Fma Mid Sem Combine Slides

Financial & Management
Accounting (FMA)
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Profit Maximization : Propositions
Operating Profit Maximization =

f(Revenue Maximization or Cost Minimization or Revenue
Maximization is greater than cost minimization.
If VC > 60% of Revenue, cost minimization may result in higher

profit than revenue maximization and vice-a-versa.
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From Business Strategy to Business Activities to Financial
Statements to assessing business performance (maximizing
operating profit)
Market (industry/ AMNS’s You need mechanism to account for and

Strategy
AMNS’s Business
sector) Structure & Activities convert business activities into report?

Govt Policies
Revenue
AMNS’s Vision & and Cost
Mission
Financial Statements for
Accounting System Output
internal and external
(Business Language)
stakeholders
GAAP
1. Statement of income and
expenditure,
2. Statement of Sources &
Application of funds
3. Cash Flow Statement
Financial Statement Analysis &

Interpretation (Mgt Accounting)
7/22/2023 3
FMA - Concept
What is Financial Accounting?
Recording and reporting monetary transactions (Financial

Transactions) as per statutory requirements (Generally Accepted
Accounting Principles- GAAP).
Outcomes: Financial Statements (Statement of Income and

Expenditure, Statement of Sources & Application of Funds and
Cash Flow Statement)
Users: Internal and External

Major Learnings from Financial Accounting
 Understood Concepts of accounting and rationale behind the

concepts.
 Financial Accounting enabled to record (measure) revenues and
expenses as per GAAP and to prepare financial statements.
 Understood various line items in Financial statements and importance
of Financial Statements
 Helped to know how much revenue and cost will result in ZERO profit
(BEP)? What and how much to produce?
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Major Learnings from Financial Accounting
 Can estimate the level of business risk (operating & financial)

organization is exposed
 Learnt how much revenue and cost will generate desired level of
profits?
 Understood importance of cash flow and capital blocked various
components of working capital – A/R, Inventories, etc.
 Understood as to why to reduce organization’s dependency on bank
borrowing for working capital financing?
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What is Management Accounting?
Tools and Techniques used by the management for financial

decision making, budgetary control and profitability analysis,
enterprise performance management, driving profitability
rather than just analysing it.
Major Learnings from Management Accounting
Management Accounting helped to

 analyze the financial position of the Company through ratio
analysis.
 suggest measures for improving the financial performance of
organization.
 analyze the profitability position of the company.
 assess the return on investment.
 analyze the asset turnover ratio.
 determine the solvency position of company.
 suggest measures for effective and efficient usage of inventory
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Understanding financial and management accounting
concepts, application and outcomes will enable
Business Manager to analyse and interpret financial
health of an organization.
Business Analytics and FMA
Business Analytics utilizes Descriptive and Diagnostic analytics is

useful for cost accounting (Management Accounting) and
descriptive and predictive tools are applied for performance
measurement using financial staments (Financial Accounting).
Therefore, descriptive, predictive, and prescriptive can be used

for planning and decision making.
Understanding financial and management accounting
concepts, application and outcomes will enable
Business Analysts (Analytics) / CFO financial analyst to
do Financial Analysis (Descriptive, Diagnostic,
Predictive and Prescriptive) and Financial Analytics
Role of Financial Analytics
The goal of financial analytics, a component of business

analytics, is to shape business strategy through reliable data,
factual insight rather than intuition.
Financial analytics offers insight into organizations' financial

status and improves the profitability, cash flow and value of the
business.
Financial analytics also helps companies improve income

statements and business processes.
Financial Analytics – Concept and Types:
Financial analytics offers various views of companies' past,

present and future performance. The following are key types of
analytics that can help companies of different sizes:
 Predictive sales analytics ( Revenue Forecasting: Variables from

Financial Statement – Financial Accounting)
 Client profitability analytics (Profitable clients: Internal variables –

Management Accounting)
 Product profitability analytics (Profitable products / services – Cost

Accounting / management accounting)
 Cash-flow analytics (regression analysis to predict operating
cash flow: working capital ratio and cash conversion cycle –
Financial and Management Accounting)
 Value-driven analytics (Focussing on business' value drivers, or the key

"levers“ - Financial and Management Accounting)
 Shareholder value analytics (examining the returns organization

provides to shareholders, is used concurrently with profit and
revenue analytics - Financial and Management Accounting)
Types of Financial Analysis
Predictive Analysis answers “What will happen in future and

when”. This involves the art of forecasting. To predict the
future occurrence of a particular event, the analyst needs to
build a model or algorithm for identifying the various necessary
components.
Prescriptive Analysis answers “How can I make it happen?”

Diagnosis and prediction are useless without recommendations
or suggestions as to how to bring about improvement.
Descriptive Analysis explains “What happened” For example conducting
financial ratio to compare RoI on historic performance using
visualization and text mining tools.
Diagnostic Analysis offers an answer to “How did it happen and why it

happened and it will also try to bring out solutions to stop such
occurrences. For example, if there is reduced number of orders by a
particular client in the previous year, the Diagnostic analysis will get to
cause as to how and why it happened. Not just this, it will also try to
bring out solutions to stop such occurrences.
Importance of FMA in Investment Banking (MBA – Finance)
Trading /Investment
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Fund on own fund / On
behalf of client
3
1 Based &
Fee Based
Activities
Investment Sources of Funds:
Banking
Investment Own fund, Clients’4
fund and Markets
5 Avenues
(Application of
funds)
Money Market and

Forex Market 6 Capital Market 7
Return on investments depends on understanding fundamental aspects of business
based on financial statements and economic environment (FMA). 19
Objectives of Monetary & Credit Policy are to:
Nirmala Sitharaman – Shaktikanta Das – Economic Advisor -

Growth Engine Confidence among V Anantha Nageswaran
participants
Regulate the Price of Capital. Interest Rate

Regulate the Price of Goods & Services. Inflation
Regulate the Price of Forex. Forward Premia or Discount

To Improve the Credit Flow to the Corporates.
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Course Objectives
Learning Aims:
 Understand the framework of accounting systems and
the Generally Accepted Accounting Principles
 Preparation financial statements.
 Understand cost concepts, behavior and risk
associated with cost.
 Analyze & Interpret Financial position of an
organization.
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Need for Accounting
Purpose of business is to make profit from operation,

one must keep an ongoing track of the activities
undertaken in course of business. Two basic questions
would have to be answered:
(a) What is the result of business operations? This will
be answered by finding out whether it has made profit
or loss.
(b) What is the position of the resources acquired and
used for business purpose? How are these resources
financed? Where the funds come from?
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Conti..
The answers to these questions are to be found

continuously and the best way to find them is to record
all the business activities.
Recording of business activities has to be done in a

scientific manner so that they reveal correct outcome.
The science of book-keeping and accounting provides an

effective solution. It is a branch of social science.
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Conti..
This course aims at providing a platform to the

participants to understand basic principles and
concepts, which can be applied to accurately
measure performance of business.
After going through this course, you should be able to

apply the principles / rules, conventions and practices to
different business situations like trading, manufacturing
or service.
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Accounting Definition
The field of accounting is generally sub-

divided into:
(a) Book Keeping
(b) Financial Accounting
(c) Cost Accounting and
(d) Management Accounting
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Accounting Definition - Book-keeping
“Book-keeping is an art of recording business transactions in a set

of books.”
It is basically a record keeping function. One must understand that

not all dealings are, however, recorded. Only transactions
expressed in terms of money will find place in books of accounts.
These are the transactions which will ultimately result in transfer of

economic value from one person to the other.
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Accounting Definition - Book-keeping
It is also referred to as a set of primary records. These

records form the basis for accounting.
It is an art because, the record is to be kept in such a

manner that it will facilitate further processing and
reporting of financial information which will be useful to
all stakeholders of the business.
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Accounting Definition - Financial Accounting
It is commonly termed as Accounting. The Indian Institute of

Certified Public Accountants defines Accounting as “an art of
(1) recoding,
(2) classifying and
(3) summarizing in a significant manner and in terms of (a) money,
(b) transactions and ( c ) events which are in part at least of a
(e) financial character, and (f) interpreting the results thereof.”
Financial Accounting deals with recording and reporting financial

transactions as per the statutory requirements (GAAP)
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Financial Accounting is concerned with how entities prepare
financial statements.
The intended user for financial accounting is external to the entity

(organization).
The time period for financial accounting is historical. It means that

the financial reported statements are constructed based on events
which have already happened.
Financial accounting is heavily regulated and standardized
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Therefore, the Financial Accounting course is an introduction to the

fundamental concepts of financial accounting in a management
context.
The course will teach us how accounting systems are used to record
the day-to-day economic activities of a business and places special
emphasis on understanding accounting terminology.
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You will be able to learn fundamental accounting concepts and then

apply those concepts in a detailed examination of the financial
statements used to describe the business.
In the course, you will be presented with real-world challenges that

require them to interpret the financial data to find answers.
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Financial Accounting Cycle
As soon as a transaction
Allhappens
the adjustments
it is atentriesfirst
are to be recorded
recorded in properly
subsidiary
and
book. adjusted accordingly
Financial statementTcan he transactions
now be easilyare
before preparing financial
prepared which willrecorded
exhibit thein Journal
true
statements.
financial position chronologically.
and Trail
An adjusted operating
Balance may
All the nominal accounts are to
All journals are posted into
results. also be prepared.
After
ledgertaking
be closed by the transferring to all the ledger
chronologically and
Trading Account andaccount’s
Profit
in andclosing
a classified balances,
manner.
Loss Account. a Trial Balance is prepared
at the end of the period
for the preparations of
financial statements.
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Financial Accounting - Process
1. The first step in the cycle of accounting is to identify

transactions that will find place in books of accounts.
Transactions having financial impact only are to be

recorded.
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2. Secondly, the recording of the business transactions (Journal

Entry) is done based on the Golden Rules of Accounting
Golden Rule
Types of Accounts
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Transaction of similar nature are grouped together and

recorded accordingly (Ledger or Books of Accounts). e.g.
Sales Transactions, Purchase Transactions, Cash
Transactions etc.
One has to interpret the transaction and then apply the

relevant Golden Rule to make a correct entry thereof
and group similar transaction into ledger.
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3. Thirdly, as the transactions increase in number, it will

be difficult to understand the combined effect of the
same by referring to individual records.
Hence, the art of accounting also involves the step of

summarizing (Trial Balance) them and reporting in terms
of financial statements.
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Lastly, the accounting process provides the users with financial

statements which will describe what has happened to the business.
Remember the two basic questions we talked about, one to know
whether (1) business has made profit or loss and (2) the other to
know the position of resources that are used by the business.
1. Statement of Income & Expenditure

2. Statement of Sources & Application of Funds
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Outcomes of Financial Accounting
Financial Accounting is recording and reporting

transactions of monetary term as per statutory
requirement (GAAP)
Outcome of Financial Accounting:
1. Statement of Income & Gains and Expenses & Losses,

2. Statement of Sources & Application of Fund and
3. Funds Flow Statement
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Outcomes of Financial Accounting
Statement of Income & Gain and Statement of Sources & Application of Fund.
Expenses & Losses. Shows Financial Position on a particular date
Shows Financial Performance during a since inception
period.
Profit &
Loss (P/L) Balance
Sheet (B/S)
FF
Accounting Definition -
Management Accounting
Management Accounting (Ratios) is “the process of

identification, measurement, analysis, interpretation
and communication of information used by
management to plan, evaluate and control within an
entity and to assure appropriate use of and
accountability for its resources.
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Accounting Definition -
Management Accounting
Management Accounting is concerned with how an

organization prepares reports like budgets for internal
users i.e. management.
Management Accounting reports are intended for future

and what may happen.
Management Accounting reports are only used within the

organization, so the organization and its management are
free to choose how they construct these reports.
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Importance of Management
Accounting
Basically, Management Accounting aims to facilitate

management in formulating strategies, planning and
constructing business activities, making decisions,
optimal use of resources, and safeguarding assets of
business.
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Cost Accounting - Concept
The theme Cost Accountancy could be defined as

application of
 cost accounting principles, methods and
techniques for
 ascertaining and controlling/managing cost,
 ascertaining profit; and
 presenting information for the purpose of
managerial decision-making.”
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Significance of Cost Accounting
Cost Accounting is frequently used to facilitate internal

decision making and provides tools with which
management can appraise performance and control
costs of doing business.
It primarily involves relating the costs to the different

products produced and sold or services rendered by the
business.
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Financial Accounting vs.Cost
Accounting
While Financial Accounting deals with (1) recording and

reporting (2) monetary business transactions (at a
broader level) as per (3) statutory requirements
(GAAP),
Cost Accounting aims at further breaking it up to the last

possible level to identify costs with products and
services.
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OBJECTIVES OF ACCOUNTING
(a) To ascertain the amount of profit or loss made by the

business i.e. to compare the income earned versus the
expenses incurred and the net result thereof.
(b) To know the financial position of the business i.e. to
assess what the business owns and what it owes.
(c) To provide a record for compliance with statutes and
laws applicable.
(d) To enable the readers to assess progress made by the
business over a period of time.
(e) To disclose information needed by different
stakeholders.
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ACCOUNTING CONCEPTS AND CONVENTIONS
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ACCOUNTING CONCEPTS AND
CONVENTIONS: A. BASIC ASSUMPTIONS
(a) Separate Business Entity

Concept
The entity concept requires
that all the transactions are to
be viewed, interpreted and
recorded from ‘business
entity’ point of view. Business
is separate from owner.
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(b) Going Concern or Continuity Concept

The basic principles of
this concept is that
business is assumed to
exist for an indefinite
period and is not
established with the
objective of closing it
down.
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(c) Money Measurement Concept

A business transaction will
always be recoded if it can be
expressed in terms of money.
The advantage of this concept
is that different types of
transactions could be
recorded as homogenous
entries with money as
common denominator.
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(d) The Accounting As per the going-concern concept

Period Concept the business entity is assumed to
have an indefinite life.
Now if we are to assess whether
the business has made profit or
loss, should we wait until this
indefinite period is over?
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(d) The Accounting Would it mean that we will not be able to

Period Concept assess the business performance on an
ongoing basis?
Does it deprive all stakeholders the right to

the accounting information?
Would it mean that the business will not pay

income tax as no income will be computed?
To circumvent this problem, the business entity is supposed to be

paused after a certain time interval. This time interval is called an
accounting period.
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Financial & Management Accounting
Prof. Niranjan Swain

[email protected]
Mob: 9381458097
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2

