Financial Accounting and Analysis

1. For the following transactions, analyze the accounting transactions using the accounting
equation framework
1. Introduced Rs500000 through a cheque by the Owner as the Initial capital in the business
2. Purchased goods on credit from Ms. Ritu at Rs 40000
3. Paid Rs 10000 as salary to the employees
4. Invested Rs200000 in a fixed deposit account
5. Paid school fees of the kid Rs 25000, from the business’s bank account.

Answer-
Date Particulars LF Dr. Cr.
cash A/c
1 500000
Dr
to capital A/c 500000
(being starting business with the initial investment of
Rs500000)
Goods A/c
2 40000
Dr
To liability A/c 40000
(being goods purchased on credit)
Capital A/c
3 10000
Dr
To cash A/c 10000
(being paid salary to the employees)
Investment A/c
4 200000
Dr
To cash A/c 200000
(being invest Rs200000 in the fixed deposit)
Capital A/c
5 25000
Dr
cash A/c 25000
(being withdrawn Rs25000 from the account for the fee of
kid)

Analysis of each transaction-

1. Introduced Rs500000 through a cheque by the Owner as the Initial capital in the
business- Bringing in Rs 500000 in the business will increase the both capital and cash account
by Rs500000 hence, increase in cash account is debited and increase in capital account is
credited in the journey entry.

2. Purchased goods on credit from Ms. Ritu at Rs 40000- Being goods purchased and credit
means an increase in the assets and also increase in liabilities hence goods A/c is debited and
liability account is credited by Rs40000
3. Paid Rs 10000 as salary to the employees- Paying salary to the employees’ means a decrease
in capital as well as decrease in cash hence the capital account is debited and the cash account is
credited by Rs10000
4. Invested Rs200000 in a fixed deposit account- Investment represent taking out money from
cash and invest in any other asset which is fixed deposit in this case. In this case the investment
is increased and cash decreased by Rs200000.

5. Paid school fees of the kid Rs 25000, from the business’s bank account- In this case the
owner capital is decreased by Rs25000 and also the cash is decreased by Rs25000. Hence,
capital account is debited and cash account s credited by Rs25000.

2. You started learning the course of financial accounting and analysis in the MBA program.
You learned about commonly used accounting terms. Discuss about any five terms which are
commonly used by the different users of accounting information for the sake of understanding
the financial statements
Answer- Following are the 5 commonly used accounting terms-

1. Assets- Assets are the resources with some economic value that an individual or a
business controls or owns with an expectation that it will provide future benefits. An
asset can be thought of a something that can in future derive some benefits to the firm.
Assets are reflect in the company’s balance sheet and are brought to increase firm’s value.
Assets result from past business activities. Assets come in many types and classes. Types
include current and noncurrent, operating and non operating, physical, and intangible.
Classes include broad categories such as cash and equivalents, equities, commodities, real
estate, intellectual property, and fixed income, among others.
2. Liability- Liability is something an individual or a company owes, which can be in terms
of economic benefits such as money, good or services. In accounts it can be understood
as the obligation of an individual or a firm to pay in terms of economic benefits to
someone. Liabilities can be categorized as current or non-current depending on their
temporality. They can include a future service owed to others or a previous transaction
that has created an unsettled obligation. Most companies will have these two line items
on their balance sheet.
3. Depreciation- It is an accounting method used to allocate the cost of a physical asset
over its useful period. In simple language it is the estimate of how much of an asset’s
value has been used. Companies don’t usually accounts for the entire value of an asset
entirely in the year of an asset purchase hence they depreciate long term asset for both tax
and accounting purposes. It allows companies to ear revenue from the assets they own by
paying for them over a certain period of time.
4. Revenue- It is the amount of money generated from the normal operating processes of a
business. It is calculated as the product of average selling price and the units sold.
Revenue is considered as the top line as it appears first in any company’s statement. It is
used to estimate the top line growth of a company whether or not a company is able to
make the estimate sale.
 5. Net profit- It is the amount of money a company makes after deducting all the operating,
interest and tax expenses. Net profit is another useful parameter to estimate a company’s
health. It tells about the fact whether or not a company is actually making more than what
it spends. It also helps in estimating the growth and future prospective of any business.
Net revenue is also called the bottom line as it is always positioned at the bottom of a
financial statement.

3. from the given information

Amount in Lakhs
cost of goods sold 580
opening stock 40
closing stock 70
creditors at the beginning of the year 60
creditors at the end of the year 100
cash purchases 45
Original cost of equipment sold 400
Gain on the equipment sold 50
Accumulated depreciation on the equipment 80

Calculate:
a. Total purchases, credit purchases and payment to creditors
b. Define the term Net book value, Accumulated depreciation calculate the net book value and
cash proceeds from sale of investment

Answer-
a) Total purchases= closing stock- Opening stock +cost of goods sold

=70-40+580

= 610

Credit purchases= creditor closing balance+ cash paid- opening creditor balance

= 100+45- 60

= 85

Payment to creditor = Cost of goods sold+ increase in inventor- increase in accounts payable

=580+ 30-40

= 570
 b) Net book value- It is the amount at which an organization records an asset in its
accounting records. Accumulated depreciation is the cumulative depreciation of an asset
up to a single point in its life.

NBV= 400-80= 320

Gain from sale= Cash proceeds(X) - cost- accumulated depreciation

50= X- 400-80

50= X- 320

X= 370