Code D

A Case Study to understand Accounting Terminology, Principles and Process: A warm up exercise to learn Accounting & Finance cases Amar was young mechanic living in a village called Rampur. He had agriculture land near his house. He thought, that his land being on main road & village youth are purchasing bikes from nearby district, let me build a small shed in a corner of the land and start selling bikes to the village He also decided to bring welding machine, lathe and necessary tools that he can provide auto-repairing service to the village [1] He owned the land used for shed, but the value of piece of land was 50,000. He put 100,000 in constructing the shed, 10,000 for electrical fittings, 15,000 for furniture, 40,000 for machines & 5000 for tools. He deposited 100,000 with bike manufacturer. He possesses wonderful technical invaluable skill. He gave name to his enterprise as M/s. Amar Enterprise (firm). During the year, which ended on 31/3/2007, firm purchased 20 bikes at price of 60,000 each & sold 18 bikes at price of 70,000 each. He also had attended 100 service calls for auto repairing during the year, and for each service call he used to charge Rs, 250/. He estimated on the basis of past experience, that due to his business activity additional electricity amounting to 12,000 was consumed. He estimated that each of the assets he owned for the firm would last for 10 yea As per accounts he earned profit of 171,500. [2] At the beginning of the next year, his friend Akbar wanted to join as partner in the firm. Both agreed to value business at 400,000. However, book value as per account was 298,500. Next year, incidentally same kind of transactions took place, however 20 of the service call were not paid as they were granted credit for three months. But the partners thought that all machines & furniture be sold. Machines were sold for 35,000, and furniture for 5000. The accounts were closed on 31/03/2008, 10 of the service call were unpaid. After revised estimate they thought that the remaining assets would not last more than 8 year. [3] In the third year of business, beginning 01/04/2008, they decided to expand business. Keeping existing firm as continued in the village, they also incorporated a Private Limited Company, named as Amar Auto Private Limited. The company started same line of business in nearby town. The premises were rented at monthly rent of 2000/. While in the beginning of the year, optimist promoters bought one automatic machine at price of 500,000 for the firm and second machine for the company.

Both the enterprise took loan of 400,000 from SBI. An annual insurance for business property was taken on 01/06/2008 by paying annual premium of 6000. Amar owned property other than invested in both businesses, while Akbar had nothing except what is invested in the business. 2 of the debtors, who were given service on credit, were not traceable. [4] The third year took dramatic turn, as Nano car was available at price of the bike, no bike was sold during the year either from the firm in the village or from the company in the town. And there was no hope to the promoters that business will run, equally bank also lost hope that either business has now any prospects. On 31/03/2009, there was no sign that business will run further. [5]

Financial Statement for Amar Enterprise Balance Sheet as on 31st March 2008 Liabilities Long term Capital* Reserve* Provisions* Debenture Rs
421,500 329,938 Nil Nil

Assets Fixed Assets Goodwill -Amortization Land Building(Shed) - Depreciation Furniture -Depreciation -Sale Electrical Fittings

Rs
101500 -12688 88813 50000 90000 -11250 78750

13500- Nil 1687.50 -11813 9000 -1125 36000 -4500 -31500 7875 Nil

Secured Loan Short Term

Nil Bank CC/OD Creditors (Bills Nil Payable)

Machinery -Depreciation -Sales Current Assets Loan & Advance (Deposits with M/S) Debtors (Bills 5000 -2500 receivables) - Paid Inventory (Cl. Stock) Bank & Cash

100000

2500

240000 183500

Total Liabilities 751,438 Total Assets * Liabilities towards owner

751,438

TOTAL ASSETS = TOTAL LIABILITIES FixedAssets + Current Assets Current Liabilities + Non Current Assets + Non Current Liabilities + Capital + Retained Earning (Reserve) Rs. 751,438 Rs. 751,438 --------------------------------------------------------Total Assets Total Liabilities

Profit & Loss Account for the year ended 31st March 2008 Dr. Particulars To Opening stock To Purchase To Expenses - Electricity Cr. Amount(Rs.) Particulars Amount(Rs.) 1,260,000 120,000 By Sales
1,200,000

12,000

By Closing 240,000 Stock By Services 25,000 By Profit on 3,500 sale of machinery

- Depreciation 18563 - Loss on sale 6813 of F&F - amortization 12,688 To Profit & Loss 158,438 A/c
1528500 1528500

Income Statement: Particulars Sales (Revenue) - Cost of Sales Opening Stock (+) Purchases (-) Closing Stock 120,000 1,200,000 - 240,000 -------------------Gross Margin - Operating Expenses 205,000 - 12,000 -------------------193,000 3,500 -38,064 -------------------158,438 NIL 158,438 Amount (Rs.) 1,285,000 1,080,000