Concept The entity concept requires that all the
transactions are to be viewed,
interpreted and recorded from ‘business
entity’ point of view. Business is separate
from owner (equity shareholder).
Example: Suppose owner (Equity shareholder) has
purchased land or constructed building. Will it be
recorded or appear in business financial statements
? Ans: NO
In absence of this concept, owner’s assets, liabilities, income & gains,
expenses & losses will be part of business’s assets, liabilities, income & gains,
expenses & losses AND vise versa
3

The basic principles of this
concept is that business is
assumed to exist for an
indefinite period and is not
established with t he
objective of closing it down.
In absence of this concept (presence of definite life period of the business),

business will not get resources (human resource, monetary resource from
lender, equity capital from owner).
Would you like to work for an organization which is going to be closed down in 2028? Will
you invest in this organization? Will bank lend money to the organization ? Ans: NO
4

A business activity/transaction will
expressed in terms of money. The
advantage of this concept is that
different types of transactions
could be recorded as homogenous
entries with money as common
denominator.
Business has entered into contract with supplier, customer, banker, etc. Will
these be recorded in books of accounts?
There is quarrel between business and supplier, will it be recorded in books of
accounts? Ans: NO
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(d) The Accounting

Period Concept
As per the going-concern concept the
business entity is assumed to have an
indefinite life.
Now if we are to assess whether the business
has made profit or loss, should we wait until
this indefinite period is over? Ans: NO to
Why?
Ans: Because if we wait until indefinite period then objective of accounting
to assess whether business has profit or loss will be defeated. Because we will
unable to asses financial health of an organization
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(d) In absence of the Will be able to assess the business

Accounting Period performance on an ongoing basis? Ans: NO
Concept
Will the stakeholders have the right to the
accounting information? Ans: NO
Will business be able to pay income tax on

income which is not computed? Ans: NO

accounting period ( in India – Financial Year ending 31st March).
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(e) The Accrual Concept

The accrual concept is based on recognition of both cash and
credit transactions.
Irrespective of cash received against sale or cash paid against

expense, transactions must be recorded.
It means we have to record revenue irrespective of cash RECEIVED or

NOT against sale
Similarly, we have to record expense irrespective of cash PAID or

NOT against expense.
Absence of Accrual concept will lead to either under or over

estimation of Book Profit or expenses. HOW?
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Absence of Accrual concept will lead to under
estimation of Book Profit. HOW?
Example: Suppose your business has made revenue of Rs.100 crore during FY
2022-23.
Business incurred cash expense of Rs.60 crore (excluding depreciation which is

non-cash expense) to generate revenue of Rs.100 crore.
Entire cash expenses have been paid nothing left as outstanding. It means entire
Rs.60 crore has gone out of business (out flow).
This revenue of Rs.100 includes 70% cash sales and 30% credit sales. Credit sales
was on 20th February 2023 and credit period was for 90 days.
[It means Rs.30 will be collected after 31st March 2023 (after FY 2023-24)]
Accounting / Book profit (in absence of accrual concept) during the FY

= Cash Revenue – Cash Expense
= Rs.70 crore – Rs.60 crore = Rs.10 crore
Hence, Book Profit is understated. How?
This cash expense of Rs.60 crore incurred to generate revenue of

Rs.100.
Therefore, we must consider entire revenue of Rs.100 crore

(irrespective of cash received or not) not Rs.60 crore.
Absence of Accrual concept will lead to over
estimation of Book Profit and under expenses. HOW?
Suppose expense paid is Rs.40 crore and remaining Rs.20 incurred but not
paid (outstanding).
But the entire revenue of Rs.100 crore is cash sales
Therefore, in absence of accrual concept, the Book Profit during FY =

Rs.100 crore – Rs.40 crore = Rs.60 crore
Hence, the Book Profit is overstated. How?
The business has incurred expense (consumed resources) of Rs.60 crore and
generated revenue of Rs.100.
Therefore, we must consider total expense of Rs.60 crore (irrespective of

paid or not) not Rs.40 crore.
Therefore, correct book profit would be Rs.100 crore – Rs.60 crore

= Rs.40 . This is due to Accrual Concept of Accounting
Impact of Accrual Concept :
Book Profit (Accounting Profit)
vs.
Operating Cash Flow
2022-23.
Business incurred Rs.60 crore expense (excluding depreciation which is non-

cash expense) to generate revenue of Rs.100 crore.
Entire cash expenses have been paid nothing left as outstanding. It means
entire Rs.60 crore has gone out of business (operating cash out flow).
This revenue of Rs.100 includes 70% cash sales and 30% credit sales. Credit
sales was on 20th February 2023 and credit period was for 90 days.
Accounting / Book profit during the FY =
Rs.40 crore (Rs.100 crore – Rs.60 crore).
Net Operating Cash Flow during FY = Rs.10 crore (Rs.70 crore – Rs.60 crore).
Suppose expenses are Rs.80 crore then:

Operating Cash Flow during FY = -Rs.10 crore (Rs.70 crore – Rs.80 crore).
Accrual concept creates difference between book

profit (accounting profit) and operating cash flow
which measures liquidity position of an organization.
CONVENTIONS : B. BASIC PRINCIPLES
(a) The Revenue Realisation Concept
It says amount should be recognized only to the tune of

which it is certainly realizable. Thus, mere getting an order
from the customer won’t make it eligible to recognize as
revenue.
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(b) The Matching Concept

Sale of goods has two effects: (i) a revenue effect, which results in
increase in owner’s equity by the sales value of the transaction and
(ii) an expense effect, which reduces owner’s equity by the cost of
goods sold, as the goods go out of the business.
The net effect of these two effects will reflect either profit or loss.
In order to correctly arrive at the net result, both these aspects
must be recognized during the same accounting period.
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One cannot recognize only the revenue effect thereby inflating the
profit or only the expense effect which will deflate the profit.
Both the effects must be recognized in the same accounting period.
This is the principle of matching concept.
To generalize, when a given event has two effects – one on revenue

and the other on expense, both must be recognized in the same
accounting period. Examp: Depreciation
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(c) Full Disclosure Concept
Accounting data should properly be clarified, summarized,

aggregated and explained for the purpose of presenting the
financial statements which are useful for the users of
accounting information.
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(d) Dual Aspect Concept
When a business transaction happens, it will involve use of one or the

other resource of the business to create or settle one or more obligations.
e.g. consider Mr. Suresh starts a business with the investment of Rs.25
lakhs from SBI
Here, the business has got a resource of cash worth Rs.25 (which is its
asset), but at the same time it has created an obligation for business (in
the event of business closure, the money will be paid back to SBI).
This could be shown as:

Assets = Liabilities + Capital (Money contributed by the owner)
Rs.25 Lakhs = Rs.25 lakhs + Zero
a) Assets of Rs.25 lakhs which business owns,
b) Liabilities of Rs.25 lakhs which business owes to SBI (Creditors Liability),
c) Capital which contributed by the owner is ZERO
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(e) Verifiable Objective Evidence Concept

Under this principle, accounting data must be verified. In other
words, documentary evidence of transactions must be made which
are capable of verification by an independent respect.
In the absence of such verification, the data which will be available

will neither be reliable nor be dependable, i.e., these should be
biased data.
Verifiability and objectivity express dependability, reliability and

trustworthiness that are very useful for the purpose of displaying
the accounting data and information to the users.
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(f) Historical Cost Concept

Business transactions are always recorded at the actual cost at
which they are actually undertaken. The basic advantage is that it
avoids an arbitrary value being attached to the transactions.
Whenever an asset is bought, it is recorded at its actual cost and

the same is used as the basis for all subsequent accounting
purposes. Land, Equipment, etc. purchased (capex)
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The limitation of this concept is that the Balance Sheet does not
show the market value of the assets owned by the business and
accordingly the owner’s equity will not reflect the real value.
However, on an ongoing basis, the assets are shown at their
historical costs as reduced by depreciation.
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(g) Balance Sheet Equation Concept

Under this principle, all which has been received by business must
be equal to that has been given by business and needless to say that
receipts are clarified as debits and giving is clarified as credits. The
basic equation, appears as :-
Debit = Credit
Naturally every debit must have a corresponding credit and vice-e-
versa.
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So, we can write the above in the following form –
Expenses + Losses + Assets = Revenues + Gains + Liabilities
And if expenses and losses, and incomes and gains are set off, the
equation takes the following form –
Asset = Liabilities
Asset = External Liabilities+ Equity
Assets = Creditors Liabilities + Owners Liabilities
i.e., the Accounting Equation.
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ACCOUNTING CONCEPTS AND CONVENTIONS:
C. MODIFYING PRINCIPLES
(a) The Concept of Materiality

This is more of a convention than a concept. It proposes that while
accounting for various transactions, only those which may have material
effect on profitability or financial status of the business should have special
consideration for reporting. This does not mean that the accountant should
exclude some transactions from recording. e.g. even Rs.20 worth
conveyance paid must be recorded as expense.
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(b) The Concept of Consistency
This concept advocates that once an organization decides to adopt a

particular method of revenue or expense recognition in line with the
other concepts, the same should be consistently applied year after
year, unless there is a valid reason for change in the method.
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Lack of consistency would result in the financial information
becoming non-comparable between the different accounting periods.
The insistence of this concept would result in avoidance of window
dressing the results by choosing the accounting method by
convenience and thereby either inflating or understating net income.
Example: Preparing financial statements, Inventories Valuation,

Depreciation
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(c) The Conservatism Concept

The concept underlines the prudence of under-stating than over-
stating the net income of an entity for a period and the net assets as
on a particular date. This is because business is done in situations of
uncertainty. For years, this concept was meant to “anticipate no
profits but recognize all losses”.
This can be stated as
(i) Delay in recognizing income unless one is reasonably sure
(ii) Immediately recognize expenses when reasonably sure
(iii) Creating provision
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(d) Timeliness Concept

Under this principle, every transaction must be recorded in proper
time. Normally, when the transaction is made, the same must be
recorded in the proper books of accounts. In short, transaction
should be recorded date-wise in the books.
Delay in recording such transaction may lead to manipulation,

misplacement of vouchers, misappropriation etc. of cash and
goods. This principle is followed particularly while verifying day to
day cash balance. Principle of timeliness is also followed by banks,
i.e. every bank verifies the cash balance with their cash book and
within the day, the same must be completed.
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(e) Industry Practice

As there are different types of industries, each industry has its
own characteristics and features. There may be seasonal
industries also.
Every industry follows the principles and assumption of

accounting to perform their own activities. Some of them follow
the principles, concepts and conventions in a modified way.
The accounting practice which has always prevailed in the

industry is followed.
Example: Charging depreciation, Creating Provision, Valuation of

Inventories,
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BASIC ACCOUNTING TERMS – Sources
of Funds (Liabilities)
Liability : Which organization owes

1. Owners (Equity Share Capital) and Creditors Liabilities (Loan from
bank, Debentures, etc.)
2. Long Term (Debentures, Loan from Bank) and Short Term
Liabilities (Current Liabilities: Credit Purchase, Expense
Outstanding)
3. Interest Bearing (Loan from banks) and Non-Interest Bearing
Current Liabilities (Credit Purchase / Accounts Payable)
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BASIC ACCOUNTING TERMS – (Application of
Funds – Assets are shown at book value or at
cost price
(v) Asset: Which Organization owns
Assets can be Tangible (Land, Building, Equipment,

Computer, etc.) and Intangible (Goodwill, Patent, Trade
Marks, etc.).
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BASIC ACCOUNTING TERMS -
(Application of Funds )
Assets can also be classified into Current Assets (WC: GWC

and NWC) and Non-Current Assets (Fixed Assets).
Current Assets:
Cash or Nearness to ash –
Accounts Receivable (Good Debts, Doubtful Debts
and Bad Debts), Inventories, Loans and
Advances, Prepaid Expenses, etc.
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(Application of Funds)
(xvii) Fixed Assets

(Capex– Generates return for long term, Non-
recurring in nature, etc. Example: Land &
Building, Plant and Machinery, etc.)
Depreciation is charged against all tangible fixed assets

except Land. Depreciation is a non-cash expense
(Impacts profit but does not impact cash flow)
34
BASIC ACCOUNTING TERMS
(xiii) Non-current Investments

(Financial Assets : Example – Investment in other
company’s shares and Debenture):
(xiv) Current Investments : (short term loan given to
other organizations – ICDs)
35
BASIC ACCOUNTING TERMS – Statement of
income and Expenditure (P&L Account)
Total Income: Income from Operations and Income from

other sources.
Income from operations:
Gross Sales vs. Net Sales
Cash Sales vs. Credit Sales
Scrap Sales
Return Inward
Income from Other Sources:

Interest and Dividend Received
Sale of old fixed assets and sale of financial
assets
36
Purchase – (Operating Expense - Recurring in nature)
Examp: Cash Purchase and Credit Purchase
Return Outward
Expenses and Expense Outstanding
37
(xviii) Revenue expenditure :.

