,000/- + 30% of the amount by
Rs. 10,00,000/- which the total income exceeds Rs.
10,00,000/-.
Surcharge : Nil
Education Cess : 3% of the Income Tax.

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Accounting for Managers 14MBA13

Subject Code: 14MBA13 IA Marks: 50

Module 2: (10 Hours)

Module 3: (12 Hours)

Module 4: (14 Hours)

Dept. of MBA-SJBIT Page 1

Module -2 Preparation of books of 10-20

Module 3 Preparation of Financial 21-27

Module 4 Analysis of Financial 28-40

Module 5 Accounting Standards and 41-42

Module 6 Emerging issues in 43-49

Module 7 Fundamentals of Taxation 47-58

Dept. of MBA-SJBIT Page 2

Dept. of MBA-SJBIT Page 3

Importance or Uses of Accounting

Dept. of MBA-SJBIT Page 4

Accounting covers the following activities:

1. Identifying the transactions and events

2. Measuring the identified transactions and events

Dept. of MBA-SJBIT Page 5

Accounting Conventions & Concepts

Accounting Period Concept

Basic Principles of Accounting

Dept. of MBA-SJBIT Page 6

Revenue Recognition Principle

Historical Cost Principle

Full Disclosure Principle

Dept. of MBA-SJBIT Page 7

Accounting standard is a selected set of accounting policies or broad guidelines regarding

Dept. of MBA-SJBIT Page 8

Security Analysis and Advisers

Employees and Trade Unions

Suppliers and Other Trade Creditors

Govt. & Regulatory Agencies

Dept. of MBA-SJBIT Page 9

Debit & Credit Aspects

Golden Rules of Accounts:

-- Credit the Giver

-- Credit what goes out

Dept. of MBA-SJBIT Page 10

Procedures to enter Journal Entries

1. First find out, which two accounts belongs to a particular transaction.

Example:2 (Jan 2005)

Dept. of MBA-SJBIT Page 11

Cash in hand 1500

Procedures to post entries from Journal book to Ledger book

1. List out the no. of accounts in the journal book.

2. Open separate ledger account for each account.

Dept. of MBA-SJBIT Page 12

5. Balance the amount in both the sides.

Rules Debit : All assets, expenses & losses

Dept. of MBA-SJBIT Page 13

3. Purchases Return book

4. Sales Return book

5. Bills Receivable book

6. Bills Payable book

Dept. of MBA-SJBIT Page 14

Sales Returns Book

5. Bills Receivable Book