EBIDTA (Operating Profit) Non-operating income (-)Non-Operating Expenses

Net Income (-) Dividend Retained Earnings

Working Notes:
Cash Account for the year ended 31.03.2008 Dr. Particulars To bal b/d To sales To services To machine sales To F&F sales To Debtors paid Amount(Rs.) 73000 1260000 20000 35000 5000 2500 By Cash a/c 1395500 183500 1395500 Particulars By Electricity By Creditors Cr. Amount(Rs.) 12000 1200000

Financial statements for the year ended 31.03.2007

Balance Sheet as on 31.03.2008 Liabilities Capital Owner's Capital Retained earnings
320,000

Assets Land Shed -Depreciation

171,500 Electrical Fitting 100,00 0 10,000 10,000 - 1,000 15,000 - 1,500 50,000

90,000

-Depreciation F&F -Depreciation Creditors -Creditors paid

1,200,000 1,200,000 Nil

9,000 13,500

Machine -Depreciation Tools (-) W/D

40,000 - 4,000 5,000 - 5,000

36,000

Nil

Deposit with M/s Inventory Cash Total Liabilities

491,500 Total Assets

100,000 120,000 73,000 491,500

Dr. Particulars To purchases To electricity to Depreciation to tool written off Profit

Profit and loss account for the year ended 31.03.2008 Amount(Rs.) Particulars 1,200,000 By sales 12,000 By Services 16,500 5,000 By closing stock 171,500

Cr. Amount (Rs.) 1,260,000 25,000 120,000

1,405,000 Dr. Particulars To Capital To sales To services Cash Account Amount (Rs.) Particulars 270,000 By Shed BY Electrical 1,260,000 Fitting 25,000 By F&F By Machine BY Tools By deposit By electricity By creditors By balance carried down (c/d) 1,555,000

1,405,000 Cr. Amount (Rs.) 100,000 10,000 15,000 40,000 5,000 100,000 12,000 1,200,000

73,000 1,555,000

Assumptions:
1. Purchases are made for credit. 2. Loose tools worth Rs. 5000 have been written off. 3. Deposits to bike manufacturer are for a period longer than one year. 4. Service calls provided have been treated as part of core business and hence included in sales in Income statement 5. Furniture and machinery is sold on the last date of the month. 6. Credit for the service calls is for the period of February to March. 7. Goodwill is expected to be amortized over 8 years

A Mini Case
Name: P. Anirudha Asish 195 Roll No. 2012PGP076

A Doctor after finishing his study; started practicing from 1.4.2009. He invested amount equal to number in the above box multiply by 1000. He purchased dispensary items worth 50% of his investment and equipment for 250. During the year he provided service to 1600 patients. From each patient he charged uniform fee of 50. Generally a patient pay the service fee in cash, but patients number as mentioned in box have not paid the amount till end of the year. Half of the amount he thinks will not be recoverable. He employed one assistant at monthly salary of 200/. Generally salary is paid on the last day of month. Doctor assumes that electric consumption would be 100 per month, while the bill is actually settled in the subsequent month. At the end of year on 31.3.2010, he found that half of the dispensary items are in stock. He assumes that half of the stock will be of expired drugs having no saleable value. Doctor received an offer of employment at salary of 3000 per month. The employer also offered that, on doctors investment

incurred in his dispensary, employer would pay 5% interest annually. Should he accept the offer? Submit your answer by email before 4/8/2009, section A or B, Number in the box, profit, and cash at the end, should he accept the offer? [Prepare for your understanding: Opening & closing B/s, P & L A/c]

Balance Sheet as on 31.03.2010 Liabilities

Capital

Amount
195000

Assets
Equipment Debtors - Bad debts Closing Stock Cash P/L(Loss)

Amount
250 4875 24375 164000 1600 195100

O/S electrical 100 expenses

Total Liabilities 195100

Total Assets

Profit and Loss Account for the Year ended 31.03.2010 Particulars
To Purchases To Bad debts

Amount(Rs.)
97500 4875

Particulars
By Sales By Closing Stock - Written off By Loss

Amount(Rs.)
80000 24375

To salary To electricity Paid during the year 1100 +o/s 100

2,400 1,200

1,600

105975

105975

Working Notes: Cash Account Dr. Particulars To capital a/c To services Amount(Rs.) 195,000 70,250 Particulars By purchases By equipment By salary By electricity By cash c/d Cr. Amount(Rs.) 97,500 250 2,400 1,100 164,000 265,250

265,250

Calculation of Income while receiving an offer of employment : Salary Earning on interest Total Amount Rs.36000 Rs. 4875

--------------Rs. 40,875 From the above calculations, we can see that when doctor starts practicing he makes a loss of Rs.1600. If he accepts employment he earns Rs.40,875. So he should accept the offer of employment.