Purchase of Raw materials,
Salaries, Wages, Depreciation,
Rent, Interest, etc.
38
(ix) Contingent Liability :
39
(x) Drawings : It represents an amount of cash, goods or

any other assets which the owner withdraws from
business for his or her personal use.
40
These debtors may again be classified as

under:
(i) Good debts :
(ii) Doubtful Debts :
(iii) Bad debts :
41
(xxi) Trade Discount
42

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1
2

Concept The entity concept requires that all the
transactions are to be viewed,
interpreted and recorded from ‘business
entity’ point of view. Business is separate
from owner (equity shareholder).
Example: Suppose owner (Equity shareholder) has
purchased land or constructed building. Will it be
recorded or appear in business financial statements
? Ans: NO
In absence of this concept, owner’s assets, liabilities, income & gains,
expenses & losses will be part of business’s assets, liabilities, income & gains,
expenses & losses AND vise versa
3

The basic principles of this
concept is that business is
assumed to exist for an
indefinite period and is not
established with t he
objective of closing it down.
In absence of this concept (presence of definite life period of the business),

business will not get resources (human resource, monetary resource from
lender, equity capital from owner).
Would you like to work for an organization which is going to be closed down in 2028? Will
you invest in this organization? Will bank lend money to the organization ? Ans: NO
4

A business activity/transaction will
expressed in terms of money. The
advantage of this concept is that
different types of transactions
could be recorded as homogenous
entries with money as common
denominator.
Business has entered into contract with supplier, customer, banker, etc. Will
these be recorded in books of accounts?
There is quarrel between business and supplier, will it be recorded in books of
accounts? Ans: NO
5
(d) The Accounting

Period Concept
As per the going-concern concept the
business entity is assumed to have an
indefinite life.
Now if we are to assess whether the business
has made profit or loss, should we wait until
this indefinite period is over? Ans: NO to
Why?
Ans: Because if we wait until indefinite period then objective of accounting
to assess whether business has profit or loss will be defeated. Because we will
unable to asses financial health of an organization
6
(d) In absence of the Will be able to assess the business

Accounting Period performance on an ongoing basis? Ans: NO
Concept
Will the stakeholders have the right to the
accounting information? Ans: NO
Will business be able to pay income tax on

income which is not computed? Ans: NO

accounting period ( in India – Financial Year ending 31st March).
7
(e) The Accrual Concept

The accrual concept is based on recognition of both cash and
credit transactions.
Irrespective of cash received against sale or cash paid against

expense, transactions must be recorded.
It means we have to record revenue irrespective of cash RECEIVED or

NOT against sale
Similarly, we have to record expense irrespective of cash PAID or

NOT against expense.
Absence of Accrual concept will lead to either under or over

estimation of Book Profit or expenses. HOW?
8
2022-23.
Business incurred cash expense of Rs.60 crore (excluding depreciation which is

non-cash expense) to generate revenue of Rs.100 crore.
Entire cash expenses have been paid nothing left as outstanding. It means entire
Rs.60 crore has gone out of business (out flow).
This revenue of Rs.100 includes 70% cash sales and 30% credit sales. Credit sales
was on 20th February 2023 and credit period was for 90 days.
Accounting / Book profit (in absence of accrual concept) during the FY

= Cash Revenue – Cash Expense
= Rs.70 crore – Rs.60 crore = Rs.10 crore (Cash Profit)
Hence, Book Profit is understated. How?
This cash expense of Rs.60 crore incurred to generate revenue of

Rs.100.
Therefore, we must consider entire revenue of Rs.100 crore

(irrespective of cash received or not) not Rs.60 crore.
Absence of Accrual concept will lead to over
estimation of Book Profit and under expenses. HOW?
Suppose expense paid is Rs.40 crore and remaining Rs.20 incurred but not
paid (outstanding).
But the entire revenue of Rs.100 crore is cash sales
Therefore, in absence of accrual concept, the Book Profit during FY =

Rs.100 crore – Rs.40 crore = Rs.60 crore
Hence, the Book Profit is overstated. How?
The business has incurred expense (consumed resources) of Rs.60 crore and
generated revenue of Rs.100.
Therefore, we must consider total expense of Rs.60 crore (irrespective of

paid or not) not Rs.40 crore.
Therefore, correct book profit would be Rs.100 crore – Rs.60 crore

= Rs.40 . This is due to Accrual Concept of Accounting
Impact of Accrual Concept :
Book Profit (Accounting Profit)
vs.
Operating Cash Flow
2022-23.
Business incurred Rs.60 crore expense (excluding depreciation which is non-

cash expense) to generate revenue of Rs.100 crore.
Entire cash expenses have been paid nothing left as outstanding. It means
entire Rs.60 crore has gone out of business (operating cash out flow).
This revenue of Rs.100 includes 70% cash sales and 30% credit sales. Credit
sales was on 20th February 2023 and credit period was for 90 days.
Net Operating Cash Flow during FY = Rs.10 crore (Rs.70 crore – Rs.60 crore).
Suppose expenses are Rs.80 crore then:

Operating Cash Flow during FY = -Rs.10 crore (Rs.70 crore – Rs.80 crore).
Accrual concept creates difference between book

profit (accounting profit) and operating cash flow
which measures liquidity position of an organization.
CONVENTIONS : B. BASIC PRINCIPLES
(a) The Revenue Realisation Concept
It says amount should be recognized only to the tune of

which it is certainly realizable. Thus, mere getting an order
from the customer won’t make it eligible to recognize as
revenue.
14

Sale of goods has two effects: (i) a revenue effect, which results in
increase in owner’s equity by the sales value of the transaction and
(ii) an expense effect, which reduces owner’s equity by the cost of
goods sold, as the goods go out of the business.
The net effect of these two effects will reflect either profit or loss.
In order to correctly arrive at the net result, both these aspects
must be recognized during the same accounting period.
15
One cannot recognize only the revenue effect thereby inflating the
profit or only the expense effect which will deflate the profit.
Both the effects must be recognized in the same accounting period.
This is the principle of matching concept.
To generalize, when a given event has two effects – one on revenue

and the other on expense, both must be recognized in the same
accounting period. Examp: Depreciation
16
(c) Full Disclosure Concept
Accounting data should properly be clarified, summarized,

aggregated and explained for the purpose of presenting the
financial statements which are useful for the users of
accounting information.
17
(d) Dual Aspect Concept
When a business transaction happens, it will involve use of one or the

other resource of the business to create or settle one or more obligations.
e.g. consider Mr. Suresh starts a business with the investment of Rs.25
lakhs from SBI
Here, the business has got a resource of cash worth Rs.25 (which is its
asset), but at the same time it has created an obligation for business (in
the event of business closure, the money will be paid back to SBI).
This could be shown as:

Assets = Liabilities + Capital (Money contributed by the owner)
Rs.25 Lakhs = Rs.25 lakhs + Zero
a) Assets of Rs.25 lakhs which business owns,
b) Liabilities of Rs.25 lakhs which business owes to SBI (Creditors Liability),
c) Capital which contributed by the owner is ZERO
18
19
(e) Verifiable Objective Evidence Concept

Under this principle, accounting data must be verified. In other
words, documentary evidence of transactions must be made which
are capable of verification by an independent respect.
In the absence of such verification, the data which will be available

will neither be reliable nor be dependable, i.e., these should be
biased data.
Verifiability and objectivity express dependability, reliability and

trustworthiness that are very useful for the purpose of displaying
the accounting data and information to the users.
20
(f) Book Value / Historical Cost Concept

Business transactions are always recorded at the actual cost at
which they are actually undertaken. The basic advantage is that it
avoids an arbitrary value being attached to the transactions.
Whenever an asset is bought, it is recorded at its book value /

actual cost and the same is used as the basis for all subsequent
accounting purposes. Land, Equipment, etc. purchased (capex)
21

The limitation of this concept is that the Balance Sheet does not
show the market value of the assets owned by the business and
accordingly the owner’s equity will not reflect the real value.
However, on an ongoing basis, the assets are shown at their
historical costs as reduced by depreciation.
22

Under this principle, all which has been received by business must
be equal to that has been given by business.
Receipts are clarified as debits and giving is clarified as credits. The
basic equation, appears as :-
Assets = Liabilities + Capital

Application of Funds = Sources of Funds
23
ACCOUNTING CONCEPTS AND CONVENTIONS:
C. MODIFYING PRINCIPLES
(a) The Concept of Materiality

This is more of a convention than a concept. It proposes that while
accounting for various transactions, only those which may have material
effect on profitability or financial status of the business should have special
consideration for reporting. This does not mean that the accountant should
exclude some transactions from recording. e.g. even Rs.20 worth
conveyance paid must be recorded as expense.
24
This concept advocates that once an organization decides to adopt a

particular method of revenue or expense recognition in line with the
other concepts, the same should be consistently applied year after
year, unless there is a valid reason for change in the method.
25

Lack of consistency would result in the financial information
becoming non-comparable between the different accounting periods
(Trend Analysis) and competitors (Comparative Analysis).
Example: Different Methods of Inventories Valuation and

Depreciation.
Financial statements prepared at different point of time becomes
difficult for comparative analysis
26
(c) The Conservatism Concept

The concept underlines the prudence of under-stating than over-
stating the net income of an entity for a period and the net assets as
on a particular date. This is because business is done in situations of
uncertainty. For years, this concept was meant to “anticipate no
profits but recognize all losses”.
This can be stated as
Example: Creating provision for doubtful bad debt, Creating
provision for other contingent liabilities (court cases)
27
(d) Timeliness Concept

Under this principle, every transaction must be recorded in proper
time. Normally, when the transaction is made, the same must be
recorded in the proper books of accounts (recording on the day of
transaction). In short, transaction should be recorded date-wise in
the books.
This principle is followed particularly while verifying day to day

cash balance. This problem is found more in case of investment
banking and to mitigate they prepare every day trial balance.
Principle of timeliness is also followed by banks, i.e. every bank

verifies the cash balance with their cash book and within the day,
the same must be completed.
28
(e) Industry Practice

As there are different types of industries, each industry has its
own characteristics and features. There may be seasonal
industries also.
Every industry follows the principles and assumption of

accounting to perform their own activities. Some of them follow
the principles, concepts and conventions in a modified way.
The accounting practice which has always prevailed in the

industry is followed.
Example: Charging depreciation, Creating Provision, Valuation of

Inventories, Writing off of intangible fixed assets
29
BASIC ACCOUNTING TERMS – Sources
of Funds (Liabilities)
Liability : Which organization owes

1. Owners (Equity Share Capital) and Creditors Liabilities (Loan from
bank, Debentures, etc.)
2. Long Term (Debentures, Loan from Bank) and Short Term
Liabilities (Current Liabilities: Credit Purchase, Expense
Outstanding)
3. Interest Bearing (Loan from banks) and Non-Interest Bearing
Current Liabilities (Credit Purchase / Accounts Payable)
30
BASIC ACCOUNTING TERMS – (Application of
Funds – Assets are shown at book value or at
cost price
(v) Asset: Which Organization owns
Assets can be Tangible (Land, Building, Equipment,

Computer, etc.) and Intangible (Goodwill, Patent, Trade
Marks, etc.).
31
Assets can also be classified into Non-Current Assets (Fixed Assets) and
Current Assets (WC: GWC and NWC)
Fixed Assets (in term of life and physical existence):

(Capex– Generates return for long term (more than one year) and
Non-recurring in nature, etc.
Example: Land & Building, Plant and Machinery, etc.)
Depreciation is charged against all tangible fixed assets except
Land. Depreciation is a non-cash expense (Impacts profit - reduces
profit, but does not impact cash flow)
32
Non-current Investments
(Financial Assets : Example – Investment in other
company’s shares and Debenture):
Current Investments : (short term loan given to other organizations

– ICDs)
33
(Application of Funds )
Current Assets:
Cash or Nearness to cash represent liquidity position of an
organization (not quantity but quality of current assets)
Cash in hand and at bank, Accounts Receivable (Good Debts,
Doubtful Debts and Bad Debts), Inventories (RM, WILP and FG),
Loans and Advances, Prepaid Expenses, etc.
34
BASIC ACCOUNTING TERMS – Statement of
income and Expenditure (P&L Account)
Total Income: Income from Operations and Income from other

sources.
Income from operations:
Gross Sales vs. Net Sales
Cash Sales vs. Credit Sales
Scrap Sales

Interest and Dividend Received
Sale of old fixed assets and sale of financial assets
35
Revenue Expenditure:
Recurring in nature
Exam: Salaries, Purchase of good and services -
Cash Purchase and Credit Purchase,
Expenses and Expense Outstanding
Operating: Salaries, wages, depreciation
Non-operating expenditure (financial expenditure):

Interest, Lease rental
36
(ix) Contingent Liability :
Creating provision for court cases in anticipation of

making loss.
37
(x) Drawings :
It represents an amount of cash, goods or any other

assets which the owner withdraws from business for his
or her personal use.
38
The debtors may again be classified as under:
(i) Good debts (Accounts Receivable Outstanding) :
(ii) Doubtful Debts (Provision for bad debt is created

against Accounts Receivable Outstanding) :
(iii) Bad debts : (Loss against accounts receivables)
39
Trade Discount :
Trade Discount is not recorded in books of account.
Suppose list price of TV is 60k and sold for 55k with trade discount
of 5k.
In this case income of 55k will be recorded.
However, cash discount is recorded.
40

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Accounting for Depreciation – An expired cost of
fixed asset except land
Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and
depreciation is charged @20% p.a..
As per the straight line method (SLM) of depreciation of 20%
Gross Block of ECG Machine on 1st June 2020 =

Less: Depreciation: 20% for 10 months (June to March 21):
Net Block of ECG Machine as on 31st March 2021 (B/S):
Net Block of ECG Machine as on 1st April 2021=

Less: Depreciation 20% for 12 months (2021-22)

Net Block of ECG Machine as on 1st April 2022 =

Less: Depreciation: 20% for 12 months (2022-23):

Under SLM, Depreciation is charged on Gross Block of Fixed Assets

Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and depreciation is
charged @20% p.a.
As per the Written Down Value Method (WDV) method of depreciation of 20%
Gross Block of ECG Machine on 1st June 2020 =

Less: Depreciation: 20% for 10 months (June to March 21):
Net Block of ECG Machine as on 1st April 2021=


Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and depreciation is charged @20%
p.a.


Under WDV Depreciation is charged on Net Block of Fixed Assets.

Depreciation vs.Amortization
Significance of Cash Flow
Apollo Hospitals Enterprise Ltd. turnover during 2020-21 was Rs.1056

crore. Expenses excluding depreciation was Rs.800 crore. Depreciation
was Rs.56 crore. Hospital revenue includes 60% credit sales (633.67
crore) made on 20th December 2021 and credit period was 160 days.
During the financial year 2020-21, Hospital has collected 500 crore from
last year’s (2019-2020) credit sales.
1) Calculate accounting profit (PBT) during 2020-21
2) Calculate net operating cash flow as on 31st December 2021
Revenue = 1056
Less: Expense & Depreciation = 800 + 56
PBT = 200
Operating Cash Flow: 1056 – 633.67 = 422.33 +500 = 922.33-800 =
122.33
6

During the financial year 2020-21, Hospital could not collect 500 crore
from last year’s (2019-2020) credit sales.
1. Calculate accounting profit (PBT) during 2020-21
2. Calculate net operating cash flow as on 31st December 2021
Revenue = 1056
PBT = 200 (Book Profit)
Operating Cash Flow: 1056 – 633.67 = 422.33 = 422.33-800 = - 377.67
7
Book Profit (Accounting Profit) Operating Cash FLow

+ve 200 +ve 122.33
+ve 200 -ve -377.67
-ve (Loss) -ve (Negative Cash Flow)
I. Operating Cash Flow could be different from book profit

due to accrual concept of accounting.
II. There could be negative operating cash flow but with
positive book profit and vise a versa.
III. Both Operating cash flow and book profit could be
negative
CASH FLOW (Operating Cash flow: It measures liquidity
position of the business)
8
Types of Accounts
1. Real Account
2. Nominal Account
3. Personal Account
9
Types of Accounts
Real Account: Real Accounts are the ones that are related with
properties, assets or possessions.
10
Types of Accounts
Real Account:
11
Types of Accounts
Real Account Golden Rule:
Debit What Comes in

Credit What Goes Out
12
Types of Accounts
Nominal Account:
A Nominal account is a General

ledger account pertaining to all income, expenses,
losses and gains.
An example of a Nominal Account is an

Interest Account.
13
Types of Accounts
Nominal Account:
14
Types of Accounts
Real Account vs. Nominal Account:

The main difference between real and nominal accounts are the
type of accounts each hold.
Nominal accounts are recorded in the income statement while

the real accounts are recorded in the balance sheet. ...
Nominal accounts are known as temporary accounts while real

accounts are permanent accounts.
15
Types of Accounts
Nominal Account Rule:
Debit All Expenses & Losses

Credit All Incomes & Gains
16
Types of Accounts
Personal Account:
These accounts types are related to persons.

These persons may be natural or artificial
persons
17
Types of Accounts
Personal Accounts:
These accounts are related to individuals, firms, companies,
etc.
A few examples of personal accounts include debtors,
creditors, banks, outstanding /
prepaid accounts, accounts of credit customers, accounts of
goods suppliers, capital, drawings, etc.
18
Types of Accounts
Personal Accounts Golden Rule:
Debit the Receiver

Credit the Giver
19
ACCOUNITNG RULES
20
ACCOUNITNG RULES
The following example to understand application of

these rules. Consider the following transactions:
(i) Mr. Vikas and Mrs. Vaibhavi who are husband and wife
started offering consultancy services, by investing cash
of Rs.5,00,000 and Rs. 2,50,000 respectively.
21
ACCOUNITNG RULES
From business point of view the two effects of this

transaction are: first, the cash of Rs.7,50,000 has come
into business and second, there is an obligation of the
business towards Mr. Vikas and Mrs. Vaibhavi.
Cash is real account, so rule for real account will apply.

Cash has come into the business thereby increasing the
asset. Hence, Cash Account should be debited.
22
ACCOUNITNG RULES
We also know that Vikas’s A/c and Vaibhavi’s A/c are

personal accounts, so rule for personal account will
apply. (As both Vikas and Vaibhavi are givers of cash,
their respective accounts will be credited.)
23
ACCOUNITNG RULES
The answer will be

Debit Cash Rs.7,50,000
Credit Vikas’s Capital Rs. 5,00,000
Credit Vaibhavi’s capital Rs. 2,50,000
Cash A/c Dr. 7,50,000
To Vikash’s Capital A/c 5,00,000

To Vaibhavi’s Capital A/c 2,50,000
Note that the total debits and total credit match. It is the
reflection of the dual aspect concept
24
ACCOUNITNG RULES
(ii) They buy office furniture of Rs. 25,000 for cash.
Here, the two effects are:
First, Furniture (fixed asset) has come into the business

and
second cash (current asset) that has gone out of business.
25
ACCOUNITNG RULES
Since, both the accounts viz. Furniture and Cash are real accounts,
rule for real account will apply.
Furniture has come in (asset increase), it will be debited and cash has
gone out (asset decrease), it will be credited.
The answer will be:- Debit Furniture A/c Rs. 25,000
Credit Cash A/c Rs. 25,000

Furniture A/c Dr. 25,000
To Cash A/c A/c 25,000
26
(iii) They open a current account with Citi Bank by depositing Rs.
1,00,000
Here, the two effects are: First, cash in hand has gone out (asset
decrease) and second, the business cash at bank has increased
(asset increase).
Cash is a real account and Bank is a personal account.
The answer will be: Debit Citi Bank Rs. 1,00,000

Credit Cash Rs. 1,00,000
Citi Bank’s A/c Dr. 1,00,000
To Cash A/c 1,00,000

27
28
ACCOUNTING EQUATION
The whole Financial Accounting dependes on

Accounting Equation which is also known as Balance
Sheet Equation. The basic Accounting Equation is:
29
Illustration-I
Prepare an Accounting Equation from the following transactions in the
books of X Ltd. for January, 2023 : Assess effect of these transactions on
Balance Sheet)
1 Invested Capital in the firm Rs.20,000
2 Purchased goods on credit from Das & Co. for Rs. 2,000
4 Bought plant for cash Rs. 8,000
8 Purchased goods for cash Rs. 4,000
12 Sold goods for cash (cost Rs.4,000 + Profit Rs.2,000) ` Rs.6,000.
18 Paid to Das & Co. in cash Rs. 1,000
22 Received from B. Banerjee Rs. 300 (being a debtor)
25 Paid salary Rs. 6,000
30 Received interest Rs. 5,000
31 Paid wages Rs. 3,000
30

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1
tangible fixed asset except land
Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and
depreciation is charged @20% p.a..
As per the straight line method (SLM) of depreciation of 20%
Gross Block of ECG Machine on 1st June 2020 = Rs.2,00,000 (Shown as asset in
B/S, Increases assets amount
Less: Depreciation: 20% for 10 months (June to March 21): Rs.33,334 (debited to P/L A/c
which will reduce profit)
Net Block of ECG Machine as on 31st March 2021 (B/S): Rs.166,667 (shown as asset in
B/S). Depreciation reduces asset’s
book value
Net Block of ECG Machine as on 1st April 2021= Rs.1,66,667

on gross block of fixed asset: Rs.40,000 (debited to P/L A/c
which will reduce profit)
Net Block of ECG Machine as on 31st March 2022 (B/S): Rs.1,26,667 (shown as asset in
book value
Net Block of ECG Machine as on 1st April 2022 = Rs.1,26,667
Less: Depreciation: 20% for 12 months (2022-23): Rs.40,000 (debited to P/L A/c
on gross block of fixed asset which will reduce profit)
book value
Net Block of ECG Machine as on 1st April 2023 = Rs.86,667
Less: Depreciation: 20% for 12 months (2023-24): Rs.40,000 (debited to P/L A/c
on gross block of fixed asset which will reduce profit)
book value
Under SLM, Depreciation is charged on Gross Block of Fixed Assets

Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and depreciation is
charged @20% p.a.
Gross Block of ECG Machine on 1st June 2020 = Rs.2,00,000 (Shown as asset in B/S)
Less: Depreciation: 20% for 10 months (June to March 21): Rs.33,334 (debited to P/L A/c which
will reduce profit
Net Block of ECG Machine as on 31st March 2021 (B/S): Rs.166,667 (shown as asset in B/S.
Depreciation reduces asset book value)
Net Block of ECG Machine as on 1st April 2021= Rs.1,66,667

on Net Block of fixed asset: Rs.33,334 (debited to P/L A/c which
will reduce profit
Net Block of ECG Machine as on 31st March 2022 (B/S): Rs.1,33,333 (shown as asset in B/S.
Hospital purchased ECG machine worth Rs.2 lakhs on 1st June 2020 and depreciation is charged @20%
p.a.
Less: Depreciation: 20% for 12 months (2022-23): Rs.26,667 (debited to P/L A/c which
on nets block of fixed asset will reduce profit
Net Block of ECG Machine as on 31st March 2023 (B/S): Rs.1,06,667 (shown as asset in B/S.
Less: Depreciation: 20% for 12 months (2023-24): Rs.21,334 (debited to P/L A/c)
on net block of fixed asset which will reduce profit
Net Block of ECG Machine as on 31st March 2024 (B/S): Rs.85,333 (shown as asset in B/S.
Under WDV Depreciation is charged on Net Block of Fixed Assets.

Depreciation vs.Amortization

During the financial year 2020-21, Hospital has collected 500 crore from
last year’s (2019-2020) credit sales.
1) Calculate accounting profit (PBT) during 2020-21
2) Calculate net operating cash flow as on 31st December 2021
Revenue = 1056
PBT = 200
Operating Cash Flow: 1056 – 633.67 = 422.33 +500 = 922.33-800 =
122.33
6

During the financial year 2020-21, Hospital could not collect 500 crore
from last year’s (2019-2020) credit sales.
1. Calculate accounting profit (PBT) during 2020-21
2. Calculate net operating cash flow as on 31st December 2021
Revenue = 1056
PBT = 200 (Book Profit)
Operating Cash Flow: 1056 – 633.67 = 422.33 = 422.33-800 = - 377.67
7
Book Profit (Accounting Profit) Operating Cash FLow

+ve 200 +ve 122.33
+ve 200 -ve -377.67
-ve (Loss) -ve (Negative Cash Flow)
I. Operating Cash Flow could be different from book profit

due to accrual concept of accounting.
II. There could be negative operating cash flow but with
positive book profit and vise a versa.
III. Both Operating cash flow and book profit could be
negative
CASH FLOW (Operating Cash flow: It measures liquidity
position of the business)
8
Types of Accounts
1. Real Account
2. Nominal Account
3. Personal Account
9
Types of Accounts
Real Account: Real Accounts are the ones that are related with
properties, assets or possessions.
These properties can be both physically existing as well as non-

physical in nature.
Thus, Real Accounts can be of two types: Tangible Real Accounts

and Intangible Real accounts.
10
Types of Accounts
Real Account:
 A real account is an account that retains and rolls forward its

ending balance at the end of the year.
 These amounts then become the beginning balances in the
next period.
 The areas in the balance sheet in which real accounts are
found are assets.
 Goodwill is an intangible Real Account
11
Types of Accounts
Real Account Golden Rule:
Debit What Comes in

Credit What Goes Out
Debiting increases assets and crediting will

decrease the assets
12
Types of Accounts
Nominal Account:
A Nominal account is a General

ledger account pertaining to all income, expenses,
losses and gains.
An example of a Nominal Account is an

Interest Account.
13
Types of Accounts
Nominal Account:
Nominal Accounts are accounts related and associated with
losses, expenses, income, or gains.
Examples include a purchase account, sales account, salary

A/C, commission A/C, etc.
The outcome of a nominal account is either profit or loss,

which is then ultimately transferred to the capital account.
14
Types of Accounts
Real Account vs. Nominal Account:

The main difference between real and nominal accounts are the
type of accounts each hold.
Nominal accounts are recorded in the income statement while

the real accounts are recorded in the balance sheet. ...
Nominal accounts are known as temporary accounts while real

accounts are permanent accounts.
15
Types of Accounts
Nominal Account Rule:
Debit All Expenses & Losses

Credit All Incomes & Gains
Debiting reduces profits and crediting incomes and

gain will increase the profits
16
Types of Accounts
Personal Account:
These accounts types are related to persons.

These persons may be natural or artificial
persons
17
Types of Accounts
Personal Accounts:
These accounts are related to individuals, firms, companies,
etc.
A few examples of personal accounts include debtors,
creditors, banks, outstanding /
prepaid accounts, accounts of credit customers, accounts of
goods suppliers, capital, drawings, etc.
18
Types of Accounts
Personal Accounts Golden Rule:
Debit the Receiver

Credit the Giver
Debiting decrease liabilities and Crediting will

increase the liabilities
19
ACCOUNITNG RULES
20
ACCOUNITNG RULES
The following example to understand application of

these rules. Consider the following transactions:
(i) Mr. Vikas and Mrs. Vaibhavi who are husband and wife
started offering consultancy services, by investing cash
of Rs.5,00,000 and Rs. 2,50,000 respectively.
21
ACCOUNITNG RULES
From business point of view the two effects of this

transaction are: first, the cash of Rs.7,50,000 has come
into business and second, there is an obligation of the
business towards Mr. Vikas and Mrs. Vaibhavi.
Cash is real account, so rule for real account will apply.

Cash has come into the business thereby increasing the
asset. Hence, Cash Account should be debited.
22
ACCOUNITNG RULES
We also know that Vikas’s A/c and Vaibhavi’s A/c are

personal accounts, so rule for personal account will
apply. (As both Vikas and Vaibhavi are givers of cash,
their respective accounts will be credited.)
23
ACCOUNITNG RULES
The answer will be

Debit Cash Rs.7,50,000
Credit Vikas’s Capital Rs. 5,00,000
Credit Vaibhavi’s capital Rs. 2,50,000
Cash A/c Dr. 7,50,000
To Vikash’s Capital A/c 5,00,000

To Vaibhavi’s Capital A/c 2,50,000
Note that the total debits and total credit match. It is the
reflection of the dual aspect concept
24
ACCOUNITNG RULES
(ii) They buy office furniture of Rs. 25,000 for cash.
Here, the two effects are:
First, Furniture (fixed asset) has come into the business

and
second cash (current asset) that has gone out of business.
25
ACCOUNITNG RULES
Since, both the accounts viz. Furniture and Cash are real accounts,
rule for real account will apply.
Furniture has come in (asset increase), it will be debited and cash has
gone out (asset decrease), it will be credited.
The answer will be:- Debit Furniture A/c Rs. 25,000
Credit Cash A/c Rs. 25,000

Furniture A/c Dr. 25,000
To Cash A/c A/c 25,000
26
(iii) They open a current account with Citi Bank by depositing Rs.
1,00,000
Here, the two effects are: First, cash in hand has gone out (asset
decrease) and second, the business cash at bank has increased
(asset increase).
Cash is a real account and Bank is a personal account.
The answer will be: Debit Citi Bank Rs. 1,00,000

Credit Cash Rs. 1,00,000
Citi Bank’s A/c Dr. 1,00,000
To Cash A/c 1,00,000

27
28
ACCOUNTING EQUATION
The whole Financial Accounting dependes on

Accounting Equation which is also known as Balance
Sheet Equation. The basic Accounting Equation is:
29
Illustration-I
Prepare an Accounting Equation from the following transactions in
the books of X Ltd. for January, 2023 : (Effect of these transactions
on Balance Sheet)
1 Invested Capital in the firm Rs.20,000
2 Purchased goods on credit from Das & Co. for Rs. 2,000
4 Bought plant for cash Rs. 8,000
8 Purchased goods for cash Rs. 4,000
12 Sold goods for cash (cost Rs.4,000 + Profit Rs.2,000) ` Rs.6,000.
18 Paid to Das & Co. in cash Rs. 1,000
22 Received from B. Banerjee Rs. 300 (being a debtor)
25 Paid salary Rs. 6,000
30 Received interest Rs. 5,000
31 Paid wages Rs. 3,000
30
31
32
Journal Entries
Transaction Type of Golden Rule Journal Entry
Accounts
Mr. X started Cash – Real Debit what comes in Cash A/c Dr. Rs.50000
business with cash Account Credit the giver To Capital A/c Rs.50000
Rs. 50,000 Mr. X – Personal
A/c
Purchased goods for Purchase - Debit all expenses Purchase A/c Dr. Rs.20000
cash Rs.20000 Nominal A/c Credit what goes out To Cash A/c Rs.20000
Cash -Real
A/c
Purchased goods Purchase – Debit all expenses Purchase A/c Dr.Rs.12000
from Mr. A for Rs. Nominal A/c Credit the giver To Mr. A A/c Rs.12000
12000 Mr. A -
(Credit Purchase) Personal A/c
Purchase furniture Furniture – Real Debit what comes in Furniture A/c Dr. Rs.6000
for cash for Rs. 6000 A/c Credit what goes out To Cash A/c Rs.6000
Cash - Real
A/c
Sold goods for cash Cash - Real Debit what comes in Cash A/c Dr. Rs.13000
for Rs. 13000 A/c Credit all gains To Sales A/c Rs.13000
Sales - 1
Nominal A/c
Journal Entries
Transacti Type of Golden Journal Entry
on Accounts Rule
Sold goods Mr. B - Debit the Mr. B’s A/c Dr. Rs.15000
on credit Personal A/c receiver To Sales A/c Cr. Rs.15000
to Mr. B Sales - Credit all
for Rs. Nominal A/c incomes
15000 and gains
Paid cash Mr. A - Debit the A’s A/c Dr. Rs.12000
to Mr. A Rs. Personal A/c receiver To Cash A/c Cr. Rs.12000
12000 Cash - Credit
Real A/c what goes
out
Received Cash - Debit what Cash A/c Dr.Rs.15000
cash from Real A/c comes in To Mr. B’s A/c Cr. Rs,15000
Mr. B Rs. Mr. B - Credit the
15000 Personal giver
2
Journal Entries
Transaction Type of Accounts Golden Rule Journal Entry
Brought machinery for Machinery – Real A/c Debit what comes Machinery A/c Dr. 80k
cash for Rs.80000 Cash - Real A/c in To Cash 80k
Credit what goes
out
Paid Rent of Rs. 4000 Rent - Nominal A/c Debit all expenses Rent A/c Dr. 4000
by Cheque Bank - Personal A/c Credit the giver To Bank A/c 4000
Paid Wages for cash Wages - Nominal A/c Debit all expenses Wages A/c Dr. 4500
Rs. 4500 Cash - Real A/c Credit what goes To cash A/c 4500
out
3
Journal Entries
Paid salary to Mr. Ram Salary - Nominal A/c Debit all expenses Salary A/c Dr. 1200
Rs. 1200 Cash - Real A/c Credit what goes out To Cash A/c 1200
Received Commission Cash - Real A/c Debit what comes in Cash A/c Dr. 2000
Rs. 2000 Commission – Nominal Credit all gains To Commission
A/c 2000
Salaries due to clerks Salaries - Nominal A/c Debit all expenses Salaries A/c Dr.
Rs. 2000 2000
Outstanding salaries Credit the giver
(liability) – To O/S Salaries
Representative personal 2000
A/c
Out of the rent paid this Prepaid rent (asset) – Debit the receiver Prepaid Rent A/c Dr.
year , Rs. 600 is for Representative personal 600
next year a/c
Credit all gains
Rent- Nominal A/c To Rent A/c 600
(benefit for next year)
4
Transaction: Started Business with capital of
Rs. 2500000
Type of Accounts Golden Rule
Cash – Real A/c Debit what comes in

Capital – Personal A/c Credit the giver
Cash A/c Dr. Rs. 2500000

To Capital A/c Rs. 2500000
(Being business started with cash Rs. 25 lakhs)
Transaction : Opened a bank account with SBI
for Rs. 200000
Bank – Personal A/c Debit the receiver

Cash -- Real A/c Credit what goes out
Bank A/c Dr. Rs.200000
To Cash A/c Rs.200000

(Being cash Rs.2 lakhs deposited in
the bank)
Transaction : Purchased goods from Tandon &
Co. for cash Rs. 100000
Purchase – Nominal A/c Debit all expenses

Purchase A/c Dr. Rs. 100000
To Cash A/c Rs. 100000

(Being goods worth Rs. 1 lakh purchased for cash)
Transaction : Purchased goods on credit from
Burman’s Pvt Ltd. for Rs. 200000
Purchase – Nominal A/c Debit all expense

Mr. Burman –Personal A/c Credit the GIVER

To Burman A/c Rs. 200000
(Being for goods worth Rs. 2 lakhs
purchased goods from Burman on
credit)
Transaction : Goods Return to Burman of Rs.
50000
Burman’s - Personal A/c Debit the receiver

Purchase Return- A/c Credit all gains
Burman’s A/c Dr. Rs. 50000

To Purchase Return A/c Rs. 50000
Transaction : Paid Rs. 140000 in full
settlement
Burman’s – Personal A/c Debit the receiver

Discount – Nominal A/c Credit all gains
Cash - Real A/c Credit what goes out
Burman A/c Dr. Rs.150000
To Discount A/c Rs.10000

To cash A/c Rs.140000
(Being cash paid to Mr. Burman and
received discount worth Rs.10k)
Transaction : Paid Mr. Dharam, the landlord
Rs. 50000 towards rent
Rent - Nominal A/c Debit all expenses

Rent A/c Dr. Rs.50k

To Cash A/c 50k
(Being rent paid to landlord Mr. Dharam Rs.50k)
Transaction : Withdraw cash for household
expenses Rs.60000
Drawings - Personal A/c Debit the receiver

Drawings A/c Dr. Rs.60000

(Being cash withdrawn for household
expenses)
Transaction: Sold goods to Mr. Karan for Cash
Rs. 250000
Cash- Real A/c Debit what comes in

Sales - nominal A/c Credit all incomes & gains
To Sales A/c Rs.250000

(Being goods sold for cash)
Transaction : Sold goods to Dev on credit for
Rs. 100000
Dev – Personal A/c Debit the receiver

Sales - nominal A/c Credit all gains and income
Dev A/c Dr. Rs.100000

To Sales A/c Rs. 100000
(Being goods sold for dev on Credit )
Transaction : Goods return by Mr. Dev for Rs.
25000
Sales Return – Nominal A/c Reverse transaction

Dev - Personal A/c Credit the giver
Sales Return A/c Dr. Rs.25000

To Dev A/c Rs.25000
(Being goods returned by Dev)
Transaction : Received cash from Mr. Dev Rs.
70000 in full settlement

Discount- Nominal A/c All expenses and losses
Dev – Personal A/c Credit the giver
Cash A/c Dr. Rs.70000

Discount A/c Dr. Rs. 5000
To Mr. Dev A/c Rs.75000

(Being cash received from Dev and allowed
him discount)
Transaction: Purchased furniture for office
use for Rs. 100000

Furniture – Real A/c Debit what comes in
Furniture A/c Dr. Rs.100000

(Being Furniture purchased for office
use by cash)
Transaction: Purchased furniture for
re-sale Rs. 100000
Purchase - Nominal A/c Debit all expense

Cash – Real A/c Credit what goes out
Purchase A/c Dr. Rs.100000

(Being furniture purchased for resale)
Transaction 1: Paid cartage on goods purchased Rs.
35000
Transaction 2: Paid Cartage on good sold Rs. 80000

Cartage inwards- Nominal A/c Debit all expenses
Cash – Real A/c
Credit what goes out
Cartage outwards- Nominal A/c Debit all expenses
Cash - Real A/c
Cart. inwards A/c Dr. Rs.35000
Cart. outwards A/c Dr. Rs.80000

To Cash Rs.80000
Transaction: Purchased goods on credit
from Arora at the list price of Rs.8000. A
trade discount of 10% was allowed.

Arora – Personal A/c Credit the giver
To Arora A/c Rs.7200

(Being goods purchased on credit from
Arora with trade discount of 10%)
Transaction: Goods sold on credit to Flora
at a list price of Rs.4000. A trade discount
of 5% was allowed

Flora - Personal A/c Debit the receiver
Sale – Nominal A/c Credit the income
Flora A/c Dr. Rs.3800

(Being goods sold on credit to Flora and
allowed trade discount of 5%)
Transaction: Received cheque from Flora
for Rs.3600 in full settlement.

Bank - Personal A/c Debit the receiver
Discount A/C – Nominal A/C Debit the losses
Flora – Personal A/c Credit the giver

Discount A/C Dr. Rs.200
To Flora A/c Rs.3800
(Being cheque received from Flora in full
settlement)
Transaction: Paid Arora Rs.7000 by cheque
in full settlement

Arora - Personal A/c Debit the receiver
Bank – Personal A/c Credit the giver
Discount – Nominal A/c Credit the income
Arora A/c Dr. Rs.7200

To Bank A/c Rs.7000
To Discount A/C Rs.200
(Being cheque Rs.7000 paid to Arora for full
settlement and avail discount of Rs. 200)
Journal Entries
Accounts
A/c
Cash -Real
A/c
12000 Mr. A -
Cash - Real
A/c
Sales - 1
Nominal A/c
Journal Entries
on Accounts Rule
15000 and gains
12000 Cash - Credit
Real A/c what goes
out
2
Journal Entries
Credit what goes
out
out
3
Journal Entries
A/c 2000
Rs. 2000 2000
A/c
next year a/c
Credit all gains
4
Rs. 2500000


for Rs. 200000


the bank)




credit)
50000


settlement



Rent A/c Dr. Rs.50k

To Cash A/c 50k
expenses Rs.60000


expenses)
Rs. 250000


Rs. 100000


25000


To Dev A/c Rs.25000



him discount)
use for Rs. 100000


use by cash)
re-sale Rs. 100000


35000

Cash – Real A/c
Cash - Real A/c

To Cash Rs.80000


of 5% was allowed




settlement)
in full settlement


To Bank A/c Rs.7000
Journal Entries - Questions
Dt Particulars Rs
1 Commenced business with cash 40,000
2 Purchased goods on credit from shyam 30,000

3 Purchased goods for cash 1,000
4 Paid Gopalan an advance for goods 2,000

ordered
5 Received cash from Murthy as advance for 3,000

goods ordered by him
6 Purchased furniture for office use for cash 2,000

Journal Entries - Answer
Date Particulars Debit Credit
2001 Rs Rs
Jan 1 Cash Account Dr 40,000
To capital account 40,000
(being the cash brought into business
as capital)
Jan 2 Purchases Account Dr 30,000
To Shyam account 30,000
(being the goods purchased on credit)
To cash account 1,000
(being the goods purchased for cash)
Jan 4 Gopalan Account Dr 2,000
(being the amount paid to Gopalan)
To Murthy account 3,000
(being the cash received from Murthy)
Jan 6 Furniture Account Dr 2,000
(being the furniture purchased for
office use for cash)
7 Paid wages 500
8 Received commission (in cash) 600
9 Goods returned to shyam 200

10 Goods sold to Kamal 10,000
11 Paid for postage and telegrams 200
13 Goods returned by Kamal 500

15 Paid for Stationery 200
Jan 7 Wages Account Dr 500
To cash account 500
(being the wages paid)
Jan 8 Cash Account Dr 500
To commission received account 500
(being the commission received)
Jan 9 Shyam Account Dr 200
To Purchase returns account 200
(being goods returned to shyam)
Jan Kamal Account Dr 10,00
10 To sales account 0 10,000
(being goods sold to kamal on credit)
Jan Postages & Telegrams Account Dr 200
12 To cash account 200
(being amount paid for postages &
telegrams)
Jan Sales returns Account Dr 500
13 To Kamal account 500
(being goods returned by Kamal)
Jan Stationery Account Dr 200
(being the amount paid for stationery)
18 Cash Deposited at bank 500

20 Goods sold for cash 750
22 Bought goods for cash 1,000
25 Paid salaries 700
28 Paid rent 500
31 Draw cash for personal use 1,000
Jan Bank Account Dr 500
(being the amount deposited into
Bank)
Jan cash Account Dr 750
20 To sales account 750
(being the goods sold for cash)
Jan Purchases Account Dr 1,000
22 To cash account 1,000
Jan Salaries Account Dr 700
(being the amount paid as salaries)
Jan Rent Account Dr 500
(being the rent paid)
Jan Narayan’s Drawing Account Dr 1000
(being the cash drawn for personal
use)
32 Rent Outstanding 50,000
33 Insurance Premium Paid in Advance 10,000

(Prepaid)
34 Purchased Equipment 1 Lakhs
35 Depreciation Charged @ 20% 1 Lakh
36 Create Provision for Doubtful Bad Debt
32 Rent A/C 50000

To Rent Outstanding A/C 50000
33 Prepaid Insurance A/C Dr. 10000
To Cash A/C 10000
34 Equipment A/C Dr. 1 Lakhs
To Cash A/C 1 Lakhs
35 Depreciation A/C Dr. 20k
To Equipment A/C (Net Block) 20k
36 Provision for Doubtful Bad Debt A/C Dr. XXX
To Sundry Debtor A/C XXX
Creating Provision for Doubtful Bad Debt against
sundry debtors
Sold good on credit to XYZ Ltd. Worth Rs.50 lakhs

Sold service on credit to PQR worth Rs.6 lakhs
XYZ’s A/C Dr. Rs.50 lakhs (XYZ Ltd is representative Personal Account)
To Sales A/c Rs.50 lakhs (Sales is Nominal Account)
(Being goods worth Rs. 50 lakhs sold on credit to XYZ Ltd.)
PQR’s A/c Dr. 6 lakhs

To Sales A/c Rs.6 lakhs
(Being service worth Rs. 6 lakhs extended on credit to patient)
Total sundry debtors = Rs.56.00 lakhs

Create (provide) 10% provision for doubtful bad debt on sundry debtors
Bad Debt A/c Dr.5.6 lakhs (This is debited to P/L Account which will reduce profit)
To Provision for Doubtful Debt Rs.5.6 lakhs
( This 5.6 lakhs will be deducted from sundry debtors in B/s. Therefore, net sundry
debtors in B/S will be = 50.40 lakhs (56 lakhs – 5.6 lakhs)
Deferred Revenue Expenditure:
Expenditure today to get long term return. Example: Advertisement
expenditure (expense)
This expenditure is revenue in nature but benefits are derived for a number
of years.
Suppose Rs.500, 00, 000 spent on advertisement and benefits are expected
for 5 years.
Advertisement A/C Dr. Rs. 100,00,000

To Cash A/C Rs.100,00,000
At the year end:

P/L A/C Dr. Rs.100,00,000
To Advertisement Expense Rs.100,00,000
Remaining Rs.400,00,000 will be shown as current assets in Balance Sheet

Deferred Revenue :
Suppose Amazon India has received a subscription fee of Rs.3,00,000 for 3
years from a customer (A).
Cash A/C Dr. Rs.3,00,000

To Deferred Revenue (A) Rs.3,00,000
At the end of 1st Year

Deferred Revenue(A) A/c Dr. Rs.1,00,000
To Revenue A/c Rs.1,00,000
Remaining Rs.2,00,000 will be shown as current liability in balance sheet.
At the end of 2nd Year
Deferred Revenue (A) A/c Dr. Rs.1,00,000

Deferred Revenue :
At the end of 3rd Year

Statement of Income & Expenditure for the Year 2022-23.
Tata Steel Ltd
(A) Income from Operations
+ Sales & Services Revenue
+ Other Operating Income
Total Income from Operation
(B) Non-Operating Income (Income from

other sources)
+ Interest Received
+ Other Investment (capital gain from
shares)
+ Foreign Exch Gain
+ Income from Affiliates
TOTAL INCOME (A+ B)
( C ) Operating Expenses
Raw Material Consumed ***
Salaries, Wages, etc
Repairs and Maintenance
Research & Development
Depreciation & Amortization
Prov For Doubtful Accts RM Consumed: Opening stock of RM +
Other Operating Expense
Total Operating Expenses
Purchase – Purchase Return – Loss in
stock – Closing stock of RM.
(D) Non-Operating Expense / Loss
Interest Income
Other Investment (Inc) Loss
Foreign Exch Loss
Net Sales – RM Consumed = Contribution
Loss from Affiliates Contribution / Net Sales = Contribution
TOTAL NO-OPERATING EXPENSES AND
LOSSES (C + D ) Margin
PBT (A + B - C - D)
Minus Tax
PAT (Profit After Tax)
Statement of Sources and Application of Funds as on
31/03/2023
SOURCES OF FUND
Share Capital
+ Common Stock
+ Retained Earnings (R & S)
Net Worth or Total Owners
Equity (A) 6000
Long-Term Liabilities
+ LT Borrowings
+ Pension Liabilities
+ Deferred Revenue
Total Noncurrent Liabilities (B) 4000
Total Sources of Long Term

Fund (A + B) 10000
Statement of Sources and Application of Funds as on 31/03/2023
APPLICATION OF FUNDS
Fixed Assets
Gross Block of
+ Property, Plant & Equip
- Accumulated Depreciation
Net Block of PPE
Intangible Assets
+ Goodwill
Total Fixed Assets ( C) 8000
Current Assets
Cash
ST Investments
Accounts Receivable
Inventories:
+ Raw Materials
+ Work In Process
+ Finished Goods
+ Prepaid Expenses
Current Liabilities
Interest & Dividends Payable
Other Payables & Accruals
ST Borrowings
Deferred Revenue
Deferred Tax Liabilities
Total Current Liabilities
(CA - CL) Net Current Assets (D) 2000
Total Application of Funds (C + D) 10000

Journal Entries
Accounts
A/c
Cash -Real
A/c
12000 Mr. A -
Cash - Real
A/c
Sales - 1
Nominal A/c
Journal Entries
on Accounts Rule
15000 and gains
12000 Cash - Credit
Real A/c what goes
out
2
Journal Entries
Credit what goes
out
out
3
Journal Entries
A/c 2000
Rs. 2000 2000
A/c
next year a/c
Credit all gains
4
Rs. 2500000


for Rs. 200000


the bank)




credit)
50000


settlement



Rent A/c Dr. Rs.50k

To Cash A/c 50k
expenses Rs.60000


expenses)
Rs. 250000


Rs. 100000


25000


To Dev A/c Rs.25000



him discount)
use for Rs. 100000


use by cash)
re-sale Rs. 100000


35000

Cash – Real A/c
Cash - Real A/c

To Cash Rs.80000


of 5% was allowed




settlement)
in full settlement


To Bank A/c Rs.7000
Dt Particulars Rs
1 Commenced business with cash 40,000
2 Purchased goods on credit from shyam 30,000

3 Purchased goods for cash 1,000
4 Paid Gopalan an advance for goods 2,000

ordered
5 Received cash from Murthy as advance for 3,000

goods ordered by him
6 Purchased furniture for office use for cash 2,000

Date Particulars Debit Credit
2001 Rs Rs
To capital account 40,000
(being the cash brought into business
as capital)
To Shyam account 30,000
(being the goods purchased on credit)
Jan 4 Gopalan Account Dr 2,000
(being the amount paid to Gopalan)
To Murthy account 3,000
(being the cash received from Murthy)
Jan 6 Furniture Account Dr 2,000
(being the furniture purchased for
office use for cash)
7 Paid wages 500
8 Received commission (in cash) 600
9 Goods returned to shyam 200

10 Goods sold to Kamal 10,000
11 Paid for postage and telegrams 200
13 Goods returned by Kamal 500

15 Paid for Stationery 200
Jan 7 Wages Account Dr 500
To cash account 500
(being the wages paid)
Jan 8 Cash Account Dr 500
To commission received account 500
(being the commission received)
Jan 9 Shyam Account Dr 200
To Purchase returns account 200
(being goods returned to shyam)
Jan Kamal Account Dr 10,00
10 To sales account 0 10,000
(being goods sold to kamal on credit)
Jan Postages & Telegrams Account Dr 200
(being amount paid for postages &
telegrams)
Jan Sales returns Account Dr 500
13 To Kamal account 500
(being goods returned by Kamal)
Jan Stationery Account Dr 200
(being the amount paid for stationery)
18 Cash Deposited at bank 500

20 Goods sold for cash 750
22 Bought goods for cash 1,000
25 Paid salaries 700
28 Paid rent 500
31 Draw cash for personal use 1,000
Jan Bank Account Dr 500
(being the amount deposited into
Bank)
Jan cash Account Dr 750
20 To sales account 750
(being the goods sold for cash)
Jan Purchases Account Dr 1,000
22 To cash account 1,000
Jan Salaries Account Dr 700
(being the amount paid as salaries)
Jan Rent Account Dr 500
(being the rent paid)
Jan Narayan’s Drawing Account Dr 1000
(being the cash drawn for personal
use)
32 Rent Outstanding 50,000
33 Insurance Premium Paid in Advance 10,000

(Prepaid)
34 Purchased Equipment 1 Lakhs
35 Depreciation Charged @ 20% 1 Lakh
36 Create Provision for Doubtful Bad Debt
32 Rent A/C 50000

To Rent Outstanding A/C 50000
33 Prepaid Insurance A/C Dr. 10000
To Cash A/C 10000
34 Equipment A/C Dr. 1 Lakhs
To Cash A/C 1 Lakhs
35 Depreciation A/C Dr. 20k
To Equipment A/C (Net Block) 20k
36 Provision for Doubtful Bad Debt A/C Dr. XXX
To Sundry Debtor A/C XXX
Creating Provision for Doubtful Bad Debt against
sundry debtors
Sold good on credit to XYZ Ltd. Worth Rs.50 lakhs

Sold service on credit to PQR worth Rs.6 lakhs
XYZ’s A/C Dr. Rs.50 lakhs (XYZ Ltd is representative Personal Account)
To Sales A/c Rs.50 lakhs (Sales is Nominal Account)
(Being goods worth Rs. 50 lakhs sold on credit to XYZ Ltd.)
PQR’s A/c Dr. 6 lakhs

To Sales A/c Rs.6 lakhs
(Being service worth Rs. 6 lakhs extended on credit to patient)
Total sundry debtors = Rs.56.00 lakhs

Create (provide) 10% provision for doubtful bad debt on sundry debtors
Bad Debt A/c Dr.5.6 lakhs (This is debited to P/L Account which will reduce profit)
To Provision for Doubtful Debt Rs.5.6 lakhs
( This 5.6 lakhs will be deducted from sundry debtors in B/s. Therefore, net sundry
debtors in B/S will be = 50.40 lakhs (56 lakhs – 5.6 lakhs)
Deferred Revenue Expenditure:
Expenditure today to get long term return. Example: Advertisement
expenditure (expense)
This expenditure is revenue in nature but benefits are derived for a number
of years.
Suppose Rs.500, 00, 000 spent on advertisement and benefits are expected
for 5 years.
Advertisement A/C Dr. Rs. 100,00,000

To Cash A/C Rs.100,00,000
At the year end:

P/L A/C Dr. Rs.100,00,000
To Advertisement Expense Rs.100,00,000
Remaining Rs.400,00,000 will be shown as current assets in Balance Sheet

Deferred Revenue :
Suppose Amazon India has received a subscription fee of Rs.3,00,000 for 3
years from a customer (A).
Cash A/C Dr. Rs.3,00,000

To Deferred Revenue (A) Rs.3,00,000
At the end of 1st Year

Deferred Revenue(A) A/c Dr. Rs.1,00,000
At the end of 2nd Year

Deferred Revenue :
At the end of 3rd Year

Statement of Income & Expenditure for the Year 2022-23.
Tata Steel Ltd
(A) Income from Operations
+ Sales & Services Revenue
+ Other Operating Income
Total Income from Operation
(B) Non-Operating Income (Income from

other sources)
+ Interest Received
+ Other Investment (capital gain from
shares)
+ Foreign Exch Gain
+ Income from Affiliates
TOTAL INCOME (A+ B)
( C ) Operating Expenses
Raw Material Consumed ***
Salaries, Wages, etc
Repairs and Maintenance
Research & Development
Depreciation & Amortization
Prov For Doubtful Accts RM Consumed: Opening stock of RM +
Other Operating Expense
Total Operating Expenses
Purchase – Purchase Return – Loss in
stock – Closing stock of RM.
(D) Non-Operating Expense / Loss
Interest Income
Other Investment (Inc) Loss
Foreign Exch Loss
Net Sales – RM Consumed = Contribution
Loss from Affiliates Contribution / Net Sales = Contribution
TOTAL NO-OPERATING EXPENSES AND
LOSSES (C + D ) Margin
PBT (A + B - C - D)
Minus Tax
PAT (Profit After Tax)
Statement of Sources and Application of Funds as on
31/03/2023
SOURCES OF FUND
Share Capital
+ Common Stock
+ Retained Earnings (R & S)
Net Worth or Total Owners
Equity (A) 6000
Long-Term Liabilities
+ LT Borrowings
+ Pension Liabilities
+ Deferred Revenue
Total Noncurrent Liabilities (B) 4000
Total Sources of Long Term

Fund (A + B) 10000
Statement of Sources and Application of Funds as on 31/03/2023
Fixed Assets
Gross Block of
+ Property, Plant & Equip
- Accumulated Depreciation
Net Block of PPE
Intangible Assets
+ Goodwill
Total Fixed Assets ( C) 8000
Current Assets
Cash
ST Investments
Accounts Receivable
Inventories:
+ Raw Materials
+ Work In Process
+ Finished Goods
+ Prepaid Expenses
Current Liabilities
Interest & Dividends Payable
Other Payables & Accruals
ST Borrowings
Deferred Revenue
Deferred Tax Liabilities
Total Current Liabilities
(CA - CL) Net Current Assets (D) 2000
Total Application of Funds (C + D) 10000

Trial Balance
 Trial Balance is a list of closing balances of ledger

accounts on a certain date and is the first step
towards the preparation of financial statements.
 It is usually prepared at the end of an accounting

period to assist in the drafting of financial
statements.
1
Trial Balance
 Ledger balances are segregated into debit balances

and credit balances.
 Asset and expense accounts appear on the debit
side of the trial balance whereas liabilities, capital
and income accounts appear on the credit side.
 If all accounting entries are recorded correctly and

all the ledger balances are accurately extracted, the
total of all debit balances appearing in the trial
balance must equal to the sum of all credit
balances.
2
Exercise: From the following Trial Balance of Pratibha and
Company, prepare State of Income and Expenditure for the Year
ending 30th June,2020 after giving effect to under mentioned
adjustments.
Particulars Debit Balalnce Credit Balance

Capital (debt capital or Loan)
a/c on 30-06-2020 50000
Opening stock of inventories 8000
Purchases 20000
Purchase Returns 400
Sales 80000
Sales returns 1500
Carriage inwards 1200
Carriage outwards 2500
Apprenticeship Premium 1500
Bills Payable 2500
Sundry Creditors 15800
Wages 3300
Salaries 5500
Rent 1100
Freight 2400
Fire Insurance Premium 900
3
Bad debts 2100
Discount 500
Printing & Stationary 250
Rates and Taxes 350
Traveling Expenses 150
Sundry Trade Expenses 200
Business Premises 55000
Furniture and Fixtures 2500
Bills Receivable 3000
Sundry Debtors 20000
Packing Machinery 4500
Loan given to Smith 5000
Investments 3500
Cash in hand 250
Cash at Bank 3500
Proprietor's withdrawals 3000
TOTAL 150200 150200
4
Adjustments to be made for the current period.
1. Inventory in hand (closing stock of inventories) on 30th

June,2020, Rs.7000.
2. Wages to Laborers of Rs.300 for the last month are outstanding.
3. Salaries to clerks for the month of June,2020 are outstanding

Rs.500.
4. Rent of godowns for the last month is outstanding Rs.100.
5. Fire Insurance Premium include Rs.600 paid on 17th Jan.,2020,

to run for one year from 1st Jan.,2020 to 31st December 2020.
6. Apprenticeship Premiums are for three years, Received in

advance on 1st July,2019.
5
7. A stationary bill for Rs.30 remains unpaid and unrecorded.
8. Depreciate: Business Premises by 5%, Furniture & Fixtures by

10%, and Packing Machinery by 10%.
9. Interest on loan to Smith for one year has accrued at 7%
10.Interest on Investments in debt securities Rs.75 has accrued as on

30th June,2019.
11.Interest on loan capital to be allowed at 5% for one year.
12.Interest on Drawings to be charged to him as ascertained for the

year Rs.80.
6
13.Create a provision on debtors for doubtful debts at 5% and
discount at 3%.
14.Create a reserve on creditors for discount at 3%.
7
Trial Balance


statements.
1
Trial Balance


balances.
2
Practice 2: From the following Trial Balance of Israelita Albert
Einstein (Brazilian Hospital) Ltd as on 31st December 2001.
Prepare Profit & Loss Account and Balance Sheet
Identify all incomes

and gains to be
Trial Balance of Israelita Albert Einstein Ltd. from credited, Expenses
1st Jan to 31st Dec 2001 and Losses to be
Particulars Dr. Cr. debited to P/L
Capital 25000 Account.
Loans 5000
Sales 35000
Accounts Payable 4000 Identify all assets,
Bills Payable 5000 Liabilities and
Purchase Return 2000 Capital to be in B/L
Dividend Received 3000
3
Trial Balance of Israelita Albert Einstein Ltd. from 1st Jan to 31st
Dec 2001
Particulars Dr. Cr.
and gains to be
Equipment 13000 credited, Expenses
Buildings 17000 and Losses to be
Accounts Receivable Outstanding (A/R) 9650 debited to P/L
Purchases 18000 Account.
Discount Allowed 1200
Wages 7000
Salaries 3000
Travelling Expense 750 Identify all assets,
Freight 200
Liabilities and
Insurance 300
Commission Paid 100
Capital to be in B/L
Cash on-hand 100
Cash at Bank 1600
Repairs & Maintenance 500
Interest on Loans 600
Opening Inventories 6000
Total 79000 79000
4
Following Transactions were not recorded in Trial
Balance from 1st Jan to 31st Dec 2001
Closing Stock of Inventories 8000

Depreciation during 2000-01
on Equipment 0.15
on Building 0.1
Provision for doubtful on A/R 500

Insurance Premium Prepaid 50
Rent Outstanding 100
Check the impact of transactions not recorded on P/L A/C and B/L.
Adjust accordingly
5
Statement of Income and Expenditure of Israelita Albert
Einstein Ltd. (Brazilian Hospital) for the year ending
31/12/2001
Statement of Income and Expenditure Israelita Albert Einstein Ltd. for

the year ending 31/12/2001
REVENUE:
Sale (Service) 35000
Income from Operation 35000
Income from other sources 3000
Total Income (income from operations + Income
from other sources) 38000
REVENUE EXPENDITURE
Add: Purchase 18000
Less: Purchase Return 2000
(1) Less: Closing Stock of Inventories 8000
Consumables Consumed 14000
Add with CA in B/S
6
31/12/2001
Wages 7000
Salaries Expenses 3000
Travelling Expenses 750
Freight Expenses 200
Insurance Premium Expenses 300
(4) Less: Prepaid (Add with CA in B/S) 50 250
Commission 100
Repairs & Maintenance Expenses 500
Interest on Loan 600
(5) Add Rent Outstanding (Add with CL in B/S) 100
(3) Provision for doubtful debt (Deduct from A/R in B/S) 500
(2) Depreciation
On Plant and Machinery 1950
(Deduct from P/M and
On Bulding 1700 Building in B/S)
Total Expenses 31850

Profit (38000 – 31850) credited to capital account 6150.00
7
Statement of Sources and Application of Funds of Israelita
Albert Einstein Ltd. (Brazilian Hospital) as on 31/12/2001
Sources & Application of Funds as on 31/12/2001

SOURCES OF FUNDS
Capital 25000
Add: Net Profit (Transferred from profit & Loss Account) 6150
Owners Equity (Net Worth) 31150
Creditors Liabilities
Long-term liabilties
Loan from bank 5000
Current Liabilties
Accounts Payable 4000
Bills Payable 5000
Outstanding Rent 100
Total Sources of Funds 45250
8
Long-Term Assets (Fixed Assets)

Gross Block of Plant and Machinery 13000
Less: Depreciation 1950
Net Block of Plant and Machinery 11050
Gross Block of Building 17000
Net Block of Building 15300
CURRENT ASSETS
Cash on Hand 100
Cash at Bank 1600
Accounts Receivable 9650
Less: Provision for doubtful bad debt 500 9150
Closing stock of inventories 8000
Pre-Paid Insurance Premium 50
Total Application of Funds 45250
Assets = Creditors’ Liability + Owner’s

Capital
9
Practice 3 ( RIL ) : From Trial Balance, prepare P/L
and B/S
Trial Balance as on 31/12/2018 Dr. Cr.
Sales 300000
Equipment 120000
Rent, Rates & Taxes 20000
Sales Return 30000
Freight 4000
Inventories as on 31/12/2017 120000
Purchases 230000
Interest on Bank Loan 5000
Salaries 70000
Cash in hand 5000
Purchase Return 10000
Bank Loan 150000
Capital 181500
Bills Payable 26000
Legal Charges 500
General Expenses 8000
Cash at Bank 20000
Total 707500 707500 10
Practice 3 : From Trial Balance, prepare P/L and B/S
The following transactions were not recorded

in trial balance
Provision for bad & Doubtful Debts on A/R 5%
Interest on Bank Loan Outstanding 7000
11
Ledger
Collection of an entire group of similar accounts in
double-entry bookkeeping.
Also called book of final entry, a ledger records

classified and summarized financial information from
journals (the 'books of first entry') as debits and
credits, and shows their current balances.
1
Example of Ledger
Cash A/C CAPITAL A/C

Dr Cr Dr Cr
To Capital 50000 By Purchase 20000 By Cash 50000
To Sales 13000 By Furniture 6000 To Balance c/d 50000
By Balance C/D 37000 Total 50000 Total 50000
63000 63000 By Balance b/d 50000
To Balance b/d 37000
PURCHASE A/C Mr. A's A/C
Dr Cr Dr Cr
To Cash 20000 By Balance c/d 32000 To Balance c/d 12000 By Purchase 12000
Mr. A 12000
Total 32000 Total 32000 Total 12000 Total 12000
To Balance b/d 32000 By Balance b/d 12000
FURNITURE A/C
Dr Cr
To Cash 6000 By Balance c/d 6000
By Balance b/d 6000
2
Trial Balance


statements.
3
Trial Balance


balances.
4
Exercise: From the following Trial Balance of Pratibha and
Company, prepare State of Income and Expenditure for the Year
ending 30th June,2020 after giving effect to under mentioned
adjustments.
Particulars Debit Balalnce Credit Balance

Capital (debt capital or Loan)
a/c on 30-06-2020 50000
Opening stock of inventories 8000
Purchases 20000
Sales 80000
Sales returns 1500
Apprenticeship Premium 1500
Bills Payable 2500
Wages 3300
Salaries 5500
Rent 1100
Freight 2400
5
Bad debts 2100
Discount 500
Rates and Taxes 350
Sundry Debtors 20000
Packing Machinery 4500
Loan given to Smith 5000
Investments 3500
Cash in hand 250
Cash at Bank 3500
TOTAL 150200 150200
6
Adjustments to be made for the current period.
1. Inventory in hand (closing stock of inventories) on 30th

June,2020, Rs.7000.
2. Wages to Laborers of Rs.300 for the last month are outstanding.
3. Salaries to clerks for the month of June,2020 are outstanding

Rs.500.
4. Rent of godowns for the last month is outstanding Rs.100.
5. Fire Insurance Premium include Rs.600 paid on 17th Jan.,2020,

to run for one year from 1st Jan.,2020 to 31st December 2020.
6. Apprenticeship Premiums are for three years, Received in

advance on 1st July,2019.
7
7. A stationary bill for Rs.30 remains unpaid and unrecorded.
8. Depreciate: Business Premises by 5%, Furniture & Fixtures by

10%, and Packing Machinery by 10%.
9. Interest on loan to Smith for one year has accrued at 7%
10.Interest on Investments in debt securities Rs.75 has accrued as on

30th June,2019.
11.Interest on loan capital to be allowed at 5% for one year.
12.Interest on Drawings to be charged to him as ascertained for the

year Rs.80.
8
13.Create a provision on debtors for doubtful debts at 5% and
discount at 3%.
14.Create a reserve on creditors for discount at 3%.
9
Statement of Income and Expenditure for the Year
2019-20
Adjustment Rs.
Ref. No By Sales 80000
Less: returns 1500
Apprentice Premium 1500

6(6) Less: Received in advance 1000 500
9(9) Interest on Smith Loan @ 7% on 5000 350
10(10) Accrued Interest on Investments 75
12(12) Interest on Drawings 80
(14) Reserve for Discount on Creditors @ 3% on
14 15800 474
Income from Other Sources 1479
Total Income 79979
10
Expenditure (Revenue) [ Expenses]
Opening Inventory 8000
Purchases 20000
Less: Purchase returns 400
1 (1) Less: closing inventory 7000
Raw material consumed 20600
Carriage Outward 2500
Wages 3300
2(2) Add: Outstanding 300 3600
Freight 2400
Bad Debts 2100
7(7) Add: Outstanding 30
280
Salaries 5500
(3)Salary Outstanding 500 6000
Rent on Godown 1100
(4)Rent on Godown Outstanding 100 1200
Rent & Rates 350
Insurance Premium 900
(5)Insurance Premium Paid in Advance 300 600
11
8(8) Depreciation on:
Business Premises by 5% on 55000 2750
Furniture & Fixtures by 10% on 2500 250
Packing Machinery by 10% on 4500 450
11(11) Interest on Debt Capital 5% on 50K 2500
13(13) Provision for Doubtful Debts @ 5% on 20000 1000
Discount Allowed to Debtors 500
(13) Provision for Discount on Debtors @ 3% on 19000
13 (20000-1000) 570 1070
PBT 30779
Deduct Tax 9233.7
21545.
PAT (Transferred to Capital Account) 3
12
Practice-4 (New)
The following is the Trial Balance as on 31/12/2018

Dr. Cr.
Cash on hand 1500
Cash at bank 3000Sales 250000
Purchases 110000Return Outward 2000
Return Onward 1500Capital 56000
Wages 20000Accounts Payable 30000
Power and Fuel 8000
Carriage Outward 6000
Carriage Inward 5000
Inventories as 31/12/2017 6000
Land 10000
Building 80000
Machinery 30000
Patents 15000
Salaries 12000
Sundry Expenses 6000
Insurance Premium 1000
Drawings 8000
Total 338000 338000
1
Adjustment Entries

Provision for bad & doubtful
receivables at 5%
Salaries Outstanding 5000
Wages Outstanding 3000
Depreciation on all FA 10%
2
Exercise: From the Trial Balance of A.Atmaram as at 30th
June,2001,you are required to prepare Profit and Loss
Account for the year ended 30th June,2001.
Dr. Cr.
Rs. Rs.
A. Atmaram's Drawing's
Account 6000 A.Atmaram's Capital Account 80000
Plant and Machinery(balance

as on 1st Jan,2000) 20000 Accounts payable 10000
Plant and Machinery(balance 12000

as on 1st Jan,2001) 5000 Sales 0
Inventory on 1st Jan,2000 15000 Return outwards 1000
Purchases 82000 Provision for doubtful debts 400
Return inwards 2000 Discounts 800
Rent of premises sub-let for the

Accounts receivable 20600 year up to 31st December,2001 1200
Furniture and fittings 5000 3
Freight and Duty 2000

Rent, Rates and Taxes 4600
Printing and Stationary 800
Trade expenses 400
Postage and Telegrams 800
Insurance charges 700
Salaries and Wages 21300
Cash in hand 6200
Cash at Bank 20500
Total 213400 213400

4
Adjustments:
1. Inventory on 30th June,2001 was valued at

Rs.14600. (Deduct from inventories to get material
consumption and include under CA in B/S)
2. Write-off Rs.600 as bad debts. (Debit P/L and Deduct
from Sundry Debtors in under CA of B/S)
3. The provision for doubtful debts is to be maintained
at 5% on Sundry Debtors. ( Debit P/L and deduct from
Sundry Debtors under CA of B/S)
4. Create a provision for Discounts on Accounts
Receivables and Reserve for Discounts on Accounts
Payable at 2%. ( Debit P/L and deduct from Sundry Debtors
under CA of B/S and Credit P/L and deduct from Accounts
Payable under CL of B/S)
5
Adjustments:
1. Provide for depreciation on Furniture and Fittings at 5% per

annum, and on Plant and Machinery at 20% per annum. (
Debit P/L and Deduct from Fixed Assets in B/S)
2. Insurance prepaid was Rs.100. (Credit P/L or deduct from
insurance premium paid and include under CA of B/S)
3. A fire occurred on 25th June,2001 in the godown and stock of
the value of Rs.5000 was destroyed. (Deduct from inventories
in P/L account and deduct from B/S)
6
Trial Balance


statements.
1
Critical points to be remembered
while preparing financial statements
If transactions are recorded correctly, then debit side and credit

side of trial balance will be same. If not recorded at all then debit
side and credit of trial balance will be also same. However,
financial statements will not reflect true picture of the business.
But incorrect recorded transactions will lead to mismatch

between debit side and credit side of trial balance.
2
 There is possibility that some transactions may not have
recorded at all and are given as adjustment under Trial Balance.
 Therefore, while preparing Financial Statements [Statement of

Income and Expenditure (Profit & Loss Account) and Statement
in Sources & Application of Funds (Balance Sheet)], transactions
recorded wrong and /or not recorded at all must be corrected
otherwise financial statement will not be correct.
3
 Financial statements (Statement of income and expenditure,
statement of sources and application of funds and statement of
change in cash flows) are prepared based on Trial Balance).
 Trial Balance is the closing balance of ledger. Ledger book

having debit side greater than credit side, the difference is
called debit balance and is shown in debit column of the Trial
Balance (Example: Cash Book, Expense Book, Other Assets
Book).
4
Similarly, Ledger Book having credit side greater than debit side,
the difference is called credit balance and is shown in credit
column in the Trial Balance (Example: Sales Book, Other Income
Book, Gain, Liabilities).
5
While preparing Financial Statements (P/L Account and Balance
Sheet) based on Trial Balance:
 All the figures shown in Trial Balance will be either shown in
Statement of Income and Expenditure (Profit & Loss Account) or

in Statement in Sources & Application of Funds (Balance Sheet).
 Whereas, transactions shown under adjustment in Trail Balance
will be shown in both profit & loss account and balance sheet
6
FIGURES SHOWN IN TRAIL BALANCE
 All Incomes and Gain, and Expenses and Losses figures are
shown in Profit and Loss Account.
 Incomes and Gains are credited (Added ) in statement of income

and expenditure or Profit & Loss Account while
 Expenses and Losses are debited (deducted from income) in
statement of income and expenditure or Profit & Loss Account.
Crediting Profit & Loss Account INCRASES profit and Debiting Profit
& Loss Account DECREASES Profit. 7
 All Assets, Creditors Liabilities and Capital figures are shown in
Balance Sheet (Statement of Sources & Application of Funds)
where Assets = Liability + Shareholders Capital
 Assets (Fixed Assets, Current Assets, Intangible Assets) are

shown under assets (Application of Funds) of balance sheet.
 Creditors Liabilities (Long Term and Short Term Creditors

Liabilities) are shown under Liabilities of balance sheet.
8
 Capital contributed by owners is shown under Shareholders
Capital in balance sheet.
 Equity shareholders are owners of the business and they have

residual claim over the business. Profit made by the business
during the financial year is added with Shareholders Capital and
is known as Owners Equity (Net Worth).
 Therefore, profit INCREASES Owners Equity or Net Worth
9
 Loss Made by the business during the financial year
is deducted from Shareholders Capital and is known
as Owners Equity (Net Worth).
 Therefore, loss decreases Owners Equity or Net

Worth
10
FIGURES SHOWN BELOW TRAIL BALANCE
(Adjustments):
Closing stock of inventories (year-end inventories).
 This needs to be deducted from opening stock and

purchase to get consumption. This is done in Profit
and Loss Account
 This needs to be shown as current assets in balance

sheet
11
There are the transactions which have not been recorded. How to
factor those transactions while preparing Financial Statements?
1) Identify each adjustment transaction’s impact on profit &

Loss Account and Balance Sheet.
2) Add or deduct from respective account.
3) Remember, all adjustments under trail balance will have two

effects i.e. one on Profit & Loss Account and another on
Balance Sheet.
12
Examples of adjustment transactions
under trial balance are:
Expense outstanding / due but not paid / payable.

This has understated expense leading to overstating or inflating
current year’s profit.
What you need to do?
1) You need to increase expense to reduce over stated profit (Add or
increasing expense in Profit & Loss Account or debiting profit &
loss account)
2) You need to added outstanding expenses under current liabilities
in balance sheet.
13
Expense paid in advance (prepaid expenses):
This has overstated expense leading to understating or deflating
current year’s profit.
What you need to do?
1) You need to decrease expense to increase understated profit
(Deduct or decreasing expense in Profit & Loss Account or
crediting profit & loss account)
2) You need to added prepaid expenses under current assets in
balance sheet.
14
Providing / Creating Provision for Doubtful Bad debt:
 Business anticipates future bad debt loss against accounts

receivables (sundry debtors) outstanding and hence, based on
its past experience, business has decided to create provision for
future loss against accounts receivable outstanding.
 This will reduce profit and will also reduce accounts receivable
outstanding.
15
What you need to do:
1) Create percentage of provision for doubtful bad debt against
receivables / sundry debtors and add as loss (provision for loss)
in profit and loss account which will reduce profit.
2) Deduct provision for doubtful bad debt from sundry debtors or

accounts receivable outstanding in balance sheet to reflect net
accounts receivable outstanding.
16
Charging Depreciation against Fixed Assets:
Business has missed out to charge depreciation during the financial
year. Depreciation is a non-cash expense which reduces profit but
does not impact cash flow. Depreciation also reduces book value of
assets
 Missed out to charge depreciation has led to understating
expenses leading to overstating or inflating profit.
 Missed out to charge depreciation has not reduced book value of

assets which it should have been. 17
What you need to do:
1) Increase depreciation as an expense (non-cash expense) in profit
and loss account (debit profit & loss account) to reduce
overstated profit.
2) Deduct depreciation from fixed asset in balance sheet to reduce
book value of fixed assets (net book value)
18
Practice 1: From the following Trial Balance of Woolworths Group
Limited (Australian Company) Ltd. Prepare Statement of Income and
Expenditure for the Year ending 30th June,2020 after giving effect
to under mentioned adjustments.
Trail Balance of Woolworths Group Limited as on 30/06/2020

Particulars Dr Cr. and gains to be
Opening stock of inventories 8000 credited, Expenses
Started business with Loan 50000 and Losses to be
Sales 80000 debited to P/L
Sales returns 1500

Identify all assets,
Liabilities and
Apprenticeship Premium 1500 Capital to be in B/L
Bills Payable 2500
Wages 3300
Salaries 5500
Rent 1100
Freight 2400
Bad debts 2100
19
Limited (Australian Company), prepare State of Income and
Expenditure for the year ending 30th June,2020 after giving effect
Discount Allowed to debtors 500 Identify all incomes

Printing & Stationary expenses 250 and gains to be
Rates and Taxes 350 credited, Expenses
Traveling Expenses 150 and Losses to be
debited to P/L
Account.
Sundry Debtors 20000 Identify all assets,
Machinery 4500 Liabilities and
Loan given to Smith 5000 Capital to be in B/L
Investments 3500
Cash in hand 250
Cash at Bank 3500
TOTAL 150200 150200
20
Following transactions were not considered while preparing Trial
Balance
Sr. Following transactions were not considered while preparing Trial Balance
th
1 Inventory in hand (closing stock of inventories) on 30 June,2020, Rs.7000. 7000
2 Wages to Laborers of Rs.300 for the last month are outstanding. 300
3 Salaries to clerks for the month of June,2020 are outstanding Rs.500. 500
4 Rent of godowns for the last month is outstanding Rs.100. 100
th
5 Fire Insurance Premium include Rs.600 paid on 17 Jan.,2020, to run for one 300
st st
year from 1 Jan.,2020 to 31 December 2020. (600/2=300)
st
6 Apprenticeship Premiums are for three years, received in advance on 1 500
July,2019.
7 A stationary bill for Rs.30 remains unpaid and unrecorded. 30
8 Depreciate: Business Premises by 5%, Furniture & Fixtures by 10%, and
Machinery by 10%.
Business Premises 0.05
Furnitire & Fixtures 0.1
Machinery 0.1
Adjust accordingly
21
Following transactions were not considered while preparing Trail Balance
9 Interest on loan given to Smith’s for one year has accrued at 7% 0.07
10 Interest on Investments (debt securities) Rs.75 has accrued as on 75
th
30 June,2019.
11 Interest on Loan capital ( Creditors Liabilities) at 5% for one year. 0.05
12 Interest on Drawings to be charged to owner as ascertained for the 80
year Rs.80.
13 Create a provision on sundry debtors for doubtful debts at 5% and
discount at 3% on debtors
Bad Debt provision 0.05
Provision for Discount 0.03
14 Create a reserve on creditors for discount at 3%. 0.03
Adjust accordingly
22
Statement of Income and Expenditure of Woolworths
Group Limited for the year ending June 30, 2020
Statement of Income and Expenditure for the year ending 30th June 2020
Sales (revenue) 80000
Less: Sales Returns 1500
Total: Income from Operations 78500
Apprentice Premium 1500
(6) Less: Received in advance 1000 500
(9) Interest @ 7% on 5000 loan given to
Mr. Smith 350
(10) Accrued Interest on Investments 75
(12) Interest on Drawings 80
(14) Reserve for Discount @ 3% on
Creditors 15800 474
Total: Income from Other Sources 1479
Total Income (78500+1479) 79979
23
REVENUE EXPENDITURE: Net Expense

Opening Stock of Inventory 8000
Purchases during the year 20000
Less: Purchase returns 400
Closing stock of inventory 7000
Material consumed 20600
Wages 3300
(2) Add: Wages Outstanding (Add with CL in B/S) 300 3600
Freight 2400
Salaries 5500
(3) Add: Outstanding (Add with CL in B/S) 500 6000
Rent 1100
(4) Add: Rent Outstanding (Add with CL in B/S) 100 1200
To Fire Insurance Premium 900
To Bad Debts 2100
24
Printing & Stationary 250 Net Expense

(7) Add: Printing & Stationary Outstanding 30 280
Rent & Rates 350
To Traveling Expenses 150
To Sundry Trade Expenses 200
(8) To Depreciation on: To be deducted
from respective
Business Premises by 5% on 55000 2750 fixed assets to get
Furniture & Fixtures by 10% on 2500 250 net block in B/S
Packing Machinery by 10% on 4500 450 3450

(11) To Interest on Loan 5% on 50K 2500
(13) To Provision for Doubtful Debts @ 5% on
20000 1000
To Discount Allowed to debtors 500
(13) To Provision for Discount on Debtors @
3% on 19000 (20000-1000) 570 1070
Total Revenue Expenditure 49200
To Net Profit (79979-49200) credited to
Capital A/C 30779
25

and gains to be
Loans 5000
Sales 35000
26
Trial Balance of Israelita Albert Einstein Ltd. from 1st Jan to
31st Dec 2001
Particulars Dr. Cr.
and gains to be
Wages 7000
Salaries 3000
Freight 200 Liabilities and
Insurance 300 Capital to be in B/L
Commission Paid 100
Cash on-hand 100
Cash at Bank 1600
Total 79000 79000
27

on Equipment 0.15
on Building 0.1

Adjust accordingly
28
31/12/2001
Statement of Income and Expenditure Israelita Albert Einstein Ltd. for

the year ending 31/12/2001
REVENUE:
Sale (Service) 35000
Income from other sources 3000
Total Income (income from operations + Income
from other sources) 38000
REVENUE EXPENDITURE
Add: Purchase 18000
Less: Purchase Return 2000
(1) Less: Closing Stock of Inventories 8000
Consumables Consumed 14000
Add with CA in B/S
29
31/12/2001
Wages 7000
Salaries Expenses 3000
Travelling Expenses 750
Freight Expenses 200
Insurance Premium Expenses 300
Commission 100
Repairs & Maintenance Expenses 500
Interest on Loan 600
(5) Add Rent Outstanding (Add with CL in B/S) 100
(3) Provision for doubtful debt (Deduct from A/R in B/S) 500
(2) Depreciation
On Plant and Machinery 1950
(Deduct from P/M and
On Bulding 1700 Building in B/S)

Profit (38000 – 31850) credited to capital account 6150.00
30
Sources & Application of Funds as on 31/12/2001

SOURCES OF FUNDS
Capital 25000
Add: Net Profit (Transferred from profit & Loss Account) 6150
Owners Equity (Net Worth) 31150
Creditors Liabilities
Long-term liabilties
Loan from bank 5000
Current Liabilties
Bills Payable 5000
Outstanding Rent 100
Total Sources of Funds 45250
31
Long-Term Assets (Fixed Assets)

Gross Block of Plant and Machinery 13000
Net Block of Plant and Machinery 11050
Gross Block of Building 17000
Net Block of Building 15300
CURRENT ASSETS
Cash on Hand 100
Cash at Bank 1600
Less: Provision for doubtful bad debt 500 9150
Closing stock of inventories 8000
Pre-Paid Insurance Premium 50
Total Application of Funds 45250
Assets = Creditors’ Liability + Owner’s

Capital
32
and B/S
Sales 300000
Equipment 120000
Sales Return 30000
Freight 4000
Purchases 230000
Salaries 70000
Cash in hand 5000
Bank Loan 150000
Capital 181500
Bills Payable 26000
Legal Charges 500
Cash at Bank 20000
Total 707500 707500 33

in trial balance
34
Limited (Australian Company) Ltd. Prepare Statement of Income and
Expenditure for the Year ending 30th June,2020 after giving effect
Trail Balance of Woolworths Group Limited as on 30/06/2020

Particulars Dr Cr. and gains to be
Opening stock of inventories 8000 credited, Expenses
Started business with Loan 50000 and Losses to be
Sales 80000 debited to P/L
Sales returns 1500

Identify all assets,
Liabilities and
Apprenticeship Premium 1500 Capital to be in B/L
Bills Payable 2500
Wages 3300
Salaries 5500
Rent 1100
Freight 2400
Bad debts 2100
1
Limited (Australian Company), prepare State of Income and
Expenditure for the year ending 30th June,2020 after giving effect
Discount Allowed to debtors 500 Identify all incomes

Printing & Stationary expenses 250 and gains to be
Rates and Taxes 350 credited, Expenses
Traveling Expenses 150 and Losses to be
debited to P/L
Account.
Sundry Debtors 20000 Identify all assets,
Machinery 4500 Liabilities and
Loan given to Smith 5000 Capital to be in B/L
Investments 3500
Cash in hand 250
Cash at Bank 3500
TOTAL 150200 150200
2
Following transactions were not considered while preparing Trial
Balance
Sr. Following transactions were not considered while preparing Trial Balance
th
1 Inventory in hand (closing stock of inventories) on 30 June,2020, Rs.7000. 7000
2 Wages to Laborers of Rs.300 for the last month are outstanding. 300
3 Salaries to clerks for the month of June,2020 are outstanding Rs.500. 500
4 Rent of godowns for the last month is outstanding Rs.100. 100
th
5 Fire Insurance Premium include Rs.600 paid on 17 Jan.,2020, to run for one 300
st st
year from 1 Jan.,2020 to 31 December 2020. (600/2=300)
st
6 Apprenticeship Premiums are for three years, received in advance on 1 500
July,2019.
7 A stationary bill for Rs.30 remains unpaid and unrecorded. 30
8 Depreciate: Business Premises by 5%, Furniture & Fixtures by 10%, and
Machinery by 10%.
Business Premises 0.05
Furnitire & Fixtures 0.1
Machinery 0.1
Adjust accordingly
3
Following transactions were not considered while preparing Trail Balance
9 Interest on loan given to Smith’s for one year has accrued at 7% 0.07
10 Interest on Investments (debt securities) Rs.75 has accrued as on 75
th
30 June,2019.
11 Interest on Loan capital ( Creditors Liabilities) at 5% for one year. 0.05
12 Interest on Drawings to be charged to owner as ascertained for the 80
year Rs.80.
13 Create a provision on sundry debtors for doubtful debts at 5% and
discount at 3% on debtors
Bad Debt provision 0.05
Provision for Discount 0.03
14 Create a reserve on creditors for discount at 3%. 0.03
Adjust accordingly
4

and gains to be
Loans 5000
Sales 35000
5
Trial Balance of Israelita Albert Einstein Ltd. from 1st Jan to 31st
Dec 2001
Particulars Dr. Cr.
and gains to be
Wages 7000
Salaries 3000
Freight 200
Liabilities and
Insurance 300
Commission Paid 100
Capital to be in B/L
Cash on-hand 100
Cash at Bank 1600
Total 79000 79000
6

on Equipment 0.15
on Building 0.1

Adjust accordingly
7
and B/S
Sales 300000
Equipment 120000
Sales Return 30000
Freight 4000
Purchases 230000
Salaries 70000
Cash in hand 5000
Bank Loan 150000
Capital 181500
Bills Payable 26000
Legal Charges 500
Cash at Bank 20000
Total 707500 707500 8

in trial balance

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Financial & Management

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